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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, 2000
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, 2000 Registrant had outstanding 9,464,013 shares of its Common
Stock.
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................. $ 261 $ 1,763
Accounts receivable, net .................................................................. 49,095 48,092
Deferred tax asset ........................................................................ 1,206 1,206
Prepaids and other ........................................................................ 1,664 1,356
Restricted assets ......................................................................... 2,155 2,339
--------------- ---------------
Total current assets ................................................................... 54,381 54,756
PROPERTY AND EQUIPMENT, net .................................................................. 196,058 194,498
OTHER ASSETS:
Intangible assets, net .................................................................... 17,918 18,270
Deferred costs and other .................................................................. 5,807 6,467
--------------- ---------------
Total assets ........................................................................... $ 274,164 $ 273,991
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................................................. $ 26,009 $ 27,392
Note payable .............................................................................. 40,000 40,000
--------------- ---------------
Total current liabilities .............................................................. 66,009 67,392
LONG-TERM DEBT ............................................................................... 101,250 101,500
OTHER LONG-TERM LIABILITIES .................................................................. 7,604 7,891
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, 10,161,113
and 10,137,528 shares issued and outstanding, respectively .............................. 10 10
Additional paid-in capital ................................................................ 90,516 90,394
Stock option loans ........................................................................ (455) (455)
Retained earnings ......................................................................... 13,229 11,258
Treasury stock (697,100 shares of common stock, at cost) .................................. (3,999) (3,999)
--------------- ---------------
Total stockholders' equity ............................................................. 99,301 97,208
--------------- ---------------
Total liabilities and stockholders' equity ............................................. $ 274,164 $ 273,991
=============== ===============
</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,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
REVENUES ..................................................................................... $ 53,468 $ 38,356
OPERATING EXPENSES ........................................................................... 41,638 30,068
PRE-OPENING AND START-UP EXPENSES ............................................................ 349 543
DEPRECIATION AND AMORTIZATION ................................................................ 1,778 1,405
GENERAL AND ADMINISTRATIVE EXPENSES .......................................................... 2,802 2,353
--------------- ---------------
INCOME FROM OPERATIONS ....................................................................... 6,901 3,987
INTEREST EXPENSE ............................................................................. 3,593 1,608
INTEREST INCOME .............................................................................. (27) (21)
--------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ................................................... 3,335 2,400
PROVISION FOR INCOME TAXES ................................................................... 1,364 960
--------------- ---------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE .................................................................................. 1,971 1,440
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF RELATED INCOME TAX PROVISION OF $1,969 IN 1999 ...................................... -- 2,954
--------------- ---------------
NET INCOME (LOSS) ............................................................................ $ 1,971 $ (1,514)
=============== ===============
EARNINGS (LOSS) PER SHARE:
BASIC
Income before cumulative effect of change in accounting pinciple ........................ $ .21 $ .15
Cumulative effect of change in accounting principle ..................................... -- (.31)
--------------- ---------------
Net income (loss) ....................................................................... $ .21 $ (.16)
=============== ===============
DILUTED
Income before cumulative effect of change in accounting pinciple ........................ $ .21 $ .15
Cumulative effect of change in accounting principle ..................................... -- (.31)
--------------- ---------------
Net income (loss) ....................................................................... $ .21 $ (.16)
=============== ===============
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC ..................................................................................... 9,452 9,412
DILUTED ................................................................................... 9,602 9,663
</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,
--------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ 1,971 $ (1,514)
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 .................................................................. 1,048 1,077
Amortization .................................................................. 730 328
Provision for bad debts ....................................................... 174 34
Loss on sale of property and equipment ........................................ 43 --
Change in assets and liabilities
Accounts receivable ........................................................ (1,177) (2,549)
Restricted assets .......................................................... 184 37
Other assets ............................................................... (415) (313)
Accounts payable and accrued liabilities ................................... (1,381) (949)
Deferred revenues and other liabilities .................................... (287) (749)
--------------- ---------------
Net cash provided by (used in) operating activities ........................... 890 (1,644)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................... (2,341) (9,445)
Proceeds from sales of property and equipment .................................. 77 --
--------------- ---------------
Net cash used in investing activities ......................................... (2,264) (9,445)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ................................................... 21,400 14,500
Payments on long-term debt ..................................................... (21,650) 5,475
Proceeds from issuance of common stock ......................................... 97 --
Proceeds from exercises of stock options ....................................... 25 93
--------------- ---------------
Net cash (used in) provided by financing activities ........................... (128) 9,118
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................................ (1,502) (1,971)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................. 1,763 2,519
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................... $ 261 $ 548
=============== ===============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized ...................................... $ 4,270 $ 1,408
=============== ===============
Income taxes paid .............................................................. $ 3,915 $ 248
=============== ===============
</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") 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 1999 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.
2. WORKING CAPITAL DEFICIT AND FINANCING ARRANGEMENTS
At March 31, 2000, the Company reported a working capital deficit of $11.6
million. Excluding the $40.0 million of borrowings outstanding under the
Company's Subordinated Bridge Loan Agreement ("Bridge Facility"), which matures
in October 2000, the Company had working capital of $28.4 million. Management
believes that the repayment of borrowings outstanding under the Bridge Facility
will be funded from potential proceeds of one, or a combination, of the efforts
the Company is currently pursuing or negotiating to raise long-term financing
including: (a) the issuance of longer term subordinated debt, (b) an expansion
of the existing revolving line of credit under the 1998 Credit Facility, (c) a
sale and leaseback of certain owned facilities and leasehold interests, or (d)
other debt or equity financing arrangements. Should the Company not be
successful in raising longer term financing pursuant to its efforts as described
above before maturity of the Bridge Facility, the lender has an option to
convert the borrowings outstanding under the Bridge Facility into eight year
exchange notes, and to purchase up to five percent of the Company's outstanding
common stock at an exercise price of 110% of the market price of the Company's
common stock as of the date of the exchange. If these contemplated financing
transactions are not consummated, the Company would be required to seek
alternative and potentially dilutive capital funding sources to repay the Bridge
Facility when due. No assurance can be made that the Company will be able to
obtain the various financings described above.
The Company's lease financing arrangement does not provide sufficient
financing to fund the remaining construction costs for the New Morgan Academy,
which is currently under construction, and the Moshannon Valley Correctional
Center for which construction commenced in 1999 but as of May 2000 was still
under a Stop-Work Order issued by the Federal Bureau of Prisons in June 1999. As
of May 2000, there were approximately $59.0 million in anticipated unfunded
capital requirements for the completion of these two projects. The funds for
these new facilities are expected to be expended during the next twelve to
eighteen months. The Company's current lease financing arrangement is available
to fund up to approximately $5.2 million of these construction costs. Management
believes that the remaining facility construction costs will be funded with an
increase of the Company's lease financing arrangement.
3. CREDIT FACILITIES
As of March 31, 2000, $40.0 million of borrowings were outstanding under the
Company's $50.0 million Bridge Facility. The Bridge Facility matures in October
2000 and bears interest at LIBOR plus a margin of 6.5% and increases by 0.5%
each quarter until repaid. At maturity, the lenders have an option to convert
the borrowings outstanding under the Bridge Facility into longer term exchange
notes as described above in Note 2.
-5-
<PAGE>
As of March 31, 2000, the Company had borrowings outstanding under the 1998
Credit Facility of $51.3 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 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 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, 2000, the Company had outstanding $50.0 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 lenders 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.
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
year. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities, such as stock options, into common stock.
5. SEGMENT DISCLOSURE
The Company's three operating divisions are its reportable segments. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Notes to Consolidated
Financial Statements included in the Company's 1999 Annual Report on Form 10-K.
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.
Corporate and other assets are comprised primarily of cash, accounts receivable,
deposits, deferred costs and deferred taxes.
-6-
<PAGE>
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,
------------------------
2000 1999
-------- --------
Revenues
Adult secure institutional .................. $ 21,081 $ 16,918
Juvenile .................................... 20,496 13,689
Pre-release ................................. 11,891 7,749
-------- --------
Total revenues ................................. $ 53,468 $ 38,356
======== ========
Income from operations
Adult secure institutional .................. $ 4,836 $ 3,925
Juvenile .................................... 2,402 911
Pre-release ................................. 2,908 1,753
General and administrative expense .......... (2,802) (2,353)
Amortization of intangibles ................. (382) (153)
Corporate and other ......................... (61) (96)
-------- --------
Total income from operations ................... $ 6,901 $ 3,987
======== ========
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
Assets
Adult secure institutional ............ $ 143,520 $ 141,268
Juvenile .............................. 48,360 53,498
Pre-release ........................... 53,892 47,592
Intangible assets, net ................ 17,918 18,270
Corporate and other ................... 10,474 13,363
--------------- ---------------
Total assets ............................. $ 274,164 $ 273,991
=============== ===============
-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: (a) adult secure institutional, correctional and detention services;
(b) juvenile treatment, educational and detention services and (c) pre-release
correctional and treatment services. The following table sets forth, for the
periods indicated, total service capacity, service capacity and contracted beds
in operation, and average occupancy percentages.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Total service capacity:
Residential ............................................................................... 12,026 12,137
Non-residential community-based ........................................................... 2,819 2,708
Total ................................................................................... 14,845 14,845
Service capacity in operation (end of period) ................................................ 13,046 12,240
Contracted beds in operation (end of period) (1) ............................................. 9,835 9,029
Average occupancy based on contracted beds in operation (1) (2) .............................. 96.8% 95.8%
Average occupancy excluding start-up operations (1) .......................................... 98.5% 97.0%
</TABLE>
- -----------
(1)Occupancy percentages are based on contracted service capacity of residential
facilities in operation. Since certain facilities have service 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
applicable facilities, resulting in a lower average occupancy in periods when
the Company has substantial start-up activities.
The Company derives substantially all its revenues from operating
correctional, detention, pre-release and treatment facilities for federal, state
and local governmental agencies in the United States. Revenues for operation of
correctional, detention, pre-release and treatment facilities are generally
recognized on a per diem rate based upon the number of occupant days for the
period, or hours served for the period or cost-plus reimbursement.
Factors that the Company 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 that the Company believes could reasonably
be maintained.
The Company's operating margins generally vary from facility to facility
(regardless of whether the facility is adult secure institutional, juvenile or
pre-release) based on the level of competition for the contract award, the
proposed length of the contract, the 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 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 (nine facilities in operation at March 31, 2000).
-8-
<PAGE>
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, including food, medical services,
supplies and clothing, depend on occupancy levels at the facilities operated by
the Company. 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.
Pre-opening and start-up expenses consist primarily of payroll, benefits,
training and other operating costs prior to opening a new or expanded facility
and during a period of approximately three months of operation while occupancy
is ramping up.
General and administrative expenses consist primarily of salaries of the
Company's corporate and administrative personnel who provide senior management,
accounting, finance, human resources, payroll, information systems, business
development, and other services.
Newly opened facilities are staffed according to contract requirements when
the Company begins receiving occupants. Occupants are typically assigned to a
newly opened facility on a phased-in basis over a one to three-month period. The
Company 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 commencement of operations as well as development and
construction of new facilities.
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 following table sets forth for the periods indicated the percentages of
revenue represented by certain items in the Company's historical consolidated
statements of operations.
THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
-------- --------
Total revenues ......................................... 100.0% 100.0%
Operating expenses ..................................... 77.9 78.4
Pre-opening and start-up expenses ...................... 0.7 1.4
Depreciation and amortization .......................... 3.3 3.7
General and administrative expenses .................... 5.2 6.1
-------- --------
Income from operations ................................. 12.9 10.4
Interest expense, net .................................. 6.7 4.1
-------- --------
Income before provision for income taxes and
cumulative effect of change in accounting principle . 6.2 6.3
Provision for income taxes ............................. 2.6 2.5
-------- --------
Income before cumulative effect of change
in accounting principle ............................. 3.6% 3.8%
======== ========
-9-
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased 39.4% to $53.5 million for the three months
ended March 31, 2000 from $38.4 million for the three months ended March 31,
1999.
Adult secure institutional division revenues increased 24.6% to $21.1 million
for the three months ended March 31, 2000 from $16.9 million for the three
months ended March 31, 1999 due principally to (a) expansions at the Big Spring
Complex completed in the fourth quarter of 1999 and the first quarter of 2000,
(b) the opening of the additional 450 beds in the D. Ray James Prison in the
0first quarter of 1999 and (c) increased occupancy at the Santa Fe County Adult
Detention Facility. The final 550 bed expansion of the D. Ray James Prison began
housing inmates late in the first quarter of 2000 and is expected to attain
normal occupancy levels during the second quarter of 2000. Revenues attributable
to start-up operations for the D. Ray James Prison were approximately $44,000
for the three months ended March 31, 2000.
Juvenile division revenues increased 49.7% to $20.5 million for the three
months ended March 31, 2000 from $13.7 million for the three months ended March
31, 1999 due to (a) the operations of the juvenile facilities and programs
acquired from Interventions - Illinois in November 1999, (b) the opening of the
Cornell Abraxas Youth Center late in the first quarter of 1999, (c) increased
occupancy at the Cornell Abraxas I facility due to an expansion completed in the
fourth quarter of 1999, (d) increased occupancy at the Santa Fe County Juvenile
Detention Facility and (e) the addition of various new programs during 1999
including two new non-residential mental health programs and one residential
mental health program in Pennsylvania.
Pre-release division revenues increased 53.5% to $11.9 million for the three
months ended March 31, 2000 from $7.7 million for the three months ended March
31, 1999 due principally to the pre-release facilities and programs acquired
from Interventions - Illinois in November 1999.
OPERATING EXPENSES. Operating expenses increased 38.5% to $41.6 million for
the three months ended March 31, 2000 from $30.1 million for the three months
ended March 31, 1999.
Adult secure institutional division operating expenses increased 25.1% to
$15.2 million for the three months ended March 31, 2000 from $12.1 million for
the three months ended March 31, 1999 due principally to (a) the opening of an
additional 450 beds in the D. Ray James Prison in the first quarter of 1999 and
(b) increased occupancy at the Santa Fe County Adult Detention Facility. As a
percentage of revenues, excluding start-up operations, adult secure
institutional division operating expenses were 72.0% for the three months ended
March 31, 2000 compared to 71.6% for the three months ended March 31, 1999. The
operating margin was impacted favorably by operating results of the Big Spring
Complex expansions that were offset, in part, by a margin reduction due to the
sale and leaseback of certain owned furniture and equipment during the fourth
quarter of 1999.
Juvenile division operating expenses increased 44.5% to $17.6 million for the
three months ended March 31, 2000 from $12.2 million for the three months ended
March 31, 1999 due principally to (a) the operations of the juvenile facilities
and programs acquired from Interventions - Illinois in November 1999, (b) the
opening of the Cornell Abraxas Youth Center late in the first quarter of 1999,
(c) increased occupancy at the Cornell Abraxas I facility due to a facility
expansion completed in the fourth quarter of 1999, (d) increased occupancy at
the Santa Fe County Juvenile Detention Facility and (e) the addition of various
new programs during 1999, including two new non-residential mental health
programs and one residential mental health program in Pennsylvania. As a
percentage of revenues, excluding start-up operations, operating expenses were
85.6% for the three months ended March 31, 2000 compared to 89.3% for the three
months ended March 31, 1999. The increase
-10-
<PAGE>
in operating margin was attributable to higher margins at certain new programs
and expansions operating since the first quarter of 1999 that were offset, in
part, by a margin reduction due to the sale and leaseback of furniture and
equipment during the fourth quarter of 1999.
Pre-release division operating expenses increased 53.2% to $8.9 million for
the three months ended March 31, 2000 from $5.8 million for the three months
ended March 31, 1999 due principally to the acquisition of various pre-release
facilities and programs from Interventions - Illinois in November 1999. As a
percentage of revenues, operating expenses were 74.8% for the three months ended
March 31, 2000 compared to 74.9% for the three months ended March 31, 1999.
PRE-OPENING AND START-UP EXPENSES. Start-up expenses were $349,000 for the
three months ended March 31, 2000 compared to $543,000 for the three months
ended March 31, 1999 and were principally attributable to the start-up
activities of the final 550 bed expansion of the D. Ray James Prison in the
fourth quarter of 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 26.5%
to $1.8 million for the three months ended March 31, 2000 from $1.4 million for
the three months ended March 31, 1999 due to (a) the completion of the
expansions at the Big Spring Complex, (b) the completion of 450 beds in the D.
Ray James Prison in the first quarter of 1999 and an additional 550 beds in the
fourth quarter of 1999 and (c) various facility expansions. Depreciation was
decreased due to the sale and leaseback of certain furniture and equipment
during the fourth quarter of 1999 and due to the Company's change in the
estimated useful lives of certain adult secure institutions effective July 1,
1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 19.1% to $2.8 million for the three months ended March 31, 2000 from
$2.4 million for the three months ended March 31, 1999. The increase in general
and administrative expenses resulted principally from the centralization of
certain administrative functions and to the sale and leaseback of certain
furniture and equipment during the fourth quarter of 1999.
INTEREST. Interest expense, net of interest income, increased to $3.6 million
for the three months ended March 31, 2000 from $1.6 million for the three months
ended March 31, 1999 due principally to borrowings under the Company's $50.0
million Bridge Facility used principally to finance the Interventions - Illinois
acquisition and facility expansions in 1999. Additionally, interest cost of
$451,000 was capitalized during the three months ended March 31, 1999 related to
the construction of the D. Ray James Prison. There was no interest capitalized
during the three months ended March 31, 2000.
INCOME TAXES. For the three months ended March 31, 2000 and 1999, the Company
recognized a provision for income taxes at an estimated effective rate of 41%
and 40%, respectively. The increase in the estimated effective tax rate was due
to increased income in certain higher taxing states and a higher marginal
federal tax rate.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's primary capital requirements are for (a) construction
of new facilities, (b) acquisitions, (c) expansions of existing facilities, (d)
working capital, (e) start-up costs related to new operating contracts and (f)
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 (typically through per diem
occupancy fees) is realized.
-11-
<PAGE>
As discussed below, current credit facilities do not provide sufficient
financing to fund the repayment of borrowings outstanding under the Bridge
Facility. Management believes that repayment of the Bridge Facility will be
funded from potential proceeds of one, or a combination, of the efforts the
Company is currently pursuing or negotiating to raise long term financing,
including: (a) the issuance of longer term subordinated debt, (b) an expansion
of the existing revolving line of credit under the 1998 Credit Facility, (c) a
sale and leaseback of certain owned facilities and leasehold interests, or (d)
other debt or equity financing arrangements. Should the Company not be
successful in raising longer term financing pursuant to its efforts as described
above before maturity of the Bridge Facility, the lender has an option to
convert the borrowings outstanding under the Bridge Facility into eight year
exchange notes, and to purchase up to five percent of the Company's outstanding
common stock at an exercise price of 110% of the market price of the Company's
common stock as of the date of the exchange. If these contemplated financing
transactions are not consummated, the Company would be required to seek
alternative and potentially dilutive capital funding sources to repay the Bridge
Facility when due. No assurance can be made that the Company will be able to
obtain the various financing described above.
NEW FACILITIES AND PROJECTS UNDER CONSTRUCTION. The New Morgan Academy is
currently under construction and is expected to be completed and operational
during the fourth quarter of 2000. In April 1999, the Company was awarded a
contract to design, build and operate a 1,095 bed prison for the Federal Bureau
of Prisons ("FBOP") in Moshannon Valley, Pennsylvania ("Moshannon Valley
Correctional Center"). Construction and activation activities commenced
immediately. In June 1999, the FBOP issued a Stop-Work Order pending a
re-evaluation of their environmental documentation supporting the decision to
award the contract. The environmental study was completed with a finding of no
significant impact. While the Stop-Work Order remains in effect, management of
the Company believes it will be lifted and construction will be resumed in the
near-term. Development and construction costs for the New Morgan Academy and the
Moshannon Valley Correctional Center are being financed with the Company's lease
financing arrangement discussed below under "Long-Term Credit Facilities".
As of May 12, 2000, there were approximately $59.0 million in anticipated
unfunded capital requirements for the completion of the New Morgan Academy and
the Moshannon Valley Correctional Center. The funds for these new facilities and
related furnishings are expected to be expended during the next 12 to 18 months.
The Company's current lease financing arrangement is available to fund up to
approximately $5.2 million of these construction costs. Management believes that
the remaining facility construction costs will be funded with an increase in the
Company's lease financing arrangement.
WORKING CAPITAL DEFICIT. At March 31, 2000, the Company reported a working
capital deficit of $11.6 million. Excluding the $40.0 million of borrowings
outstanding under the Company's Bridge Facility, which matures in October 2000,
the Company had working capital of $28.4 million.
SHORT-TERM CREDIT FACILITIES. As of March 31, 2000, $40.0 million of
borrowings were outstanding under the Company's $50.0 million Bridge Facility
which has a 363 day term and matures in October 2000. The Bridge Facility
currently bears interest at LIBOR plus a margin of 6.5% and increases by 0.5%
each quarter until repaid. At maturity, the lenders have an option to convert
the borrowings outstanding under the Bridge Facility into longer term exchange
notes. The Company believes that the Bridge Facility will be refinanced prior to
maturity with the issuance of longer term subordinated debt.
LONG-TERM CREDIT FACILITIES. In December 1998, the Company entered into the
1998 Credit Facility with a banking 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 the Company's projected pro forma cash
flow. The $60.0 million borrowing capacity is reduced by $3.0 million per
quarter beginning September 30,
-12-
<PAGE>
2000. The 1998 Credit Facility matures in March 2003 and bears interest, at the
election of the Company, 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 the Company's assets, including the stock of all
of the Company's subsidiaries, does not permit the payment of cash dividends and
requires the Company to comply with certain leverage, net worth and debt service
covenants. At March 31, 2000, the Company had $51.3 million outstanding under
the 1998 Credit Facility. The Company is currently in the process of negotiating
an expansion of its revolving line of credit under the 1998 Credit Facility.
The Company has entered into operating lease arrangements for the acquisition
or development of operating facilities. The leases under this arrangement each
have a term of five years, include purchase and renewal options and provide for
a substantial residual value guarantee (approximately 85% of the total cost) by
the Company which could, under certain circumstances, be due upon termination of
the leases. Upon termination of a lease, the Company could either exercise a
purchase option, or the facilities could be sold to a third party. The Company
expects the fair market value of the leased facilities to substantially reduce
or eliminate the Company's potential obligation under the residual value
guarantee. At March 31, 2000 there was approximately $5.2 million available
under this arrangement.
The Company has outstanding $50.0 million of 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, 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 prepayment provisions. Interest is payable semi-annually. The holders of the
Senior Notes and the lenders 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 the Company.
CAPITAL EXPENDITURES. Capital expenditures for the three months ended March
31, 2000 were $2.3 million and related principally to the expansion of the Big
Spring Complex and certain software development costs.
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 the Company'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.
The Company anticipates obtaining additional sources of financing to fund such
activities.
YEAR 2000 ISSUES
During 1999, the Company implemented a broad information systems upgrade. In
connection with that upgrade, the Company upgraded certain hardware and software
systems to ensure Year 2000 compliance. The Company currently is not aware of
any Year 2000 compliance problems relating to its systems. The Company is also
not aware of any material Year 2000 problems with its third-party suppliers or
contracting governmental agencies. Accordingly, the Company does not anticipate
incurring material expenses or experiencing any material operational disruptions
as a result of any Year 2000 problems.
-13-
<PAGE>
INFLATION
Management of the Company believes that inflation has not had a material
effect on its 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 occupancy fees.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
The Company 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.
INTEREST RATE EXPOSURE
The Company's exposure to changes in interest rates primarily results from
its long-term debt with both fixed and floating interest rates. The Company's
long-term debt with fixed interest rates consists of the Senior Notes. The
Company's long-term debt with variable interest is its revolving line of credit.
At March 31, 2000, approximately 50.6% ($51.3 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 $130,000 for the three months ended
March 31, 2000. At March 31, 2000, the fair value of the Company's fixed rate
debt approximated carrying value based upon discounted future cash flows using
current market prices.
FORWARD LOOKING STATEMENT DISCLAIMER
This quarterly report on Form 10-Q may contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on current plans and expectations of Cornell
Corrections, Inc. and involve risks and uncertainties that could cause actual
future activities and results of operations to be materially different from
those set forth in the forward-looking statements. Important factors that could
cause actual results to differ include, among others, (i) risks associated with
acquisitions and the integration thereof (including the ability to achieve
administrative and operating cost savings and anticipated synergies), (ii) the
timing and costs of expansions of existing facilities, (iii) changes in
governmental policy to eliminate or discourage the privatization of
correctional, detention and pre-release services in the United States, (iv)
availability of debt and equity financing on terms that are favorable to the
Company, and (v) fluctuations in operating results because of occupancy,
competition (including competition from two competitors that are substantially
larger than the Company), and risks of operations.
-14-
<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.
-15-
<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 15, 2000 By: /S/ STEVEN W. LOGAN
-------------------
STEVEN W. LOGAN
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 15, 2000 By: /S/ JOHN L. HENDRIX
-------------------
JOHN L. HENDRIX
Vice President and
Chief Financial Officer
(Principal Financial Officer)
-16-
EXHIBIT 11.1
CORNELL CORRECTIONS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------
2000 1999
---------------------------------- ----------------------------------
BASIC DILUTED BASIC DILUTED
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Earnings ........................................ $ 1,971 $ 1,971 $ (1,514) $ (1,514)
=============== =============== =============== ===============
Shares used in computing net earnings per share:
Weighted average common shares and
common share equivalents ...................... 10,149 10,149 10,110 10,110
Less treasury shares ............................ (697) (697) (697) (697)
Effect of shares issuable under stock options
and warrants based on the treasury stock method -- 150 -- 251
--------------- --------------- --------------- ---------------
9,452 9,602 9,412 9,663
--------------- --------------- --------------- ---------------
Net earnings per share ............................. $ 0.21 $ 0.21 $ (0.16) $ (0.16)
=============== =============== =============== ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CORNELL CORRECTIONS 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 261
<SECURITIES> 0
<RECEIVABLES> 51,921
<ALLOWANCES> 2,826
<INVENTORY> 0
<CURRENT-ASSETS> 54,381
<PP&E> 196,058
<DEPRECIATION> (10,391)
<TOTAL-ASSETS> 274,164
<CURRENT-LIABILITIES> 66,009
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 99,291
<TOTAL-LIABILITY-AND-EQUITY> 274,164
<SALES> 0
<TOTAL-REVENUES> 53,468
<CGS> 0
<TOTAL-COSTS> 41,987
<OTHER-EXPENSES> 4,580
<LOSS-PROVISION> 174
<INTEREST-EXPENSE> 3,593
<INCOME-PRETAX> 3,335
<INCOME-TAX> 1,364
<INCOME-CONTINUING> 1,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,971
<EPS-BASIC> .21
<EPS-DILUTED> .21
</TABLE>
