PROSPECTUS October 17, 1997
- --------------------------------------------------------------------------------
2,920,000
CORNELL CORRECTIONS, INC.
Common Shares
- --------------------------------------------------------------------------------
Of the 2,920,000 shares of Common Stock, par value $.001 per share (the "Common
Stock"), offered hereby (the "Offering"), 2,250,000 shares are being offered
by Cornell Corrections, Inc. (the "Company"), and 670,000 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.
The Common Stock is listed on the American Stock Exchange (the "AMEX") under
the symbol "CRN." On October 16, 1997, the last reported sales price of the
Common Stock on the AMEX was $20 1/8 per share. See "Price Range of Common
Stock and Dividend Policy."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 8-14.
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>
Price to Underwriting Discounts Proceeds to Proceeds to
Public and Commissions(1) Company(2) Selling Stockholders
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Common Share $19.625 $1.08 $18.546 $18.546
- -----------------------------------------------------------------------------------------------------------------------
Total(3) $57,305,000 $3,151,775 $41,727,656 $12,425,569
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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."
(2) BEFORE DEDUCTING ESTIMATED EXPENSES OF THE OFFERING OF $500,000 WHICH WILL
BE PAID BY THE COMPANY.
(3) THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS A 30-DAY OPTION TO
PURCHASE UP TO 412,500 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 $65,400,313, THE TOTAL
UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE $3,597,017 AND THE TOTAL
PROCEEDS TO THE SELLING STOCKHOLDERS WILL BE $20,075,639. 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 SBC Warburg Dillon Read Inc., New York,
New York, on or about October 22, 1997. The Underwriters include:
SBC WARBURG DILLON READ INC.
EQUITABLE SECURITIES CORPORATION
WASSERSTEIN PERELLA SECURITIES, INC.
<PAGE>
Inside Front Cover
[Map of United States and facility locations]
o The Company and its predecessors have over 10 years experience in the
secure institutional market.
o Contracts to operate six residential facilities with a total offender
capacity of 3,882.
o Programs include general educational and substance abuse programs,
certain transportation services and institutional food services.
o The Company and its predecessors have over 20 years experience in the
pre-release market.
o Contracts to operate 14 residential facilities with a total offender
capacity of 1,324.
o Focus is upon rehabilitation and re-entry into society at large.
o Programs include life skills and employment training and job placement
assistance.
o The Company and its predecessors have over 24 years experience in the
juvenile market.
o Contracts to operate 10 residential and 11 non-residential facilities
with a total offender capacity of 1,866.
o Programs include counseling, wilderness, medical and accredited
educational programs tailored to meet the special needs of juveniles.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS IN THE
COMMON STOCK AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
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; (III) ALL REFERENCES TO NUMBER OF BEDS WITH
RESPECT TO THE COMPANY'S RESIDENTIAL FACILITIES ARE TO DESIGN CAPACITY AND (IV)
ALL REFERENCES TO TOTAL OFFENDER CAPACITY INCLUDE DESIGN CAPACITY BEDS PLUS THE
PROGRAM CAPACITY OF THE COMPANY'S NON-RESIDENTIAL, COMMUNITY-BASED OPERATIONS.
THE COMPANY
The Company is one of the leading providers of privatized correctional,
detention and pre-release services in the United States based on total offender
capacity. The Company is the successor to entities that began developing secure
institutional correctional and detention facilities in 1987, pre-release
facilities in 1977 and juvenile facilities in 1973. The Company has
significantly expanded its operations through acquisitions and internal growth
and is currently operating or developing facilities in 10 states and the
District of Columbia. As of September 9, 1997, the Company has contracts to
operate 41 facilities with a total offender capacity of 7,072, which has
significantly increased from 3,577 offenders at December 31, 1996. For the six
months ended June 30, 1997, the Company's revenues were $28.0 million,
representing an increase of 147% from $11.3 million for the six months ended
June 30, 1996. The Company had net income of $1.3 million compared to a net loss
of $710,000 for the same respective six month periods.
The Company provides integrated facility development, design, construction
and operational services to governmental agencies within three areas of
operational focus: (i) secure institutional correctional and detention services;
(ii) pre-release correctional services and (iii) juvenile correctional and
detention services. Secure institutional correctional and detention services
primarily consist of the operation of secure adult incarceration facilities.
Pre-release correctional services primarily consist of providing pre-release and
halfway house programs for adult offenders who are either on probation or
serving the last three to six months of their sentences on parole and preparing
for re-entry into society at large. Juvenile correctional and detention services
primarily consist of providing residential treatment and educational programs
and non-residential community-based programs to juvenile offenders between the
ages of 10 and 17 who have either been adjudicated or suffer from behavioral
problems. At the adult facilities it operates, the Company generally provides
maximum and medium security incarceration and minimum security residential
services, institutional food services, certain transportation services, general
education programs (such as high school equivalency and English as a second
language programs), health care (including medical, dental and psychiatric
services), work and recreational programs and chemical dependency and substance
abuse programs. Additional services provided in the Company's pre-release
facilities typically include life skills and employment training and job
placement assistance. Juvenile services provided by the Company include
counseling, wilderness, medical and accredited educational programs tailored to
meet the special needs of juveniles. The Company derives substantially all its
revenues from operating correctional, detention and pre-release facilities for
federal, state and local governmental agencies in the United States. Of the
facilities operated by the Company, 11 are owned, 26 are leased and four are
operated or currently under development through other arrangements. See
"Business -- Properties."
In the United States, there is a growing trend toward privatization of
government services and functions, including correctional and detention
services, as governments of all types face continuing pressure to control costs
and improve the quality of services. According to the Private Adult Correctional
Facility Census dated March 15, 1997 ("1996 Facility Census"), the design
capacity of privately managed adult secure institutional correctional and
detention facilities in operation or under construction worldwide increased from
10,973 beds at December 31, 1989 to 85,201 beds at December 31, 1996, a compound
annual growth rate of 34%. In addition, the design capacity of privately managed
adult secure institutional correctional and detention facilities increased 34%
in the last year.
3
<PAGE>
The United States leads the world in private prison management contracts.
The 1996 Facility Census reports that at December 31, 1996 there were private
adult secure institutional correctional and detention facilities in operation or
under construction in 25 states, the District of Columbia and Puerto Rico.
According to reports issued by the United States Department of Justice, Bureau
of Justice Statistics (the "BJS"), the number of adult offenders housed in
United States federal and state prison facilities and in local jails increased
from 744,208 at December 31, 1985 to 1,630,940 at June 30, 1996, a compound
annual growth rate of 7.8%. Management believes that the increase in the demand
for privatized adult secure institutional correctional and detention facilities
is also a result, in large part, of the general shortage of beds available in
United States adult secure institutional correctional and detention facilities.
The pre-release correctional services industry has experienced substantial
growth. According to the BJS, the number of parolees increased from 220,438 at
December 31, 1980 to 690,159 at December 31, 1994, a compound annual growth rate
of 8.5%. During the same period, the number of individuals on probation
increased from 1.1 million to approximately 3.0 million, a compound annual
growth rate of 7.4%. The probation and parole populations represent
approximately 71% of the total number of adults under correctional supervision
in the United States. The pre-release correctional services industry is
extremely fragmented with several thousand providers across the country, most of
which are small and operate in a specific geographic area.
The juvenile corrections industry has also expanded rapidly in recent years
as the need for services for at-risk and adjudicated youth has risen. According
to the Criminal Justice Institute, the population in the juvenile correctional
system, both residential and non-residential community-based, has increased from
62,268 youths at January 1, 1988 to 102,582 youths at January 1, 1995, a
compound annual growth rate of 7.4%. In 1994, there were approximately 2.7
million juvenile arrests and 5.3 million youths in special education programs.
The juvenile corrections industry is also fragmented with several thousand
providers across the country, most of which are small and operate in a specific
geographic area.
OPERATING STRATEGIES
The Company's objective is to enhance its position as one of the leading
providers of privatized correctional, detention and pre-release services. The
Company is committed to the following operating strategies: (i) diversifying its
business within all three areas of its operational focus; (ii) delivering cost
effective and quality management programs in all of its markets and (iii)
providing specialized and innovative services to address the unique needs of
governmental agencies and certain segments of the offender population.
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. The Company continues to seek to increase revenues by
pursuing the following growth strategies: (i) selectively pursuing opportunities
to obtain contract awards for new privatized facilities; (ii) increasing design
capacity and program capacity at existing facilities and (iii) pursuing
strategic acquisitions. By expanding the number of beds under contract and its
program capacities, the Company increases economies of scale and purchasing
power and enhances its opportunities for larger contract awards.
4
<PAGE>
RECENT DEVELOPMENTS
ACQUISITIONS
The Company has completed four acquisitions since May 1996 and believes
that the private correctional and detention industry is positioned for further
consolidation. The Company believes that the larger, better capitalized
providers will continue to acquire smaller providers that are insufficiently
capitalized to pursue the industry's growth opportunities. The Company intends
to pursue selective acquisitions of other operators of private correctional and
detention facilities in secure institutional, pre-release and juvenile areas of
operational focus to enhance its position in its current markets, to expand into
new markets and to broaden the types of services which the Company can provide.
In addition, the Company believes there are opportunities to eliminate costs
through consolidation and coordination of the Company's current and subsequently
acquired operations.
In September 1997, the Company acquired substantially all of the assets of
The Abraxas Group, Inc. and four related entities (collectively, "Abraxas").
Abraxas is a non-profit provider of residential and non-residential
community-based juvenile programs, serving approximately 1,400 juvenile
offenders throughout Pennsylvania, Ohio, Delaware and the District of Columbia.
In January 1997, the Company acquired substantially all of the assets of
Interventions Co. ("Interventions"), a non-profit operator of a 300 bed adult
residential pre-release facility in Dallas, Texas and a 150 bed capacity
residential transitional living center for juveniles in San Antonio, Texas.
During 1996 the Company acquired (i) a 310 bed adult residential
pre-release facility located in Houston, Texas (the "Reid Center") and (ii)
substantially all of the assets of MidTex Detentions, Inc. ("MidTex"), a
private correctional operator for the Federal Bureau of Prisons ("FBOP").
MidTex operated secure institutional facilities in Big Spring, Texas with a
design capacity of 1,305 beds (the "Big Spring Complex").
NEW CONTRACT AWARDS
In June 1997, the Company was awarded a contract with the State of Georgia
to design, build, finance and operate a 550 bed minimum to medium security adult
correctional facility. The facility will be owned and financed by the Company,
and is scheduled to be completed during the third quarter of 1998.
In February 1997, the Company received an award from Santa Fe County to
design, build and operate a 760 total bed project in Santa Fe, New Mexico, which
will be completed in phases. The Company took over the operation of an existing
240 bed adult and juvenile jail on July 1, 1997, with construction of a new 604
bed adult detention facility currently scheduled to be completed during the
second quarter of 1998. The 240 bed jail will subsequently be converted into a
156 bed residential juvenile detention facility and is scheduled to be completed
during the fourth quarter of 1998.
INTERNAL EXPANSION
In addition to smaller expansions within certain of its existing
facilities, the Company recently began construction of a 516 bed expansion of
the Big Spring Complex. This expansion is scheduled to be completed during the
second quarter of 1998 and will bring the total design capacity at the Big
Spring Complex to 1,868 beds, making it one of the largest correctional
facilities operated by a private provider in the State of Texas.
EXPANDED CREDIT FACILITY
To fund its growth and operating strategies, in September 1997 the Company
entered into a new $60 million revolving line of credit (the "1997 Credit
Facility"), which replaced its prior $15 million revolving line of credit (the
"1996 Credit Facility"). The 1997 Credit Facility, which matures in 2003, will
be used by the Company for acquisitions and working capital purposes.
------------------------
The Company's principal executive offices are located at 4801 Woodway,
Suite 100E, Houston, Texas 77056, and its telephone number at such address is
(713) 623-0790.
5
<PAGE>
THE OFFERING
Common Stock offered by the
Company............................ 2,250,000 shares
Common Stock offered by the Selling
Stockholders....................... 670,000 shares(1)
---------
Total Common Stock offered...... 2,920,000 shares
=========
Common Stock to be outstanding after
the Offering....................... 9,355,404 shares(2)
Use of Proceeds by the Company....... For repayment of borrowings, future
acquisitions, working capital and general
corporate purposes. See "Use of
Proceeds."
American Stock Exchange symbol....... CRN
- ------------
(1) An aggregate of 209,073 of the shares of Common Stock offered by the Selling
Stockholders results from warrant exercises immediately prior to the
Offering. See "Principal and Selling Stockholders."
(2) Excludes an aggregate of: (i) 594,498 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options granted under the
Company's 1996 Stock Option Plan (the "Stock Option Plan"); (ii) 295,856
shares of Common Stock reserved for issuance upon exercise of outstanding
stock options and warrants not included under the Stock Option Plan and
(iii) 354,334 shares of Common Stock to be reserved for issuance upon the
exercise of long-term incentive stock options proposed to be granted by the
Company's Board of Directors which grants will be subject to approval by the
stockholders of an amendment to the Stock Option Plan or the adoption of a
new stock option plan (the "Long-Term Incentive Options"). See
"Management -- Stock Option Plan," "Management -- Proposed Stock Option
Grants" and Note 6 of Notes to the Company's Consolidated Financial
Statements.
6
<PAGE>
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, 1996 and for the
six months ended June 30, 1997 and the Pro Forma Balance Sheet Data as of June
30, 1997 reflect the results of operations and consolidated financial position
of the Company and its subsidiaries as if: (i) the acquisitions by the Company
in 1996 and 1997; (ii) the exercise of outstanding warrants relating to the
shares of Common Stock to be sold by the Selling Stockholders in the Offering
and (iii) 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, 1996, and, in the case of the Balance Sheet Data,
on June 30, 1997.
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ---------------------
1992 1993 1994(1) 1995 1996(2) 1996 1997
--------- --------- ------- --------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 2,540 $ 3,198 $15,689 $ 20,692 $32,327 $ 11,337 $28,041
Income (loss) from operations...... 910 (960) (343) (10) 339 (263) 2,147
Interest expense(3)................ -- -- 294 1,115 2,810 498 209
Income (loss) before income
taxes............................. 940 (915) (499) (989) (2,304) (710) 2,024
Net income (loss).................. 940 (915) (600) (989) (2,379) (710) 1,295
Earnings (loss) per share.......... $ .38 $ (.34) $ (.16) $ (.25) $ (.53) $ (.20) $ .18
Number of shares used in per share
computation(4).................... 2,491 2,695 3,811 3,983 4,466 3,523 7,139
OPERATING DATA:
Total offender capacity:
Residential...................... -- 302 1,281 1,640 3,577 2,044 5,872
Non-residential community-
based........................... -- -- -- -- -- -- --
Total........................ -- 302 1,281 1,640 3,577 2,044 5,872
Beds under contract (end of
period)........................... -- 282 1,155 1,478 3,254 1,796 5,367
Contracted beds in operation (end
of period)........................ -- 282 1,155 1,135 2,899 1,561 3,541
Average occupancy based on
contracted beds in operation(5)... -- -- 92.1% 98.9% 97.0% 95.8% 96.4%
</TABLE>
PRO FORMA
------------------------
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 80,385 $45,165
Income (loss) from operations...... 4,500 3,347
Interest expense(3)................ 177 88
Income (loss) before income
taxes............................. 4,504 3,345
Net income (loss).................. 2,702 2,141
Earnings (loss) per share.......... $ .32 $ .25
Number of shares used in per share
computation(4).................... 8,526 8,546
OPERATING DATA:
Total offender capacity:
Residential...................... 4,527 6,372
Non-residential community-
based........................... 900 900
Total........................ 5,427 7,272
Beds under contract (end of
period)........................... 4,098 5,867
Contracted beds in operation (end
of period)........................ 3,743 4,041
Average occupancy based on
contracted beds in operation(5)... 92.7% 95.1%
JUNE 30, 1997
-------------------------
HISTORICAL PRO FORMA
---------- ---------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital.................... $ 5,318 $32,032
Total assets....................... 53,282 98,100
Long-term debt, including current
portion........................... 2,592 592
Stockholders' equity............... 42,537 84,181
- ------------
(1) Includes operations purchased by the Company in March 1994.
(2) Includes operations purchased by the Company in May and July 1996.
(3) Interest expense for 1996 includes a $1.3 million non-recurring charge
($726,000 of which was non-cash) to expense deferred financing costs
associated with the early retirement of debt.
(4) Prior to March 31, 1994, the Company was organized as a partnership. For
purposes of computing average shares outstanding for the period prior to
March 31, 1994, the partnership units were converted to common shares using
a one-to-one unit-to-share conversion ratio.
(5) For any applicable residential 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.
7
<PAGE>
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
Although the Company reported net income of $1.3 million for the six months
ended June 30, 1997, the Company incurred net losses of $600,000, $989,000 and
$2.4 million for the years ended December 31, 1994, 1995 and 1996, respectively.
No assurance can be given that the Company will not incur losses in future
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
ACQUISITION RISKS; INTEGRATION OF ACQUISITIONS
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 possible adverse effects 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 integrate 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.
As a result of the acquisitions of Interventions and Abraxas (the "1997
Acquisitions"), total offender capacity has increased by approximately 1,850
since December 31, 1996. Prior to the 1997 Acquisitions, both Interventions and
Abraxas were operated as non-profit organizations. Consequently, no assurance
can be given that the Company will be able to successfully integrate the
operations and personnel of the 1997 Acquisitions with those of the Company on a
profitable basis, and the Company's 1997 pro forma financial information 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 1997 Acquisitions 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 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 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
8
<PAGE>
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
institutional adult facilities, the extent to which the Company is able to
effectively compete with the two companies now holding the major share of
contracts for currently privatized adult facilities. No assurance can be given
that the Company will be able to obtain additional contracts to develop or
operate new facilities on favorable terms.
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 secure 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 necessary to
finance acquisitions or the construction of new facilities. 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.
FACILITY OCCUPANCY LEVELS AND CONTRACT DURATION
A substantial portion of the Company's revenues are generated under
residential facility management contracts that specify a rate per day per
offender ("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 the contracting governmental
agency or agencies to supply the facility with a sufficient number of offenders
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 certain cases, soliciting additional offenders 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 offenders
serving relatively short sentences or only the last three to six months of their
sentences, the high turnover rate of offenders requires a constant influx of new
offenders from the relevant governmental agencies to provide sufficient
occupancies to achieve profitability. A failure of a governmental agency to
supply sufficient occupancies for any reason may cause the Company to forego
revenues and income. Moreover, occupancy rates during the "start-up" phase
when facilities are first opened typically result in capacity underutilization
for a one-to three-month period after the facilities first receive offenders. 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."
9
<PAGE>
FIXED REVENUE STRUCTURE
Most of the Company's facility management contracts provide for payments to
the Company of either fixed per diem rates or per diem rates 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 rates, then the
Company's results of operations would be adversely affected.
POSSIBLE LOSS OF LEASE RIGHTS
The site of the Big Spring Complex (1,352 beds, currently being expanded to
1,868 beds) 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 by the United States government in 1978. The document conveying the
Larger Tract to the City of Big Spring (the "Conveyance") contains certain
restrictive covenants relating to the use of the Larger Tract that apply to the
City of Big Spring 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 of Big Spring and the Company which permit the Company to operate the
Big Spring Complex and advised the City of Big Spring in writing that it had no
objections to the execution thereof by the parties thereto. While the Company
believes that (i) the City of Big Spring 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 of Big Spring and its lessees, the FAA could assert that such
uses of the Larger Tract violate the Conveyance. In addition, the City of Big
Spring 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
of Big Spring (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 of Big Spring do not
give the Company recourse against the City of Big Spring 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 Larger Tract, or in
any case in which the United States government or the FAA has superior rights to
use the Larger Tract, the continued ability of the Company to lease and use the
Big Spring Complex could be subject to the discretion of the United States
government or the FAA. The inability of the Company to continue to operate the
Big Spring Complex would have a material adverse effect on the Company's
financial condition and results of operations.
BUSINESS CONCENTRATION
Contracts with the FBOP and the California Department of Corrections
("CDC") currently account for approximately 58% of the Company's revenues. The
loss of, or a significant decrease in, business from one or both of these
governmental agencies would have a material adverse effect on the Company's
financial condition and results of operations.
10
<PAGE>
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 many 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 private bank debt, 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 secure 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 offender's complaint or
other causes.
ACCEPTANCE OF PRIVATIZED CORRECTIONAL AND DETENTION FACILITIES
Management of correctional and detention facilities by private entities has
not achieved acceptance by many governmental agencies. Some sectors of the
federal government and some state governments are legally unable to delegate
their traditional management responsibilities for correctional and detention
facilities to private companies. The operation of correctional and detention
facilities by private entities is a relatively new concept, is not widely
understood and has encountered resistance from certain groups, such as labor
unions, local sheriffs' 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
11
<PAGE>
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 offenders
that can be placed 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, internal incident or other disturbance at a Company-operated
facility or another privately operated facility, or placement of one or more
notorious offenders or criminal or violent actions by offenders 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.
Although the Company has not experienced any material adverse effect on its
business or results of operations as a result of previous escapes or
absconsions, no assurance can be given that any future escapes or absconsions
would not have a material adverse effect on the Company's business or 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 offenders
or other persons for personal injury or other damages resulting from contact
with Company-operated facilities, programs, personnel or offenders, including
damages arising from an offender's escape or absconscion or from a disturbance
or riot at a Company-operated facility. The U.S. Supreme Court has recently held
that prison guards employed by private firms are not entitled to qualified
immunity from suit by prisoners for violations of their rights. 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 offenders 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 other 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"), Youth Services International, Inc. and Correctional
Services Corporation. At December 31, 1996, CCA and WHC accounted for more than
75% of the privatized secure institutional adult beds under contract in the
United States, according to the 1996 Facility Census. The Company also competes
in some markets with small local companies that 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 companies may have greater financial resources than the Company to finance
12
<PAGE>
acquisition and internal growth opportunities. Consequently, the Company may
encounter significant competition in its efforts to achieve its growth strategy.
See "Business -- Competition."
ECONOMIC RISKS ASSOCIATED WITH DEVELOPMENT ACTIVITIES
When the Company is engaged to act as project manager for the design and
construction of a facility, the Company typically acts as the primary contractor
and subcontracts with other parties that act as the general contractors. As
primary contractor, the Company is subject to the various risks of construction
(including shortages of labor and materials, work stoppages, labor disputes and
weather interference) which could cause construction delays, and the Company is
subject to the risk that the general contractor will be unable to complete
construction at the budgeted costs or to fund any excess construction costs.
Under such contracts the Company is ultimately liable for all late delivery
penalties and cost overruns.
DEPENDENCE ON EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The Company depends greatly on the efforts of its executive officers and
key personnel to obtain new contracts, to make acquisitions and to manage the
Company's operations. The loss or unavailability of any of the Company's
executive officers could have an adverse effect on the Company. The Company's
ability to perform under current and new contracts will depend, in part, on its
ability to attract and retain 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, 9,355,404 shares of Common Stock will be
outstanding, and 890,354 shares will be issuable upon exercise of outstanding
warrants and stock options. The 2,920,000 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. A total of 2,047,067 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 2,246,201 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."
In 1996, the Company filed a registration statement on Form S-8 under the
Securities Act to register 880,000 shares of Common Stock reserved or to be
available for issuance pursuant to the Stock Option Plan.
The Company and persons who will beneficially own in the aggregate
2,547,083 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 90 days following the
date of this Prospectus without the prior written consent of SBC Warburg Dillon
Read Inc. ("SBC Warburg Dillon Read"), subject to certain exceptions. See
"Underwriting."
13
<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE
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 $11.27 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") authorizes 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
Certain current stockholders of the Company (the "Applicable
Stockholders"), who beneficially own in the aggregate approximately 10.2% of
the outstanding Common Stock following completion of the Offering assuming
exercise of their outstanding stock options, are parties to a Stockholders
Agreement (the "Stockholders Agreement"). The Stockholders Agreement provides
that the Applicable Stockholders agree to vote all shares of Common Stock owned
by them to elect two directors out of a six-member Board of Directors of the
Company. Consequently, the Applicable Stockholders, through their Common Stock
holdings and representation on the Board of Directors of the Company, will be
able to exercise influence over the policies and direction of the Company. The
Stockholders Agreement will terminate upon the first to occur of (i) October 7,
2000 or (ii) an Applicable Stockholder owning less than 350,000 shares of the
outstanding Common Stock (including shares of Common Stock issuable upon the
exercise of currently vested options). See "Certain Relationships and Related
Party Transactions -- Stockholders Agreement" and "Principal and Selling
Stockholders."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,250,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$41.2 million at a public offering price of $19 5/8 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.
The net proceeds received by the Company in the Offering will be used to
repay the outstanding borrowings under the 1997 Credit Facility, which amounts
can be reborrowed from time to time after the Offering. Remaining proceeds will
be used for future acquisitions, partial repayment of new construction
financings, working capital and general corporate purposes.
As of October 16, 1997, the outstanding borrowings under the 1997 Credit
Facility totaled $18.0 million, with a stated interest rate of 8.5%. The Company
used borrowings under the 1997 Credit Facility to finance the 1997 Acquisitions
and to fund a portion of the construction financing for the expansion of the Big
Spring Complex and the development of the facility in Charlton County, Georgia
(the "Charlton County Facility"). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock of the Company is currently listed on the AMEX under the
symbol "CRN." On October 16, 1997, the last reported sales price for the
Common Stock on the AMEX was $20 1/8 per share. As of October 15, 1997, there
were approximately 43 record holders of the Common Stock. The high and low sales
prices for the Common Stock on the AMEX since the Common Stock began trading on
October 3, 1996 are shown below:
HIGH LOW
------- -------
1996:
Fourth Quarter (from October 3).............. $12 3/4 $ 8 7/8
1997:
First Quarter................................ 11 5/8 9
Second Quarter............................... 18 9
Third Quarter................................ 16 5/8 14 7/16
Fourth Quarter (through October 16).......... 20 3/4 15 3/4
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain excess cash flow, if any, for use in the
operation and expansion of its business and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent upon, among other factors, the Company's results of operations,
financial condition, capital requirements and restrictions, if any, imposed by
financing commitments and legal requirements. The 1997 Credit Facility contains
restrictions on the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company: (i) as of June 30, 1997; (ii) on a pro forma basis to give effect to
the Abraxas acquisition and (iii) on a pro forma basis adjusted to give effect
to the Offering and the application of the estimated net proceeds therefrom and
the exercise of outstanding warrants relating to the shares of Common Stock to
be sold by the Selling Stockholders in the Offering. See "Use of Proceeds."
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, 1997
----------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(DOLLARS IN THOUSANDS)
Long-term debt, including current
portion:
Credit Facility.................... $ 2,000 $21,000 $ --
Other.............................. 592 592 592
---------- --------- -----------
Total long-term debt,
including current
portion.................... 2,592 21,592 592
---------- --------- -----------
Stockholders' equity:
Preferred Stock, par value $.001
per share, 10,000,000 shares
authorized, none issued and
outstanding..................... -- -- --
Common Stock, par value $.001 per
share, 30,000,000 shares
authorized, 7,413,384 shares
issued and outstanding
historical and 9,872,457 shares
issued and outstanding pro forma
as adjusted(1).................. 7 7 10
Additional paid-in capital......... 47,753 47,753 89,394
Stock option loans................. (455) (455) (455)
Accumulated deficit................ (2,415) (2,415) (2,415)
Treasury stock (555,000 shares of
Common Stock, at cost).......... (2,353) (2,353) (2,353)
---------- --------- -----------
Total stockholders' equity.... 42,537 42,537 84,181
---------- --------- -----------
Total capitalization....... $ 45,129 $64,129 $84,773
========== ========= ===========
- ------------
(1) Excludes: (i) 594,498 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options granted under the Stock Option Plan;
(ii) 295,856 shares of Common Stock reserved for issuance upon exercise of
other outstanding stock options and warrants and (iii) shares issuable with
respect to the Long-Term Incentive Options. See "Management -- Stock Option
Plan" and Note 6 of Notes to the Company's Consolidated Financial
Statements.
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Common Stock as of June 30,
1997 was $36,243,000, or approximately $5.28 per share. Pro forma net tangible
book value 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 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
per share of Common Stock immediately after completion of the Offering. After
giving effect to the Offering at the public offering price of $19 5/8 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, 1997 would have been $77,887,000, or approximately
$8.36 per share. This represents an immediate increase in pro forma net tangible
book value of $3.08 per share to existing stockholders and an immediate dilution
in pro forma net tangible book value of $11.27 per share to new investors in the
Offering.
The following table illustrates this per share dilution:
Public offering price per share...... $ 19.63
Pro forma net tangible book value per
share before the Offering.......... $ 5.28
Increase per share attributable to
the Offering....................... 3.08
---------
Pro forma net tangible book value per
share after the Offering........... 8.36
---------
Dilution of net tangible book value
per share to new investors......... $ 11.27
=========
The following table sets forth, on an unaudited pro forma basis at June 30,
1997, 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 public offering price of $19 5/8 per
share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 6,858,384 75.3% $ 47,760,000 52.0% $ 6.96
New investors........................ 2,250,000 24.7 44,156,250 48.0 19.63
---------- ------- -------------- -------
Total......................... 9,108,384 100.0% $ 91,916,250 100.0%
========== ======= ============== =======
</TABLE>
The foregoing table excludes: (i) 594,498 shares of Common Stock reserved
for issuance upon exercise of outstanding stock options granted under the Stock
Option Plan; (ii) 295,856 shares of Common Stock reserved for issuance upon
exercise of other outstanding stock options and warrants and (iii) shares
issuable with respect to the Long-Term Incentive Options. See
"Management -- Stock Option Plan" and Note 6 of Notes to the Company's
Consolidated Financial Statements.
17
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated balance sheet as
of June 30, 1997 and the unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1996 and for the six months ended
June 30, 1997 reflect the consolidated financial position and results of
operations, respectively, of the Company and its subsidiaries as if: (i) the
acquisition of Abraxas by the Company; (ii) the exercise of outstanding warrants
relating to the shares of Common Stock to be sold by the Selling Stockholders in
the Offering and (iii) the Offering and the application of the estimated net
proceeds therefrom, had occurred, in the case of the balance sheet, on June 30,
1997, and, in the case of the statements of operations, on January 1, 1996. In
addition, the unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1996 and for the six months ended
June 30, 1997 reflect the results of operations as if the Company's initial
public offering in October 1996 ("IPO") and the acquisitions by the Company in
1996 and the acquisition of Interventions had occurred on January 1, 1996. 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.
18
<PAGE>
CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------- PRO FORMA PRO FORMA AS
THE PRO FORMA FOR THE OFFERING ADJUSTED FOR
COMPANY ABRAXAS ADJUSTMENTS ACQUISITION ADJUSTMENTS THE OFFERING
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents ....... $ 1,579 $ 1,607 $ (853)(1) $ 2,333 $ 20,226 (10) $ 22,977
418 (11)
Receivables, net ................ 8,383 8,398 -- 16,781 -- 16,781
Other current assets ............ 3,071 829 (737)(2) 3,163 -- 3,163
-------- -------- -------- -------- -------- --------
Total current assets ....... 13,033 10,834 (1,590) 22,277 20,644 42,921
Property and equipment, net ......... 31,743 12,380 1,950 (3) 46,073 -- 46,073
Intangibles ......................... 5,694 -- 600 (4) 6,294 -- 6,294
Other assets ........................ 2,812 2,261 (2,261)(2) 2,812 -- 2,812
-------- -------- -------- -------- -------- --------
Total assets ............... $ 53,282 $ 25,475 $ (1,301) $ 77,456 $ 20,644 $ 98,100
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and accrued
liabilities ................... $ 5,432 $ 3,752 $ 1,422 (5) $ 10,606 $ -- $ 10,606
Current portion of long-term
debt .......................... 2,283 3,154 (3,154)(6) 283 -- 283
(2,000)(7)
-------- -------- -------- -------- -------- --------
Total current liabilities .. 7,715 6,906 (3,732) 10,889 -- 10,889
Other long-term liabilities ......... 2,721 -- -- 2,721 -- 2,721
Long-term debt, excluding current
portion ........................... 309 12,364 (12,364)(6) 21,309 (21,000)(10) 309
2,000 (7)
19,000 (8)
Stockholders' equity ................ 42,537 6,205 (6,205)(9) 42,537 41,226 (10) 84,181
418 (11)
-------- -------- -------- -------- -------- --------
Total liabilities and stockholders'
equity ............................ $ 53,282 $ 25,475 $ (1,301) $ 77,456 $ 20,644 $ 98,100
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated balance
sheet.
19
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Records a reduction to cash used to fund a portion of the Abraxas
acquisition costs.
(2) Records an adjustment to eliminate a reserve fund and other assets not
acquired in the Abraxas acquisition.
(3) Records a net increase in the carrying value of Abraxas property and
equipment to estimated fair value.
(4) Records the cost of a non-compete agreement with the President of Abraxas.
(5) Records accrued transaction costs and other Abraxas acquisition related
liabilities.
(6) Records the elimination of Abraxas current and non-current debt which was
not assumed by the Company in the Abraxas acquisition.
(7) Records the reclassification of the Company's current portion of long-term
debt to long-term debt as a result of refinancing amounts due under the
1996 Credit Facility with the 1997 Credit Facility.
(8) Records the increase in long-term debt related to financing the Abraxas
acquisition.
(9) Records the elimination of net assets of Abraxas prior to the acquisition.
(10) Records the sale of 2,250,000 shares of Common Stock, par value $.001 per
share, at $19 5/8 per share, net of underwriting discounts and commissions
and aggregate offering expenses of $500,000, the use of $21.0 million of
the net proceeds thereof to repay outstanding indebtedness, and the use of
the remaining proceeds of $20.2 million as an increase to cash.
(11) Records the proceeds upon the exercise, concurrently with the Offering, of
stock warrants by certain Selling Stockholders in order to purchase 209,073
shares of Common Stock that will be sold by such Selling Stockholders in
the Offering.
20
<PAGE>
CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------- TOTAL PRO FORMA
THE REID INTER- PRO FORMA FOR THE OFFERING
COMPANY MIDTEX CENTER VENTIONS ABRAXAS ADJUSTMENTS ACQUISITIONS ADJUSTMENTS
-------- ------- ------ ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ......................... $ 32,327 $ 8,603 $1,131 $ 7,244 $ 31,080 $ -- $ 80,385 $ --
Operating expenses ............... 26,038 5,774 997 5,608 23,543 5,359 (1) 67,927 --
500 (2)
108 (3)
Depreciation and amortization .... 1,390 407 22 162 1,316 (866)(4) 2,387 --
60 (5)
(18)(6)
(97)(7)
11 (8)
General and administrative
expenses ....................... 4,560 672 -- 644 5,054 (5,359)(1) 5,571 --
-------- ------- ------ ------- -------- ------- -------- -------
Income from operations ........... 339 1,750 112 830 1,167 302 4,500 --
Interest expense ................. 2,810 843 -- 173 1,226 939 (9) 1,671 (1,494)(14)
(1,281)(10)
(3,039)(11)
Interest income .................. (167) (14) -- (300) -- 300 (12) (181) --
-------- ------- ------ ------- -------- ------- -------- -------
Income (loss) before provision for
income taxes ................... (2,304) 921 112 957 (59) 3,383 3,010 1,494
Provision for income taxes ....... 75 -- -- -- -- 1,129 (13) 1,204 598 (13)
-------- ------- ------ ------- -------- ------- -------- -------
Net income (loss) ................ $ (2,379) $ 921 $ 112 $ 957 $ (59) $ 2,254 $ 1,806 $ 896
======== ======= ====== ======= ======== ======= ======== =======
Earnings (loss) per share ........ $ (.53) $ .25
======== ========
Number of shares used in per share
computation (thousands)(15) .... 4,466 7,119
======== ========
</TABLE>
PRO FORMA AS
ADJUSTED FOR
THE OFFERING
------------
Revenues............................. $ 80,385
Operating expenses................... 67,927
Depreciation and amortization........ 2,387
General and administrative
expenses........................... 5,571
------------
Income from operations............... 4,500
Interest expense..................... 177
Interest income...................... (181)
------------
Income (loss) before provision for
income taxes....................... 4,504
Provision for income taxes........... 1,802
------------
Net income (loss).................... $ 2,702
============
Earnings (loss) per share............ $ .32
============
Number of shares used in per share
computation (thousands)(15)........ 8,526
============
See accompanying notes to unaudited pro forma condensed consolidated statement
of operations.
21
<PAGE>
CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA AS
THE PRO FORMA FOR THE OFFERING ADJUSTED FOR
COMPANY ABRAXAS ADJUSTMENTS ACQUISITION ADJUSTMENTS THE OFFERING
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues ......................... $ 28,041 $ 17,124 $ -- $ 45,165 $ -- $ 45,165
Operating expenses ............... 22,556 13,060 1,860 (1) 37,726 -- 37,726
250 (2)
Depreciation and amortization .... 1,120 601 (376)(4) 1,375 -- 1,375
30 (5)
General and administrative
expenses ....................... 2,218 2,359 (1,860)(1) 2,717 -- 2,717
-------- -------- -------- -------- -------- --------
Income from operations ........... 2,147 1,104 96 3,347 -- 3,347
Interest expense ................. 209 606 314 (9) 1,129 (1,041)(14) 88
Interest Income .................. (86) -- -- (86) -- (86)
-------- -------- -------- -------- -------- --------
Income (loss) before provision for
income taxes ................... 2,024 498 (218) 2,304 1,041 3,345
Provision for income taxes ....... 729 -- 100 (13) 829 375 (13) 1,204
-------- -------- -------- -------- -------- --------
Net income ....................... $ 1,295 $ 498 $ (318) $ 1,475 $ 666 $ 2,141
======== ======== ======== ======== ======== ========
Earnings per share ............... $ .18 $ .21 $ .25
======== ======== ========
Number of shares used in per share
computation (thousands) (15) ... 7,139 7,139 8,546
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated statement
of operations.
22
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Records reclassification of general and administrative expenses for
Abraxas, Interventions and MidTex to operating expenses to conform to the
Company's policy.
(2) Records an adjustment to operating expenses to reflect estimated property
taxes for land and buildings acquired from Abraxas which were tax-exempt
prior to the acquisition.
(3) Records an adjustment to operating expenses to reflect annual payments in
lieu of property taxes to the City of Big Spring resulting from the
acquisition of substantially all the assets of MidTex.
(4) Records adjustments to depreciation expense for revised basis in
depreciable assets as follows for Abraxas:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
(DOLLARS IN THOUSANDS)
Elimination of historical
depreciation expense............... $(1,316) $ (601)
Depreciation expense for revised
basis in depreciable assets........ 450 225
-------- ------
$ (866) $ (376)
======== ======
(5) Records amortization expense of $60,000 for the year ended December 31,
1996 and $30,000 for the six months ended June 30, 1997 for the non-compete
agreement with the President of Abraxas.
(6) Records adjustments to depreciation expense for revised basis in
depreciable assets for Interventions.
(7) Records adjustments to depreciation and amortization as follows for MidTex:
YEAR ENDED
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
Elimination of historical
depreciation and amortization
expense............................ $ (407)
Amortization of prepaid facility use
costs.............................. 310
------
$ (97)
======
(8) Records adjustments to depreciation expense for the revised basis in
depreciable assets for the Reid Center.
(9) Records additional interest expense for the year ended December 31, 1996 on
bank borrowings of $50.8 million incurred to consummate the Abraxas,
Interventions, MidTex and Reid Center acquisitions and additional interest
expense for the six months ended June 30, 1997 on bank borrowings of $19.0
million incurred to consummate the acquisition of Abraxas based on a stated
interest rate of 8.00%, plus amortization of debt issuance costs incurred
under terms of the 1997 Credit Facility.
(10) Records an adjustment to reverse a $1.3 million non-recurring charge in
1996 to expense deferred financing costs associated with the 1996 Credit
Facility.
(11) Records a reduction in interest expense of $3.0 million to reduce assumed
indebtedness with proceeds of $38.0 million from the IPO.
(12) Records an adjustment to eliminate investment income earned on investments
not acquired in the Interventions acquisition.
(13) Records adjustments to record the income tax effects of the foregoing
adjustments.
(14) Records a reduction in interest expense of $1.5 million of the year ended
December 31, 1996 and $1.0 million for the six months ended June 30, 1997
as a result of the repayment in full of borrowing outstanding under the
1997 Credit Facility from the net proceeds of the Offering.
(15) Pro forma shares for the Offering include only 1,407,000 of the 2,459,073
shares (which includes 209,073 shares issued upon the exercise of warrants)
sold in the Offering. The 1,052,073 shares represent shares assumed
repurchased with the excess cash proceeds received by the Company.
23
<PAGE>
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, 1996 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 1994, 1995 and 1996 are included elsewhere in this Prospectus. The
selected consolidated 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,
1996 and 1997 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, 1997
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, 1996 and the six months ended June 30, 1997 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 by the Company in 1996 and 1997; (ii) the exercise of warrants
relating to the shares of Common Stock to be sold by the Selling Stockholders in
the Offering and (iii) the Offering and the application of the estimated net
proceeds therefrom to the Company, as if such events had occurred on January 1,
1996. The pro forma Balance Sheet Data as of June 30, 1997 gives effect to such
events as if they had occurred on June 30, 1997. 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 at the beginning of the period or on the date indicated, nor are
they intended to project the Company's results of operations or financial
position for any future period or date. 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
--------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------- --------------------
1992 1993 1994(1) 1995 1996(2) 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ......................... $ 2,540 $ 3,198 $ 15,689 $ 20,692 $ 32,327 $ 11,337 $ 28,041
Operating expenses ............... -- 2,827 12,315 16,351 26,038 9,461 22,556
Depreciation and amortization .... 3 16 758 820 1,390 510 1,120
General and administrative
expenses ....................... 1,627 1,315 2,959 3,531 4,560 1,629 2,218
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations ..................... 910 (960) (343) (10) 339 (263) 2,147
Interest expense(3) .............. -- -- 294 1,115 2,810 498 209
Interest income .................. (30) (45) (138) (136) (167) (51) (86)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes .......................... 940 (915) (499) (989) (2,304) (710) 2,024
Provision for income taxes(4) .... -- -- 101 -- 75 -- 729
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ................ $ 940 $ (915) $ (600) $ (989) $ (2,379) $ (710) $ 1,295
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per share ........ $ .38 $ (.34) $ (.16) $ (.25) $ (.53) $ (.20) $ .18
======== ======== ======== ======== ======== ======== ========
Number of shares used in per share
computation(5) ................. 2,491 2,695 3,811 3,983 4,466 3,523 7,139
</TABLE>
PRO FORMA
------------------------
SIX
YEAR MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
---------- ----------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues ............................. $ 80,385 $ 45,165
Operating expenses ................... 67,927 37,726
Depreciation and amortization ........ 2,387 1,375
General and administrative
expenses ........................... 5,571 2,717
---------- ----------
Income (loss) from
operations ......................... 4,500 3,347
Interest expense(3) .................. 177 88
Interest income ...................... (181) (86)
---------- ----------
Income (loss) before income
taxes .............................. 4,504 3,345
Provision for income taxes(4) ........ 1,802 1,204
---------- ----------
Net income (loss) .................... $ 2,702 $ 2,141
========== ==========
Earnings (loss) per share ............ $ .32 $ .25
========== ==========
Number of shares used in per share
computation(5) ..................... 8,526 8,546
(TABLE CONTINUED ON FOLLOWING PAGE)
24
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------ --------------------
1992 1993 1994(1) 1995 1996(2) 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total offender capacity:
Residential ................... -- 302 1,281 1,640 3,577 2,044 5,872
Non-residential
community-based ............. -- -- -- -- -- -- --
Total ....................... -- 302 1,281 1,640 3,577 2,044 5,872
Beds under contract (end of
period) ....................... -- 282 1,155 1,478 3,254 1,796 5,367
Contracted beds in operation (end
of period) .................... -- 282 1,155 1,135 2,899 1,561 3,541
Average occupancy based on
contracted beds in
operation(6) .................. -- -- 92.1% 98.9% 97.0% 95.8% 96.4%
BALANCE SHEET DATA:
Working capital ................. $ 812 $ 810 $ 2,015 $ 1,525 $ 7,747 $ 2,098 $ 5,318
Total assets .................... 1,300 2,048 13,095 14,184 46,824 19,773 53,282
Long-term debt .................. -- -- 3,447 7,649 745 13,868 2,592
Stockholders' equity ............ 896 1,085 6,631 3,053 41,051 2,367 42,537
</TABLE>
PRO FORMA
------------------------
SIX
YEAR MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
---------- ----------
(UNAUDITED)
OPERATING DATA:
Total offender capacity:
Residential ........................ 4,527 6,372
Non-residential
community-based .................. 900 900
Total ............................ 5,427 7,272
Beds under contract (end of
period) ............................ 4,098 5,867
Contracted beds in operation (end
of period) ......................... 3,743 4,041
Average occupancy based on
contracted beds in
operation(6) ....................... 92.7% 95.1%
BALANCE SHEET DATA:
Working capital ...................... $ 32,032
Total assets ......................... 98,100
Long-term debt ....................... 592
Stockholders' equity ................. 84,181
- ------------
(1) Includes operations purchased by the Company in March 1994.
(2) Includes operations purchased by the Company in May and July 1996.
(3) Interest expense for 1996 includes a $1.3 million non-recurring charge
($726,000 of which was non-cash) to expense deferred financing costs
associated with the early retirement of debt.
(4) 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 prior to March 31, 1994 because the Company was
organized as a partnership until that time.
(5) Prior to March 31, 1994, the Company was organized as a partnership. For
purposes of computing average shares outstanding for the period prior to
March 31, 1994, the partnership units were converted to common shares using
a one-to-one unit-to-share conversion ratio.
(6) 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.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides integrated facility development, design, construction
and operational services to governmental agencies within three areas of
operational focus. The following table sets forth the number of facilities and
beds under contract or award at the end of the periods shown.
DECEMBER 31,
------------------------------- JUNE 30,
1994 1995 1996 1997
--------- --------- --------- --------
Facilities in operation(1)........... 13 12 16 21
Total offender capacity:
Residential..................... 1,281 1,640 3,577 5,872
Non-residential
community-based............... -- -- -- --
Total...................... 1,281 1,640 3,577 5,872
Beds under contract (end of
period)............................ 1,155 1,478 3,254 5,367
Contracted beds in operation (end of
period)............................ 1,155 1,135 2,899 3,541
Average occupancy based on contracted
beds in operation(2)............... 92.1% 98.9% 97.0% 96.4%
- ------------
(1) As of September 9, 1997, the Company had 39 facilities in operation and
contracts to operate two additional facilities under development. Of the 41
facilities, 11 are non-residential community-based facilities.
(2) For any applicable facilities, includes reduced occupancy during the
start-up phase.
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 generally recognized on a
per diem rate based upon the number of occupant days for the period.
Factors which the Company considers in determining the per diem rate to
charge include: (i) the programs specified by the contract and the related
staffing levels; (ii) wage levels customary in the respective geographic areas;
(iii) whether the proposed facility is to be leased or purchased and (iv) 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's operating margins generally vary from facility to facility
(regardless of whether the facility is secure institutional, pre-release or
juvenile) based on the terms negotiated with each contracting governmental
agency, which terms depend on factors such as the level of competition for the
contract award, the proposed length of the contract, the historical (for
existing facilities) or anticipated (for new facilities) occupancy levels for a
facility, the level of capital commitment required with respect to a facility
and the anticipated changes in operating costs, if any, over the term of the
contract.
The Company incurs all facility operating expenses, except for certain debt
service and lease payments with respect to facilities for which the Company has
only a management contract (two facilities in operation at June 30, 1997).
A majority of the Company's facility operating expenses consist of fixed
costs. These fixed costs include lease and rental expense, insurance, utilities
and depreciation. As a result, when the Company commences operation of new or
expanded facilities, fixed operating expenses increase. The amount of the
Company's variable operating expenses depends on occupancy levels at the
facilities operated by the Company. These variable operating expenses include
food, medical services, supplies and clothing. The Company's largest single
operating expense, facility payroll expense and related employment taxes and
costs, has both a fixed and a variable component. The Company can adjust the
staffing and payroll to a certain extent based on occupancy at a facility, but a
minimum fixed number of employees is required to operate and maintain any
facility regardless of occupancy levels. Since a majority of the Company's
operating expenses are fixed, to the extent that the Company can increase
revenues at a facility through
26
<PAGE>
higher occupancy or expansion of the number of beds under contact, the Company
should be able to improve operating results.
General and administrative expenses consist primarily of salaries of the
Company's corporate and administrative personnel who provide senior management,
accounting, finance, personnel and other services and costs of developing new
contracts.
Newly opened facilities are staffed according to contract requirements when
the Company begins receiving offenders. Offenders are typically assigned to a
newly opened facility on a phased-in basis over a one to three-month period. The
Company may incur operating losses at new facilities until break-even occupancy
levels are reached. However, the Company does not have a 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 requests for proposals ("RFPs")).
Working capital requirements generally increase immediately prior to the
Company commencing management of a new facility as the Company incurs start-up
costs and purchases necessary equipment and supplies before facility management
revenue is realized.
RESULTS OF OPERATIONS
The Company's historical operating results reflect that the Company has
significantly expanded its business since 1993. Material fluctuations in the
Company's results of operations are principally the result of the timing and
effect of acquisitions and the level of development activity conducted by the
Company and occupancy rates at Company-operated facilities. The Company's
acquisitions to date have been accounted for using the purchase method of
accounting, whereby the operating results of the acquired businesses have been
reported in the Company's operating results since the date of acquisition.
The Company's income from operations as a percentage of revenues 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 operating margins.
The following table sets forth for the periods indicated the percentages of
revenues represented by certain items in the Company's historical consolidated
statements of operations.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues .......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses ................ 78.5 79.0 80.5 83.5 80.4
Depreciation and amortization ..... 4.8 4.0 4.3 4.5 4.0
General and administrative
expenses ........................ 18.9 17.0 14.1 14.3 7.9
------ ------ ------ ------ ------
Income (loss) from operations ..... (2.2) 0.0 1.1 (2.3) 7.7
Interest expense (income) ......... 1.0 4.8 8.2 4.0 0.5
------ ------ ------ ------ ------
Income (loss) before income taxes . (3.2) (4.8) (7.1) (6.3) 7.2
Provision for income taxes ........ 0.6 0.0 0.2 0.0 2.6
------ ------ ------ ------ ------
Net income (loss) ................. (3.8)% (4.8)% (7.3)% (6.3)% 4.6%
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES. Revenues increased by 147.3% to $28.0 million for the six months
ended June 30, 1997 from $11.3 million for the six months ended June 30, 1996.
The increase in revenues of $16.7 million was due principally to the acquisition
of MidTex in July 1996, the acquisition of the Reid Center in May 1996,
27
<PAGE>
the acquisition of Interventions in January 1997, and the opening of two new
juvenile facilities and one new pre-release center during the first quarter of
1997.
OPERATING EXPENSES. Operating expenses increased by 138.4% to $22.6
million for the six months ended June 30, 1997 from $9.5 million for the six
months ended June 30, 1996. The increase in operating expenses was due
principally to the acquisition of MidTex in July 1996, the acquisition of the
Reid Center in May 1996, the acquisition of Interventions in January 1997, and
the opening of two new juvenile facilities and one new pre-release center during
the first quarter of 1997. As a percentage of revenues, operating expenses
decreased to 80.4% from 83.5%. The decrease in operating expenses as a
percentage of revenues is principally due to higher operating margins at the Big
Spring Complex which was acquired in July 1996, and improved occupancy of
certain facilities as compared to the prior year period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$1.1 million for the six months ended June 30, 1997 from $510,000 for the six
months ended June 30, 1996. The increase was due principally to the amortization
of prepaid facility use costs of the Big Spring Complex acquired in July 1996,
depreciation of the Reid Center acquired in May 1996 and the 150 bed capacity
transitional living center for juveniles located in San Antonio, Texas (the
"Griffin Juvenile Facility") acquired in January 1997, and depreciation and
amortization of deferred start-up costs of the three new facilities opened
during the first quarter of 1997. In addition, amortization costs include
approximately $187,000 to expense start-up costs related to the non-renewal of a
120 bed juvenile contract as of June 30, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 36.2% to $2.2 million for the six months ended June 30, 1997 from
$1.6 million for the six months ended June 30, 1996. The increase in general and
administrative expenses resulted from adding corporate and administrative
personnel, including a new chief operating officer, to manage the increased
business of the Company, and from additional costs of administering the Company
as a result of the IPO in the fourth quarter of 1996. As a percentage of
revenues, general and administrative expenses decreased to 7.9% from 14.3% due
principally to spreading fixed costs over a larger revenue base.
INTEREST. Interest expense, net of interest income, decreased to $123,000
for the six months ended June 30, 1997 from $447,000 for the six months ended
June 30, 1996. The decrease in net interest expense was principally due to lower
outstanding borrowings under the Company's 1996 Credit Facility and 1995 credit
facility (the "1995 Credit Facility") for the respective periods.
INCOME TAXES. For the six months ended June 30, 1997, the Company
recognized a provision for income taxes at an estimated effective annual rate of
36.0% compared to no provision for income taxes for the six months ended June
30, 1996 due to a loss. The effective income tax rate applied in 1997 includes a
benefit for the reversal of previously reserved deferred tax assets resulting
from prior net operating losses which are expected to be utilized in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased by 56.2% to $32.3 million for the year ended
December 31, 1996 from $20.7 million for the year ended December 31, 1995. The
increase in occupancy fees of $11.3 million, or 54.8%, was due principally to
the acquisition of MidTex in July 1996, the opening of two new pre-release
facilities during the first quarter of 1996, and the acquisition of the Reid
Center in May 1996. The increase in other income for the year ended December 31,
1996 to $450,000 from $98,000 for the year ended December 31, 1995 was due
principally to the recognition of revenue related to a previously reserved note
receivable of $206,000 pertaining to 1994 operations of the 302 bed medium and
maximum security facility operated primarily for the U.S. Marshals Service (the
"USMS") in Central Falls, Rhode Island (the "Wyatt Facility"), the
realization of which improved from prior periods due to payments received on the
note and due to the additional operating experience with the facility.
Additional other income related to commissary operations and commissions earned
at the Big Spring Complex.
OPERATING EXPENSES. Operating expenses increased by 59.2% to $26.0 million
for the year ended December 31, 1996 from $16.4 million for the year ended
December 31, 1995. This increase was principally attributable to the acquisition
of MidTex in July 1996, the opening of two new pre-release
28
<PAGE>
facilities during the first quarter of 1996, and the acquisition of the Reid
Center in May 1996. As a percentage of revenues, operating expenses increased to
80.5% from 79.0% due primarily to the relative increase in secure institutional
operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
69.5% to $1.4 million for the year ended December 31, 1996 from $820,000 for the
year ended December 31, 1995. The increase was due principally to the
amortization of prepaid facility use costs of the Big Spring Complex, the
opening of two new pre-release facilities in January 1996, and the acquisition
of the Reid Center in May 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 29.1% to $4.6 million for the year ended December 31, 1996 from
$3.5 million for the year ended December 31, 1995. Included in general and
administrative expenses for the year ended December 31, 1996 was a non-
recurring, non-cash charge of $870,000 in connection with the July 1996 grant of
certain options to purchase shares of the Company's Common Stock. As a
percentage of revenues, excluding the non-recurring charge, general and
administrative expenses decreased to 11.4% from 17.0% due principally to
spreading fixed costs over a larger revenue base.
INTEREST. Interest expense, net of interest income, increased to $2.6
million for the year ended December 31, 1996 from $979,000 for the year ended
December 31, 1995. The increase in net interest expense was due principally to
the $1.3 million non-recurring charge ($726,000 of which was non-cash) to
expense deferred financing costs associated with the early retirement of
significant portions of the 1996 Credit Facility, borrowings under the Company's
1995 Credit Facility and the 1996 Credit Facility related to the acquisition of
MidTex in July 1996, the Company's financing of the purchase of certain
outstanding stock in November 1995, the construction and development of the two
new pre-release facilities which opened during the first quarter of 1996 and the
acquisition of the Reid Center in May 1996.
INCOME TAXES. The Company did not recognize any provision for federal
income taxes due to a taxable loss in both years. The Company recognized a
provision for state income taxes of $75,000 for the year ended December 31,
1996. As of December 31, 1996, the Company had recognized a deferred tax asset
of $608,000. Management of the Company believes that this deferred tax asset is
realizable.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased 31.9% to $20.7 million for the year ended
December 31, 1995 from $15.7 million for the year ended December 31, 1994. The
revenue increase was due principally to the recognition of occupancy fees for a
full 12 months in 1995 related to the acquisition of Eclectic Communications,
Inc. ("Eclectic") versus the recognition of nine months in 1994. Additionally,
an increase in 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.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 19.3% to $3.5 million for the year ended December 31, 1995 from $3.0
million for the year ended December 31, 1994. The increase in general and
administrative expenses was due principally to the addition of the operations of
Eclectic and an increase in RFP and development costs. Development costs
increased by $457,000 for the year ended December 31, 1995 compared to the year
ended December 31, 1994. As a percentage of
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revenues, general and administrative expenses decreased to 17.0% from 18.9% due
principally to spreading fixed costs over a larger revenue base.
INTEREST. Interest expense, net of interest income, increased to $979,000
for the year ended December 31, 1995 from $156,000 for the year ended December
31, 1994. The increase resulted from the expensing of debt issuance costs and
commitment fees of $472,000 associated with the 1995 Credit Facility, the
incurrence of $4.0 million of debt and other long-term obligations in connection
with the acquisition of Eclectic and increased borrowings under the 1995 Credit
Facility to purchase treasury stock.
INCOME TAXES. There was no provision for income taxes for the year ended
December 31, 1995 due to a taxable loss. The Company recognized a provision for
income taxes of $101,000 for the year ended December 31, 1994, even though the
Company incurred a loss for financial reporting purposes in 1994, principally
because certain goodwill amortization contributing to the loss for financial
reporting purposes was not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's primary capital requirements are for 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 of
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.
CHANGES IN FINANCIAL POSITION. As of June 30, 1997, total assets had
increased $6.5 million to $53.3 million since December 31, 1996. The increase
related principally to the acquisition of Interventions in January 1997. The
Company paid $6.0 million for substantially all of the assets of Interventions,
including the retirement of $2.3 million of pre-acquisition bank debt. The
purchase price was paid with $2.0 million of borrowings from the 1996 Credit
Facility, and the remainder with cash. As of December 31, 1996, total assets had
increased $32.6 million to $46.8 million since December 31, 1995. The increase
related principally to the acquisitions of MidTex and the Reid Center for which
total consideration was $25.7 million, and excess cash proceeds from the IPO.
Total stockholders' equity increased by $38.0 million to $41.1 million as of
December 31, 1996, largely as a result of the IPO and certain other equity
transactions. The Company utilized the net proceeds from the IPO to retire all
of its then outstanding borrowings. Therefore, immediately following the
consummation of the IPO, the Company had no material debt. 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. As of June 30, 1997, the Company had $2.0 million
outstanding under the 1996 Credit Facility.
WORKING CAPITAL. The Company's working capital decreased to $5.3 million
at June 30, 1997 from $7.7 million at December 31, 1996. This decrease was
principally due to the use of cash to fund a portion of the Interventions
acquisition in January 1997 and the classification of $2.0 million of borrowings
outstanding under the 1996 Credit Facility as current at June 30, 1997.
Increases to working capital include increased receivables resulting from newly
opened facilities and the timing of certain collections, and a $2.0 million cash
advance from the State of Georgia to be applied toward the construction and
development of the newly awarded 550 bed contract at the Charlton County
Facility. The Company's working capital increased to $7.7 million at December
31, 1996 from $1.5 million at December 31, 1995. This increase was principally
due to excess cash proceeds from the IPO after repayment of borrowings, and an
increase in receivables resulting from the acquisitions of MidTex in July 1996
and the Reid Center in May 1996.
EXISTING CREDIT FACILITY. In September 1997, the Company entered into the
1997 Credit Facility, which is a $60.0 million revolving line of credit, the
availability of which is determined by the Company's
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projected pro forma cash flow. The amount currently available under the 1997
Credit Facility is approximately $48.0 million. The 1997 Credit Facility matures
in 2003 and bears interest at rates ranging from LIBOR plus 1.75% to 2.50%.
In January 1997, the Company financed the acquisition of substantially all
of the assets of Interventions with, among other things, $2.0 million of
borrowings under the 1996 Credit Facility. In September 1997, the Company
purchased substantially all of the assets of Abraxas. The Company financed the
$19.8 million purchase price with $19.0 million of borrowings under the 1997
Credit Facility, and the remainder with cash. In addition, the $2.0 million of
outstanding borrowings under the 1996 Credit Facility was refinanced with
borrowings under the 1997 Credit Facility. See Note 8 to the Company's
Consolidated Financial Statements.
CAPITAL EXPENDITURES. Capital expenditures for the six months ended June
30, 1997 of $1.8 million were related to construction-in-progress for the 516
bed expansion of the Big Spring Complex and the 550 bed Charlton County
Facility, improvements and furniture and equipment at the newly opened
facilities and normal replacement of furniture and equipment at various
facilities. The Company anticipates expending an additional $28.0 million
through 1998 to complete the Big Spring Complex expansion and the development of
the Charlton County Facility, and is currently seeking to obtain additional
long-term project financing in the amount of approximately $25.0 million for
these capital expenditures. Capital expenditures for the year ended December 31,
1996 were $1.3 million and related to construction-in-progress for a new
pre-release facility which opened during the first quarter of 1997, completion
of construction and purchase of furniture and equipment for the two pre-release
facilities which opened during the first quarter of 1996 and normal replacement
of furniture and equipment at various facilities.
CASH PROVIDED BY OPERATING ACTIVITIES. The Company had net cash provided
by operating activities of $2.1 million for the six months ended June 30, 1997.
Significant sources of cash include $2.4 million of net income plus depreciation
and amortization, and a $2.0 million advance from the State of Georgia for the
construction and development of the Charlton County Facility. This advance will
be applied to future per diem billings to the State of Georgia once the facility
begins operations. Significant uses of operating cash during the period include
increased accounts receivable and start-up costs for facilities under
development, and increased prepaid insurance and other items related to the
additional acquired and newly opened facilities. The Company had net cash used
in operating activities of $540,000 for the year ended December 31, 1996.
Significant uses of operating cash during 1996 include start-up costs for
facilities under development, and increased prepaid insurance and other items
related to the additional acquired facilities.
Management of the Company believes that the cash flows anticipated to be
generated from operations, together with the credit available under the 1997
Credit Facility and the net proceeds of the Offering, will provide sufficient
liquidity for its foreseeable needs. The Company anticipates it will need to
obtain separate additional sources of financing for significant acquisitions and
construction costs related to future secure institutional contract awards.
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 rates or per diem rates that
increase by only small amounts during the terms of the contracts. Inflation
could substantially increase the Company's personnel costs (the largest
component of facility management expense) or other operating expenses at rates
faster than any increases in occupancy fees.
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BUSINESS
GENERAL
The Company is one of the leading providers of privatized correctional,
detention and pre-release services in the United States based on total offender
capacity. The Company is the successor to entities that began developing secure
institutional correctional and detention facilities in 1987, pre-release
facilities in 1977 and juvenile facilities in 1973. The Company has
significantly expanded its operations through acquisitions and internal growth
and is currently operating or developing facilities in 10 states and the
District of Columbia. As of September 9, 1997, the Company has contracts to
operate 41 facilities with a total offender capacity of 7,072, which has
significantly increased from 3,577 offenders at December 31, 1996. The Company's
residential facilities have a total design capacity of 6,172 beds, with 28
facilities currently in operation (4,586 beds), two facilities under development
(1,070 beds) and the existing Big Spring Complex under expansion (516 beds). For
the six months ended June 30, 1997, the Company's revenues were $28.0 million,
representing an increase of 147% from $11.3 million for the six months ended
June 30, 1996. The Company had net income of $1.3 million compared to a net loss
of $710,000 for the same respective six month periods.
The Company provides integrated facility development, design, construction
and operational services to governmental agencies within three areas of
operational focus: (i) secure institutional correctional and detention services;
(ii) pre-release correctional services and (iii) juvenile correctional and
detention services. See "Business -- Facility Design, Construction and
Finance." Secure institutional correctional and detention services primarily
consist of the operation of secure adult incarceration facilities. Pre-release
correctional services primarily consist of providing pre-release and halfway
house programs for adult offenders who are either on probation or serving the
last three to six months of their sentences on parole and preparing for re-entry
into society at large. Juvenile correctional and detention services primarily
consist of providing residential treatment and educational programs and
non-residential community-based programs to juvenile offenders between the ages
of 10 and 17 who have either been adjudicated or suffer from behavioral
problems. At the adult facilities it operates, the Company generally provides
maximum and medium security incarceration and minimum security residential
services, institutional food services, certain transportation services, general
education programs (such as high school equivalency and English as a second
language programs), health care (including medical, dental and psychiatric
services), work and recreational programs and chemical dependency and substance
abuse programs. Additional services provided in the Company's pre-release
facilities typically include life skills and employment training and job
placement assistance. Juvenile services provided by the Company include
counseling, wilderness, medical and accredited educational programs tailored to
meet the special needs of juveniles. The Company derives substantially all its
revenues from operating correctional, detention and pre-release facilities for
federal, state and local governmental agencies in the United States. Of the
facilities operated or currently under development by the Company, 11 are owned,
26 are leased and four are operated through other arrangements. See
"Business -- Properties."
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:
DIVERSIFY ITS BUSINESS. The Company continues to diversify its business
within all three areas of its operational focus. The Company believes that, by
being a diversified provider of services, it 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. In addition, by providing services from juvenile
through long-term adult incarceration, and finally through pre-release, the
Company is better equipped to meet the needs within its three areas of
operational focus. The Company continues to actively pursue contracts to provide
services for specialized segments of the offender population categorized by age
(such as services for aging offenders or juvenile offenders), medical status,
gender or security needs.
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DELIVER COST EFFECTIVE AND QUALITY MANAGEMENT PROGRAMS. The Company seeks
to deliver high quality services in all its markets on a cost effective basis.
The Company focuses 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 SPECIALIZED AND INNOVATIVE SERVICES. The Company implements
specialized and innovative services to address unique needs of governmental
agencies and certain segments of the offender population. For example, certain
facilities of the Company are equipped with interactive satellite links to
courtrooms and judges, which reduce the time, effort and expense related to
transporting offenders to offsite courtrooms.
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 and its
program capacities, the Company increases economies of scale and purchasing
power and enhances its opportunities for larger contract awards. The Company
seeks to increase revenues by pursuing the following growth strategies:
BID FOR NEW CONTRACT AWARDS. The Company selectively pursues opportunities
to obtain contract awards for new privatized facilities. As of October 16, 1997,
the Company has submitted written bids to operate four new projects with an
aggregate offender capacity of over 1,100. Awards for these projects should be
made by the applicable governmental agencies by the end of 1997. The nature of
the written bid process is dynamic and, at any given date, the number of new
projects and the aggregate offender capacity for which written bids have been
submitted can increase or decrease significantly based upon when written bids
are submitted and when responses to these bids are received.
INCREASE DESIGN CAPACITY AND PROGRAM CAPACITY OF EXISTING FACILITIES. The
Company has the potential to expand its design capacity and program capacity 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. In
addition, as evidenced by the current 516 bed expansion of its Big Spring
Complex, the Company will make greater capital investments for more substantial
facility expansions when it deems it appropriate.
PURSUE STRATEGIC ACQUISITIONS. The Company has completed four acquisitions
since May 1996 and 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 insufficiently capitalized to
pursue the industry's growth opportunities. The Company intends to pursue
selective acquisitions of other operators of private correctional and detention
facilities in secure institutional, pre-release and juvenile areas of
operational focus to enhance its position in its current markets, to expand into
new markets and to broaden the types of services which the Company can provide.
In addition, 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 has increased its access to capital
markets, allowing the Company the flexibility to use various combinations of its
Common Stock, cash and debt financing to make additional acquisitions. The
Company from time to time considers acquisitions of all or a portion of other
companies managing private correctional and detention facilities and related
businesses. There are no current agreements or understandings with respect to
any such acquisitions. The timing, size and success of the Company's acquisition
program efforts and the associated potential capital commitments are not
predictable.
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HISTORY OF ACQUISITIONS
Since 1994, the Company has completed five acquisitions and believes that
the private correctional and detention industry is positioned for further
consolidation.
In September 1997, the Company acquired substantially all of the assets of
Abraxas, a juvenile operator of seven residential facilities and 11
non-residential community-based programs, serving an aggregate capacity of
approximately 1,400 juvenile offenders. The aggregate purchase price for the
acquisition was approximately $19.8 million. Founded in 1973, the 24 years of
operating history and approximately 750 employees of Abraxas add a significant
depth of juvenile management expertise and a vast network of relationships
within the corrections industry. Abraxas has received national recognition,
including multiple "Pennsylvania Residential Program of the Year" awards, and
has been a featured program for the Ohio governor's crime summit. Following
consummation of the acquisition, approximately 750 employees of Abraxas became
employees of the Company.
In January 1997, the Company acquired substantially all of the assets of
Interventions for an aggregate purchase price of $6.0 million. The acquisition
included the operation of a 300 bed adult residential pre-release facility in
Dallas, Texas and a 150 bed capacity residential transitional living center for
juveniles in San Antonio, Texas. Following the consummation of the acquisition,
approximately 160 employees of Interventions became employees of the Company.
In July 1996, the Company acquired substantially all the assets of MidTex,
the operator of the Big Spring Complex, for an aggregate purchase price of
approximately $23.2 million. The City of Big Spring has an Intergovernmental
Agreement (the "IGA") with the FBOP to house up to 1,352 offenders at the Big
Spring Complex, and as part of the acquisition, MidTex assigned to the Company
its rights under an operating agreement with the City of Big Spring (the "Big
Spring Operating Agreement") to manage the Big Spring Complex. The Big Spring
Operating Agreement has a base term of 20 years from the closing of the
acquisition and three five-year renewal options at the discretion of the
Company. 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
secure institutional facility beds managed at that time by the Company, and the
Company believes that the acquisition strengthened its base for continued
expansion of the Company's secure institutional area of operational focus.
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 March 1994, the Company acquired Eclectic, the operator of 11 privatized
secure institutional and pre-release facilities in California with an aggregate
design capacity of 979 beds. Consideration for the acquisition of Eclectic was
$10.0 million, consisting of $6.0 million in cash, $3.3 million of subordinated
indebtedness and $0.7 million of other long-term obligations.
INDUSTRY AND MARKET
In the United States, there is a growing trend toward privatization of
government services and functions, including correctional and detention
services, as governments of all types face continuing pressure to control costs
and improve the quality of services. According to the 1996 Facility Census, the
design capacity of privately managed adult secure institutional correctional and
detention facilities in operation or under construction worldwide increased from
10,973 beds at December 31, 1989 to 85,201 beds at December 31, 1996, a compound
annual growth rate of 34%. In addition, the design capacity of
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privately managed adult secure institutional correctional and detention
facilities increased 34% in the last year.
The United States leads the world in private prison management contracts.
The 1996 Facility Census reports that at December 31, 1996, there were private
adult secure institutional correctional and detention facilities in operation or
under construction in 25 states, the District of Columbia and Puerto Rico.
According to reports issued by the BJS, the number of adult offenders housed in
United States federal and state prison facilities and in local jails increased
from 744,208 at December 31, 1985 to 1,630,940 at June 30, 1996, a compound
annual growth rate of 7.8%. Management believes that the increase in the demand
for privatized adult secure institutional correctional and detention facilities
is also a result, in large part, of the general shortage of beds available in
United States adult secure institutional correctional and detention facilities.
Industry reports also indicate that adult offenders convicted of violent
crimes generally serve only one-third of their sentence, with the majority of
them being repeat offenders. Accordingly, there is a perceived public demand
for, among other things, longer prison sentences, as well as prison terms for
juvenile offenders, resulting in even more overcrowding in United States
correctional and detention facilities. Finally, numerous courts and other
government entities in the United States have mandated that additional services
offered to offenders be expanded and living conditions be improved. Many
governments do not have the readily available resources to make the changes
necessary to meet such mandates.
Similar to the adult secure institutional correctional and detention
industry, the area of pre-release correctional services has experienced
substantial growth. The pre-release area is primarily comprised of individuals
that have been granted parole or sentenced to probation. Probationers
(individuals sentenced for an offense without incarceration) and parolees
(individuals released prior to the completion of their sentence) are typically
placed in pre-release settings. These individuals typically spend three to six
months in halfway houses until they are prepared to re-enter society.
According to the BJS, the number of parolees increased from 220,438 at
December 31, 1980 to 690,159 at December 31, 1994, a compound annual growth rate
of 8.5%. During the same period, the number of individuals on probation
increased from 1.1 million to approximately 3.0 million, a compound annual
growth rate of 7.4%. The probation and parole populations represent
approximately 71% of the total number of adults under correctional supervision
in the United States. The pre-release correctional services industry is
extremely fragmented with several thousand providers across the country, most of
which are small and operate in a specified geographic area.
The juvenile corrections industry has also expanded rapidly in recent years
as the need for services for at-risk and adjudicated youth has risen. According
to the Criminal Justice Insititute, the population in the juvenile correctional
system, both residential and non-residential community-based, has increased from
62,268 youths at January 1, 1988 to 102,582 youths at January 1, 1995, a
compound annual growth rate of 7.4%. In 1994, there were approximately 2.7
million juvenile arrests and 5.4 million youths in special education programs.
The juvenile corrections industry is also fragmented with several thousand
providers across the country, most of which are small and operate in a specific
geographic area.
AREAS OF OPERATIONAL FOCUS
SECURE INSTITUTIONAL. The Company currently operates or has contracts to
operate six facilities (3,882 beds) that provide secure institutional
correctional and detention services for incarcerated adults. These facilities
consist of: (i) the 1,868 bed Big Spring Complex (which includes the 516 bed
expansion expected to be completed during the second quarter of 1998), a minimum
to medium security facility operated primarily for the FBOP; (ii) the 302 bed
Wyatt Facility, a medium to maximum security facility operated primarily for the
USMS in Central Falls, Rhode Island; (iii) two minimum security facilities with
a total design capacity of 558 beds in California operated for the CDC; (iv) the
Santa Fe County Detention Center, a contracted 604 bed adult jail scheduled to
be completed during the second quarter of 1998 (which is currently being
operated with 200 adult beds within an existing 240 bed facility) to be operated
for Santa Fe
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County and (v) the 550 bed Charlton County Facility, a minimum to medium
security facility, scheduled to be completed during the third quarter of 1998,
to be operated for the State of Georgia.
The Company operates the Big Spring Complex pursuant to the Big Spring
Operating Agreement between the Company and the City of Big Spring. The City of
Big Spring in turn is a party to the IGA with the FBOP for an indefinite term
with respect to the facilities. The Immigration and Naturalization Service (the
"INS") and the USMS also use the Big Spring Complex. Offenders include
detainees held by the INS, adjudicated offenders held by the INS who will be
deported after serving their sentences and adjudicated offenders held for the
FBOP. The Big Spring Complex is equipped with an interactive satellite link to
INS courtroom facilities and judges, which allows for processing of a high
volume of INS detainees, while reducing the time, effort and expense incurred in
transporting offenders to offsite courtrooms.
The Wyatt Facility in Central Falls opened in 1993 and houses primarily
federal offenders awaiting adjudication under federal criminal charges. In
addition, the Wyatt Facility houses certain other offenders under a contract
with the Sheriff's Department of Suffolk County, Massachusetts.
The Leo Chesney Correctional Facility (for females) and the Baker
Correctional Facility (for males) are both in California and house primarily
offenders sentenced by the State of California, most of whom are non-violent
offenders with sentences of up to two years.
The Santa Fe County Detention Center currently consists of a 240 bed
detention facility, with approximately 200 adult and 40 juvenile beds. The adult
population will be moved into a 604 bed adult detention facility upon the
completion of its construction during the second quarter of 1998. The Santa Fe
County Detention Center houses offenders from Santa Fe County and various
surrounding counties.
The Charlton County Facility is scheduled to open during the third quarter
of 1998. The Company was awarded a 500 bed contract in June 1997, which was
later expanded by an additional 50 beds. The Charlton County Facility will house
offenders from the State of Georgia.
Under its contracts, the Company provides a variety of programs and
services at its secure institutional facilities, including secure incarceration
services, institutional food services, certain transportation services, general
education programs (such as high school equivalency and English as a second
language programs), work and recreational programs and chemical dependency and
substance abuse programs.
PRE-RELEASE. The Company currently operates or has contracts to operate 14
facilities (with an aggregate design capacity of 1,324 beds) that provide
pre-release correctional services. Of these facilities, six are operated
primarily for the FBOP, five are operated primarily for the CDC, one is operated
for the TDCJ, one is operated for the North Carolina Department of Corrections
(the "NCDC") and one is operated for Dallas County, Texas. Most residents of
these facilities are or will be serving the last three to six months of their
sentences and preparing for re-entry into society at large.
At its pre-release facilities, the Company typically provides minimum
security residential services, institutional food services, general education
programs, life skills and employment training, job placement assistance and
chemical dependency and substance abuse counseling. About 20% of the offenders
at the FBOP pre-release facilities in California, Utah and Texas are on home
confinement; monitoring is primarily done by required check-ins and by
unscheduled visits to places of residence and employment.
JUVENILE SERVICES. The Company offers programs to meet the multiple needs
of troubled juveniles, and currently operates or has contracts to operate 10
residential facilities and 11 non-residential community-based facilities serving
an aggregate capacity of 1,866 youths. Juvenile correctional and detention
services primarily consist of treatment programs for offenders that are designed
to lead to rehabilitation while providing public safety and holding offenders
accountable for their decisions and behavior. The Company operates primarily
within a restorative justice model. The basic philosophy is that merely serving
time in an institution does not relieve juvenile offenders of the obligation to
repay their victims and that incarceration alone does not compensate for the
societal impact of crimes. The use of a balanced approach gives equal emphasis
to accountability, competency development and community protection.
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The 160 bed Salt Lake City juvenile detention facility includes an
interactive satellite link to juvenile courtroom facilities and judges, which
allows for processing of a high number of juvenile detainees, while reducing the
time, effort and expense incurred in transporting detainees to offsite
courtrooms.
The Santa Fe County Detention Center is a contracted 156 bed juvenile
detention facility scheduled to be completed during the fourth quarter of 1998
(which is currently being operated for 40 offenders within an existing 240 bed
facility).
The Griffin Juvenile Facility is a 150 bed capacity transitional living
center for juveniles located in San Antonio, Texas. The Company currently has a
44 bed contract for the housing of adjudicated and certain homeless
non-adjudicated juveniles.
In September 1997, the Company acquired substantially all the assets of
Abraxas, a nationally recognized provider of juvenile services which began
operations in 1973. The operations of Abraxas add a significant depth of
juvenile management and program expertise to the Company's existing juvenile
operations. The Abraxas operations include the operation of seven residential
facilities and 11 non-residential community-based programs, serving an aggregate
capacity of approximately 1,400 juvenile offenders in Pennsylvania, Ohio,
Delaware and the District of Columbia. The operations of Abraxas are now
conducted through Abraxas Group, Inc., a wholly-owned subsidiary of the Company.
The seven residential and 11 non-residential community-based facilities of
Abraxas provide multiple programs including education, individual and group
counseling, social skills training, physical training, community service,
substance abuse treatment and wilderness challenges. The educational schools
within Abraxas are accredited, whereby graduating juveniles are eligible to
receive a full high school diploma as an alternative to the traditional General
Educational Development ("G.E.D.") certificate.
The three largest facilities operated by Abraxas include: (i) the A-1
program ("A-1"); (ii) the Leadership Development Program (the "LDP") and
(iii) Abraxas of Ohio. In the acquisition, the Company acquired A-1's property
comprised of approximately 16 buildings situated on approximately 100 acres with
an aggregate design capacity of 191 beds. Located in the Allegheny National
Forest, A-1 operates as an open residential facility for the treatment of
delinquent and/or dependent males who have substance abuse problems and/or are
involved in the sale of a controlled substance. A-1 also operates a licensed
school which offers a full range of educational services and interscholastic
sports programs. While at A-1, juvenile offenders may earn a high school
diploma, pursue vocational tracks or receive G.E.D. instruction and testing. The
LDP is leased by the Company with property located on approximately 3.5 acres in
South Mountain, Pennsylvania. The LDP is a 15-week residential treatment program
with a wilderness component. The LDP includes group counseling, substance abuse
treatment and licensed educational programs. The Company also acquired Abraxas
of Ohio's facility located on approximately 80 acres in north central Ohio. This
residential program offers a comprehensive substance abuse treatment and
education program for males. Individuals participate in intensive group
curriculum which includes a wide variety of topics such as: stages of denial,
self-help tools for recovery, goal setting, values, beliefs and morals, relapse
process and prevention and sex education. Individuals may earn a high school
diploma, pursue vocational tracks or receive G.E.D. instruction and testing.
The non-residential community-based programs of Abraxas transition juvenile
offenders from residential placement back to their home communities. Abraxas
provides in-home counseling and intensive case management services while
integrating an array of community resources into a comprehensive plan. This dual
role of service provider and intermediary serves to bridge the gap between
residential facilities and the community. The Company utilizes therapists and
consulting psychologists in its multi-level treatment programs.
The Company intends to pursue additional contract awards to provide
juvenile detention and correctional services, and to continue to increase its
number of contracts for specialized rehabilitation programs and services for
juvenile offenders such as wilderness programs and secure education and training
centers.
37
<PAGE>
FACILITIES
As of September 9, 1997, the Company operates 39 facilities and has been
awarded contracts to operate two additional facilities that are currently under
development. In addition to providing management services, the Company has been
involved in the development, design and/or construction of many of these
facilities. The facilities currently under development are the Charlton County
Facility, which is scheduled to commence operations during the third quarter of
1998, and the Santa Fe County Adult Detention Center scheduled to open during
the second quarter of 1998. The following table summarizes certain additional
information with respect to contracts and facilities under operation by the
Company as of September 9, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
CONTRACTING TOTAL INITIAL COMMENCEMENT
GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL
FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4)
- ---------------------------------------- ------------ ------------ --------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
SECURE INSTITUTIONAL CORRECTIONAL AND
DETENTION FACILITIES:
Baker Correctional Facility............. CDC 288 1987 7/97 1 1/2 None
Baker, California(5)
Big Spring Complex...................... FBOP(6) 1,868(7) (6) (6) (6) (6)
Big Spring, Texas
Wyatt Facility.......................... USMS 302 1992 11/93 5 One
Central Falls, Rhode Island(5) (8) Five-Year
Leo Chesney Correctional Facility....... CDC 270 1988 4/93 6 1/2 None
Live Oak, California(5)
Santa Fe County Adult Detention Center.. Santa Fe 604 1997 7/97 3 Two
Santa Fe, New Mexico(9) County One-Year
Charlton County Facility................ State of 550 1998 9/98 1 Nine
Charlton County, Georgia Georgia One-Year
PRE-RELEASE FACILITIES:
Dallas County Judicial Center........... Dallas 300 1991 9/97 1 None
Wilmer, Texas County
Durham Center........................... NCDC 75 1996 12/96 4 1/2 One
Durham, North Carolina Five-Year
El Monte Center......................... FBOP 52 1993 4/93 (10) (10)
El Monte, California(5)
Indiana Street Center................... CDC 96 1990 7/94 6 None
San Francisco, California(5)
Inglewood Men's Center.................. CDC 53 1982 7/94 4 None
Inglewood, California(5)
Inglewood Women's Center................ CDC 27 1984 7/92 (11) None
Inglewood, California(5)
Leidel Community Correctional Center.... FBOP 94 1996 1/96 3 Two
Houston, Texas One-Year
Marvin Gardens Center................... CDC 42 1981 7/94 4 None
Los Angeles, California(5)
Oakland Center.......................... FBOP(12) 61 1981 9/93 (13) (13)
Oakland, California(5)
Reid Community Correctional Center...... TDCJ 310 1996 1/96 (14) (14)
Houston, Texas
Salt Lake City Center................... FBOP(12) 58 1995 12/95 2 Three
Salt Lake City, Utah One-Year
San Diego Center........................ FBOP 50 1984 11/95 2 Three
San Diego, California(5) One-Year
Santa Barbara Center.................... CDC(15) 25 1977 7/94 4 None
Santa Barbara, California(5)
Taylor Street Center.................... FBOP(16) 81 1984 2/96 2 Three
San Francisco, California(5) One-Year
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
38
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
CONTRACTING TOTAL INITIAL COMMENCEMENT
GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL
FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4)
- ---------------------------------------- ------------ ------------ --------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
JUVENILE FACILITIES:
RESIDENTIAL FACILITIES:
A-1..................................... (17) 191 1973 7/97 1 Annual
Marienville, Pennsylvania
A-2..................................... (17) 23 1974 7/97 1 Annual
Erie, Pennsylvania
A-3..................................... (17) 20 1975 7/97 1 Annual
Pittsburgh, Pennsylvania
ACAF.................................... (17) 43 1989 7/97 1 Annual
Pittsburgh, Pennsylvania
Griffin Juvenile Facility............... Bexar 150 1996 7/97 Annual None
San Antonio, Texas County
LDP..................................... (17) 115 1994 7/97 1 Annual
S. Mountain, Pennsylvania
Abraxas of Ohio......................... (17) 96 1993 7/97 1 Annual
Shelby, Ohio
PSRU.................................... (17) 12 1994 7/97 1 Annual
Erie, Pennsylvania
Salt Lake City Juvenile Detention
Facility.............................. State of 160 1996 6/96 3 None
Salt Lake City, Utah Utah(18)
Santa Fe County Juvenile Detention
Center................................ Santa Fe 156(9) 1997 7/97 3 Two
Santa Fe, New Mexico County One-Year
NON-RESIDENTIAL COMMUNITY-BASED CENTERS:
Bensalem................................ (17) 120 1994 7/97 1 Annual
Bensalem, Pennsylvania(19)
Day Treatment Program................... (17) 28 1996 7/97 1 Annual
Harrisburg, Pennsylvania
Dauphin County Mental Health............ (17) 115 1996 7/97 1 Annual
Harrisburg, Pennsylvania
Delaware................................ (17) 20 1994 7/97 1 Annual
Milford, Delaware
Erie Mental Health...................... (17) 20 1997 7/97 1 Annual
Erie, Pennsylvania
Lehigh Valley........................... (17) 23 1992 7/97 1 Annual
Lehigh Valley, Pennsylvania
NRC..................................... (17) 40 1991 7/97 1 Annual
Pittsburgh, Pennsylvania
Philadelphia Family Preservation/SCOH... (17) 64 1992 7/97 1 Annual
Philadelphia, Pennsylvania
Washington DC........................... (17) 49 1993 7/97 1 Annual
District of Columbia
Workbridge.............................. (17) 386 1994 7/97 1 Annual
Pittsburgh, Pennsylvania
Wyoming Valley.......................... (17) 35 1992 7/97 1 Annual
Wyoming Valley, Pennsylvania
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
39
<PAGE>
- ------------
(1) Total offender capacity includes design capacity plus the program capacity
of the non-residential, community-based operations. Design capacity is
based on the physical space available presently, or with minimal additional
expenditure, for offender or residential beds in compliance with relevant
regulations and contract requirements. In certain cases, the management
contract for a facility provides for a lower number of beds.
(2) Date from which the Company, or its predecessor, has had a contract with
the contracting governmental agency on an uninterrupted basis.
(3) Substantially all contracts are terminable by the contracting governmental
agency for any reason upon the required notice to the Company.
(4) Except as otherwise noted, the renewal option, if any, is at the discretion
of the contracting governmental agency.
(5) Facility is accredited by the American Correctional Association.
(6) The City of Big Spring entered into the IGA with the FBOP for an indefinite
term (until modified or terminated) with respect to the Big Spring Complex,
which began operations during 1989. The Big Spring Operating Agreement has
a term of 20 years with three five-year renewal options at the Company's
discretion, pursuant to which the Company manages the Big Spring Complex
for the City of Big Spring. With respect to the expansion of the Big Spring
Complex, the portion of the Big Spring Operating Agreement relating to the
expansion has a term of 30 years with four five-year renewal options at the
Company's discretion.
(7) Includes the 516 bed expansion, expected to be completed during the second
quarter of 1998.
(8) The USMS entered into an intergovernmental agreement with the Central Falls
Detention Facility Corporation ("DFC") in August 1991 for an indefinite
term (until modified or terminated) with respect to the Wyatt Facility. The
DFC, in turn, entered into a Professional Management Agreement with the
Company for the Company to operate this facility effective November 1993
for a term of five years, with one five-year renewal option. In addition,
pursuant to a contract between the DFC and the Sheriff's Department of
Suffolk County, Massachusetts, entered into in March 1996, Massachusetts
state offenders are housed under the Company's management at this facility.
(9) These facilities are currently housed in a single 240 bed facility. This
project will be completed in phases, whereby, on July 1, 1997, the Company
took over the operation of an existing 240 bed adult and juvenile facility,
while beginning construction of a new 604 bed adult detention facility,
scheduled to be completed during the second quarter of 1998. The offenders
housed in the 240 bed facility will then be transferred to the new 604 bed
detention facility, along with offenders from surrounding counties at which
time, the 240 bed facility will be converted into a 156 bed juvenile
detention facility, scheduled to be completed during the fourth quarter of
1998.
(10) 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. The existing term expires September 30,
1997. The Company has submitted a rebid and is waiting for a response.
(11) The current contract expires September 30, 1997. The Company has submitted
a rebid and is waiting for a response.
(12) 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.
(13) The current contract term was two years, with an original termination date
of August 1995; the FBOP has exercised the last of its three one-year
renewal options.
(14) The current contract expired August 31, 1997 and TDCJ granted a one-year
extension.
(15) 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.
(16) 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.
(17) The Abraxas programs/facilities contract with numerous counties throughout
Pennsylvania, Ohio and Delaware, and with the District of Columbia.
(18) Utah Department of Human Services, Division of Youth Corrections.
(19) Operates within Pennsylvania's Youth Development Center/State Facility.
40
<PAGE>
FACILITY MANAGEMENT CONTRACTS
The Company is compensated on the basis of the number of offenders held or
supervised under each of its facilities' management contracts. The Company's
existing facility management contracts generally provide that the Company will
be compensated at an occupant per diem rate. Such compensation is invoiced in
accordance with applicable law and is typically paid on a monthly basis. Under a
per diem rate structure, a decrease in occupancy rates would cause a decrease in
revenues and profitability. The Company is, therefore, dependent upon
governmental agencies to supply the Company's facilities with a sufficient
number of offenders to meet the contract capacities, and in most cases such
governmental agencies are under no obligation to do so. Moreover, because
certain of the Company's facilities have offenders serving relatively short
sentences or only the last three to six months of their sentences, the high
turnover rate of offenders requires a constant influx of new offenders from the
relevant governmental agencies to provide sufficient occupancies to achieve
profitability. Occupancy rates during the start-up phase when facilities are
first opened typically result in capacity underutilization for 30 to 90 days.
After a management contract has been awarded, the Company incurs facility
start-up costs consisting principally of initial employee training, travel and
other direct expenses incurred in connection with the contract. These costs vary
by contract and have ranged between $30,000 and $1.5 million. See "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 material contract
due to a governmental agency not receiving appropriations, although no assurance
can be given that the governmental agencies will continue to receive
appropriations in all cases. 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 but one renewal option under the
Company's management contracts have been exercised. In connection with the
exercise of the renewal option, the contracting governmental agency or the
Company typically has requested changes or adjustments to the contract terms.
Additionally, the Company's facility management contracts typically allow a
contracting governmental agency to terminate a contract without cause by giving
the Company written notice ranging from 30 to 180 days. To date, no contracts
have been terminated before expiration. See "Risk Factors -- Facility Occupancy
Levels and Contract Duration."
MARKETING
The Company's principal customers are federal, state and local governmental
agencies responsible for adult and juvenile correctional, detention and
pre-release services. These governmental agencies generally procure these
services from the private sector by issuing 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. In addition, the Company may
incur substantial costs to acquire options to lease or purchase land for a
proposed facility and engage outside consulting and legal expertise related to a
particular RFP. The preparation of a response to an RFP typically takes from
five to 10 weeks.
41
<PAGE>
A typical RFP requires bidders to provide detailed information, including,
but not limited to, descriptions of the following: the services to be provided
by the bidder, the bidder's experience and qualifications, and the price at
which the bidder is willing to provide the services requested by the agency
(which services may include the renovation, improvement or expansion of an
existing facility or the planning, design and construction of a new facility).
Based on proposals received in response to an RFP, the governmental agency will
award a contract; however, the governmental agency does not necessarily award a
contract to the lowest bidder. In addition to costs, governmental agencies also
consider experience and qualifications of bidders in awarding contracts.
The marketing process for obtaining facility management contracts consists
of several critical events. These include issuance of an RFP by a governmental
agency, submission of a response to the RFP by the Company, the award of the
contract by a governmental agency and the commencement of construction or
operation of the facility. The Company's experience has been that a substantial
period of time may elapse from the initial inquiry to receipt of a new contract,
although, as the concept of privatization has gained wider acceptance, the
length of time from inquiry to the award of contract has shortened. The length
of time required to award a contract is also affected, in some cases, by the
need to introduce enabling legislation. The bidding and award process for an RFP
typically takes from three to nine months. Generally, if the facility for which
an award has been made must be constructed, the Company's experience has been
that a newly constructed facility typically commences operations between 12 and
24 months after the governmental agency's award.
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 October 16, 1997, the Company has submitted written bids to operate
four new projects with an aggregate offender capacity of over 1,100. Awards for
these projects should be made by the applicable governmental agencies by the end
of 1997. The nature of the written bid process is dynamic and, at any given
date, the number of new projects and the aggregate offender capacity for which
written bids have been submitted can increase or decrease significantly based
upon when written bids are submitted and when responses to these bids are
received.
When a contract requires construction of a new facility, the Company's
success depends, in part, upon its ability to acquire real property for its
facilities on desirable terms and at satisfactory locations. Management of the
Company expects that many such locations will be in or near populous areas and
therefore anticipates legal action and other forms of opposition from residents
in areas surrounding certain proposed sites. The Company may incur significant
expenses in responding to such opposition and there can be no assurance of
success. In addition, the Company may choose not to bid in response to an RFP or
may determine to withdraw a bid if legal action or other forms of opposition are
anticipated.
OPERATIONS
Pursuant to the terms of its management contracts, the Company is
responsible for the overall operation of its facilities, including staff
recruitment, general administration of the facilities, security and supervision
of the offenders and facility maintenance. The Company also provides a variety
of rehabilitative and educational programs at many of its facilities. Offenders
at most adult facilities managed by the Company may receive basic education
through academic programs designed to improve offender literacy levels
(including English as a second language programs) and the opportunity to acquire
G.E.D. certificates. Programs for offenders at the Company's juvenile facilities
typically have an increased emphasis on education and counseling. At many
facilities, the Company also offers vocational training to offenders who lack
marketable job skills. In addition, the Company offers life skills, transition
planning programs that provide offenders job search training and employment
skills, health education, financial responsibility training and other skills
associated with becoming productive citizens. At several of its facilities, the
42
<PAGE>
Company also offers counseling, education and/or treatment to offenders with
chemical dependency or substance abuse problems.
The Company operates each facility in accordance with Company-wide policies
and procedures generally based on the standards and guidelines established by
the American Correctional Association ("ACA") Commission on Accreditation
and/or the appropriate licensing agencies (collectively "Accreditation
Standards"). The ACA is an independent organization comprised of professionals
in the corrections industry which establishes guidelines and standards by which
a correctional institution may gain accreditation. The Accreditation Standards
describe specific objectives to be accomplished and cover such areas as
administration, personnel and staff training, security, medical and health care,
food service, offender supervision and physical plant requirements.
Internal quality control, conducted by senior facility staff and executive
officers of the Company, takes the form of periodic operational, programmatic
and fiscal audits; facility inspections; regular review of logs, reports and
files; and strict maintenance of personnel standards, including an active
training program. Each of the Company's facilities develops its own training
plan that is reviewed, evaluated and updated annually. Dedicated space and
equipment for training is provided and outside resources such as community
colleges are utilized in the training process. All adult correctional officers
undergo a minimum 40-hour orientation upon their hiring and receive
academy-level training amounting to 120 hours and on-the-job training of up to
80 hours. Each correctional officer also receives up to 40 hours of training and
education annually. All juvenile treatment employees undergo a minimum 80-hour
orientation upon their hiring and also receive up to 40 hours of training and
education annually.
Abraxas has received awards and recognition for its operations and
programs, including being recognized (i) in 1995 by the Pennsylvania Juvenile
Court Judges' Commission as "Residential Program of the Year" and (ii) in 1994
by the Office of Juvenile Justice and Delinquency Prevention in its Program
Report titled "What Works: Promising Interventions in Juvenile Justice."
FACILITY DESIGN, CONSTRUCTION AND FINANCE
In addition to operating correctional facilities, the Company also provides
consultation and management services to governmental agencies with respect to
the development, design and construction of new correctional and detention
facilities and the redesign and renovation of older facilities. The Company or
its predecessors have consulted on and/or managed the development, design and/or
construction of a number of facilities in each of its three areas of operational
focus, including:
<TABLE>
<CAPTION>
TOTAL
OFFENDER
FACILITY NAME CAPACITY SERVICES PROVIDED
- ---------------------------------------------- --------- ------------------------------------
<S> <C> <C>
Wyatt Facility................................ 302 Development, design and construction
Plymouth, Massachusetts Detention Center...... 1,140 Development, design and construction
Baker Correctional Facility................... 288 Development
Leo Chesney Correctional Facility............. 270 Development
Leidel Community Correctional Center.......... 94 Development, design and construction
Salt Lake City Juvenile Detention Facility.... 160 Development, design and construction
A-1........................................... 191 Development
Abraxas of Ohio............................... 96 Development
LDP........................................... 115 Development
</TABLE>
The Company is currently managing the development, design and construction
of: (i) the 516 bed expansion of the Big Spring Complex; (ii) the 550 bed
Charlton County Facility; (iii) the 604 bed adult facility in Santa Fe County,
New Mexico and (iv) the renovation of the 156 bed juvenile facility in Santa Fe
County, New Mexico. Currently, the Company operates or will operate all of the
facilities it has developed, designed and constructed with the exception of the
detention center in Plymouth, Massachusetts, which is operated by the Sheriff's
Department of the County of Plymouth, Massachusetts.
The Company utilizes an experienced team of outside professional
architectural consultants as part of the group that participates from conceptual
design through final construction of a project. When designing a facility, the
Company's outside architects utilize, with appropriate modifications, prototype
designs the
43
<PAGE>
Company has previously used in developing projects. Management of the Company
believes that the use of such proven designs allows the Company to reduce cost
overruns and avoid construction delays. Additionally, the Company designs its
facilities with the intention to improve security and minimize the personnel
needed to properly staff the facility by enabling enhanced visual and electronic
surveillance of the facility.
The Company may propose various construction financing structures to the
contracting governmental agencies. The governmental agency may finance, or the
Company may arrange for the financing of, the construction of such facilities
through various methods including, but not limited to, the following: (i) a
one-time general revenue appropriation by the governmental agency for the cost
of the new facility; (ii) general obligation bonds that are secured by either a
limited or unlimited tax levy by the issuing governmental entity or (iii) lease
revenue bonds or certificates of participation secured by an annual lease
payment that is subject to annual or bi-annual legislative appropriations. If
the project is financed using project-specific tax-exempt bonds or other
obligations, the construction contract is generally subject to the sale of such
bonds or obligations. Substantial expenditures for construction will not be made
on such a project until the tax-exempt bonds or other obligations are sold. If
such bonds or obligations are not sold, construction and management of the
facility will be delayed until alternate financing is procured or development of
the project will be entirely suspended. When the Company is awarded a facility
management contract, appropriations for the first annual or bi-annual period of
the contract's term have generally already been approved, and the contract is
subject to governmental appropriations for subsequent annual or bi-annual
periods. Of the 41 facilities the Company operates or has contracted to operate,
four were funded using various of the above-described financing methods, 11 are
owned by the Company and 26 are leased. The Big Spring Complex is operated under
long-term leases ranging from 34 to 50 years including renewal options at the
discretion of the Company. As part of the purchase price for the MidTex
acquisition, the Company prepaid a majority of the facility costs related to the
Big Spring Complex through at least the year 2030. 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. See "Risk Factors -- Contracts Subject to Government Funding."
COMPETITION
The Company competes with a number of companies including, but not limited
to, CCA, WHC, Youth Services International, Inc. and Correctional Services
Corporation. At December 31, 1996, CCA and WHC accounted for more than 75% of
the privatized secure institutional adult beds under contract in the United
States, according to the 1996 Facility Census. The Company also competes in some
markets with small local companies that have better knowledge of the 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 September 9, 1997, the Company had approximately 1,620 full-time
employees and 340 part-time employees. The Company employs management,
administrative and clerical, security, educational and counseling services,
health services and general maintenance personnel. Approximately 165 employees
at one of the residential facilities of Abraxas are represented by a union. The
union's collective bargaining agreement effectively terminated on September 9,
1997, the closing date of the Abraxas acquisition. The Company is currently
negotiating with the union's representative over terms for a new agreement. The
correctional officers of the Wyatt Facility have voted to have the Rhode Island
Private Correction Officers represent them for purposes of collective
bargaining. On September 4, 1997, the National Labor Relations Board certified
this union as the exclusive representative for purposes of collective bargaining
for these employees. To date no collective bargaining has been scheduled. The
Company believes its relations with its employees are good.
44
<PAGE>
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, health care and safety regulations. The Company's contracts
frequently include extensive reporting requirements and require supervision with
on-site monitoring by representatives of contracting governmental agencies.
In addition to regulations requiring certain contracting governmental
agencies to enter into a competitive bidding procedure before awarding
contracts, the laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.
INSURANCE
The Company maintains a $10 million per occurrence per facility general
liability insurance policy for all its operations. The Company also maintains
insurance in amounts it deems adequate to cover property and casualty risks,
workers' compensation and directors' and officers' liability. 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, offender
privileges. In the opinion of management of the Company, the outcome of the
proceedings to which the Company is currently a party will not have a material
adverse effect upon the Company's operations or financial condition.
PROPERTIES
The Company leases corporate headquarters office space in Houston, Texas
and regional administrative offices in Ventura, California, Dallas, Texas, Big
Spring, Texas and Pittsburgh, Pennsylvania. The Company also leases space for 26
of the facilities it is currently operating or developing. In connection with
the acquisition of MidTex, and as part of the purchase price, the Company
prepaid a majority of the facility costs related to the Big Spring Complex
through at least the year 2030. For information concerning lease rights relating
to a portion of the Big Spring Complex, see "Risk Factors -- Possible Loss of
Lease Rights."
The Company owns, or will own upon completion of construction, 11
facilities: (i) the Leidel Center and the Reid Center, both located in Houston,
Texas; (ii) the Griffin Juvenile Facility in San Antonio, Texas; (iii) the A-3
and ACAF facilities in Pittsburgh, Pennsylvania; (iv) the A-2 and PSRU
facilities in Erie, Pennsylvania; (v) the A-1 facility in Marienville,
Pennsylvania; (vi) Abraxas of Ohio in Shelby, Ohio; (vii) the Philadelphia
Family Preservation/SCOH facility in Philadelphia, Pennsylvania and (viii) the
Charlton County Facility in Charlton County, Georgia. The Company is not
required to lease space at the Wyatt Facility, which is owned by the DFC, the
Salt Lake City juvenile facility, which is owned by the County of Salt Lake and
leased to the State of Utah, or the Santa Fe County Adult Detention Center and
the Santa Fe County Juvenile Detention Center, which are owned by Santa Fe
County. For a list of the locations of each facility, see "-- Facilities."
The Company is currently constructing and financing the 550 bed Charlton
County Facility which it will own. Additionally, the Company is currently
constructing and financing the 516 bed expansion at the Big Spring Complex and
has the right to use the facility for 50 years. See "Risk Factors -- Possible
Loss of Lease Rights."
45
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth the names, ages (as of September 9, 1997)
and positions of the Company's directors, executive officers and certain other
key employees:
NAME AGE POSITION
- ------------------------------ --- ---------------------------------------
David M. Cornell.............. 62 Director; Chairman of the Board,
President and Chief Executive Officer(1)
William J. Schoeffield, Jr.... 47 Chief Operating Officer(1)
Marvin H. Wiebe, Jr........... 50 Vice President(1)
Steven W. Logan............... 35 Chief Financial Officer, Treasurer and
Secretary(1)
Arlene R. Lissner............. 66 Director; President of
Abraxas Group, Inc.(1)
Thomas R. Jenkins............. 50 Vice President -- Operations of
Abraxas Group, Inc.
Charles J. Haugh.............. 58 Managing Director of Secure Institutions
Laura Shol.................... 42 Managing Director of Pre-Release Centers
Richard T. Henshaw III........ 58 Director
Peter A. Leidel............... 41 Director
Campbell A. Griffin, Jr....... 68 Director
Tucker Taylor................. 58 Director
- ------------
(1) Executive officer of the Company.
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. became Chief Operating Officer of the Company
effective October 16, 1996. Mr. Schoeffield had 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 non-profit
provider of correctional and substance abuse programs from 1975 to 1984. Mr.
Wiebe has served as President of the International Community Corrections
Association ("ICCA") and as an auditor for the ACA Commission on Accreditation
for Corrections and is a member of the ICCA, the California Probation Parole &
Correctional Association and the ACA.
STEVEN W. LOGAN has been Chief Financial Officer, Treasurer and Secretary
of the Company since 1993. From 1984 to 1993, Mr. Logan served in various
positions with Arthur Andersen LLP, Houston, most recently as an Experienced
Manager in the Enterprise Group, a group specializing in emerging, high-growth
companies which Mr. Logan helped form in Houston in 1987. Mr. Logan is a
Certified Public Accountant.
ARLENE R. LISSNER has been a director of the Company since September 10,
1997, and has served as President of Abraxas Group, Inc. since September 9,
1997. Ms. Lissner founded Abraxas in 1973, where she served as President and
Chief Executive Officer until 1977, at which time she left that position to
become Chairperson of the Board of Directors of Abraxas. Ms. Lissner resumed her
role as President and
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<PAGE>
Chief Executive Officer of Abraxas from April 1996 through September 1997. Prior
to founding Abraxas, Ms. Lissner directed a variety of programs for the Illinois
Department of Mental Health, Office of Drug Abuse Programs.
THOMAS R. JENKINS has served as Vice President -- Operations of Abraxas
Group, Inc. since September 9, 1997. From November 1995 through September 1997
he served as Vice President -- Operations of Abraxas. From 1973 through November
1995, Mr. Jenkins served with the Department of Public Welfare, Commonwealth of
Pennsylvania in various capacities ranging from Director of various juvenile
facilities to Director of the Pennsylvania Child Welfare Services.
CHARLES J. HAUGH has served as Managing Director of Secure Institutions of
the Company since May 1997. He previously served as Executive Director of
Facilities of the Company since the Company acquired MidTex in July 1996 through
May 1997. 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.
LAURA SHOL has served as the Company's Managing Director of Pre-Release
Centers since May 1997. She previously served as Director of Community
Corrections of the Company from June 1996 through May 1997, 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.
RICHARD T. HENSHAW III has been a director of the Company since March 1994.
Mr. Henshaw has been a Managing Director of Charterhouse Group International,
Inc. ("Charterhouse"), a private investment firm specializing in leveraged
buy-out acquisitions, since January 1997, and was a Senior Vice President since
1991. Mr. Henshaw is also a director of American Disposal Services, Inc., a
solid waste services company.
PETER A. LEIDEL has been a director of the Company and its predecessor
since May 1991. Mr. Leidel is founder and a Senior Manager of Yorktown Partners
LLC, and a partner of Ticonderoga Partners III, L.P. and Concord Partners II,
L.P. ("Concord II"), all private investment funds. As of September 2, 1997,
Mr. Leidel resigned as Senior Vice President of Dillon, Read & Co. Inc. (a
predecessor of SBC Warburg Dillon Read) where he worked since 1983 and became a
member of Yorktown Partners LLC. Mr. Leidel is a director of Willbros Group,
Inc. and seven private companies.
CAMPBELL A. GRIFFIN, JR. became a director of the Company in October 1996.
Mr. Griffin joined the law firm of Vinson & Elkins L.L.P. in 1957 and was a
partner from 1968 to 1992. He was a member of the Management Committee of Vinson
& Elkins L.L.P. from 1981 to 1990 and the Managing Partner of the Dallas office
from 1986 to 1989. From 1991 to 1993, Mr. Griffin served as an Adjunct Professor
of Administrative Science at William Marsh Rice University and, from 1993 to
1995, he was a Councilman for the City of Hunters Creek Village. Mr. Griffin has
been a director of various local organizations and is an arbitrator for the
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 became a director of the Company in October 1996. 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.
Currently, there are two committees of the Board of Directors: an Audit
Committee and a Compensation Committee. The members of the Audit Committee are
Mr. Griffin and Mr. Taylor. The Audit Committee recommends the appointment of
independent public accountants to conduct audits of the Company's financial
statements, reviews with the independent accountants the plan and results of the
47
<PAGE>
auditing engagement, approves other professional services provided by the
independent accountants and evaluates the independence of the accountants. The
Audit Committee also reviews 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 members of the Compensation Committee are Mr. Leidel
and Mr. Henshaw. The Compensation Committee approves, or in some cases
recommends 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 Committee also acts on the granting of stock options, including
grants under the Stock Option Plan. The members of the Audit and Compensation
Committees are not employees of the Company.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company (a "Nonemployee Director") and who was or will be elected or
appointed after October 3, 1996 receives 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 became or
will become Nonemployee Directors after October 3, 1996 receive a grant of
nonqualified options to purchase 15,000 shares of Common Stock under the Stock
Option Plan. Such options 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 market value of a share of Common Stock at the date of grant. 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.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain summary
information concerning the compensation paid or accrued by the Company during
the years ended December 31, 1996 and 1995 to the Company's chief executive
officer and the other executive officers 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
ANNUAL AWARDS
COMPENSATION(1) -------------------
--------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- ------------------------------------- --------- ---------- --------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
David M. Cornell..................... 1996(2) $ 168,750 $ 29,167 126,124 $4,750(3)
Chairman of the Board, 1995 125,000 -- 137,110 3,750
President and Chief
Executive Officer
William J. Schoeffield, Jr........... 1996(2) $ 33,333 $ 8,333 100,000 $ --
Chief Operating Officer 1995 -- -- -- --
Marvin H. Wiebe, Jr.................. 1996(2) $ 90,500 $ 59,500(4) 15,000 $5,206(5)
Vice President 1995 90,500 82,475 -- 7,726
Steven W. Logan...................... 1996(2) $ 113,333 $ 11,667 126,124 $3,466(3)
Chief Financial Officer, 1995 90,000 -- 65,000 2,700
Treasurer & Secretary
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
48
<PAGE>
- ------------
(1) Other annual compensation for each Named Executive Officer did not exceed
the lesser of $50,000 or 10% of the annual compensation earned by such
individual.
(2) The Compensation Committee has approved current annual salaries of $200,000,
$160,000, $130,000 and $150,000 for Messrs. Cornell, Schoeffield, Wiebe and
Logan, respectively.
(3) The amounts shown represent contributions by the Company under its 401(k)
Profit Sharing Plan.
(4) Excludes $56,750 representing Mr. Wiebe's portion of an annual fixed
installment payment in 1996 relating to an acquisition by the Company in
1994.
(5) The amount for Mr. Wiebe includes contributions by the Company under its
401(k) Profit Sharing Plan of $2,602, an automobile allowance of $1,767, and
payment by the Company of $837 for excess life insurance for 1996.
OPTION GRANTS. The following table sets forth information on grants of
stock options during 1996 to the Named Executive Officers.
STOCK OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS GRANT
UNDERLYING GRANTED TO EXERCISE DATE
OPTIONS GRANTED EMPLOYEES PRICE EXPIRATION PRESENT
NAME IN 1996(1) IN 1996 (PER SHARE) DATE VALUE(2)
- ------------------------------ --------------- ------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
David M. Cornell.............. 126,124 31.4% $ 4.86 7/9/2006 $ 215,672
William J. Schoeffield, Jr.... 100,000 24.9 12.00 10/16/2006 571,000
Marvin H. Wiebe, Jr........... 15,000 3.7 5.64 5/1/2003 28,800
Steven W. Logan............... 126,124 31.4 4.86 7/9/2006 215,672
</TABLE>
- ------------
(1) The options granted to Mr. Cornell and Mr. Logan were granted on July 9,
1996 and became exercisable immediately. The options granted to Mr. Wiebe
were granted on May 1, 1996 and became exercisable in 25% increments on each
of the date of grant, and the first, second and third anniversaries of the
date of grant. The options granted to Mr. Schoeffield were granted on
October 16, 1996 and became exercisable in 20% increments on each of the
date of grant and the first, second, third and fourth anniversaries of the
date of grant. All of the above options were granted pursuant to the Stock
Option Plan.
(2) Based on the Black-Scholes option pricing model. The actual value, if any,
that may be realized will depend on the excess of the underlying stock price
over the exercise price on the date the option is exercised, so there is no
assurance the value realized will be at or near the value estimated by the
Black-Scholes option pricing model. The estimated values under the model are
based on the following assumptions for the grants to Mr. Cornell, Mr.
Schoeffield, Mr. Wiebe and Mr. Logan, respectively: expected volatility
based on a historical volatility of month-end common stock prices of a
comparable company for the applicable option term (0.0%, 32.5%, 0.0% and
0.0%), a risk-free rate of return based on a zero-coupon U.S. Treasury rate
at the time of grant for the applicable option term (6.9%, 6.6%, 6.6% and
6.9%), an average of dividend yields on Common Stock (0.0%), and option
exercise periods (10 years, 10 years, 7 years and 10 years) with the
exercise occurring at the end of such period.
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<PAGE>
OPTION EXERCISES AND 1996 YEAR-END OPTION HOLDINGS. The following table
sets forth information with respect to exercises of options by the Named
Executive Officers during 1996 pursuant to the Stock Option Plan and information
with respect to unexercised options to purchase Common Stock granted in 1996 and
prior years to the Named Executive Officers and held by them at December 31,
1996.
1996 YEAR-END OPTION HOLDINGS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
OF SHARES DECEMBER 31, 1996 DECEMBER 31, 1996(2)
ACQUIRED VALUE ------------------------------ -----------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE(1)
- ---------------------------------- ------------ ----------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
David M. Cornell.................. 137,110 $ (3) 126,124 -- $ 506,388 $ --
William J. Schoeffield, Jr........ -- -- 20,000 80,000 -- --
Marvin H. Wiebe, Jr............... -- -- 3,750 11,250 12,131 36,394
Steven W. Logan................... 82,750 (4) 139,874 7,500 595,282 50,288
</TABLE>
- ------------
(1) All of these options become immediately exercisable upon a change in control
of the Company.
(2) The excess, if any, of the market value of Common Stock at December 31, 1996
($8.875) over the option exercise price(s).
(3) On July 8, 1996, Mr. Cornell acquired 137,110 shares of Common Stock at a
per share exercise price of $2.00. The IPO price per share on October 3,
1996 was $12.00 and the per share market value on December 31, 1996 was
$8.875.
(4) On July 8, 1996, Mr. Logan acquired 82,750 shares of Common Stock at the
following per share exercise prices: 50,000 shares at $2.00, 29,000 shares
at $2.50, and 3,750 shares at $2.17. The IPO price per share on October 3,
1996 was $12.00 and the per share market value on December 31, 1996 was
$8.875.
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
Stock Option 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 reserved 880,000 shares of Common Stock for issuance in
connection with the Stock Option Plan, which is 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 "-- Director Compensation." The exercise price and vesting terms for the
options are determined by the Compensation Committee and shall be set forth in
an option agreement. The exercise price is at least 100% of the 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.
50
<PAGE>
Pursuant to an employment agreement with Arlene R. Lissner, the Company has
granted to Ms. Lissner an option to purchase 10,000 shares of the Company's
Common Stock, with an exercise price equal to 50% of the fair market value of
the Company's Common Stock on September 9, 1997. See "Certain Relationships and
Related Party Transactions -- Employment Arrangements."
As of September 9, 1997, options to purchase 824,358 shares of Common Stock
had been granted under the Stock Option Plan, of which 221,110 had been
exercised, 8,750 had been canceled, 594,498 were outstanding and 320,748 were
exercisable. No options may be granted under the Stock Option Plan after May 15,
2006.
PROPOSED STOCK OPTION GRANTS
The Board of Directors of the Company has proposed long-term incentive
stock option grants of an aggregate of 354,334 shares to Messrs. Cornell, Logan,
Schoeffield and Wiebe. The future grant of such long-term incentive stock
options will be subject to stockholder approval of an amendment to the Stock
Option Plan or a new stock option plan. The grant date of such long-term
incentive stock options will be the date of approval of the amendment to the
Stock Option Plan or the new stock option plan, and the exercise price of the
long-term incentive stock options will be equal to the fair market value of the
Common Stock of the Company on the grant date. When granted, the long-term
incentive stock options are intended to be treated as "incentive stock
options" under the Internal Revenue Code.
The long-term incentive stock options will not vest until September 5,
2005; however, early vesting can occur on the attainment of certain performance
objectives. An amount equal to 25% of the long-term incentive stock options vest
upon the Company achieving revenues of $200 million over any period of 12
consecutive months; 25% upon the Company achieving earnings per share of $1.00
in any period of 12 consecutive months; 25% upon the Company achieving an
average stock price of $25.00 per share for any 90 consecutive trading days and
25% upon the Company achieving a 12% return on equity over any period of 12
consecutive months.
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").
The Company maintains indemnification agreements with its officers and
directors, pursuant to which it agrees 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 require officers and directors to repay the amount
of any expenses if it is determined that they were not entitled to
indemnification.
The Company maintains liability insurance for the benefit of its directors
and officers.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
MANAGING UNDERWRITERS
SBC Warburg Dillon Read is a managing underwriter in the Offering.
Immediately prior to the Offering, certain private investment partnerships
managed by SBC Warburg Dillon Read, and persons related to SBC Warburg Dillon
Read, owned an aggregate of 7.6% 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 4.3% of the outstanding shares of Common
Stock (assuming the exercise of their options, but not the
51
<PAGE>
options or warrants of other persons, into shares of Common Stock).
Additionally, Concord II, a private venture capital fund in which SBC Warburg
Dillon Read has an indirect interest, owned an aggregate of 7.4% of the shares
of Common Stock immediately prior to the Offering (4.9% immediately after
completion of the Offering). See "-- Certain Equity Transactions,"
"-- Registration Rights Agreement," "Principal and Selling Stockholders" and
"Underwriting." Mr. Leidel, a director of the Company and its predecessors
since May 1991, and a partner in Concord II, has recently resigned as an
employee of Dillon Read. In addition, 3,774 shares of Common Stock beneficially
owned by Mr. Leidel are held by SBC Warburg Dillon Read, as agent for Mr.
Leidel. See "Management -- Directors, Executive Officers and Other Key
Employees."
CERTAIN EQUITY TRANSACTIONS
At the time of its IPO, the Company's Class A Common Stock and Class B
Common Stock were reclassified as the Common Stock (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 519,500 shares to Concord Partners ("Concord") and Concord II in
exchange for an aggregate of 519,500 Series A Preferred Units in the Partnership
owned, directly and indirectly, by Concord and Concord II; (ii) an aggregate of
380,876 shares to Concord Partners Japan Limited ("Concord Japan"), Lexington
Partners III, L.P. ("Lexington III"), Lexington Partners IV, L.P. ("Lexington
IV"), and SBC Warburg Dillon Read, as agent (collectively with Concord Japan,
Lexington III and Lexington IV, the "Lexington Investors"), in exchange for an
aggregate of 380,876 Series A Preferred Units in the Partnership owned, directly
and indirectly, by the Lexington Investors; (iii) 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 (iv) 600,000 shares to David M. Cornell in exchange for all of
the stock owned by Mr. Cornell in Mayo, Inc. (which, in turn, owned 600,000
Common Units in the Partnership).
CAPITAL INVESTMENTS. On March 31, 1994, the Company issued an aggregate of
1,088,009 shares of the Company's Common Stock (which was reclassified as Class
A Common Stock on March 8, 1995 pursuant to an amendment to the Company's
charter) for an aggregate purchase price of approximately $6.5 million to the
following entities: (i) an aggregate of 768,790 shares to Charterhouse Equity
Partners II, L.P. ("CEP II") and a related party; (ii) an aggregate of 181,499
shares to Concord II; (iii) an aggregate of 57,975 shares to certain of the
Lexington Investors; and (iv) 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 Internationale Nederlanden (U.S.)
Capital Corporation ("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, which warrants
were exercised in connection with the IPO.
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
pursuant to stock option agreements to Concord (19,114 shares), Concord II
(60,639 shares), the Lexington Investors (49,929 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
shares), which provided the financing for the Stock Repurchase pursuant to an
amendment to the 1995 Credit Facility.
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<PAGE>
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 a short term convertible note (the
"Convertible Bridge Note"). 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 Concord II and certain
of the Lexington Investors to purchase at least $200,000 of Class B Common
Stock. On July 9, 1996, Concord II purchased an aggregate of 53,355 shares of
Class B Common Stock and certain of the Lexington Investors purchased an
aggregate of 36,976 shares of Class B Common Stock for an aggregate of $254,733
(or $2.82 per share). In connection with the transaction, the Company issued
options to CEP II to purchase 60,221 shares of Class B Common Stock at $2.82 per
share.
EMPLOYMENT ARRANGEMENTS
On September 9, 1997, Abraxas Group, Inc., a Delaware corporation and
indirect wholly-owned subsidiary of the Company, and the Company entered into an
employment agreement with Arlene Lissner pursuant to which Ms. Lissner agreed to
serve as President of Abraxas Group, Inc. As compensation for her services,
Abraxas Group, Inc. agrees to pay Ms. Lissner an annual salary of $125,000 for a
period of three years. See "Management -- Stock Option Plans." The Company is
a party to the employment agreement solely to guarantee the performance of
Abraxas Group, Inc.'s obligations thereunder.
On September 9, 1997, in connection with the acquisition of Abraxas, the
Company entered into a Covenant Not to Compete Agreement with Ms. Lissner,
pursuant to which she agreed for a period of 20 years not to: (i) engage in any
business in competition with any business operation of the Company or its
affiliates; (ii) request that any customer or supplier of the Company or any of
its affiliates curtail or cancel its business with the Company or any such
affiliate or (iii) induce or attempt to influence any employee of the Company or
any of its affiliates to terminate his or her employment with the Company or any
such affiliate, or hire or retain the services of any such employee. In
consideration of Ms. Lissner's agreements, the Company will pay Ms. Lissner 10
annual installments of $60,000 each, commencing on January 2, 1998. Such
payments may be accelerated upon the mutual agreement of Ms. Lissner and the
Company.
REGISTRATION RIGHTS AGREEMENT
The Company and certain stockholders, option holders and warrant holders of
the Company, including Concord II, the Lexington Investors, CEP II, Chef
Nominees Limited, Brown University Third Century Fund, ING, Mr. Cornell, Ms.
Cornell, Mr. Logan and Wade H. Whilden, 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) of holders of
shares of Common Stock (or other securities of the Company) subject to the
Registration Rights Agreement (the "Registrable Securities") holding at least
15% of the outstanding Registrable Securities, if the request occurs after March
31, 1997. 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
53
<PAGE>
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, 2,246,201 shares of Common Stock (including shares issuable upon
exercise of outstanding options and warrants) will be 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
stockholders (other than one counsel for the selling stockholders as a group).
Under the Registration Rights Agreement, the Company will indemnify the selling
stockholders thereunder, and such stockholders will indemnify the Company,
against certain liabilities in respect of any registration statement or offering
covered by the agreement.
STOCKHOLDERS AGREEMENT
The Applicable Stockholders are parties to the Stockholders Agreement. Upon
completion of the Offering, the Applicable Stockholders will beneficially own in
the aggregate approximately 10.2% of the outstanding Common Stock assuming
exercise of their outstanding stock options. The Stockholders Agreement provides
that the Applicable Stockholders agree to vote all shares of Common Stock owned
by them to elect two directors of the Company to a Board of Directors consisting
of six members. Consequently, the Applicable Stockholders, through their Common
Stock holdings and representation on the Board of Directors of the Company, will
be able to exercise influence over the policies and direction of the Company.
The Stockholders Agreement will terminate upon the first to occur of (i) October
7, 2000 or (ii) an Applicable Stockholder owning less than 350,000 shares of the
outstanding Common Stock (including shares of Common Stock issuable upon the
exercise of currently vested options).
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<PAGE>
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; (ii) each director and executive officer of the Company; (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 100E, Houston, Texas 77056.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING(1)
---------------------------------- ---------------------------------
OUTSTANDING NUMBER OF OUTSTANDING
TOTAL OPTIONS AND SHARES TOTAL OPTIONS AND
NAME AND ADDRESS NUMBER WARRANTS PERCENT OFFERED NUMBER WARRANTS PERCENT
- ---------------------------------------- -------- ----------- ------- --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Charterhouse Equity Partners II, L.P.... 916,477 147,687 13.0% 271,182 645,295 147,687 6.8%
c/o Charterhouse Group
International, Inc.(1)(2)
535 Madison Avenue
New York, NY 10022
Concord Partners II, L.P.(1)............ 506,994 -- 7.4 50,000 456,994 -- 4.9
c/o Ticonderoga Capital Inc.
535 Madison Avenue
New York, NY 10022
Internationale Nederlanden (U.S.)
Capital Corporation................... 235,500 235,500 3.3 200,000 35,500 35,500 *
135 E. 57th St.
New York, NY 10022
Concord Partners Japan Limited et
al(1)(3).............................. 525,756 -- 7.6 120,000 405,756 -- 4.3
535 Madison Avenue
New York, NY 10022
Brown University Third Century Fund..... 88,818 9,073 1.3 28,818 60,000 -- *
164 Angell St., Box C
Providence, RI 02912
Wellington Management Company, LLP...... 347,000 -- 5.0 -- 347,000 -- 3.7
75 State Street
Boston, MA 02109
David M. Cornell(4)..................... 509,987 126,124 7.3 -- 509,987 126,124 5.4
Richard T. Henshaw III(5)............... -- -- -- -- -- -- --
Peter A. Leidel(6)...................... -- -- * -- -- -- *
Campbell A. Griffin, Jr................. 7,500 7,500 * -- 7,500 7,500 *
Tucker Taylor........................... 10,000 7,500 * -- 10,000 7,500 *
Arlene R. Lissner....................... 325 -- * -- 325 -- *
Steven W. Logan......................... 252,962 143,624 3.6 -- 252,962 143,624 2.7
Marvin H. Wiebe, Jr..................... 14,507 7,500 * -- 14,507 7,500 *
William J. Schoeffield, Jr.............. 65,588 40,000 * -- 65,588 40,000 *
All executive officers and directors as
a group (nine persons)(7)............. 860,869 332,248 11.9 -- 860,869 332,248 8.9
</TABLE>
- ------------
* Less than one percent.
(1) If the Underwriters' over-allotment option is exercised, CEP II, Concord II,
Concord Japan, ING and SBC Warburg Dillon Read, as agent, will sell up to an
aggregate of 412,500 shares of Common Stock.
(2) 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
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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<PAGE>
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 Exchange Act
be deemed to be beneficially owned by Charterhouse.
(3) Includes 127,839 shares held by Concord Japan, which is a private venture
capital fund managed by SBC Warburg Dillon Read. Also includes 60,249 shares
held by Lexington III, 2,435 shares held by Lexington IV, each of which is a
private investment fund for certain SBC Warburg Dillon Read affiliated
persons, managed by SBC Warburg Dillon Read, and 335,233 shares held by SBC
Warburg Dillon Read as agent for certain affiliated persons.
(4) Includes 88,665 shares 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.
(5) Mr. Henshaw is Managing Director of Charterhouse. He disclaims any
beneficial ownership of the shares beneficially owned by Charterhouse.
(6) Mr. Leidel is a partner of Concord II. He disclaims any beneficial ownership
of the shares held by Concord II. SBC Warburg Dillon Read, as agent for Mr.
Leidel, holds 3,774 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) Excludes shares of which Mr. Henshaw and Mr. Leidel disclaim beneficial
ownership. See notes 5 and 6.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists 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 9,355,404 shares of Common Stock
and no shares of Preferred Stock, and the Company will have outstanding options
or warrants to purchase an additional 890,354 shares of Common Stock. The
following summary is qualified in its entirety by reference to the Certificate
of Incorporation, which is incorporated as an exhibit to this registration
statement on Form S-1 (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 "Price Range of Common Stock and 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. 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 subject to Section 203 of the DGCL.
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 combination; (ii) as a result of the initial transaction, the
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<PAGE>
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% 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
does not apply to transactions between the Company and either Concord II or the
Lexington 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 has entered 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
Securities Transfer & Trust, Inc.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, 9,355,404 shares of Common Stock will
be outstanding and 890,354 shares will be issuable upon exercise of outstanding
warrants and stock options. The 2,920,000 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. A total
of 2,047,067 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 provides 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 if a minimum of one year
(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., 93,554 shares
immediately after completion of the Offering) or (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 two
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 Company and persons who will beneficially own in the aggregate
2,547,083 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 90 days following the date of this
Prospectus, without the prior written consent of SBC Warburg Dillon Read,
subject to certain exceptions. See "Underwriting."
The Company filed 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.
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.
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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
- ---------------------------------------- ----------------
SBC Warburg Dillon Read Inc............. 1,093,000
Equitable Securities Corporation........ 655,000
Wasserstein Perella Securities, Inc..... 437,000
ABN AMRO Chicago Corporation............ 75,000
J.C. Bradford & Co...................... 40,000
A.G. Edwards & Sons, Inc................ 75,000
Ferris, Baker Watts, Inc................ 40,000
First Analysis Securities Corporation... 25,000
Genesis Merchant Group Securities....... 25,000
Legg Mason Wood Walker, Incorporated.... 40,000
Lehman Brothers Inc..................... 75,000
NationsBanc Montgomery Securities,
Inc..................................... 75,000
Nichols, Safina, Lerner & Co., Inc...... 25,000
PaineWebber Incorporated................ 75,000
Prudential Securities Incorporated...... 75,000
Sanders Morris Mundy Inc................ 25,000
Wm. Smith Securities, Incorporated...... 25,000
Stephens Inc............................ 40,000
----------------
Total.............................. 2,920,000
================
The Managing Underwriters are SBC Warburg Dillon Read, Equitable Securities
Corporation ("Equitable Securities") and Wasserstein Perella 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 $0.65 per
share. The Underwriters may allow, and such dealers may re-allow, a concession
not to exceed $0.10 per share on sales to certain other dealers. The offering of
the shares of Common Stock is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of the shares. After the shares are released
for sale to the public, the public offering price, the concession and the
reallowance may be changed by the Managing Underwriters.
Certain stockholders of the Company have granted to the Underwriters an
option for 30 days from the date of the Underwriting Agreement to purchase up to
an additional 412,500 shares of Common Stock from them at the 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.
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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 90 days after the date of this Prospectus, without the prior written
consent of SBC Warburg 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
55,642 shares of Common Stock to the 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 SBC Warburg Dillon Read, and persons related to SBC Warburg Dillon
Read, owned an aggregate of 7.6% 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 4.3% of the Common Stock
(assuming the exercise of their options, but not the options or warrants of
other persons, into shares of Common Stock). Additionally, Concord II, a private
venture fund in which SBC Warburg Dillon Read has an indirect interest, owned an
aggregate of 7.4% of the shares of Common Stock immediately prior to the
Offering (4.9% immediately after completion of the Offering). See "Principal
and Selling Stockholders" and "Certain Relationships and Related Party
Transactions -- Managing Underwriters." Mr. Leidel, a director of the Company
and its predecessors since May 1991 and a partner in Concord II, has recently
resigned as an employee of SBC Warburg Dillon Read. In addition, 3,774 shares of
Common Stock beneficially owned by Mr. Leidel are held by SBC Warburg Dillon
Read as agent. See "Management -- Directors, Executive Officers and Other Key
Employees."
The provisions of Rule 2720 of the National Association of Securities
Dealers, Inc. (the "NASD") Conduct Rules apply to this Offering. Under Rule
2720, when an NASD member such as SBC Warburg Dillon Read distributes an
affiliated company's equity securities, one of the following two criteria must
be met: (i) the price of such equity securities can be no higher than that
recommended by a "qualified independent underwriter" or (ii) the offering must
be for a class of equity security for which a "bona fide independent market"
exists. Because a "bona fide independent market" for the Common Stock exists,
the public offering price of the Common Stock offered hereby will not be passed
upon by a "qualified independent underwriter." Pursuant to Rule 2720, NASD
members may not execute transactions in the shares of Common Stock offered
hereby in discretionary accounts without the prior approval of the customer. The
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Managing Underwriters, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Managing
Underwriters to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions,
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<PAGE>
syndicate covering transactions and penalty bids may cause the price of the
Common Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the AMEX or otherwise and,
if commenced, may be discontinued at any time.
Equitable Securities has in the past performed financial advisory services
for the Company for which it has received customary fees. Equitable Securities
also provided financial advisory services to Abraxas in connection with the sale
of Abraxas to the Company, for which it received customary fees, including a fee
paid upon consummation of the sale of Abraxas to the Company. In addition, SBC
Warburg Dillon Read and Equitable Securities acted as managing underwriters in
connection with the IPO.
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 Liddell,
Sapp, Zivley, Hill & LaBoon, L.L.P., Houston, Texas. 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 of which this Prospectus is a part have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has been subject to the reporting requirements of the Exchange
Act since the completion of the IPO and in accordance therewith, has been
required to file periodic reports and other information with the Commission.
Such information can be inspected without charge 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. In addition, the Common Stock is traded on the
American Stock Exchange, and the periodic reports and other information filed by
the Company may be inspected at the offices of the American Stock Exchange,
Inc., 86 Trinity Place, New York, New York 10006.
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 filed by the
Company under the Exchange Act.
62
<PAGE>
CORNELL CORRECTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBERS
-------
I. CORNELL CORRECTIONS, INC.
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets of Cornell Corrections, Inc. as
of December 31, 1995 and 1996 (Audited), and June 30, 1997
(Unaudited)............................................... F-3
Consolidated Statements of Operations of Cornell
Corrections, Inc. for the Years Ended December 31, 1994,
1995 and 1996 (Audited), and for the Six Months Ended June
30, 1996 and 1997 (Unaudited)............................. F-4
Consolidated Statements of Stockholders' Equity of Cornell
Corrections, Inc. for the Years Ended December 31, 1994,
1995 and 1996 (Audited), and for the Six Months Ended June
30, 1997 (Unaudited)...................................... F-5
Consolidated Statements of Cash Flows of Cornell
Corrections, Inc. for the Years Ended December 31, 1994,
1995 and 1996 (Audited), and for the Six Months Ended June
30, 1996 and 1997 (Unaudited)............................. F-6
Notes to Consolidated Financial Statements.................. F-7
II. INTERVENTIONS CO.
Report of Independent Public Accountants.................... F-19
Balance Sheet of Interventions Co. as of December 31, 1996
(Audited)................................................. F-20
Statement of Operations of Interventions Co. for the Year
Ended December 31, 1996 (Audited)......................... F-21
Statement of Cash Flows of Interventions Co. for the Year
Ended December 31, 1996 (Audited)......................... F-22
Notes to Financial Statements............................... F-23
III. MIDTEX DETENTIONS, INC. AND BIG SPRING CORRECTIONAL CENTER
Report of Independent Public Accountants.................... F-26
Combined Balance Sheets of MidTex Detentions, Inc. and Big
Spring Correctional Center as of September 30, 1994 and
1995 (Audited), and June 30, 1996 (Unaudited)............. F-27
Combined Statements of Operations and 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).......................................... F-28
Combined Statements of Cash Flows 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)...... F-29
Notes to Combined Financial Statements...................... F-30
IV. TEXAS ALCOHOLISM FOUNDATION, INC. and THE TEXAS HOUSE
FOUNDATION, INC.
Report of Independent Public Accountants.................... F-34
Combined Balance Sheets of Texas Alcoholism Foundation, Inc.
and The Texas House Foundation, Inc. as of December 31,
1995 (Audited), and March 31, 1996 (Unaudited)............ F-35
Combined Statements of Operations and 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)...................................... F-36
Combined Statements of Cash Flows 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).... F-37
Notes to Combined Financial Statements...................... F-38
F-1
<PAGE>
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, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 7, 1997
F-2
<PAGE>
CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 390 $ 4,874 $ 1,579
Accounts receivable, net........... 3,436 4,976 8,383
Current portion of notes
receivable....................... 216 211 403
Prepaids and other................. 214 1,248 1,337
Restricted assets.................. 284 1,124 1,331
--------- --------- -----------
Total current assets.......... 4,540 12,433 13,033
PROPERTY AND EQUIPMENT, net............. 1,909 26,074 31,743
OTHER ASSETS:
Notes receivable, noncurrent....... 519 620 501
Goodwill, net...................... 6,204 5,864 5,694
Contract value, net................ 206 -- --
Deferred tax asset, noncurrent..... 409 488 488
Deferred costs and other........... 397 1,345 1,823
--------- --------- -----------
Total assets.................. $ 14,184 $ 46,824 $53,282
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities...................... $ 2,991 $ 4,403 $ 5,432
Current portion of long-term
debt............................. 24 283 2,283
--------- --------- -----------
Total current liabilities..... 3,015 4,686 7,715
LONG-TERM DEBT, net of current
portion............................... 7,625 462 309
OTHER LONG-TERM LIABILITIES............. 491 625 2,721
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01, $.001 and
$.001 par value, respectively,
1,000,000, 10,000,000 and
10,000,000 shares authorized,
respectively, none outstanding... -- -- --
Common stock, $.01, $.001 and $.001
par value, respectively,
9,000,000, 30,000,000 and
30,000,000 shares authorized,
respectively, 3,189,385,
7,320,398 and 7,413,384 shares
issued and outstanding,
respectively..................... 32 7 7
Additional paid-in capital......... 6,955 47,562 47,753
Stock option loans................. -- (455) (455)
Accumulated deficit................ (1,331) (3,710) (2,415)
Treasury stock (555,000 shares of
common stock, at cost)........... (2,603) (2,353) (2,353)
--------- --------- -----------
Total stockholders' equity.... 3,053 41,051 42,537
--------- --------- -----------
Total liabilities and
stockholders' equity.......... $ 14,184 $ 46,824 $53,282
========= ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Occupancy fees..................... $ 15,389 $ 20,594 $ 31,877 $ 10,967 $27,886
Other income....................... 300 98 450 370 155
--------- --------- --------- --------- -----------
15,689 20,692 32,327 11,337 28,041
OPERATING EXPENSES...................... 12,315 16,351 26,038 9,461 22,556
DEPRECIATION AND AMORTIZATION........... 758 820 1,390 510 1,120
GENERAL AND ADMINISTRATIVE EXPENSES..... 2,959 3,531 4,560 1,629 2,218
--------- --------- --------- --------- -----------
INCOME (LOSS) FROM OPERATIONS........... (343) (10) 339 (263) 2,147
INTEREST EXPENSE........................ 294 1,115 2,810 498 209
INTEREST INCOME......................... (138) (136) (167) (51) (86)
--------- --------- --------- --------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES.......................... (499) (989) (2,304) (710) 2,024
PROVISION FOR INCOME TAXES.............. 101 -- 75 -- 729
--------- --------- --------- --------- -----------
NET INCOME (LOSS)....................... $ (600) $ (989) $ (2,379) $ (710) $ 1,295
========= ========= ========= ========= ===========
INCOME (LOSS) PER SHARE................. $ (.16) $ (.25) $ (.53) $ (.20) $ .18
========= ========= ========= ========= ===========
NUMBER OF SHARES USED IN PER SHARE
CALCULATION........................... 3,811 3,983 4,466 3,523 7,139
========= ========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
PARTNERSHIP COMMON STOCK ADDITIONAL STOCK RETAINED
CAPITAL ------------------- PAID-IN OPTION EARNINGS TREASURY
BALANCE SHARES AMOUNT CAPITAL LOANS (DEFICIT) STOCK
----------- ----------- ------ ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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 --
CONVERSION OF PARTNERSHIP INTO CORNELL
CORRECTIONS, INC., A C CORPORATION.... (827) 2,100,376 21 806 -- -- --
ISSUANCE OF COMMON STOCK................ -- 1,088,009 11 6,490 -- -- --
DIRECT COSTS RELATED TO ISSUANCE OF
COMMON STOCK.......................... -- -- -- (355) -- -- --
NET LOSS................................ -- -- -- -- -- (600) --
----------- ----------- ------ ---------- ------ --------- --------
BALANCES AT DECEMBER 31, 1994........... -- 3,188,385 32 6,941 -- (342) --
EXERCISE OF STOCK OPTIONS............... -- 1,000 -- 3 -- -- --
PURCHASE OF TREASURY STOCK (555,000
shares, at cost)...................... -- -- -- -- -- -- (2,603)
ISSUANCE OF WARRANTS.................... -- -- -- 11 -- -- --
NET LOSS................................ -- -- -- -- -- (989) --
----------- ----------- ------ ---------- ------ --------- --------
BALANCES AT DECEMBER 31, 1995........... -- 3,189,385 32 6,955 -- (1,331) (2,603)
CONVERSION OF PAR VALUE FROM $.01 to
$.001................................. -- -- (29) 29 -- -- --
ISSUANCES OF COMMON STOCK............... -- 3,618,091 3 37,670 -- -- --
EXERCISE OF STOCK OPTIONS AND
WARRANTS.............................. -- 512,922 1 1,140 (455) -- --
INCOME TAX BENEFITS FROM STOCK OPTIONS
EXERCISED............................. -- -- -- 172 -- -- --
STOCK-BASED COMPENSATION................ -- -- -- 1,596 -- -- --
REVERSAL OF PUT RIGHT COST.............. -- -- -- -- -- -- 250
NET LOSS................................ -- -- -- -- -- (2,379) --
----------- ----------- ------ ---------- ------ --------- --------
BALANCES AT DECEMBER 31, 1996........... -- 7,320,398 7 47,562 (455) (3,710) (2,353)
ISSUANCES OF COMMON STOCK (Unaudited)... -- 92,986 -- 191 -- -- --
NET INCOME (Unaudited).................. -- -- -- -- -- 1,295 --
----------- ----------- ------ ---------- ------ --------- --------
BALANCES AT JUNE 30, 1997 (Unaudited)... $ 7,413,384 $ 7 $ 47,753 $ (455) $ (2,415) $ (2,353)
=========== =========== ====== ========== ====== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (600) $ (989) $ (2,379) $ (710) $ 1,295
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation.................. 271 166 498 185 394
Amortization.................. 487 654 892 325 725
Deferred income taxes......... 101 -- (172) -- --
Non-cash stock-based
compensation and financing
charges.................... -- -- 1,596 -- --
Change in assets and
liabilities, net of effects
from acquisition of
businesses --
Accounts receivable...... (1,161) (1,086) 1,090 (472) (1,971)
Restricted assets........ (71) (5) (233) (41) (207)
Other assets............. 779 166 (1,765) (282) (759)
Accounts payable and
accrued liabilities... 92 (137) (67) 43 559
Other liabilities........ -- -- -- -- 2,020
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities....... (102) (1,231) (540) (952) 2,056
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (167) (1,159) (1,256) (467) (1,795)
Acquisition of businesses, less
cash acquired.................... (5,921) -- (25,174) (4,251) (5,594)
Redemption of commercial paper and
U.S. Treasury notes.............. 585 -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing
activities................. (5,503) (1,159) (26,430) (4,718) (7,389)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....... 50 11,360 40,841 9,520 9,000
Payments on long-term debt......... (284) (7,158) (47,745) (3,301) (7,153)
Proceeds from issuances of common
stock............................ 6,146 3 37,673 24 --
Proceeds from exercise of stock
options and warrants............. -- -- 685 -- 191
Direct costs related to issuance of
common stock..................... -- -- -- (407) --
Purchase of treasury stock......... -- (2,353) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by financing
activities................. 5,912 1,852 31,454 5,836 2,038
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 307 (538) 4,484 166 (3,295)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................. 621 928 390 390 4,874
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 928 $ 390 $ 4,874 $ 556 $ 1,579
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid (net of interest
capitalized)..................... $ 293 $ 520 $ 1,454 $ 460 $ 294
========= ========= ========= ========= =========
Income taxes paid.................. $ -- $ -- $ 75 $ -- $ 412
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cornell Corrections, Inc. (collectively with its subsidiaries, the
"Company"), a Delaware corporation, provides to governmental agencies the
integrated development, design, construction and management of facilities within
three areas of operational focus: (i) secure institutional correctional and
detention services; (ii) pre-release correctional services and (iii) juvenile
correctional and detention services.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
RESTRICTED ASSETS
For certain facilities, the Company maintains bank accounts for restricted
cash belonging to offenders and commissary operations, for an equipment
replacement fund for the replacement of equipment used in state programs, and
for a restoration fund for any necessary restorations of the related facilities.
These bank accounts and commissary inventories are collectively referred to as
"restricted assets" in the accompanying financial statements.
DEFERRED COSTS
Facility start-up costs, which consist of costs of initial employee
training, travel and other direct expenses incurred in connection with the
opening of new facilities, are capitalized and amortized on a straight-line
basis over the lesser of the initial term of the contract plus renewals or five
years. Direct incremental development costs paid to unrelated third parties
incurred in securing new facilities, including certain costs of responding to
requests for proposal ("RFPs"), are capitalized as deferred costs and
amortized as part of start-up costs. Internal payroll and other costs incurred
in securing new facilities are expensed to general and administrative expenses.
Deferred development costs are charged to general and administrative expenses
when the success of obtaining a new facility project is considered doubtful.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Ordinary maintenance and
repair costs are expensed while renewal and betterment costs are capitalized.
Prepaid facility use cost, which resulted from the July 1996 acquisition of
MidTex, is being amortized over 35 years using the straight-line method.
Buildings and improvements are depreciated over their estimated useful lives of
20 to 40 years using the straight-line method. Furniture and equipment are
depreciated over their estimated useful lives of 3 to 10 years using the
straight-line method. Amortization of leasehold improvements is computed on the
straight-line method based upon the shorter of the life of the asset or the term
of the respective lease.
F-7
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment at December 31, 1995 and 1996, are as follows (in
thousands):
1995 1996
--------- ---------
Land.................................... $ -- $ 561
Prepaid facility use.................... -- 21,637
Buildings and improvements.............. -- 2,651
Leasehold improvements.................. 598 1,100
Furniture and equipment................. 407 938
Construction in progress................ 1,334 439
--------- ---------
2,339 27,326
Accumulated depreciation and
amortization.......................... (430) (1,252)
--------- ---------
$ 1,909 $ 26,074
========= =========
Construction in progress at December 31, 1996 represents construction and
development costs attributable to a new pre-release facility which opened during
the first quarter of 1997.
CONTRACT VALUE
Contract value represents the estimated fair value of the contracts
acquired with the acquisition of Eclectic Communications, Inc. ("Eclectic")
which were amortized over the remaining term of the contracts. Accumulated
amortization was $542,000 as of December 31, 1995 and contract value was fully
amortized as of December 31, 1996.
GOODWILL
Goodwill represents the total consideration the Company paid to acquire
Eclectic in excess of the fair market value of the net tangible and identifiable
intangible assets acquired. Goodwill is being amortized on a straight-line basis
over 20 years, which represents managements 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 indicate that goodwill should be
evaluated for possible impairment, the Company would compare estimated
undiscounted future cash flow from the related operations to the carrying amount
of goodwill. If the carrying amount of goodwill were greater than undiscounted
future cash flow, an impairment loss would be recognized. Any impairment loss
would be computed as the excess of the carrying amount of goodwill over the
estimated fair value of the goodwill (calculated based on discounting estimated
future cash flows). Accumulated amortization of goodwill was $599,000 and
$939,000 as of December 31, 1995 and 1996, respectively.
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 No. 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.
F-8
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues related to other income include development 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
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.
BUSINESS CONCENTRATION
Contracts with federal and state governmental agencies account for nearly
all of the Company's revenues.
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" ("APB Opinion No. 25"). In
accordance with SFAS No. 123, certain pro forma disclosures are provided in Note
6.
PER SHARE DATA
Per share data is based on the weighted average number of common shares and
common share equivalents outstanding for the period. Common shares equivalents
have been included in the calculation of the shares used in computing net income
(loss) per common share using the treasury stock method.
INITIAL PUBLIC OFFERING
On October 3, 1996, the Company completed an initial public offering
("IPO") of its common stock. Net proceeds to the Company from the sale of the
3,523,103 shares of newly issued common stock were approximately $37.4 million.
Proceeds of the IPO were used to repay indebtedness and for general working
capital purposes.
NON-RECURRING CHARGES
In connection with the Company's July 1996 credit facility ("1996 Credit
Facility"), the Company incurred expenses, issued certain options and warrants,
and sold shares of common stock, for which the Company recognized total deferred
financing costs of $1.3 million, of which $726,000 was noncash, to be
F-9
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized over the life of the 1996 Credit Facility. Since the use of proceeds
from the IPO were used to retire significant portions of the 1996 Credit
Facility, the total deferred financing costs were charged to interest expense as
of September 30, 1996. In addition, the Company recognized 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.
INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended June 30, 1996 and
1997 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 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. ACQUISITIONS
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, operating secure
institutional facilities in Big Spring, Texas with a capacity of 1,305 beds at
the date of acquisition ("Big Spring Complex"). In May 1996, the Company
acquired a 310-bed facility located in Houston, Texas ("Reid Center"),
previously operated by Texas Alcoholism Foundation, Inc., and The Texas House
Foundation, Inc. (collectively, "Texas House"). Total consideration for these
acquisitions was approximately $25.7 million. The acquisitions were financed
primarily through borrowings under the 1996 Credit Facility and a short term
convertible note ("Convertible Bridge Note"). In connection with the MidTex
acquisition, the Company entered into various agreements for the use of the
facilities and the annual payment of $216,000 (in lieu of property taxes) per
year for approximately the next 35 years.
The acquisition costs and the estimated fair market value of the assets
acquired and liabilities assumed associated with the above-mentioned
acquisitions are as follows (in thousands):
MIDTEX REID CENTER
------- -----------
Cash paid............................... $23,200 $ 1,986
Transaction costs....................... 470 90
------- -----------
Total purchase price.......... $23,670 $ 2,076
======= ===========
Net assets acquired --
Cash............................... $ 486 $ --
Receivables, net................... 2,726 --
Other current assets............... 755 --
Property and equipment, net:
Prepaid facility use.......... 21,710 --
Other......................... 10 2,090
Other assets....................... 5 --
Accounts payable and accrued
liabilities...................... (2,022) (14)
------- -----------
$23,670 $ 2,076
======= ===========
The carrying value of the prepaid facility use relates to the Company's
right to use the three detention facilities retained by the City of Big Spring
for 19, 20, and 23 years, respectively, plus three five-year
F-10
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Both the Reid Center and MidTex acquisitions have been accounted for as
purchases; therefore, the accompanying statements of operations reflect the
results of operations since their respective acquisition dates.
The unaudited consolidated results of operations on a pro forma basis as
though the Reid Center and MidTex had been acquired as of the beginning of the
Company's fiscal years 1995 and 1996 are as follows (amounts in thousands,
except per share data):
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
Total revenues.......................... $ 38,716 $ 42,061
Net loss................................ (8) (2,030)
Loss per share.......................... (.00) (.45)
The unaudited consolidated results of operations on a pro forma basis (i)
assuming the Reid Center and MidTex had been acquired as of the beginning of the
Company's fiscal year 1996, (ii) assuming the IPO had occurred at the beginning
of the Company's fiscal year 1996, and (iii) excluding the $2.1 million of
non-recurring charges described above, are as follows (amounts in thousands,
except per share data):
YEAR ENDED
DECEMBER 31, 1996
-----------------
Total revenues.......................... $42,061
Net income.............................. 1,772
Earnings per share...................... .25
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 $10.3
million, consisting of $6 million in cash, $3.3 million in seller subordinated
debt, approximately $700,000 of other long-term obligations, and $300,000 of
transaction costs. 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-11
<PAGE>
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):
Cash paid (including transaction
costs)................................ $ 6,334
Debt issued and other obligations
incurred.............................. 4,000
---------
Total purchase price............... $ 10,334
=========
Net assets acquired --
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)
---------
$ 10,334
=========
3. INCOME TAXES
The following is an analysis of the Company's deferred tax assets (in
thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Deferred tax assets relating to --
Net operating loss carryforwards... $ 380 $ 609
Accelerated depreciation and
amortization of property and
equipment for financial reporting
purposes......................... 114 290
Accrued expenses recorded for
financial reporting purposes and
deferred for tax purposes........ 217 282
Deferred compensation.............. -- 331
--------- ---------
711 1,512
Deferred tax liabilities................ -- --
--------- ---------
Net deferred tax asset before
valuation allowance.............. 711 1,512
Valuation allowance..................... (275) (904)
--------- ---------
Net deferred tax asset............. $ 436 $ 608
========= =========
The components of the Company's income tax provision were as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Current provision....................... $ -- $ -- $ 247
Deferred provision (benefit)............ 101 -- (172)
--------- --------- ---------
Tax provision...................... $ 101 $ -- $ 75
========= ========= =========
F-12
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of taxes at the federal statutory rate with the income
taxes recorded by the Company is presented below (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Computed taxes at statutory rate of 34
percent............................... $ (170) $ (336) $ (783)
Amortization of non-deductible
intangibles........................... 166 162 186
1994 first quarter loss reported in
partnership tax return................ 88 -- --
State income taxes, net of federal
benefit............................... 35 -- (39)
Changes in valuation allowance.......... -- 190 629
Other................................... (18) (16) 82
--------- --------- ---------
$ 101 $ -- $ 75
========= ========= =========
As of December 31, 1996, the Company has a net operating loss ("NOL")
carryforward for income tax purposes of approximately $1,600,000 available to
offset future taxable income. This carryforward will expire beginning 2008.
4. LONG-TERM DEBT
The Company's long-term debt consisted of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
1995 Credit Facility (all repaid in
1996):
Revolving credit................... $ 740 $ --
Term loan.......................... 4,000 --
Multiple-advance term loan......... 500 --
Stock repurchase loan.............. 2,350 --
--------- ---------
Total......................... 7,590 --
Other notes payable, interest at 2.9% to
9.9%.................................. 59 745
--------- ---------
7,649 745
Less -- current maturities.............. 24 283
--------- ---------
$ 7,625 $ 462
========= =========
In conjunction with the acquisition of MidTex, the 1995 Credit Facility was
replaced with the 1996 Credit Facility. The 1996 Credit Facility provided 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 was
used to finance a portion of the Mid-Tex acquisition costs, a $6,950,000
multiple-advance term loan facility for new and expanded facilities costs and a
$2,350,000 facility that was used to refinance the stock repurchase loan. In
addition, in July 1996, the Company borrowed $6.0 million under the Convertible
Bridge Note.
On October 8, 1996, the Company repaid a total of $33.9 million of
borrowings under the 1996 Credit Facility and the Convertible Bridge Note using
proceeds from the IPO. As a result of the repayments of the term loan facility
and the stock repurchase loan facility, such facilities were canceled.
In December 1996, the 1996 Credit Facility was amended to increase the
revolving credit facility to $5.0 million and the multiple-advance term loan
facility to $10.0 million. Loans under the 1996 Credit Facility bear interest at
a designated prime rate plus the following margins: revolving credit, 1%;
multiple-advance term loan, 1.75%. 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 and the
F-13
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
multiple-advance term loan facility will mature and all amounts, if any,
outstanding thereunder will be due on December 31, 1997. 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. At December 31, 1996, there were no borrowings outstanding under the
1996 Credit Facility.
Other notes payable pertain to financed insurance premiums and various
vehicle notes. Scheduled maturities of long-term debt are as follows (in
thousands):
DECEMBER 31,
------------
1997.................................... $ 283
1998.................................... 316
1999.................................... 119
2000.................................... 27
------------
Total.............................. $ 745
============
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 ("Put
Agreement"). 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 (see Note 6--"Treasury Stock" regarding the
expiration of this Put Agreement in 1996). 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 valuation of the shares of common stock underlying
such options and (iii) the $158,000 difference between the purchase price and
the estimated valuation of the 90,331 shares of common stock purchased by an
existing stockholder) were capitalized as deferred financing costs.
5. 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, 1994, 1995 and 1996, was approximately $1,667,000, $2,244,000, and
$2,358,000, respectively. As of December 31, 1996, the Company had the following
rental commitments under noncancelable operating leases (in thousands):
For the year ending December 31 --
1997............................... $ 2,209
1998............................... 1,378
1999............................... 874
2000............................... 447
2001............................... 175
Thereafter......................... 1,257
---------
$ 6,340
=========
F-14
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
401(K) PLAN
The Company has a defined contribution 401(k) plan. The Company's matching
contribution represents 50 percent of a participants contribution, up to the
first six percent of the participants salary. The Company can also make
additional discretionary contributions. For the years ended December 31, 1994,
1995 and 1996, the Company recorded $100,000, $139,000, and $210,000,
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.
6. STOCKHOLDERS' EQUITY
CAPITALIZATION
Upon the completion of the IPO, the Company's authorized stock was as
follows:
CLASS AUTHORIZED PAR VALUE
- ---------------------------------------- ---------- ---------
Common stock............................ 30,000,000 $ .001
Preferred stock......................... 10,000,000 .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.
The Company effected a reclassification of its equity in 1996 in connection
with the IPO which resulted in the reclassification of each share of Class A
Common Stock and Class B Common Stock of the Company into one share of Common
stock, par value $.001 per share, of the Company.
OPTIONS AND WARRANTS
In May 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan"). Pursuant to the 1996 Plan, the Company may grant non-qualified and
incentive stock options. The Compensation Committee of the Board of Directors is
responsible for determining the exercise price and vesting terms for the
options. Additionally, prior to the IPO, the Company made various grants of
options and warrants to purchase the Company's common stock.
The Company may grant options for up to 880,000 shares under the 1996 Plan.
The Company has granted options on 673,358 shares through December 31, 1996. The
1996 Plan option exercise price can be no less than the stock's market price on
the date of grant. The 1996 Plan options vest up to four years, and expire after
seven to ten years.
On July 8, 1996, the chairman of the board and the chief financial officer
of the Company exercised options to purchase 137,110 and 82,750 shares of Class
A Common Stock and Class B Common Stock at an aggregate price of $274,220 and
$180,638, respectively. In connection with the exercise, each officer entered
into a promissory note with the Company for the respective aggregate exercise
amounts. The promissory notes bear interest at the applicable short-term federal
rate as prescribed by Internal Revenue Service regulations, mature in four
years, are full recourse and are collateralized by shares of common stock
exercised.
F-15
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plan and other
options and warrants at December 31, 1995 and 1996 and changes during the years
then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
1995 1996
-------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........ 83,062 $ 5.11 814,562 $ 2.12
Granted................................. 732,500 1.78 776,469 5.24
Exercised............................... (1,000) 2.50 (512,922) 2.22
Forfeited............................... -- -- -- --
Expired................................. -- -- -- --
--------- -----------
Outstanding at end of year.............. 814,562 2.12 1,078,109 4.32
========= ===========
Exercisable at end of year.............. 793,562 2.11 930,609 3.46
Weighted average fair value of options
granted............................... $.55 $4.10
</TABLE>
Of the 1,078,109 options outstanding at December 31, 1996, 948,109 options
have exercise prices between $2.00 and $5.64, with a weighted average exercise
price of $3.26 and a weighted average remaining contractual life of 7.3 years.
The remaining 130,000 options have exercise prices of $12.00 and a weighted
average remaining contractual life of 9.8 years.
Had compensation cost for the stock option grants under the 1996 Plan and
other stock options and warrants been determined under SFAS No. 123, the
Company's net loss and loss per share would have been the following pro forma
amounts (in thousands, except per share amounts):
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
Net loss: As reported............................. $ (989) $ (2,379)
Pro forma............................... (1,391) (3,503)
Loss per share: As reported............................. (.25) (.53)
Pro forma............................... (.35) (.80)
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
Under SFAS No. 123, the fair value of each option grant was estimated on
the date of grant using the minimum value calculation prior to the IPO, and the
Black-Scholes option pricing model subsequent to the IPO. The following weighted
average assumptions were used for grants in 1995 and 1996, respectively:
risk-free interest rates of 6.1% and 6.8%; dividend rates of $0 and $0; expected
lives of 7.0 and 7.5 years; expected volatility of 32.5% since the Company's
stock began trading in October 1996.
The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferrable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate.
TREASURY STOCK
Effective November 1, 1995, the Company repurchased 555,000 shares of Class
A Common Stock from a former officer of the Company ("Stock Repurchase"). The
Stock Repurchase and related expenses were financed with borrowings under the
1995 Credit Facility. In connection with the Stock Repurchase, the
F-16
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company issued options to purchase 555,000 shares of Class B Common Stock, each
with an exercise price of $2.00 per share, to certain existing stockholders and
to the lender under the 1995 Credit Facility. Also, in connection with the Stock
Repurchase, the Company granted the lender under the 1995 Credit Facility the
Put Agreement to require the Company to repurchase 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. The Put
Agreement, which was accrued in 1995, expired and was reversed in 1996.
7. SUBSEQUENT EVENTS
ACQUISITIONS
On January 31, 1997, the Company acquired substantially all of the assets
of Interventions Co. ("Interventions"). The Company paid an aggregate purchase
price of $6,003,000 comprised of $3,523,000 in cash, $2,250,000 for the
repayment of Interventions' outstanding notes payable, and $230,000 of
transaction costs. The Company financed the purchase with $2,000,000 of
borrowings from the multiple-advance term loan facility under its 1996 Credit
Facility and the remainder with cash. The acquisition was treated as a purchase
for accounting purposes. The operations acquired from Interventions include (i)
a 300 bed residential pre-release correctional center in Dallas County, Texas,
(ii) various non-residential aftercare treatment programs for an additional 170
probationers in Dallas, Texas, and (iii) a 44 bed juvenile residential
transitional living center program in San Antonio, Texas. In addition, the
Company acquired from Interventions the 72,000 square foot, 150 bed capacity
facility in San Antonio in which the juvenile transitional living center is
operated.
The acquisition costs and the estimated fair market value of the assets
acquired and liabilities assumed associated with the Interventions acquisitions
are as follows (in thousands):
Cash paid............................... $ 5,773
Transaction costs....................... 230
---------
Total purchase price............... $ 6,003
=========
Net assets acquired --
Cash............................... $ 409
Receivables, net................... 1,509
Other current assets............... 54
Property and equipment............. 4,577
Accounts payable and accrued
liabilities....................... (546)
---------
Total purchase price.......... $ 6,003
=========
8. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
ACQUISITION
On September 9, 1997, the Company acquired substantially all of the assets
of The Abraxas Group, Inc. and four related entities ("Abraxas"). The Company
paid an aggregate purchase price of $19.8 million. The Company financed the
purchase with borrowings under the 1997 Credit Facility (see below). The
acquisition is being treated as a purchase for accounting purposes. Abraxas was
a non-profit provider of residential and community-based juvenile programs
serving approximately 1,400 youths.
F-17
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CREDIT FACILITY
On September 9, 1997, the Company entered into a new $60 million revolving
line of credit (the "1997 Credit Facility"), which matures in 2003 and bears
interest at rates ranging from LIBOR plus 1.75% to 2.50%.
The unaudited consolidated results of operations on a pro forma basis as
though all 1997 and 1996 acquisitions, the IPO, the Offering and the 1997 Credit
Facility had been consummated as of the beginning of the Company's fiscal year
1996 and the six month period ended June 30, 1997 are as follows (amounts in
thousands, except per share data):
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
(UNAUDITED) (UNAUDITED)
----------------- ----------------
Revenues................................ $80,385 $ 45,165
Net income.............................. 2,702 2,141
Earnings per share...................... .31 .24
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cornell Corrections, Inc.:
We have audited the accompanying balance sheet of Interventions Co. as of
December 31, 1996, and the related statements of operations and cash flows for
the year then ended. These financial statements are the responsibility of
Interventions Co.'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 financial statements referred to above present fairly,
in all material respects, the financial position of Interventions Co. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 19, 1997
F-19
<PAGE>
INTERVENTIONS CO.
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 696
Accounts receivable, net of allowance of $584 ............... 1,659
Prepaids and other .......................................... 78
------
Total current assets ................................... 2,433
PROPERTY AND EQUIPMENT, net ...................................... 3,047
INVESTMENTS ...................................................... 1,298
------
Total assets ........................................... $6,778
======
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................... $ 372
Notes payable ............................................... 2,250
------
Total current liabilities .............................. 2,622
LONG-TERM LIABILITIES ............................................ 77
CONTINGENCIES
NET ASSETS ....................................................... 4,079
------
Total liabilities and net assets ....................... $6,778
======
The accompanying notes are an integral part of this financial statement.
F-20
<PAGE>
INTERVENTIONS CO.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
REVENUES:
Occupancy fees .......................................... $ 7,168
Other income ............................................ 76
-------
7,244
OPERATING EXPENSES ........................................... 5,608
DEPRECIATION ................................................. 162
GENERAL AND ADMINISTRATIVE EXPENSES .......................... 644
-------
INCOME FROM OPERATIONS ....................................... 830
INTEREST EXPENSE ............................................. (173)
UNREALIZED APPRECIATION FROM INVESTMENTS ..................... 227
INVESTMENT INCOME ............................................ 73
-------
INCOME ....................................................... $ 957
=======
The accompanying notes are an integral part of this financial statement.
F-21
<PAGE>
INTERVENTIONS CO.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income ............................................................ $ 957
Adjustments to reconcile income to net cash provided by operating
activities --
Depreciation ................................................... 162
Provision for write-down of assets ............................. 11
Unrealized appreciation from investments ....................... (227)
Change in assets and liabilities --
Increase in accounts receivable .............................. (115)
Decrease in prepaids and other ............................... 134
Decrease in accounts payable and accrued liabilities ......... (298)
Increase in long-term liabilities ............................ 77
-------
Net cash provided by operating activities .............. 701
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .............................................. (2,717)
Purchases of investments .......................................... (170)
-------
Net cash used in investing activities .................. (2,887)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ....................................... 2,250
Payments on notes payable ......................................... (50)
-------
Net cash provided by financing activities .............. 2,200
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 14
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 682
-------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 696
=======
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid during the period ................................... $ 168
=======
The accompanying notes are an integral part of this financial statement.
F-22
<PAGE>
INTERVENTIONS CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
Interventions Co. (Interventions), a Texas nonprofit corporation, was
formed in 1991 and currently provides chemical dependency treatment services for
adult probationers for Dallas County, Texas, transitional living services for
Bexar County, Texas, youth and residential care to homeless adolescents in San
Antonio (Bexar County), Texas.
In January 1997, Cornell Corrections, Inc. (collectively with its
subsidiaries, "the Company"), acquired substantially all of the assets and
liabilities of Interventions for $6.0 million which included the assumption of
$2.3 million of notes payable and $230,000 of transaction costs. The Company
provides to governmental agencies the integrated development, design,
construction and operation of correctional facilities. The accompanying
financial statements were prepared in connection with the sale of assets to the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements of Interventions 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, Interventions considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
Interventions 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, 1996, the uninsured cash balances totaled $399,000.
ACCOUNTS RECEIVABLE
Accounts receivable primarily consist of receivables from Dallas County,
Texas, Bexar County, Texas, and the state of Texas.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost; donated property and equipment
are recorded at the estimated fair market value on the date of donation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Routine maintenance and repairs that do not improve
or extend the life of the respective assets are expensed as incurred.
FEDERAL INCOME TAXES
Interventions is exempt from federal income tax under Section 501(c)(3) of
the Internal Revenue Code. Interventions had no unrelated business income during
the year ended December 31, 1996. Accordingly, no provision for income taxes is
made in the accompanying financial statements.
REVENUE RECOGNITION
Occupancy fees are principally derived from billings to government agencies
which pay per diem rates based upon the number of occupant days for the period.
Revenues are recognized as services are provided.
USE OF ESTIMATES
Interventions' 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
F-23
<PAGE>
INTERVENTIONS CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
BUSINESS CONCENTRATION
Contracts with governmental agencies account for substantially all of
Interventions' revenues.
FINANCIAL INSTRUMENTS
Interventions considers the fair value of all financial instruments not to
be materially different from their carrying values at December 31, 1996, based
on management's estimate of Interventions' ability to borrow funds under terms
and conditions similar to those of the existing debt.
EMPLOYEE BENEFIT PLAN
Eligible employees of Interventions may make voluntary contributions to a
403(b) tax-sheltered annuity program. Interventions does not contribute to the
program.
3. INVESTMENTS:
In 1996, Interventions adopted Statement of Financial Accounting Standards
(SFAS) No. 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations." Under SFAS No. 124, investments in equity securities with
readily determinable fair values and all investments in debt securities are
reported at their fair values with net unrealized appreciation and depreciation
included in the statement of operations. The effect of SFAS No. 124 on
Interventions' net assets for 1996 was an increase of $227,000 from what would
have been reported under prior accounting principles.
Cost basis for sales of investments is determined by specific
identification. Expenses relating to investment revenues, including custodial
fees and investment advisory fees, were approximately $16,000. These expenses
have been netted against investment revenues in the accompanying statement of
operations.
4. PROPERTY AND EQUIPMENT:
At December 31, 1996, property and equipment consisted of the following (in
thousands):
ESTIMATED
LIFE IN YEARS AMOUNT
------------- ---------
Land.................................... - $ 675
Buildings and improvements.............. 2-40 2,155
Furniture, fixtures and equipment....... 3-10 316
Vehicles................................ 3 223
---------
3,369
Less -- Accumulated depreciation........ 322
---------
$ 3,047
=========
5. NOTES PAYABLE:
At December 31, 1996, Interventions had a $1,000,000 note payable to a
bank. The note is secured by an investment account held at a financial
institution and requires monthly interest payments at the prime interest rate,
8.25 percent at December 31, 1996. Interventions also had a $1,250,000 note
payable to a third party in connection with the purchase of property in 1996.
The note accrues interest at 10 percent, payable monthly, and is secured by the
deed of trust of the related property. In connection with the Company's
acquisition of Interventions, both notes and all accrued interest were repaid in
January 1997.
F-24
<PAGE>
INTERVENTIONS CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASE OBLIGATIONS:
Interventions leases certain administrative and program facilities under
operating lease agreements that expire September 30, 1997. Future minimum lease
obligations are approximately $28,000 through September 1997. Interventions
incurred rent expense of approximately $31,000 in 1996.
7. CONTINGENCIES:
Interventions performed services under contracts with the Texas Commission
on Alcohol and Drug Abuse (TCADA) and the Private Industry Council of Dallas
(PIC), which are governed by various rules and regulations of the respective
agencies. Costs charged to the respective programs are subject to audit and
adjustment by the agencies; therefore, to the extent that Interventions has not
complied with the rules and regulations governing the contracts, if any, refunds
of any funds received may be required and the collectibility of any related
receivable at December 31, 1996, may be impaired.
During 1995 and 1996, the state of Texas conducted an audit of TCADA and
the contractors which it funded during the years 1993 through 1995. Statewide
allegations of improper costs charged to TCADA programs are currently being
disposed of in arbitration while TCADA has been in conservatorship. During the
audit of Interventions, its former management company, BHS Management Corp.
(BHS), did not provide all documentation requested by the state auditors.
Subsequent to receiving the summary of findings and questioned costs,
Interventions obtained and presented information to satisfy audit questions
except for $245,000 of management fees charged by BHS to the programs and
$35,000 of other costs. Interventions has recorded a reserve for this $280,000
and is seeking collection of these amounts from TCADA or, in the alternative,
through recovery by claim against BHS or its insurance carrier.
Interventions is not aware of any other contingent liabilities relating to
compliance with the rules and regulations governing the respective contracts;
therefore, no provision has been recorded in the accompanying financial
statements for such contingencies.
F-25
<PAGE>
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-26
<PAGE>
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-27
<PAGE>
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
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-28
<PAGE>
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-29
<PAGE>
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-30
<PAGE>
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-31
<PAGE>
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-32
<PAGE>
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-33
<PAGE>
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-34
<PAGE>
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-35
<PAGE>
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-36
<PAGE>
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-37
<PAGE>
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-38
<PAGE>
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-39
<PAGE>
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-40
<PAGE>
Inside Back Cover
[Photograph of segregation unit in secure institutional facility] Secure
institutional correctional and detention services primarily consist of the
operation of secure adult incarceration facilities. The Company provides maximum
and medium security incarceration and minimum security residential services.
[Photograph of counseling session at pre-release center]Pre-release
correctional services primarily consist of providing pre-release and halfway
house programs for adult offenders who are either on probation or serving the
last three to six months of their sentences on parole and preparing for re-entry
into society at large.
[Photograph of juvenile participating in wilderness program]Juvenile
correctional and detention services primarily consist of providing residential
treatment and educational programs and non-residential community-based programs
to juvenile offenders between the ages of 10 and 17 who have either been
adjudicated or suffer from behavioral problems.
<PAGE>
No dealer, salesperson 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, the Selling Stockholders 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
not lawful 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 an implication that there has been no change in the
facts set forth in this Prospectus or in the affairs of the Company since the
date hereof.
TABLE OF CONTENTS
------------------------------------------------------
Prospectus Summary .................................................... 3
Risk Factors .......................................................... 8
Use of Proceeds ....................................................... 15
Price Range of Common Stock and Dividend Policy ....................... 15
Capitalization ........................................................ 16
Dilution .............................................................. 17
Pro Forma Financial Data .............................................. 18
Selected Consolidated Historical and Pro Forma Financial Data ......... 24
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 26
Business .............................................................. 32
Management ............................................................ 46
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 ................................................ 62
Index to Consolidated Financial Statements ............................ F-1
PROSPECTUS October 17, 1997
[Logo]
2,920,000
CORNELL CORRECTIONS, INC.
Common Shares
SBC WARBURG DILLON READ INC.
EQUITABLE SECURITIES CORPORATION
WASSERSTEIN PERELLA SECURITIES, INC.
