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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 MARCH 31, 1999
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 April 30, 1999 Registrant had outstanding 9,569,128 shares of its Common
Stock.
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 548 $ 2,519
Accounts receivable, net .............................................. 30,079 27,564
Deferred tax asset .................................................... 1,209 1,209
Prepaids and other .................................................... 2,070 2,203
Restricted assets ..................................................... 1,983 2,613
--------- ---------
Total current assets ............................................. 35,889 36,108
PROPERTY AND EQUIPMENT, net ................................................. 167,412 159,219
OTHER ASSETS:
Intangible assets, net ................................................ 9,751 9,935
Deferred costs and other .............................................. 2,988 7,433
--------- ---------
Total assets ..................................................... $ 216,040 $ 212,695
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .............................. $ 16,296 $ 17,838
Deferred revenues ..................................................... 624 1,369
Current portion of long-term debt ..................................... -- 73
--------- ---------
Total current liabilities ........................................ 16,920 19,280
LONG-TERM DEBT, net of current portion ...................................... 107,505 98,407
DEFERRED TAX LIABILITIES .................................................... 800 2,769
OTHER LONG-TERM LIABILITIES ................................................. 735 739
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, 10,121,628
and 10,105,916 shares issued and outstanding, respectively .......... 10 10
Additional paid-in capital ............................................ 90,131 90,038
Stock option loans .................................................... (455) (455)
Retained earnings ..................................................... 4,393 5,906
Treasury stock (697,100 shares of common stock, at cost) .............. (3,999) (3,999)
--------- ---------
Total stockholders' equity ....................................... 90,080 91,500
--------- ---------
Total liabilities and stockholders' equity ....................... $ 216,040 $ 212,695
========= =========
</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
MARCH 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
REVENUES ................................................................ $ 38,356 $ 27,041
OPERATING EXPENSES ...................................................... 30,068 22,116
START-UP EXPENSES ....................................................... 543 --
DEPRECIATION AND AMORTIZATION ........................................... 1,405 935
GENERAL AND ADMINISTRATIVE EXPENSES ..................................... 2,353 1,597
-------- --------
INCOME FROM OPERATIONS .................................................. 3,987 2,393
INTEREST EXPENSE ........................................................ 1,608 339
INTEREST INCOME ......................................................... (21) (42)
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ............................. 2,400 2,096
PROVISION FOR INCOME TAXES .............................................. 960 838
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE ............................................................ 1,440 1,258
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF RELATED INCOME TAX PROVISION OF $1,969 ........................ 2,954 --
-------- --------
NET INCOME (LOSS) ....................................................... $ (1,514) $ 1,258
======== ========
EARNINGS (LOSS) PER SHARE:
BASIC
Income before cumulative effect of change in accounting principle $ .15 $ .13
Cumulative effect of change in accounting principle ............. (.31) --
-------- --------
Net income (loss) ............................................... $ (.16) $ .13
======== ========
DILUTED
Income before cumulative effect of change in accounting principle $ .15 $ .13
Cumulative effect of accounting change in accounting principle .. (.31) --
-------- --------
Net income (loss) ............................................... $ (.16) $ .13
======== ========
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC ............................................................. 9,412 9,399
DILUTED ........................................................... 9,663 9,897
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 3 -
<PAGE>
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ (1,514) $ 1,258
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities --
Cumulative effect of change in accounting principle .............. 2,954 --
Depreciation ..................................................... 1,077 631
Amortization ..................................................... 328 304
Change in assets and liabilities, net of effects from acquisitions
Accounts receivable ......................................... (2,515) (3,152)
Restricted assets ........................................... 37 23
Other assets ................................................ (313) (334)
Accounts payable and accrued liabilities .................... (949) 2,055
Deferred revenues and other liabilities ..................... (749) 43
-------- --------
Net cash provided by (used in) operating activities .............. (1,644) 828
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (9,445) (7,405)
Acquisition of businesses, less cash acquired ....................... -- (43,750)
-------- --------
Net cash used in investing activities ............................ (9,445) (51,155)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ........................................ 14,500 42,750
Payments on long-term debt .......................................... (5,475) (10,328)
Proceeds from exercises of stock options ............................ 93 128
-------- --------
Net cash provided by financing activities ........................ 9,118 32,550
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS .............................. (1,971) (17,777)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 2,519 18,968
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 548 $ 1,191
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized ........................... $ 1,408 $ 341
======== ========
Income taxes paid ................................................... $ 248 $ 495
======== ========
</TABLE>
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 Cornell Corrections, Inc. (the "Company" or Cornell") 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 1998 Annual Report on Form 10-K as filed with the Securities
and Exchange Commission.
2. LONG-TERM DEBT
As of March 31, 1999, the Company had borrowings outstanding under the 1998
Credit Facility of $57.5 million. Under the 1998 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 1998 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. The 1998 Credit Facility is secured by
all of the Company's assets, including the stock of all the Company's
subsidiaries, does not permit the payment of cash dividends and requires the
Company to comply with certain earnings, net worth and debt service covenants.
Additionally, the 1998 Credit Facility provides the Company with the ability to
enter into future operating lease agreements that provide for residual value
guarantees.
As of March 31, 1999, the Company had outstanding $50 million of Senior
Secured Notes ("Senior Notes"). The Senior Notes, which bear interest at a fixed
rate of 7.74%, mature on July 15, 2010. Under the Senior Notes purchase
agreements, the Company is required to make eight annual principal payments of
$6.25 million beginning on July 15, 2003 and comply with certain financial
covenants. Earlier payments of principal are allowed subject to certain
prepayment provisions. Interest is payable semi annually. The holders of the
Senior Notes and the lender under the 1998 Credit Facility have a
collateral-sharing agreement whereby both sets of creditors have an equal
security interest in all the assets of the Company.
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted EPS is computed in the same manner as basic 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 stock
options.
4. START-UP EXPENSES
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 was generally effective for fiscal years beginning after December 15, 1998.
The Company adopted SOP 98-5 on January 1, 1999, and as a result recorded a
cumulative effect of a change in accounting principle of approximately $3.0
million, net of the related income tax provision of approximately $2.0 million.
5. SEGMENT DISCLOSURE
The Company's three operating divisions are its reportable segments. The
secure institutional segment consists of the operation of secure adult
incarceration facilities. The juvenile segment consists of providing residential
treatment and educational programs and non-residential community-based programs
to juveniles between the ages of 10 and 17. The pre-release segment consists of
providing pre-release and halfway house
- 5 -
<PAGE>
programs for adult offenders. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.
Intangible assets are not included in each segment's reportable assets, and the
amortization of intangible assets is not included in the determination of a
segment's operating income or loss. The Company evaluates performance based on
income or loss from operations before general and administrative expenses,
incentive bonuses, amortization of intangibles, interest and income taxes.
The only significant noncash item reported in the respective segments' income
or loss from operations is depreciation and amortization (excluding
intangibles):
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ---------
Revenues
Secure institutional ........................ $ 16,918 $ 11,970
Juvenile .................................... 13,689 10,451
Pre-release ................................. 7,749 4,620
--------- ---------
Total revenues ................................. $ 38,356 $ 27,041
========= =========
Depreciation and amortization
Secure institutional ........................ $ 755 $ 489
Juvenile .................................... 216 147
Pre-release ................................. 184 149
Amortization of intangibles ................. 153 100
Corporate and other ......................... 97 50
--------- ---------
Total depreciation and amortization ............ $ 1,405 $ 935
========= =========
Income from operations
Secure institutional ........................ $ 3,925 $ 2,562
Juvenile .................................... 911 1,196
Pre-release ................................. 1,753 454
General and administrative expense .......... (2,353) (1,597)
Incentive bonuses ........................... -- (72)
Amortization of intangibles ................. (153) (100)
Corporate and other ......................... (96) (50)
--------- ---------
Total income from operations ................... $ 3,987 $ 2,393
========= =========
Assets
Secure institutional ........................ $ 130,119 $ 95,480
Juvenile .................................... 37,160 29,083
Pre-release ................................. 31,094 9,030
Intangible assets, net ...................... 9,751 6,004
Corporate and other ......................... 7,916 4,446
--------- ---------
Total assets ................................... $ 216,040 $ 144,043
========= =========
Capital expenditures
Secure institutional ........................ $ 3,590 $ 6,218
Juvenile .................................... 1,019 298
Pre-release ................................. 4,067 699
Corporate and other ......................... 769 190
--------- ---------
Total capital expenditures ..................... $ 9,445 $ 7,405
========= =========
6. SUBSEQUENT EVENT
In May 1999, Cornell executed an agreement to acquire certain of the
adult and juvenile behavioral health and correctional assets of
Interventions, a not-for-profit corporation headquartered in Chicago,
Illinois. Closing of the transaction is subject to various conditions,
including receipt of required governmental and other consents.
- 6 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cornell provides integrated development, design, construction and operational
services to governmental agencies within three operating divisions: (a) secure
institutional correctional and detention services; (b) juvenile treatment,
educational and detention services and (c) pre-release correctional services.
The following table sets forth total offender capacity, the contracted offender
capacity and beds in operation at the end of the periods shown, and the average
occupancy percentage for the periods then ended.
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
Offender capacity (end of period):
Residential ............................... 9,875 9,135
Non-residential community-based ........... 1,688 1,390
Total ................................... 11,563 10,525
Contracted offender capacity in
operation (end of period) .................. 8,770 8,700
Contracted beds in operation
(end of period)(1) ......................... 7,380 7,310
Average occupancy based on
contracted beds in operation(1)(2) ......... 94.9% 93.8%
- ------------------
(1) Occupancy percentages are based on contracted offender capacity of
residential facilities in operation. Since certain facilities have offender
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
(2) Occupancy percentages reflect reduced occupancy during the start-up phase
of any applicable facility, resulting in a lower average occupancy in
periods when Cornell has substantial start-up activities.
Cornell derives substantially all its revenues from operating correctional,
detention and pre-release facilities for federal, state and local governmental
agencies in the United States. Revenues for operation of correctional, detention
and pre-release facilities are generally recognized on a per diem rate based
upon the number of occupant days for the period.
Factors which Cornell considers in determining the per diem rate to charge
include: (a) the programs specified by the contract and the related staffing
levels; (b) the wage levels customary in the respective geographic areas; (c)
whether the proposed facility is to be leased or purchased and (d) the
anticipated average occupancy levels which Cornell believes could reasonably be
maintained.
Cornell's operating margins generally vary from facility to facility
(regardless of whether the facility is secure institutional, juvenile or
pre-release) based on (a) the level of competition for the contract award, (b)
the proposed length of the contract, (c) the occupancy levels for a facility,
(d) the level of capital commitment required with respect to a facility and (e)
the anticipated changes in operating costs, if any, over the term of the
contract.
Cornell is responsible for all facility operating expenses, except for
certain debt service and lease payments with respect to facilities for which it
has only a management contract (six facilities in operation at March 31, 1999).
A majority of Cornell's facility operating expenses consist of fixed costs.
These fixed costs include lease and rental expense, insurance, utilities and
depreciation. As a result, when Cornell begins operating new or expanded
facilities, fixed operating expenses increase. The amount of Cornell's variable
operating expenses, including food, medical services, supplies and clothing,
depend on occupancy levels at the facilities operated by Cornell. Cornell's
largest single operating expense, facility payroll expense and related
employment taxes and costs, has both a fixed and a variable component. Cornell
can adjust 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.
- 7 -
<PAGE>
Start-up expenses consist primarily of payroll, benefits, training and other
operating costs prior to opening a new or expanded facility and during the first
three months of operation while occupancy is ramping up.
Cornell incurs significant start-up costs before and as it begins operations
at a facility. In April 1998, Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," or SOP 98-5, was issued. SOP 98-5 is effective
for fiscal years beginning after December 15, 1998. It 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. In January 1999, Cornell adopted SOP 98-5 and recorded a
net-of-tax charge of approximately $3.0 million for the cumulative effect of a
change in accounting principle. As a result of Cornell's adoption of SOP 98-5,
Cornell began to record start-up expenses as incurred.
General and administrative expenses consist primarily of salaries of
Cornell's corporate and administrative personnel who provide senior management,
accounting, finance, human resources, payroll, information systems and other
services and costs of business development.
Newly opened facilities are staffed according to contract requirements when
Cornell begins receiving offenders. Offenders are typically assigned to a newly
opened facility on a phased-in basis over a one- to three-month period. Cornell
may incur start-up operating losses at new facilities until break-even occupancy
levels are reached. Quarterly results can be substantially affected by the
timing of the beginning of operations as well as development and construction of
new facilities.
Working capital requirements generally increase immediately prior to Cornell
beginning management of a new facility as it incurs start-up costs and purchases
necessary equipment and supplies before facility
management revenue is realized.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of
revenue represented by certain items in Cornell's historical consolidated
statements of operations.
THREE MONTHS
ENDED MARCH 31,
----------------
1999 1998
------ ------
Total revenues................................ 100.0% 100.0%
Operating expenses............................ 78.4 81.8
Start-up expenses............................. 1.4 --
Depreciation and amortization................. 3.7 3.5
General and administrative expenses........... 6.1 5.9
------ ------
Income from operations........................ 10.4 8.8
Interest expense, net......................... 4.1 1.1
------ ------
Income before provision for income taxes and
cumulative effect of change in
accounting principle....................... 6.3 7.7
Provision for income taxes.................... 2.5 3.1
------ ------
Income before cumulative effect of change
in accounting principle.................... 3.8% 4.6%
====== ======
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
REVENUES. Revenues increased 41.8% to $38.4 million for the three months
ended March 31, 1999 from $27.0 million for the three months ended March 31,
1998.
Secure institutional division revenues increased 41.3% to $16.9 million for
the three months ended March 31, 1999 from $12.0 million for the three months
ended March 31, 1998 due principally to (a) the opening of
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<PAGE>
the 560 bed expansion of the Big Spring Complex in the fourth quarter of 1998,
(b) the opening of the 550 initial beds in the D. Ray James Prison in the fourth
quarter of 1998 and (c) the opening of the 672 bed Santa Fe County Adult
Detention Facility in the third quarter of 1998.
Juvenile division revenues increased 31.0% to $13.7 million for the three
months ended March 31, 1999 from $10.5 million for the three months ended March
31, 1998 due to (a) the opening of the Danville Center for Adolescent Females in
the second quarter of 1998, (b) the opening of the Santa Fe County Juvenile
Detention Facility in the third quarter of 1998, (c) increased occupancy at the
Cornell Abraxas I and Cornell Abraxas of Ohio facilities due to facility
expansions completed in the third quarter of 1998 and (d) the addition of
various new programs including two new non-residential mental health programs in
Pennsylvania.
Pre-release division revenues increased 67.7% to $7.7 million for the three
months ended March 31, 1999 from $4.6 million for the three months ended March
31, 1998 due principally to the five pre-release centers in Alaska acquired from
Allvest, Inc. in August 1998.
OPERATING EXPENSES. Operating expenses increased 36.0% to $30.1 million for
the three months ended March 31, 1999 from $22.1 million for the three months
ended March 31, 1998.
Secure institutional division operating expenses increased 35.9% to $12.1
million for the three months ended March 31, 1999 from $8.9 million for the
three months ended March 31, 1998 due principally to (a) the opening of the 560
bed expansion of the Big Spring Complex in the fourth quarter of 1998 and (b)
the opening of the 550 initial beds in the D. Ray James Prison in the fourth
quarter of 1998. As a percentage of revenues, secure institutional division
operating expenses were 71.6% for the three months ended March 31, 1999 compared
to 74.5% for the three months ended March 31, 1998. The improved operating
margin for the three months ended March 31, 1999 compared to the three months
ended March 31, 1998 was due principally to a greater mix of owned versus leased
facilities and a reduction to operating expenses of $500,000 at the Santa Fe
Adult Detention Facility resulting from a cost-sharing agreement with the
Company's construction contractor.
Juvenile division operating expenses increased 33.4% to $12.2 million for the
three months ended March 31, 1999 from $9.1 million for the three months ended
March 31, 1998. This increase in operating expenses was due to (a) the start of
operations at the Danville Center for Adolescent Females in the second quarter
of 1998, (b) the start of operations at the Santa Fe County Juvenile Detention
Facility late in the third quarter of 1998, (c) increased occupancy at the
Cornell Abraxas I and Cornell Abraxas of Ohio facilities due to facility
expansions completed in the third quarter of 1998 and (d) the addition of
various new programs including two new non-residential mental health programs in
Pennsylvania. As a percentage of revenues, operating expenses were 88.8% for the
three months ended March 31, 1999 compared to 87.1% for the three months ended
March 31, 1998.
Pre-release division operating expenses increased 44.5% to $5.8 million for
the three months ended March 31, 1999 from $4.0 million for the three months
ended March 31, 1998 due principally to the acquisition of five pre-release
centers in Alaska from Allvest in August 1998. As a percentage of revenues,
operating expenses were 74.9% for the three months ended March 31, 1999 compared
to 86.9% for the three months ended March 31, 1998. The higher operating margin
for the three months ended March 31, 1999 versus the three months ended March
31, 1998 was due principally to a greater mix of owned versus leased facilities,
including four owned facilities in Alaska.
START-UP EXPENSES. Start-up expenses were $543,000 for the three months ended
March 31, 1999 and were attributable to the start-up activities of the Cornell
Abraxas Youth Center and to the opening of a portion of the 1,075 bed expansion
of the D. Ray James Prison.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 50.3%
to $1.4 million for the three months ended March 31, 1999 from $935,000 for the
three months ended March 31, 1998 due to (a)
- 9 -
<PAGE>
depreciation of buildings and equipment acquired from Allvest in August 1998,
(b) the opening of the 560 bed expansion of the Big Spring Complex in the fourth
quarter of 1998, (c) the opening of the 550 initial beds in the D. Ray James
Prison in the fourth quarter of 1998 and (d) various facility expansions and
related equipment.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 47.3% to $2.4 million for the three months ended March 31, 1999 from
$1.6 million for the three months ended March 31, 1998. The increase in general
and administrative expenses resulted principally from additional corporate,
business development and administrative personnel to manage the increased
business of Cornell and for development of new contracts.
INTEREST. Interest expense, net of interest income, increased to $1.6 million
for the three months ended March 31, 1999 from $297,000 for the three months
ended March 31, 1998 due principally to borrowings under the 1998 Credit
Facility for (a) the purchase of the Great Plains Correctional Facility in
January 1998, (b) the acquisition of the Alaskan assets of Allvest in August
1998 and (c) working capital for various new programs and facility expansions.
During the three months ended March 31, 1999, Cornell capitalized interest
totaling $451,000 related to costs for construction and development of the D.
Ray James Prison.
INCOME TAXES. For the three months ended March 31, 1999 and 1998, Cornell
recognized a provision for income taxes at an estimated effective rate of 40%.
ACCOUNTING CHANGE. In April 1998, 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. Cornell adopted SOP 98-5 in January 1999 and recorded a net-of-tax
charge of approximately $3.0 million for the cumulative effect of a change in
accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Cornell's primary capital requirements are for (a) acquisitions, (b)
construction of new facilities, (c) expansions of existing facilities, (d)
working capital, including start-up costs related to new operating contracts,
and (e) furniture, fixtures and equipment. Working capital requirements
generally increase immediately prior to Cornell commencing management of a new
facility as Cornell incurs start-up costs and purchases necessary equipment and
supplies before facility management revenue (through occupancy fees) is
realized. Some of Cornell's management contracts have required Cornell 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.
- 10 -
<PAGE>
WORKING CAPITAL. Cornell's working capital increased to $19.0 million at
March 31, 1999 from $16.8 million at December 31, 1998. This increase was
principally due to an increase in accounts receivable and a corresponding
decrease in deferred revenues totaling $1.8 million due to applying the
remainder of the $2.0 million advance from the State of Georgia received in 1997
to per diem billings of the D. Ray James Prison during the quarter.
CASH USED IN OPERATING ACTIVITIES. Cornell had net cash used in operating
activities of $1.6 million for the three months ended March 31, 1999.
Significant uses of operating cash during the period include the $1.8 million
combined increase in accounts receivable and the corresponding decrease in
deferred revenues pertaining to the D. Ray James Prison, and other increases in
accounts receivable and reductions in accounts payable.
EXISTING CREDIT FACILITIES. In December 1998, Cornell entered into the 1998
Credit Facility with a syndicate. The 1998 Credit Facility provides for
borrowings of up to $60.0 million under a revolving line of credit, the
availability of which is determined by Cornell's projected pro forma cash flow.
The 1998 Credit Facility matures in March 2003 and bears interest, at the
election of Cornell, at either the prime rate plus a margin of up to 0.5% or a
rate which is 1.75% to 2.50% above the applicable LIBOR-rate. The 1998 Credit
Facility is secured by all of Cornell's assets, including the stock of all of
Cornell's subsidiaries, does not permit the payment of cash dividends and
requires Cornell to comply with certain leverage, net worth and debt service
covenants. As of March 31, 1999, Cornell had borrowings outstanding under the
1998 Credit Facility of $57.5 million.
Under the 1998 Credit Facility, Cornell is allowed to enter into future
operating lease agreements for the acquisition or development of operating
facilities at a cost not to exceed $40 million. The lease(s) under this
arrangement will have a term of five years, will include purchase and renewal
options and will provide for a substantial residual value guarantee
(approximately 85% of the total cost) by Cornell which would be due upon
termination of the lease(s). Upon termination of a lease, Cornell could either
exercise a purchase option, or the facilities could be sold to a third party.
Cornell expects the fair market value of the leased facilities to substantially
reduce or eliminate Cornell's payment under the residual value guarantee. At
March 31, 1999 there was approximately $30.8 million available under this
arrangement.
In April 1999, Cornell obtained an additional $5.0 million subordinated line
of credit from an existing lender. The note bears interest at prime plus a
margin of 3%, matures in July 1999 and may be renewed by the lender.
As of March 31, 1999, Cornell had outstanding $50 million of Senior Secured
Notes, or Senior Notes. The Senior Notes bear interest at a fixed rate of 7.74%
and mature on July 15, 2010. Under the Senior Notes purchase agreements, Cornell
is required to make eight annual principal payments of $6.25 million beginning
on July 15, 2003 and comply with certain financial covenants. Earlier payments
of principal are allowed subject to certain prepayment provisions. Interest is
payable semi annually. The holders of the Senior Notes and the lender under the
1998 Credit Facility have a collateral-sharing agreement whereby both sets of
creditors have an equal security interest in all of the assets of Cornell.
CAPITAL EXPENDITURES. Capital expenditures for the three months ended March
31, 1999 were $9.4 million and related principally to (a)
construction-in-progress for completion of the 1,625 bed D. Ray James Prison,
(b) the purchase of the Parkview Center and an additional building for future
development, both in Anchorage, Alaska, (c) leasehold improvements at the
Cornell Abraxas Youth Center and (d) various hardware and software for
information systems upgrades. Cornell spent approximately $500,000 during the
quarter for its management information systems upgrades. An estimated additional
$4.4 million is expected to be used in next nine months to improve Cornell's
internal hardware and software systems.
- 11 -
<PAGE>
ACQUISITIONS. In May 1999, Cornell executed an agreement to acquire certain
of the adult and juvenile behavioral health and correctional assets of
Interventions, a not-for-profit corporation headquartered in Chicago, Illinois.
Closing of the transaction is subject to various conditions, including receipt
of required governmental and other consents.
Management believes that the cash flows generated from operations, together
with the credit available under the 1998 Credit Facility, the operating lease
capacity thereunder, a sale/leaseback arrangement, and equity and debt financing
alternatives the Company is considering, will provide sufficient liquidity to
meet Cornell's committed capital and working capital requirements for the near
term. It is not anticipated that the current facilities will provide sufficient
financing to fund construction costs related to future secure institutional
contract awards, expansions or significant future acquisitions. Cornell
anticipates obtaining additional sources of financing to fund such activities.
YEAR 2000 ISSUES
Cornell continues to identify, evaluate and implement modifications to its
business systems in order to achieve Year 2000 date conversion compliance.
Cornell's business systems are comprised of third-party vendor systems and
certain internally developed systems that vary greatly in size, complexity and
technical architecture. As a part of Cornell's ongoing business plan, Cornell
continues to install new applications and upgrade existing ones in order to
bring applications for its various locations into compliance. The majority of
information technology systems readiness efforts and critical-systems testing
are scheduled to be completed by the middle of 1999. The remaining systems are
to be completed by the fourth quarter of 1999. Cornell is in the process of
receiving responses from third-party software vendors. Preliminary indications
are that they will be Year 2000 ready and will provide updated software on a
timely basis.
The majority of the non-information technology, or non-IT, systems are
scheduled to be inventoried by the second quarter of 1999. All non-IT systems
are scheduled to be ready by the end of the third quarter of 1999, with minor
exceptions. Normal maintenance schedules for the fourth quarter of 1999 will
allow Cornell to complete any final readiness efforts.
The inability of Cornell's contracting governmental agencies to timely pay
Cornell for its services or the inability of Cornell's third-party suppliers to
provide their products and services could seriously harm Cornell's business.
Contacts are currently being made with all critical third parties, such as
governmental agencies, financial institutions, suppliers and vendors, to
determine if they will be Year 2000 compliant. An aggressive follow-up program
will be implemented with those third parties not responding or those returning
an unacceptable response. If it is determined that there is a significant risk,
an effort will be made to work with this third-party supplier. If this is not
successful, a new provider of the same services will be found. However, if
Cornell's contracting governmental agencies do not respond or return
unacceptable responses and are not able to timely pay Cornell for its services,
Cornell's business could be seriously harmed. Cornell still has not yet
determined the complete status of Year 2000 compliance of its third parties or
what additional costs, if any, might be required by Cornell.
Cornell is currently implementing a broad information systems upgrade. In
connection with such upgrades, Cornell is upgrading certain hardware and
software systems to ensure Year 2000 compliance at an estimated aggregate cost
of $1.8 million. As Year 2000 impact assessment nears completion and the
renovation planning, readiness implementation and testing evolve, the estimated
costs may change.
- 12 -
<PAGE>
The most reasonably likely worst-case Year 2000 scenarios would be the
inability of Cornell's contracting governmental agencies to timely pay Cornell
for its services or the inability of third-party suppliers, such as utility
providers, telecommunication companies, and other critical suppliers such as
food service suppliers and health care suppliers, to continue providing their
products and services. These pose the most material operational, safety and/or
financial risks to Cornell. In addition, Cornell may not obtain accurate and
timely Year 2000 date impact information from suppliers of automation and
process control systems and processes. Without quality information from
suppliers, specifically on embedded chip technology, some Year 2000 problems
could go undetected until after January 1, 2000.
Cornell has localized contingency plans already in place and is currently
working to develop a corporate-wide contingency plan format. This format
includes a template and other guidelines to help develop a plan that will cover
the Year 2000 areas of concern. These plans are to be completed and tested, when
practicable, by the fourth quarter of 1999.
The foregoing Year 2000 discussion includes forward-looking statements of
Cornell's efforts and management's expectations relating to Year 2000 readiness.
Cornell's ability to achieve Year 2000 readiness, and the level of costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
install or modify proprietary hardware and software, and unanticipated problems
identified in the ongoing Year 2000 readiness review.
INFLATION
Management of Cornell believes that inflation has not had a material effect
on its results of operations during the past three years. However, most of
Cornell's facility management contracts provide for payments to Cornell 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
Cornell's personnel costs (the largest component of facility management expense)
or other operating expenses at rates faster than any increases in occupancy
fees.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, Cornell is exposed to market risk,
primarily from changes in interest rates. Cornell continually monitors exposure
to market risk and develops appropriate strategies to manage this risk. Cornell
is not exposed to any other significant market risks, including commodity price
risk, foreign currency exchange risk or interest rate risks from the use of
derivative financial instruments. Management does not use derivative financial
instruments for trading or to speculate on changes in interest rates or
commodity prices.
Cornell's exposure to changes in interest rates primarily results from its
long-term debt with both fixed and floating interest rates. Cornell's debt with
fixed interest rates consists of the Senior Notes. Cornell's debt with variable
interest is its revolving line of credit. At March 31, 1999, approximately 53.7%
($57.7 million) of the long-term debt was subject to variable interest rates.
The detrimental effect of a hypothetical 100 basis point increase in interest
rates would be to reduce income before provision for income taxes by
approximately $100,000 for the quarter ended March 31, 1999. At March 31, 1999,
the fair value of Cornell's fixed rate debt approximated carrying value based
upon discounted future cash flows using current market prices.
- 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 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
None.
- 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: May 17, 1999 By: /s/ DAVID M. CORNELL
DAVID M. CORNELL
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ KEVIN B. KELLEY
KEVIN B. KELLEY
Chief Accounting Officer and
Controller
(Principal Accounting Officer)
- 15 -
EXHIBIT 11.1
CORNELL CORRECTIONS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1999 1998
--------------------- ---------------------
BASIC DILUTED BASIC DILUTED
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net Earnings (Loss) ................................... $ (1,514) $ (1,514) $ 1,258 $ 1,258
==================== ====================
Shares used in computing net earnings (loss) per share:
Weighted average common shares and
common share equivalents ...................... 10,110 10,110 9,954 9,954
Less treasury shares ............................ (697) (697) (555) (555)
Effect of shares issuable under stock options
and warrants based on the treasury stock method -- 251 -- 498
-------------------- --------------------
9,412 9,663 9,399 9,897
-------------------- --------------------
Net earnings (loss) per share ....................... $ (0.16) $ (0.16) $ 0.13 $ 0.13
==================== ====================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 548
<SECURITIES> 0
<RECEIVABLES> 30,079
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,889
<PP&E> 174,976
<DEPRECIATION> (7,564)
<TOTAL-ASSETS> 216,040
<CURRENT-LIABILITIES> 16,920
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 90,070
<TOTAL-LIABILITY-AND-EQUITY> 216,040
<SALES> 3
<TOTAL-REVENUES> 38,856
<CGS> 0
<TOTAL-COSTS> 34,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,608
<INCOME-PRETAX> 2,400
<INCOME-TAX> 960
<INCOME-CONTINUING> 1,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,954
<NET-INCOME> (1,514)
<EPS-PRIMARY> .15
<EPS-DILUTED> (.16)
</TABLE>
