UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD __________ TO _______________
COMMISSION FILE NUMBER 1-14472
CORNELL CORRECTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0433642
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1700 WEST LOOP SOUTH, SUITE 1500, HOUSTON, TEXAS 77027
------------------------------------------------ -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 623-0790
Indicate by a check mark whether Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At October 31, 1998 Registrant had outstanding 9,550,916 shares of its Common
Stock.
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 732 $ 18,968
Accounts receivable, net ...................................... 26,691 20,137
Deferred tax asset ............................................ 604 604
Prepaids and other ............................................ 1,469 1,366
Restricted assets ............................................. 1,821 1,564
--------- ---------
Total current assets ....................................... 31,317 42,639
PROPERTY AND EQUIPMENT, net ...................................... 154,203 52,516
OTHER ASSETS:
Intangible assets, net ........................................ 9,802 6,104
Deferred costs and other ...................................... 5,182 2,850
--------- ---------
Total assets ............................................... $ 200,504 $ 104,109
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ...................... $ 21,234 $ 13,576
Deferred revenues ............................................. 2,232 2,549
Current portion of long-term debt ............................. 169 294
--------- ---------
Total current liabilities .................................. 23,635 16,419
LONG-TERM DEBT, net of current portion ........................... 85,515 138
OTHER LONG-TERM LIABILITIES ...................................... 801 822
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none outstanding ............................................ -- --
Common stock, $.001 par value, 30,000,000 shares
authorized, 10,105,916 and 9,945,904 shares
issued and outstanding, respectively ........................ 10 10
Additional paid-in capital .................................... 89,859 89,684
Stock option loans ............................................ (455) (455)
Retained earnings (deficit) ................................... 3,979 (156)
Treasury stock (605,000 and 550,000 shares
of common stock, at cost, respectively) ..................... (2,840) (2,353)
--------- ---------
Total stockholders' equity ................................. 90,553 86,730
--------- ---------
Total liabilities and stockholders' equity ................. $ 200,504 $ 104,109
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES .......................... $ 30,731 $ 18,013 $ 86,871 $ 46,053
OPERATING EXPENSES ................ 24,675 14,752 70,411 37,308
DEPRECIATION AND AMORTIZATION ..... 969 506 2,868 1,625
GENERAL AND ADMINISTRATIVE EXPENSES 1,802 1,235 5,433 3,453
-------- -------- -------- --------
INCOME FROM OPERATIONS ............ 3,285 1,520 8,159 3,667
INTEREST EXPENSE .................. 644 147 1,360 356
INTEREST INCOME ................... (19) (36) (92) (122)
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES .................... 2,660 1,409 6,891 3,433
PROVISION FOR INCOME TAXES ........ 1,064 507 2,756 1,236
-------- -------- -------- --------
NET INCOME ........................ $ 1,596 $ 902 $ 4,135 $ 2,197
======== ======== ======== ========
NET EARNINGS PER SHARE:
Basic ........................... $ .17 $ .13 $ .44 $ .32
======== ======== ======== ========
Diluted ......................... $ .16 $ .12 $ .42 $ .31
======== ======== ======== ========
NUMBER OF SHARES USED IN PER SHARE
CALCULATION:
Basic ........................... 9,533 6,895 9,450 6,835
======== ======== ======== ========
Diluted ......................... 9,726 7,328 9,897 7,202
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 4,135 $ 2,197
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation ................................. 1,924 618
Amortization ................................. 944 1,007
Change in assets and liabilities, net of
effects from acquisitions:
Accounts receivable ....................... (6,554) (3,734)
Restricted assets ......................... (257) (357)
Other assets .............................. (2,529) (1,346)
Accounts payable and accrued liabilities .. 6,364 4,911
Deferred revenues and other liabilities ... (338) 2,000
--------- --------
Net cash provided by operating activities .... 3,689 5,296
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................... (42,060) (3,399)
Acquisition of businesses, less cash acquired . (64,805) (22,263)
--------- --------
Net cash used in investing activities ........ (106,865) (25,662)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .................. 154,154 28,000
Payments on long-term debt .................... (68,902) (10,257)
Proceeds from exercise of stock options ....... 175 283
Purchases of treasury stock ................... (487) --
--------- --------
Net cash provided by financing activities .... 84,940 18,026
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....... (18,236) (2,340)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,968 4,874
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...... $ 732 $ 2,534
========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized ..... $ 2,125 $ 391
========= ========
Income taxes paid ............................. $ 2,044 $ 416
========= ========
The accompanying notes are an integral part
of these consolidated financial statements.
- 4 -
<PAGE>
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments and disclosures
necessary for a fair presentation of these financial statements have been
included. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
2. ACQUISITIONS
On January 6, 1998, the Company purchased the Great Plains Correctional
Facility ("Great Plains"), located in Hinton, Oklahoma. The Company paid an
aggregate purchase price of $43.8 million comprised of $43.0 million in cash and
approximately $750,000 of transaction costs. The Company financed the purchase
with $18.8 million of borrowings under the 1997 Credit Facility and the
remainder with cash. The purchase price included the 812 bed facility, a 30 year
operating contract with four five-year renewals between the Hinton Economic
Development Authority ("HEDA") and the Company, and an additional 20 adjacent
acres of land for potential future expansion of the facility. Great Plains is
operated pursuant to a one-year contract with nine one-year renewal options
between the Oklahoma Department of Corrections and HEDA; HEDA in turn
subcontracts the daily operations of the prison to the Company. In January 1998,
the Company began the transition from the prior operator and assumed complete
operation of the prison in July 1998.
On August 13, 1998, the Company acquired substantially all of the Alaskan
assets of Allvest, Inc. ("Allvest"), a privately held company based in
Anchorage, Alaska. The Company paid an aggregate purchase price of $21.1 million
comprised of $19.9 million in cash and approximately $1.2 million of transaction
costs. The Company financed the acquisition with borrowings under its 1997
Credit Facility. The acquisition included the operations of five pre-release
facilities located in Anchorage, Fairbanks and Bethel, Alaska with an aggregate
capacity of 540 beds and the real properties of three of the five facilities. In
addition, the Company and Allvest have agreed to enter into a cooperative
venture to jointly develop a possible private prison in Delta Junction, Alaska.
The unaudited consolidated results of operations on a pro forma basis as
though the August 1998 Allvest acquisition, the January 1998 purchase of the
Great Plains Correctional Facility and the September 1997 acquisition of Abraxas
had occurred as of the beginning of the Company's 1997 fiscal year are as
follows (amounts in thousands, except per share data):
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1998
---- ----
Total revenues.......................... $86,025 $91,876
Net income.............................. 5,075 4,385
Earnings per share:
Basic................................. .55 .46
Diluted............................... .53 .44
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<PAGE>
3. LONG-TERM DEBT
As of September 30, 1998, the Company had borrowings outstanding under the
1997 Credit Facility of $35.5 million. Under the 1997 Credit Facility, the
Company has a $60.0 million revolving line of credit, the availability of which
is determined by the Company's projected pro forma cash flow. The 1997 Credit
Facility matures in 2003 and bears interest, at the election of the Company, at
either the prime rate plus a margin of 0% to .5% or a rate which is 1.75% to
2.50% above the applicable LIBOR rate.
On July 15, 1998 the Company completed a private placement of $50.0 million
of senior secured notes ("Senior Secured Notes"). The Senior Secured Notes,
which bear interest at a fixed interest rate of 7.74%, mature on July 15, 2010.
Under the note purchase agreement, the Company is required to make eight annual
principal payments of $6.25 million beginning July 15, 2003. Earlier payments of
principal are allowed subject to certain prepayment provisions. Interest is
payable semi-annually. Proceeds from the sale of the Senior Secured Notes were
used to repay borrowings under the 1997 Credit Facility.
4. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" effective December 31,
1997. SFAS No. 128 revised the historical methodology used in computing earnings
per share (EPS) such that the computations required for primary and fully
diluted EPS were replaced with basic and diluted EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed in the same manner as fully
diluted EPS, except that, among other changes, the average share price for the
period is used in all cases when applying the treasury stock method to
potentially dilutive outstanding options. All earnings per share amounts
presented herein have been restated to reflect the adoption of SFAS No. 128.
5. SEGMENT REPORTING
The Company will adopt SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" in 1998. SFAS No. 131 provides revised
disclosure guidelines for segments of an enterprise based on a management
approach to defining operating segments.
6. DEFERRED COSTS
In April 1998, Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities ("SOP 98-5") was issued. SOP 98-5 requires entities to expense
start-up costs as incurred and to expense previously capitalized start-up costs
as a cumulative effect of a change in accounting principle. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. At September 30,
1998, the Company's unamortized start-up costs were approximately $3.1 million.
7. STOCKHOLDER RIGHTS PLAN
On May 1, 1998, the Company adopted a stockholder rights plan. Under the
plan, each stockholder of record at the close of the business day on May 11,
1998 received one Preferred Stock Purchase Right ("Right") for each share of
common stock held. The Rights expire on May 1, 2008. Each Right initially
entitles the stockholder to purchase one one-thousandth of a Series A Junior
Participating Preferred Share for $120.00. Each Preferred Share has terms
designed to make it economically equivalent to one thousand common shares. The
Rights will become exercisable only in the event a person or group acquires 15%
or more of the Company's common stock or commences a tender or exchange offer
which, if consummated, would result in that person or group owning 15% or more
of the Company's common stock. If a person or group acquires a 15% or more
position in the Company, each Right (except those held by the acquiring party)
will then entitle its holder to purchase, at the exercise price, common stock of
the Company having
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<PAGE>
a value of twice the exercise price. The effect will be to entitle the holder to
buy the common stock at 50% of the market price. Also, if following an
acquisition of 15% or more of the Company's common stock, the Company is
acquired by that person or group in a merger or other business combination
transaction, each Right would then entitle its holder to purchase common stock
of the acquiring company having a value of twice the exercise price. The effect
will be to entitle the Company's stockholder to buy stock in the acquiring
company at 50% of the market price. The Company may redeem the Rights at $0.01
per Right at any time prior to the acquisition of 15% or more of its common
stock by a person or group.
- 7 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company provides integrated facility development, design, construction
and operational services to governmental agencies within three operating
divisions: (i) secure institutional correctional and detention services; (ii)
juvenile correctional and detention services and (iii) pre-release correctional
services. The following table sets forth offender capacity under contract or
award, the contracted offender capacity and beds in operation at the end of the
periods shown and the average occupancy percentage for the year-to-date period
then ended.
SEPTEMBER 30, DECEMBER 31,
1998 1997
------ -----
Total offender capacity:
Residential .................................... 9,093 6,172
Non-residential community based ................ 935 900
Total ........................................ 10,028 7,072
Contracted offender capacity in operation
(end of period) ................................ 7,265 5,061
Contracted beds in operation (end of period)(1) .. 6,250 4,161
Average occupancy based on contracted beds in
operation(1)(2) ................................ 96.8% 97.6%
- - -----------
(1) Based on contracted offender capacity of residential facilities in
operation. Since certain facilities have offender capacities that exceed
contracted capacities, occupancy percentages can exceed 100% of contracted
capacity.
(2) For any applicable facilities, includes reduced occupancy during the
start-up phase.
The Company derives substantially all its revenues from operating
correctional, detention and pre-release facilities for federal, state and local
governmental agencies in the United States. Revenues for the 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.
The Company's operating expenses consist primarily of facility personnel
costs and fringe benefits, resident food, medical services, lease expense,
insurance, utilities, supplies and clothing. Depreciation and amortization
includes depreciation of buildings and other property and equipment,
amortization of prepaid facility use costs pertaining to the Big Spring Complex,
amortization of intangible assets including goodwill and amortization of
facility start-up costs. General and administrative expenses consist primarily
of salaries and related overhead of the Company's corporate and administrative
personnel who provide senior management, accounting, finance, human resources,
payroll, information systems and other services, and costs of business
development.
- 8 -
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of
total revenue represented by certain items in the Company's consolidated
statements of operations.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total revenues .................... 100.0% 100.0% 100.0% 100.0%
Operating expenses ................ 80.3 81.9 81.1 81.0
Depreciation and amortization ..... 3.2 2.8 3.3 3.5
General and administrative expenses 5.8 6.9 6.3 7.5
------ ------ ------ ------
Income from operations ............ 10.7 8.4 9.3 8.0
Interest expense, net ............. 2.0 0.6 1.5 0.5
------ ------ ------ ------
Income before provision for
income taxes ..................... 8.7 7.8 7.8 7.5
Provision for income taxes ........ 3.5 2.8 3.2 2.7
------ ------ ------ ------
Net income ........................ 5.2% 5.0% 4.6% 4.8%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues increased 71% to $30.7 million for the three months ended
September 30, 1998 from $18.0 million for the three months ended September 30,
1997. The increase in revenues of approximately $12.7 million was due
principally to the acquisition of Abraxas in September 1997, the purchase of the
Great Plains Correctional Facility in January 1998, the acquisition of Allvest
in August 1998 and expansions at various facilities.
OPERATING EXPENSES. Operating expenses increased 67% to $24.7 million for the
three months ended September 30, 1998 from $14.8 million for the three months
ended September 30, 1997. The increase in operating expenses was due principally
to the acquisition of Abraxas in September 1997, the purchase of the Great
Plains Correctional Facility in January 1998, the acquisition of Allvest in
August 1998 and expansions at various facilities. As a percentage of revenues,
operating expenses decreased to 80.3% from 81.9% primarily due to a greater mix
of owned versus leased facilities due to the purchases of the Great Plains
Correctional Facility and the Alaska facilities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 92% to
$969,000 for the three months ended September 30, 1998 from $506,000 for the
three months ended September 30, 1997 due principally to the depreciation of
buildings and equipment acquired from Abraxas in September 1997 and depreciation
of the Great Plains Correctional Facility purchased in January 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 46% to $1.8 million for the three months ended September 30, 1998 from
$1.2 million for the three months ended September 30, 1997. The increase in
general and administrative expenses resulted from additional corporate, business
development and administrative personnel needed to manage the increased business
of the Company and for development of new contracts. As a percentage of
revenues, general and administrative expenses decreased to 5.8% from 6.9% due
principally to the larger revenue base.
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<PAGE>
INTEREST. Interest expense, net of interest income, increased to $625,000 for
the three months ended September 30, 1998 from $111,000 for the three months
ended September 30, 1997. The increase was due principally to borrowings under
the Company's 1997 Credit Facility for the purchase of the Great Plains
Correctional Facility in January 1998 and the acquisition of Allvest in August
1998. During the three months ended September 30, 1998, the Company capitalized
interest totaling $874,000 related to costs of facilities currently under
construction and development including the 560 bed Big Spring Complex expansion
and the 1,625 bed D. Ray James State Prison in Charlton County, Georgia.
INCOME TAXES. For the three months ended September 30, 1998, the Company
recognized a provision for income taxes at an estimated effective rate of 40%
compared to 36% for the three months ended September 30, 1997. The effective tax
rate applied in 1997 included a benefit for the reversal of previously deferred
tax assets resulting from prior net operating losses.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Revenues increased by 89% to $86.9 million for the nine months
ended September 30, 1998 from $46.1 million for the nine months ended September
30, 1997. The increase in revenues of approximately $40.8 million was due
principally to the acquisition of Abraxas in September 1997, the purchase of the
Great Plains Correctional Facility in January 1998, the acquisition of Allvest
in August 1998 and expansions at various facilities.
OPERATING EXPENSES. Operating expenses increased 89% to $70.4 million for the
nine months ended September 30, 1998 from $37.3 million for the nine months
ended September 30, 1997. The increase in operating expenses was due principally
to the acquisition of Abraxas in September 1997, the purchase of the Great
Plains Correctional Facility in January 1998, the acquisition of Allvest in
August 1998 and expansions at various facilities. As a percentage of revenues,
operating expenses were relatively constant at 81.1% and 81.0%, respectively.
The recent trend of an increasing overall operating margin due to a greater mix
of owned versus leased facilities was offset by lower operating margins at
certain juvenile facilities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 76% to
$2.9 million for the nine months ended September 30, 1998 from $1.6 million for
the nine months ended September 30, 1997. Amortization costs for the nine months
ended September 30, 1997 included approximately $187,000 to expense start-up
costs related to the non-renewal of a 120 bed juvenile contract as of June 30,
1997. Excluding this charge, depreciation and amortization increased 101% or
$1.4 million due principally to depreciation of buildings and equipment acquired
from Abraxas in September 1997 and depreciation of the Great Plains Correctional
Facility purchased in January 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 57% to $5.4 million for the nine months ended September 30, 1998 from
$3.5 million for the nine months ended September 30, 1997. The increase in
general and administrative expenses resulted from additional corporate, business
development and administrative personnel needed to manage the increased business
of the Company and for development of new contracts. As a percentage of
revenues, general and administrative expenses decreased to 6.3% from 7.5% due
principally to the larger revenue base.
INTEREST. Interest expense, net of interest income, increased to $1.3 million
for the nine months ended September 30, 1998 from $234,000 for the nine months
ended September 30, 1997. The increase in net interest expense was principally
due to borrowings under the Company's 1997 Credit Facility for the purchase of
the Great Plains Correctional Facility in January 1998 and the acquisition of
Allvest in August 1998. For the nine months ended September 30, 1998, the
Company capitalized interest totaling $1.6 million
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<PAGE>
related to costs of facilities under construction and development including the
560 bed Big Spring Complex expansion and the 1,625 bed D. Ray James State Prison
in Georgia.
INCOME TAXES. For the nine months ended September 30, 1998, the Company
recognized a provision for income taxes at an estimated effective annual rate of
40% compared to 36% for the nine months ended September 30, 1997. The effective
income tax rate applied in 1997 included a benefit for the reversal of
previously reserved deferred tax assets resulting from prior net operating
losses.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's primary capital requirements have been for
acquisitions, new facility expansion and construction, working capital, start-up
costs related to new operating contracts, and furniture, fixtures and equipment.
Working capital requirements generally increase immediately prior to the Company
commencing management of a new facility as the Company incurs start-up costs and
purchases necessary equipment and supplies before facility management revenue is
received. Some of the Company's management contracts have required and will
require the Company to make substantial initial expenditures of cash in
connection with the opening or renovating of a facility. Substantially all these
start-up expenditures are fully or partially recoverable as pass-through costs
or are reimbursable from the contracting governmental agency over the term of
the contract.
WORKING CAPITAL. The Company's working capital was $7.7 million at September
30, 1998 and $26.2 million at December 31, 1997. This decrease was principally
due to the use of cash to fund a portion of the Great Plains Correctional
Facility purchase in January 1998.
CASH PROVIDED BY OPERATING ACTIVITIES. The Company had net cash provided by
operating activities of $3.7 million for the nine months ended September 30,
1998. Significant sources of cash include $7.0 million of net income plus
depreciation and amortization and an increase in accounts payable and accrued
liabilities. Significant uses of operating cash during the period include an
increase in accounts receivable due to the January 1998 purchase of the Great
Plains Correctional Facility and the timing of receivable collections of various
facilities, and start-up costs for facilities under development including the
Big Spring Complex expansion and the D. Ray James State Prison in Georgia.
EXISTING CREDIT FACILITIES. Under the 1997 Credit Facility, which matures in
2003, the Company has a $60.0 million revolving line of credit, the availability
of which is determined by the Company's projected pro forma cash flow. As of
September 30, 1998 the Company had borrowings outstanding under the 1997 Credit
Facility of $35.5 million.
On July 15, 1998 the Company completed a private placement of $50.0 million
of Senior Secured Notes of which, $25.0 million was issued in July 1998 and
$25.0 million in August 1998. The Senior Secured Notes, which bear interest at a
fixed rate of 7.74%, mature on July 15, 2010. Under the note purchase agreement,
the Company is required to make eight annual principal payments of $6.25 million
beginning on July 15, 2003. Earlier payments of principal are allowed subject to
certain prepayment provisions. Interest is payable semi-annually. The principal
amount of $50.0 million was used by the Company to repay outstanding borrowings
under the 1997 Credit Facility.
CAPITAL EXPENDITURES. Capital expenditures for the nine months ended
September 30, 1998 were $42.1 million and related principally to
construction-in-progress for the 560 bed expansion of the Big Spring Complex,
the 1,625 bed D. Ray James State Prison in Georgia and various facility
expansions and improvements. The Company is committed to spend an additional
$10.0 million through mid-1999 to complete the D. Ray James State Prison.
- 11 -
<PAGE>
ACQUISITIONS. In January 1998, the Company acquired the Great Plains
Correctional Facility. The Company financed the $43.8 million purchase price
with a combination of $18.8 million in borrowings under the 1997 Credit
Facility, and the remainder with cash remaining from the October 1997 stock
offering and cash generated from operations.
In August 1998, the Company acquired substantially all of the Alaskan assets
of Allvest, Inc., a privately held company based in Anchorage, Alaska. The
Company financed the $21.1 million purchase price with borrowings under the 1997
Credit Facility. The acquisition included the operations of five pre-release
facilities with an aggregate capacity of 540 beds in Anchorage, Fairbanks and
Bethel, Alaska and the real properties of three of the five facilities. In
addition, the Company and Allvest have agreed to enter into a cooperative
venture to jointly develop a possible private prison in Delta Junction, Alaska.
Management of the Company believes that the cash flows generated from
operations, together with the credit available under the 1997 Credit Facility,
will provide sufficient liquidity to meet the Company's committed capital and
working capital requirements for the near term. It is not anticipated that the
1997 Credit Facility will provide sufficient financing to fund construction
costs related to future institutional contract awards, expansions or significant
future acquisitions. The Company anticipates obtaining additional sources of
financing to fund such activities.
YEAR 2000 ISSUE
The Company continues to identify, evaluate and implement modifications to
its business systems in order to achieve Year 2000 date conversion compliance.
The Company's business systems are comprised of a mix of off-the-shelf and
internally developed systems that vary greatly in size, complexity and technical
architecture. As a part of the Company's ongoing business plan, the Company
continues to install new applications and upgrade existing ones in order to
bring applications for its various locations into compliance. The Company
currently believes all significant business systems will be Year 2000 compliant
by mid-1999 with the majority of these in compliance by the end of 1998. The
Company believes that the historical and estimated future Year 2000 remediation
costs are not material to the Company's financial position or results of
operations.
During the fourth quarter of 1998, the Company intends to communicate with
certain contracting governmental agencies, suppliers, financial institutions and
others with whom it does business to address conversion-related issues. The
Company still has not yet determined the complete status of Year 2000 compliance
of its contracting governmental agencies, suppliers and financial institutions
or what additional costs, if any, might be required by the Company. Management
believes that non-compliance by the Company's suppliers are insignificant, but
failure of certain contracting governmental agencies or its financial
institutions could have a material effect on the Company's financial position or
results of operations.
NEW ACCOUNTING STANDARD
In April 1998, Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities ("SOP 98-5") was issued. SOP 98-5 requires entities to expense
start-up costs as incurred and to expense previously capitalized start-up costs
as a cumulative effect of a change in accounting principle in the year adopted.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998. At
September 30, 1998, the Company's unamortized start-up costs were approximately
$3.1 million.
- 12 -
<PAGE>
INFLATION
Management of the Company believes that inflation has not had a material
effect on the Company's results of operations during the past three years.
However, most of the Company's facility management contracts provide for
payments to the Company of either fixed per diem fees or per diem fees that
increase by only small amounts during the terms of the contracts. Inflation
could substantially increase the Company's personnel costs (the largest
component of facility management expense) or other operating expenses at rates
faster than any increases in revenues.
- 13 -
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries or for wrongful restriction of, or interference with, inmate
privileges. In the opinion of management of the Company, the outcome of the
proceedings to which the Company is currently a party will not have a material
adverse effect upon the Company's operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
11.1 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
b. Reports on Form 8-K
Form 8-K of the Company dated August 27, 1998 reporting the
acquisition of Allvest, Inc. on August 13, 1998. Amendment No. 1 to
that Form 8-K with historical and pro forma financial information
was filed on October 27, 1998. Amendment No. 2 to that Form 8-K with
revised pro forma financial information was filed on November 13,
1998.
- 14 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned,
thereunto duly authorized.
CORNELL CORRECTIONS, INC.
Date: November 16, 1998 By: /s/ DAVID M. CORNELL
DAVID M. CORNELL
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer)
Date: November 16, 1998 By: /s/ KEVIN B. KELLY
KEVIN B. KELLY
Controller, Chief
Accounting Officer
and Secretary
- 15 -
EXHIBIT 11.1
CORNELL CORRECTIONS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- --------------------------------------------
1998 1997 1998 1997
-------------------- -------------------- -------------------- --------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Earnings ................ $ 1,596 $ 1,596 $ 902 $ 902 $ 4,135 $ 4,135 $ 2,197 $ 2,197
======== ======== ======== ======== ======== ======== ======== ========
Shares used in computing
net earnings per share:
Weighted average common
shares and common share
equivalents ............. 10,096 10,096 7,450 7,450 10,008 10,008 7,390 7,390
Less treasury shares ...... (563) (563) (555) (555) (558) (558) (555) (555)
Effect of shares issuable
under stock options
and warrants based on
the treasury stock method -- 193 -- 433 -- 447 -- 367
-------- -------- -------- -------- -------- -------- -------- --------
9,533 9,726 6,895 7,328 9,450 9,897 6,835 7,202
-------- -------- -------- -------- -------- -------- -------- --------
Net earnings per share ..... $ 0.17 $ 0.16 $ 0.13 $ 0.12 $ 0.44 $ 0.42 $ 0.32 $ 0.31
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 732
<SECURITIES> 0
<RECEIVABLES> 26,691
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,317
<PP&E> 159,416
<DEPRECIATION> (5,213)
<TOTAL-ASSETS> 200,504
<CURRENT-LIABILITIES> 23,635
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 90,543
<TOTAL-LIABILITY-AND-EQUITY> 200,504
<SALES> 0
<TOTAL-REVENUES> 86,871
<CGS> 0
<TOTAL-COSTS> 78,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,360
<INCOME-PRETAX> 6,891
<INCOME-TAX> 2,756
<INCOME-CONTINUING> 4,135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,135
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.42
</TABLE>
