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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 SEPTEMBER 30, 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 COMPANIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0433642
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1700 WEST LOOP SOUTH, SUITE 1500, HOUSTON, TEXAS 77027
------------------------------------------------ -------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 623-0790
Indicate by a check mark whether Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At October 31, 2000 Registrant had outstanding 9,205,613 shares of its Common
Stock.
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORNELL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................................. $ 229 $ 1,763
Accounts receivable, net ............................................................... 51,783 48,092
Deferred tax asset ..................................................................... 1,206 1,206
Prepaids and other ..................................................................... 4,537 1,356
Restricted assets ...................................................................... 1,499 1,578
--------------- ---------------
Total current assets .............................................................. 59,254 53,995
PROPERTY AND EQUIPMENT, net .................................................................. 197,727 194,498
OTHER ASSETS:
Intangible assets, net ................................................................. 17,212 18,270
Deferred costs and other ............................................................... 9,927 6,467
--------------- ---------------
Total assets ...................................................................... $ 284,120 $ 273,230
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............................................... $ 23,621 $ 26,631
Note payable ........................................................................... -- 40,000
--------------- ---------------
Total current liabilities ......................................................... 23,621 66,631
LONG-TERM DEBT, net of current portion ....................................................... 150,848 101,500
OTHER LONG-TERM LIABILITIES .................................................................. 6,557 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 ............................................................. 91,610 90,394
Stock option loans ..................................................................... (455) (455)
Retained earnings ...................................................................... 17,354 11,258
Treasury stock (867,300 and 697,100 shares of common stock, respectively,
at cost) ............................................................................. (5,425) (3,999)
--------------- ---------------
Total stockholders' equity ........................................................ 103,094 97,208
--------------- ---------------
Total liabilities and stockholders' equity ........................................ $ 284,120 $ 273,230
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 2 -
<PAGE>
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES........................................................... $ 56,747 $ 45,321 $ 165,622 $ 127,286
OPERATING EXPENSES................................................. 43,809 35,364 128,585 97,955
PRE-OPENING AND START-UP EXPENSES.................................. 295 518 838 2,783
DEPRECIATION AND AMORTIZATION...................................... 1,853 1,440 5,312 4,398
GENERAL AND ADMINISTRATIVE EXPENSES................................ 3,274 2,054 9,004 7,404
----------- ---------- ----------- ------------
INCOME FROM OPERATIONS............................................. 7,516 5,945 21,883 14,746
INTEREST EXPENSE................................................... 4,270 2,186 11,634 5,657
INTEREST INCOME.................................................... (27) (52) (81) (91)
----------- ---------- ----------- ------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................................ 3,273 3,811 10,330 9,180
PROVISION FOR INCOME TAXES......................................... 1,341 1,524 4,234 3,672
----------- ---------- ----------- ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.................................. 1,932 2,287 6,096 5,508
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF RELATED INCOME TAX
PROVISION OF $1,969............................................. -- -- -- 2,954
----------- ---------- ----------- ------------
NET INCOME......................................................... $ 1,932 $ 2,287 $ 6,096 $ 2,554
=========== ========== =========== ============
EARNINGS (LOSS) PER SHARE:
BASIC
Income before cumulative effect of change
in accounting principle................................. $ .21 $ .24 $ .65 $ .58
Cumulative effect of change in accounting principle........ -- -- -- (.31)
----------- ---------- ----------- ------------
Net income................................................. $ .21 $ .24 $ .65 $ .27
=========== ========== =========== ============
DILUTED
Income before cumulative effect of change
in accounting principle................................. $ .20 $ .24 $ .64 $ .57
Cumulative effect of change in accounting principle........ -- -- -- (.31)
----------- ---------- ----------- ------------
Net income................................................. $ .20 $ .24 $ .64 $ .26
=========== ========== =========== ============
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC........................................................ 9,391 9,440 9,435 9,429
DILUTED...................................................... 9,525 9,650 9,570 9,673
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 3 -
<PAGE>
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................................ $ 6,096 $ 2,554
Adjustments to reconcile net income to net cash provided by operating activities --
Cumulative effect of change in accounting principle .................................... -- 2,954
Depreciation ........................................................................... 3,012 3,461
Amortization ........................................................................... 2,300 937
Provision for bad debts ................................................................ 557 245
Loss on sale of property ............................................................... 27 --
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable ............................................................... (4,248) (12,392)
Restricted assets ................................................................. 79 (100)
Other assets ...................................................................... (3,790) (3,595)
Accounts payable and accrued liabilities .......................................... (3,773) 14,997
Deferred revenues and other liabilities ........................................... (1,305) (1,381)
--------------- ---------------
Net cash (used in) provided by operating activities .................................... (1,045) 7,680
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................................... (6,644) (24,352)
Proceeds from sales of property and equipment ............................................. 719 --
--------------- ---------------
Net cash used in investing activities .................................................. (5,925) (24,352)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .............................................................. 126,500 19,500
Payments on long-term debt ................................................................ (76,000) (10,980)
Proceeds from note payable ................................................................ -- 27,435
Payments on note payable .................................................................. (40,000) (21,685)
Payments for debt issuance costs .......................................................... (3,675) (76)
Proceeds from exercises of stock options .................................................. 37 217
Purchases of treasury stock ............................................................... (1,426) --
--------------- ---------------
Net cash provided by financing activities .............................................. 5,436 14,411
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................................... (1,534) (2,261)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................. 1,763 2,519
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................... $ 229 $ 258
=============== ===============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized ................................................. $ 12,332 $ 6,452
=============== ===============
Income taxes paid ......................................................................... $ 8,022 $ 3,092
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 4 -
<PAGE>
CORNELL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Cornell Companies, 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. CREDIT FACILITIES
Effective July 21, 2000, the Company formalized terms under an amended and
restated credit agreement (the "2000 Credit Facility") with a group of financial
institutions. The 2000 Credit Facility replaced the 1998 Credit Facility and
provides for borrowings of up to $75.0 million under a revolving line of credit,
the availability of which is determined by the Company's projected pro forma
cash flow, as defined. The 2000 Credit Facility matures in July 2005 and bears
interest, at the election of the Company, at either the prime rate plus a margin
of 1.0% to 2.0%, or a rate which is 2.0% to 3.0% above the applicable LIBOR
rate, depending on the level of borrowings. The margin is currently at the level
of 3% above the LIBOR rate. The 2000 Credit Facility is secured by substantially
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 cash flow, net worth and debt service covenants.
Additionally, the 2000 Credit Facility provides the Company with an increased
capacity to enter into operating lease agreements for the acquisition or
development of operating facilities. This lease financing arrangement provides
for funding to the lessor under the operating leases of up to $100.0 million, of
which approximately $42.6 million has been utilized. The remaining capacity of
this lease financing arrangement is expected to be utilized to complete the
remaining construction of the New Morgan Academy and the Moshannon Valley
Correctional Center. The leases under this arrangement have a term of five
years, include purchase and renewal options, and provide for substantial
residual value guarantees of approximately 81.4% of the total cost which would
be due by the Company 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 believes the fair value of the
leased facilities will equal or exceed the residual guaranteed amounts.
Concurrent with the closing of the 2000 Credit Facility, the Company's $50.0
million Subordinated Bridge Loan Agreement (the "Bridge Facility") was
refinanced with proceeds from a Note and Equity Purchase Agreement (the
"Subordinated Notes"). The Subordinated Notes have a seven-year term and are
interest-only, which is payable quarterly at a fixed rate of 12.875%. In
conjunction with the issuance of the Subordinated Notes, the Company issued
warrants to purchase 290,370 shares of the common stock at an exercise price of
$6.70. The Company recognized the value of these warrants of $1.1 million, the
fair value less issuance costs, as additional paid-in capital. The warrants may
only be exercised by a full payment of cash to the Company of the exercise price
or by the cancellation of Company indebtedness owed to the warrant holder.
3. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements contained herein to conform to current year presentation.
- 5 -
<PAGE>
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 and warrants, into common stock
using the treasury stock method.
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 divisional 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.
The only significant noncash item reported in the respective segments' income
or loss from operations is depreciation and amortization (excluding
intangibles):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Adult secure institutional.............................. $ 23,160 $ 19,979 $ 65,946 $ 55,954
Juvenile................................................ 21,262 17,409 63,301 47,969
Pre-release............................................. 12,325 7,933 36,375 23,363
----------- ------------ ----------- ------------
Total revenues............................................. $ 56,747 $ 45,321 $ 165,622 $ 127,286
=========== ============ =========== ============
Income from operations
Adult secure institutional.............................. $ 5,663 $ 4,391 $ 15,127 $ 12,925
Juvenile................................................ 2,652 2,201 8,322 4,998
Pre-release............................................. 3,075 1,721 8,971 5,115
General and administrative expense...................... (3,274) (2,054) (9,004) (7,404)
Incentive bonuses....................................... (80) (50) (121) (50)
Amortization of intangibles............................. (371) (154) (1,147) (460)
Corporate and other..................................... (149) (110) (265) (378)
----------- ------------ ----------- ------------
Total income from operations............................... $ 7,516 $ 5,945 $ 21,883 $ 14,746
=========== ============ =========== ============
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------- ----------
<S> <C> <C>
Assets
Adult secure institutional.............................. $ 144,706 $ 140,544
Juvenile................................................ 58,784 53,493
Pre-release............................................. 46,860 47,561
Intangible assets, net.................................. 17,212 18,270
Corporate and other..................................... 16,558 13,362
----------- ------------
Total assets............................................... $ 284,120 $ 273,230
=========== ============
</TABLE>
6. RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 "Revenue Recognition" ("SAB No. 101"), which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The Company believes its revenue
recognition practices are in conformity with the guidelines prescribed in SAB
No. 101.
- 6 -
<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 percentage.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Total service capacity:
Residential................................................................ 11,659 12,137
Non-residential community-based............................................ 2,705 2,708
Total.................................................................... 14,364 14,845
Service capacity in operation (end of period)................................... 12,929 12,240
Contracted beds in operation (end of period) (1)................................ 9,721 9,029
Average occupancy based on contracted beds in operation (1) (2)................. 94.0% 95.8%
Average occupancy excluding start-up operations (1)............................. 95.5% 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 (eight facilities in operation at September 30,
2000).
- 7 -
<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 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.
During periods of low unemployment, some facilities may experience difficulty
in recruiting and retaining qualified personnel. This could have an adverse
impact on the Company's results of operations in the event personnel costs
increase at rates faster than the rates received by the Company for its
services.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues................................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses....................................... 77.2 78.0 77.6 77.0
Pre-opening and start-up expenses........................ 0.5 1.1 0.5 2.2
Depreciation and amortization............................ 3.3 3.2 3.2 3.5
General and administrative expenses...................... 5.8 4.5 5.4 5.8
----------- ---------- ----------- ---------
Income from operations................................... 13.2 13.2 13.3 11.5
Interest expense, net.................................... 7.5 4.7 7.0 4.4
----------- ---------- ----------- ---------
Income before provision for income
taxes and cumulative effect of change
in accounting principle............................... 5.7 8.5 6.3 7.1
Provision for income taxes............................... 2.4 3.4 2.6 2.9
----------- ---------- ----------- ---------
Income before cumulative effect of change
in accounting principle............................... 3.3% 5.1% 3.7% 4.2%
=========== ========== =========== =========
</TABLE>
- 8 -
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES. Revenues increased 25.2% to $56.7 million for the three months
ended September 30, 2000 from $45.3 million for the three months ended September
30, 1999.
Adult secure institutional division revenues increased 15.9% to $23.2 million
for the three months ended September 30, 2000 from $20.0 million for the three
months ended September 30, 1999 due principally to the 550 bed expansion of the
D. Ray James Prison, which began housing inmates late in the first quarter of
2000 and reached a full occupancy level late in the second quarter of 2000, and
expansions at the Big Spring Complex completed in the fourth quarter of 1999 and
the first quarter of 2000. These revenue increases were offset in part by
reductions in occupancy at certain facilities including the Great Plains
Correctional Facility. Management believes these declines from normal occupancy
levels are temporary.
Juvenile division revenues increased 22.1% to $21.3 million for the three
months ended September 30, 2000 from $17.4 million for the three months ended
September 30, 1999 due primarily to (a) the operations of the juvenile
facilities and programs acquired from Interventions - Illinois in November 1999,
(b) increased occupancy at certain facilities including Cornell Abraxas I, the
Griffin Juvenile Facility and the Santa Fe County Juvenile Detention Facility,
and (c) 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 55.4% to $12.3 million for the three
months ended September 30, 2000 from $7.9 million for the three months ended
September 30, 1999 due principally to the pre-release facilities and programs
acquired from Interventions - Illinois in November 1999 and increased occupancy
at various facilities.
OPERATING EXPENSES. Operating expenses increased 23.9% to $43.8 million for
the three months ended September 30, 2000 from $35.4 million for the three
months ended September 30, 1999. For the three months ended September 30, 2000,
operating expenses included approximately $787,000 of rent expense resulting
from the sale and leaseback of certain owned furniture and equipment during the
fourth quarter of 1999. Accordingly, depreciation expense and interest expense
were reduced as a result of the sale and leaseback transaction.
Adult secure institutional division operating expenses increased 14.7% to
$16.7 million for the three months ended September 30, 2000 from $14.5 million
for the three months ended September 30, 1999 due principally to the opening of
the D. Ray James Prison 550 bed expansion which began housing inmates late in
the first quarter of 2000 and increased occupancy at the Big Spring Complex due
to expansions completed in the fourth quarter of 1999 and the first quarter of
2000. As a percentage of revenue, excluding start-up operations, adult secure
institutional division operating expenses were 72.3% for the three months ended
September 30, 2000 compared to 72.7% for the three months ended September 30,
1999. The 2000 operating margin was impacted favorably due to the expansion of
the D. Ray James Prison offset, in part, by the sale and leaseback of a certain
owned furniture and equipment during the fourth quarter of 1999, and a reduction
in occupancy at the Great Plains Correctional Facility.
Juvenile division operating expenses increased 22.9% to $18.1 million for the
three months ended September 30, 2000 from $14.7 million for the three months
ended September 30, 1999. This increase in operating expenses was due to (a) the
operations of the juvenile facilities and programs acquired from Interventions -
Illinois in November 1999, (b) increased occupancy at certain facilities
including the Griffin Juvenile Facility and the Santa Fe County Juvenile
Detention Facility, and (c) 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, juvenile division operating expenses were 85.2% for the
three months ended September 30, 2000 compared to 85.1% for the three months
ended September 30, 1999. The 2000 operating margin was impacted unfavorably due
to the sale and leaseback of certain owned furniture and equipment during the
fourth quarter of 1999 offset, in part, by increased occupancy at certain
facilities.
- 9 -
<PAGE>
Pre-release division operating expenses increased 48.2% to $9.0 million for
the three months ended September 30, 2000 from $6.0 million for the three months
ended September 30, 1999 due principally to the acquisition of various
pre-release facilities and programs from Interventions - Illinois in November
1999. As a percentage of revenues, excluding start-up operations, pre-release
division operating expenses were 72.7% for the three months ended September 30,
2000 compared to 77.2% for the three months ended September 30, 1999. The
improved operating margin for the three months ended September 30, 2000 compared
to the three months ended September 30, 1999 was due principally to an increase
in occupancy and revenue at certain facilities and the higher operating margins
of certain Interventions - Illinois programs, many of which are owned
facilities. These operating improvements 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.
PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$295,000 for the three months ended September 30, 2000 and were primarily
attributable to the start-up activities of the New Morgan Academy. Pre-opening
and start-up expenses were $518,000 for the three months ended September 30,
1999 and were attributable to the pre-opening and start-up activities of the
final 550 bed expansion at the D. Ray James Prison, a new pre-release facility
in Alaska and a new residential mental health facility in Pennsylvania.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 28.7%
to $1.9 million for the three months ended September 30, 2000 from $1.4 million
for the three months ended September 30, 1999 due to (a) the completion of the
expansions at the Big Spring Complex in the fourth quarter of 1999 and the first
quarter of 2000, (b) the completion of the 550 bed expansion in the fourth
quarter of 1999 at the D. Ray James Prison, and (c) various facility expansions.
Depreciation decreased due to the sale and leaseback of certain owned furniture
and equipment during the fourth quarter of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 59.4% to $3.3 million for the three months ended September 30, 2000
from $2.1 million for the three months ended September 30, 1999. The increase in
general and administrative expenses resulted principally from the centralization
of certain administrative functions. Additionally, for the three months ended
September 30, 2000, general and administrative expenses included approximately
$202,000 of rent expense from the sale and leaseback of certain owned furniture
and equipment during the fourth quarter of 1999.
INTEREST. Interest expense, net of interest income, increased to $4.2 million
for the three months ended September 30, 2000 from $2.1 million for the three
months ended September 30, 1999 due principally to (a) increased borrowings to
fund the acquisition of Interventions - Illinois in November 1999 and various
facility expansions and (b) increases in base interest rates and the Company's
interest rate margin on its 2000 Credit Facility. Additionally, during the three
months ended September 30, 1999 the Company capitalized interest totaling
$298,000 related to the construction of the D. Ray James Prison.
INCOME TAXES. For the three months ended September 30, 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 taxable income in certain higher taxing states and a higher
marginal federal tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES. Revenues increased 30.1% to $165.6 million for the nine months
ended September 30, 2000 from $127.3 million for the nine months ended September
30, 1999.
Adult secure institutional division revenues increased 17.9% to $65.9 million
for the nine months ended September 30, 2000 from $56.0 million for the nine
months ended September 30, 1999 due principally to (a) the final 550 bed
expansion of the D. Ray James Prison which began housing inmates late in the
first quarter of 2000 and reached a full occupancy level late in the second
quarter of 2000, (b) the opening of the
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additional 450 bed second phase of the D. Ray James Prison in the first quarter
of 1999, and (c) expansions at the Big Spring Complex completed in the fourth
quarter of 1999 and the first quarter of 2000. These revenue increases were
offset, in part, by reductions in occupancy at certain facilities including the
Great Plains Correctional Facility. Management believes these declines from
normal occupancy levels are temporary. Revenues attributable to start-up
operations were approximately $44,000 and $866,000, for the nine months ended
September 30, 2000 and 1999, respectively.
Juvenile division revenues increased 32.0% to $63.3 million for the nine
months ended September 30, 2000 from $48.0 million for the nine months ended
September 30, 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 certain facilities including the Santa Fe County
Juvenile Detention Facility and the Griffin Juvenile Facility, (d) increased
occupancy at the Cornell Abraxas I and Cornell Abraxas of Ohio facilities due to
facility expansions completed in the fourth quarter of 1999, and (e) the
addition of various new programs during 1999 including two new non-residential
mental health programs and one new residential mental health program in
Pennsylvania. Revenues attributable to start-up operations were $0 and $432,000,
for the nine months ended September 30, 2000 and 1999, respectively.
Pre-release division revenues increased 55.7% to $36.4 million for the nine
months ended September 30, 2000 from $23.4 million for the nine months ended
September 30, 1999 due principally to (a) the operations of the pre-release
facilities and programs acquired from Interventions - Illinois in November 1999
(b) the opening of a new facility in Nome, Alaska late in the third quarter of
1999 and (c) increased occupancy at various facilities including the Leidel
Comprehensive Sanctions Center, the Reid Community Correctional Center and the
Dallas County Judicial Treatment Center. Revenues attributable to start-up
operations were $0 and $122,000 for the nine months ended September 30, 2000 and
1999, respectively.
OPERATING EXPENSES. Operating expenses increased 31.3% to $128.6 million for
the nine months ended September 30, 2000 from $98.0 million for the nine months
ended September 30, 1999. For the nine months ended September 30, 2000,
operating expenses included approximately $2.4 million of rent expense resulting
from the sale and leaseback of certain owned furniture and equipment during the
fourth quarter of 1999. Accordingly, depreciation expense and interest expense
were reduced as a result of the sale and leaseback transaction.
Adult secure institutional division operating expenses increased 23.1% to
$47.9 million for the nine months ended September 30, 2000 from $38.8 million
for the nine months ended September 30, 1999 due principally to (a) the final
550 bed expansion of the D. Ray James Prison, which began housing inmates late
in the first quarter of 2000 and reached a full occupancy level late in the
second quarter of 2000, (b) the opening of the additional 450 bed second phase
of the D. Ray James Prison in the first quarter of 1999, and (c) increased
occupancy at the Big Spring Complex due to expansions completed in the fourth
quarter of 1999 and the first quarter of 2000. As a percentage of revenue,
excluding start-up operations, adult secure institutional division operating
expenses were 72.6% for the nine months ended September 30, 2000 compared to
70.4% for the nine months ended September 30, 1999. The 2000 operating margin
was impacted unfavorably due to (a) the sale and leaseback of certain owned
furniture and equipment during the fourth quarter of 1999, (b) a reduction in
occupancy at the Great Plains Correctional Facility offset, in part, by the
expansion of the D. Ray James Prison and (c) a reduction to operating expenses
during the nine months ended September 30, 1999 of $1.0 million at the Santa Fe
Adult Detention Facility resulting from a cost-sharing agreement with Company's
construction contractor.
Juvenile division operating expenses increased 29.5% to $53.7 million for the
nine months ended September 30, 2000 from $41.4 million for the nine months
ended September 30, 1999. The increase in operating expenses was due to (a) the
juvenile facilities and programs acquired from Interventions - Illinois in
November 1999, (b) increased occupancy at the Cornell Abraxas I and Cornell
Abraxas of Ohio facilities due to facility expansions, (c) the opening of the
Cornell Abraxas Youth Center which began operations late in the first quarter of
1999, (d) increased occupancy at various facilities including the Santa Fe
County Juvenile Detention Facility and the Griffin Juvenile Facility and (e) the
addition of various programs including two new non-residential mental health
programs and one residential mental health facility in
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Pennsylvania. As a percentage of revenues, excluding start-up operations,
juvenile division operating expenses were 84.7% for the nine months ended
September 30, 2000 compared to 87.4% for the nine months ended September 30,
1999. The improved operating margin for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999 was due principally to the
higher occupancy and revenue of certain facilities including Cornell Abraxas I,
Cornell Abraxas of Ohio, the Cornell Abraxas Youth Center, the Griffin Juvenile
Facility and the Santa Fe County Juvenile Detention Facility. These operating
margin improvements 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.
Pre-release division operating expenses increased 53.2% to $27.0 million for
the nine months ended September 30, 2000 from $17.6 million for the nine months
ended September 30, 1999 due principally to (a) the pre-release facilities and
programs acquired from Interventions - Illinois in November 1999, (b) the
opening of a new facility in Nome, Alaska late in the third quarter of 1999 and
(c) increased occupancy at various facilities including the Leidel Comprehensive
Sanctions Center, the Reid Community Correctional Center and the Dallas County
Judicial Treatment Center. As a percentage of revenues, excluding start-up
operations, pre-release division operating expenses were 74.4% for the nine
months ended September 30, 2000 compared to 75.8% for the nine months ended
September 30, 1999. The improved operating margin for the nine months ended
September 30, 2000 versus the nine months ended September 30, 1999 was due
principally to the higher occupancy and revenues at certain facilities. These
operating margin improvements 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.
PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$838,000 for the nine months ended September 30, 2000 and were primarily
attributable to the pre-opening and start-up activities of the final 550 beds at
the D. Ray James Prison in the first quarter of 2000, the New Morgan Academy and
the Moshannon Valley Correctional Center. Pre-opening and start-up expenses were
$2.8 million for the nine months ended September 30, 1999 and were attributable
to the pre-opening and start-up activities of the additional 450 beds in the D.
Ray James Prison, the Cornell Abraxas Youth Center during the first quarter of
1999 and other new juvenile programs in Pennsylvania and a new pre-release
facility in Alaska.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 20.8%
to $5.3 million for the nine months ended September 30, 2000 from $4.4 million
for the nine months ended September 30, 1999 due to (a) depreciation of
buildings and equipment acquired from Interventions - Illinois in November 1999,
(b) the completion of the expansions at the Big Spring Complex, (c) the
completion of the additional 450 bed expansion in the first quarter of 1999 and
the final 550 bed expansion in the first quarter of 2000 at the D. Ray James
Prison and (d) various facility expansions. Depreciation decreased due to the
sale and leaseback of certain owned furniture and equipment during the fourth
quarter 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 21.6% to $9.0 million for the nine months ended September 30, 2000
from $7.4 million for the nine months ended September 30, 1999. The increase in
general and administrative expenses resulted principally from the centralization
of certain administrative functions. Additionally for the nine months ended
September 30, 2000, general and administrative expenses included approximately
$615,000 of rent expense from the sale and leaseback of certain owned furniture
and equipment during the fourth quarter of 1999.
INTEREST. Interest expense, net of interest income, increased to $11.6
million for the nine months ended September 30, 2000 from $5.6 million for the
nine months ended September 30, 1999 due principally to (a) increased borrowings
to fund the acquisition of Interventions - Illinois in November 1999 and various
facility expansions and (b) increases in base interest rates and the Company's
interest rate margin on its 2000 Credit Facility. Additionally, during the nine
months ended September 30, 1999, the Company capitalized interest totaling $1.1
million related principally to costs for construction of the D. Ray James
Prison.
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INCOME TAXES. For the nine months ended September 30, 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 taxable 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, (f)
information systems hardware and software and (g) 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.
NEW FACILITIES AND PROJECTS UNDER CONSTRUCTION. A majority of the New Morgan
Academy was completed and became operational early in the fourth quarter of
2000. A portion of the New Morgan Academy remains under construction and is
expected to be completed by the first quarter of 2001. 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".
LONG-TERM CREDIT FACILITIES. Effective July 21, 2000, the Company formalized
terms under the 2000 Credit Facility with a group of financial institutions. The
2000 Credit Facility replaced the 1998 Credit Facility and provides for
borrowings of up to $75.0 million under a revolving line of credit, the
availability of which is determined by the Company's projected pro forma cash
flow, as defined. The 2000 Credit Facility matures in July 2005 and bears
interest, at the election of the Company, at either the prime rate plus a margin
of 1.0% to 2.0%, or a rate which is 2.0% to 3.0% above the applicable LIBOR
rate, depending on the level of borrowings. The margin is currently at the level
of 3% above the LIBOR rate. The 2000 Credit Facility is secured by substantially
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 cash flow, net worth and debt service covenants.
At November 10, 2000, the Company had $63.0 million outstanding under the 2000
Credit Facility.
Additionally, the 2000 Credit Facility provides the Company with an increased
capacity to enter into operating lease agreements for the acquisition or
development of operating facilities. This lease financing arrangement provides
for funding to the lessor under the operating leases of up to $100.0 million, of
which approximately $42.6 million has been utilized. The remaining capacity of
this lease financing arrangement is expected to be utilized to complete the
remaining construction of the New Morgan Academy and the Moshannon Valley
Correctional Center. The leases under this arrangement have a term of five
years, include purchase and renewal options, and provide for substantial
residual value guarantees of approximately 81.4% of the total cost, which would
be due by the Company 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 believes the fair value of the
leased facilities will equal or exceed the residual guaranteed amounts.
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Concurrent with the closing of the 2000 Credit Facility, the Bridge Facility
was refinanced with proceeds from the Subordinated Notes. The Subordinated Notes
have a seven-year term. The Subordinated Notes are interest-only, which is
payable quarterly at a fixed rate of 12.875%. In conjunction with the issuance
of the Subordinated Notes, the Company issued warrants to purchase 290,370
shares of the common stock at an exercise price of $6.70. The warrants may only
be exercised by a full payment of cash to the Company of the exercise price or
by the cancellation of Company indebtedness to the warrant holder.
The Company has outstanding $50.0 million of Senior Secured Notes (the
"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 2000
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.
CASH FLOWS FROM OPERATING ACTIVITIES. For the nine months ended September 30,
2000, the Company reported net cash used in operating activities of $1.0
million. This was due in part to the expansions of certain operations and to the
November 1999 acquisition of Interventions - Illinois which did not include
working capital. Due to the increase in accounts receivable attributable to
Interventions - Illinois, the use of cash from operating activities for the nine
months ended September 30, 2000 was approximately $4.2 million.
CAPITAL EXPENDITURES. Capital expenditures for the nine months ended
September 30, 2000 were $6.6 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 2000 Credit Facility and the operating lease
capacity thereunder, 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 financing arrangements will provide sufficient
financing to fund construction costs related to future secure institutional
contract awards, or significant expansions or acquisitions. The Company
anticipates obtaining additional sources of financing to fund such activities.
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.
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 currently use
derivative financial instruments for trading or to speculate on changes in
interest rates or commodity prices.
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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
debt with fixed interest rates consists of the Senior Notes and the Subordinated
Notes. The Company's debt with variable interest is its revolving line of
credit. At September 30, 2000, approximately 41% ($62.0 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 $800,000 for the nine
months ended September 30, 2000. At September 30, 2000, the fair value of the
Company's fixed rate debt approximated carrying value based upon discounted
future cash flows using current market prices.
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, offender
privileges. In the opinion of management of the Company, the outcome of the
proceedings to which the Company is currently a party will not have a material
adverse effect upon the Company's operations or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
b. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CORNELL CORRECTIONS, INC.
Date: November 14, 2000 By: /S/ STEVEN W. LOGAN
------------------------------
STEVEN W. LOGAN
Chief Executive Officer and
President
(Principal Executive Officer)
Date: November 14, 2000 By: /S/ JOHN L. HENDRIX
------------------------------
JOHN L. HENDRIX
Sr. Vice President and
Chief Financial Officer
(Principal Financial Officer)
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