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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 JUNE 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.
---------------------------------
(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)
CORNELL CORRECTIONS, INC.
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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 July 31, 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 COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 412 $ 1,763
Accounts receivable, net .......................... 50,410 48,092
Deferred tax asset ................................ 1,206 1,206
Prepaids and other ................................ 2,177 1,356
Restricted assets ................................. 1,502 1,578
--------- ---------
Total current assets ........................... 55,707 53,995
PROPERTY AND EQUIPMENT, net .......................... 197,105 194,498
OTHER ASSETS:
Intangible assets, net ............................ 17,554 18,270
Deferred costs and other .......................... 6,185 6,467
--------- ---------
Total assets ................................... $ 276,551 $ 273,230
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .......... $ 22,968 $ 26,631
Note Payable ...................................... -- 40,000
--------- ---------
Total current liabilities ...................... 22,968 66,631
LONG-TERM DEBT, net of current portion ............... 145,000 101,500
OTHER LONG-TERM LIABILITIES .......................... 7,089 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 ................................. 15,422 11,258
Treasury stock (697,100 shares of common stock,
at cost) ........................................ (3,999) (3,999)
--------- ---------
Total stockholders' equity ..................... 101,494 97,208
--------- ---------
Total liabilities and stockholders' equity ..... $ 276,551 $ 273,230
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES ...................................... $ 55,408 $ 43,609 $108,875 $ 81,965
OPERATING EXPENSES ............................ 43,139 32,521 84,776 62,590
PRE-OPENING AND START-UP EXPENSES ............. 194 1,722 543 2,265
DEPRECIATION AND AMORTIZATION ................. 1,681 1,554 3,459 2,958
GENERAL AND ADMINISTRATIVE EXPENSES ........... 2,928 2,997 5,730 5,350
-------- -------- -------- --------
INCOME FROM OPERATIONS ........................ 7,466 4,815 14,367 8,802
INTEREST EXPENSE .............................. 3,771 1,862 7,364 3,471
INTEREST INCOME ............................... (27) (18) (54) (39)
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ........................ 3,722 2,971 7,057 5,370
PROVISION FOR INCOME TAXES .................... 1,529 1,188 2,893 2,148
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE .............. 2,193 1,783 4,164 3,222
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF RELATED INCOME TAX
PROVISION OF $1,969 ......................... -- -- -- 2,954
-------- -------- -------- --------
NET INCOME .................................... $ 2,193 $ 1,783 $ 4,164 $ 268
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
BASIC
Income before cumulative effect of
change in accounting principle ........ $ .23 $ .19 $ .44 $ .34
Cumulative effect of change in
accounting principle .................. -- -- -- (.31)
-------- -------- -------- --------
Net income ............................... $ .23 $ .19 $ .44 $ .03
======== ======== ======== ========
DILUTED
Income before cumulative effect of change
in accounting principle ............... $ .23 $ .18 $ .43 $ .33
Cumulative effect of change in
accounting principle .................. -- -- -- (.31)
-------- -------- -------- --------
Net income ............................... $ .23 $ .18 $ .43 $ .03
======== ======== ======== ========
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC ...................................... 9,464 9,429 9,458 9,421
DILUTED .................................... 9,585 9,700 9,593 9,683
</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>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 4,164 $ 268
Adjustments to reconcile net income to net cash provided
by operating activities --
Cumulative effect of change in accounting principle ... -- 2,954
Depreciation .......................................... 1,977 2,302
Amortization .......................................... 1,482 656
Provision for bad debts ............................... 346 372
Loss on sale of property .............................. 27 --
Change in assets and liabilities:
Accounts receivable ................................ (2,664) (9,082)
Restricted assets .................................. 76 (66)
Other assets ....................................... (1,335) (981)
Accounts payable and accrued liabilities ........... (4,371) 4,994
Deferred revenues and other liabilities ............ (802) (753)
-------- --------
Net cash provided by (used in) operating activities ... (1,100) 664
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................... (4,592) (14,518)
Proceeds from sales of property and equipment .......... 719 --
-------- --------
Net cash used in investing activities ................. (3,873) (14,518)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ........................... 56,400 9,750
Payments on long-term debt ............................. (52,900) (7,976)
Proceeds from note payable ............................. -- 13,800
Payments on note payable ............................... -- (3,800)
Proceeds from issuance of common stock ................. 97 --
Proceeds from exercises of stock options ............... 25 217
-------- --------
Net cash provided by financing activities ............. 3,622 11,991
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................ (1,351) (1,863)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 1,763 2,519
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 412 $ 656
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized .............. $ 7,547 $ 2,136
======== ========
Income taxes paid ...................................... $ 7,787 $ 1,904
======== ========
</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 replaces 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 $37.0 million has been utilized. The remaining capacity of
this lease financing arrangement is expected to be utilized to complete the
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 expects the fair market value of the leased facilities
to substantially reduce or eliminate the Company's payment under the residual
value guarantee.
As of June 30, 2000, $40.0 million of borrowings were outstanding under the
Company's $50.0 million Subordinated Bridge Loan Agreement (the "Bridge
Facility"). Concurrent with the closing of the 2000 Credit Facility, 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.
Accordingly, the $40.0 million of borrowings which were classified as a note
payable have been reclassified as long-term debt as of June 30, 2000. 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 through a full
payment of cash to the Company or by the cancellation of Company indebtedness
owed to the warrant holder.
- 5 -
<PAGE>
3. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements contained herein to conform to current year presentation.
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 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 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 segment's income
or loss from operations is depreciation and amortization (excluding
intangibles):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Adult secure institutional ....... $ 21,707 $ 19,055 $ 42,788 $ 35,968
Juvenile ......................... 21,461 16,873 41,959 30,564
Pre-release ...................... 12,240 7,681 24,128 15,433
--------- --------- --------- ---------
Total revenues ..................... $ 55,408 $ 43,609 $ 108,875 $ 81,965
========= ========= ========= =========
Income from operations
Adult secure institutional ....... $ 4,630 $ 4,616 $ 9,464 $ 8,541
Juvenile ......................... 3,188 1,878 5,589 2,790
Pre-release ...................... 3,066 1,640 5,976 3,394
General and administrative expense (2,928) (2,997) (5,730) (5,350)
Incentive bonuses ................ (41) -- (41) --
Amortization of intangibles ...... (394) (154) (775) (306)
Corporate and other .............. (55) (168) (116) (267)
--------- --------- --------- ---------
Total income from operations ....... $ 7,466 $ 4,815 $ 14,367 $ 8,802
========= ========= ========= =========
</TABLE>
JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
Assets
Adult secure institutional $139,031 $140,544
Juvenile ................. 60,718 53,493
Pre-release .............. 43,442 47,561
Intangible assets, net ... 17,554 18,270
Corporate and other ...... 15,806 13,362
-------- --------
Total assets ............... $276,551 $273,230
======== ========
- 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 percentages.
JUNE 30, DECEMBER 31,
2000 1999
------ -----------
Total service capacity:
Residential ................................... 12,137 12,137
Non-residential community-based ............... 2,708 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) ................................ 94.4% 95.8%
Average occupancy excluding start-up operations(1) 96.8% 97.0%
-----------
(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 June 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 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ---------------
2000 1999 2000 1999
----- ----- ----- -----
Revenues ........................... 100.0% 100.0% 100.0% 100.0%
Operating expenses ................. 77.9 74.6 77.9 76.4
Pre-opening and start-up expenses .. 0.4 3.9 0.5 2.8
Depreciation and amortization ...... 3.0 3.6 3.2 3.6
General and administrative expenses 5.2 6.9 5.2 6.5
----- ----- ----- -----
Income from operations ............. 13.5 11.0 13.2 10.7
Interest expense, net .............. 6.8 4.2 6.7 4.2
----- ----- ----- -----
Income before provision for income
taxes and cumulative effect
of change in accounting principle 6.7 6.8 6.5 6.5
Provision for income taxes ......... 2.7 2.7 2.7 2.6
----- ----- ----- -----
Income before cumulative effect of
change in accounting principle .. 4.0% 4.1% 3.8% 3.9%
===== ===== ===== =====
- 8 -
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased 27.1% to $55.4 million for the three months
ended June 30, 2000 from $43.6 million for the three months ended June 30, 1999.
Adult secure institutional division revenues increased 13.9% to $21.7 million
for the three months ended June 30, 2000 from $19.1 million for the three months
ended June 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) 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 27.2% to $21.5 million for the three
months ended June 30, 2000 from $16.9 million for the three months ended June
30, 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 certain facilities including the Griffin Juvenile
Facility and the Santa Fe County Juvenile Detention Facility, and (d) 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 59.4% to $12.2 million for the three
months ended June 30, 2000 from $7.7 million for the three months ended June 30,
1999 due principally to the pre-release facilities and programs acquired from
Interventions - Illinois in November 1999.
OPERATING EXPENSES. Operating expenses increased 32.7% to $43.1 million for
the three months ended June 30, 2000 from $32.5 million for the three months
ended June 30, 1999. For the three months ended June 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 33.7% to
$16.3 million for the three months ended June 30, 2000 from $12.1 million for
the three months ended June 30, 1999 due principally to (a) the opening of the
additional 450 beds in the D. Ray James Prison in the first quarter of 1999 and
the final 550 bed expansion which began housing inmates late in the first
quarter of 2000 and (b) increased occupancy at the Big Spring Complex due to the
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 75.0% for the three months ended
June 30, 2000 compared to 66.9% for the three months ended June 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 certain facilities and (c) a reduction to operating
expenses during the three months ended June 30, 1999 of $500,000 at the Santa Fe
Adult Detention Facility resulting from a cost-sharing agreement with the
Company's construction contractor.
Juvenile division operating expenses increased 21.8% to $17.7 million for the
three months ended June 30, 2000 from $14.5 million for the three months ended
June 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, Cornell Abraxas of Ohio 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
- 9 -
<PAGE>
division operating expenses were 82.6% for the three months ended June 30, 2000
compared to 87.3% for the three months ended June 30, 1999. The improved
operating margin for the three months ended June 30, 2000 compared to the three
months ended June 30, 1999 was due principally to the higher operating margins
of certain Interventions - Illinois programs, many of which are owned
facilities, and certain new programs and expansions operating since the first
quarter 1999. 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 57.7% to $9.1 million for
the three months ended June 30, 2000 from $5.8 million for the three months
ended June 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, operating expenses were
74.7% for the three months ended June 30, 2000 compared to 75.4% for the three
months ended June 30, 1999. The improved operating margin for the three months
ended June 30, 2000 compared to the three months ended June 30, 1999 was due
principally to the higher operating margins of certain Interventions - Illinois
programs, many of which are owned 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
$194,000 for the three months ended June 30, 2000 and were attributable to the
start-up activities of the Moshannon Valley Correctional Center and the New
Morgan Academy. Pre-opening and start-up expenses were $1.7 million for the
three months ended June 30, 1999 and were attributable to the start-up
activities of the additional 450 beds in the D. Ray James Prison and new
juvenile programs in Pennsylvania.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 8.2%
to $1.7 million for the three months ended June 30, 2000 from $1.6 million for
the three months ended June 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 450 bed expansion in the first quarter of 1999
and an additional 550 bed expansion in the fourth quarter of 1999 at the D. Ray
James Prison, and (c) various facility expansions. Depreciation was decreased
due to the sale and leaseback of certain owned 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
decreased 2.3% to $2.9 million for the three months ended June 30, 2000 from
$3.0 million for the three months ended June 30, 1999. The decrease in general
and administrative expenses resulted principally from non-recurring severance,
recruiting and relocation expenses incurred during the three months ended June
30, 1999 as a result of certain executive and other senior management changes
offset in part by increased expenses due to centralizing certain administrative
functions. Additionally, for the three months ended June 30, 2000, general and
administrative expense included approximately $202,000 of rent expense resulting
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 $3.7 million
for the three months ended June 30, 2000 from $1.8 million for the three months
ended June 30, 1999 due principally to (a) increased borrowings under the
Company's $50.0 million Bridge Facility used principally to finance the
acquisition of Interventions-Illinois in November 1999 and facility expansions
in 1999 and (b) increases in the prime and LIBOR base rates which affect the
cost of borrowings under the Company's revolving line of credit. Additionally,
interest cost of $377,000 was capitalized during the three months ended June 30,
1999 related to the construction of the D. Ray James Prison.
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<PAGE>
INCOME TAXES. For the three months ended June 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.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased 32.8% to $108.9 million for the six months ended
June 30, 2000 from $82.0 million for the six months ended June 30, 1999.
Adult secure institutional division revenues increased 19.0% to $42.8 million
for the six months ended June 30, 2000 from $36.0 million for the six months
ended June 30, 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 bed second phase of the D. Ray James Prison in the
first quarter of 1999 and (c) 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. Revenues attributable
to start-up operations were approximately $44,000 for the six months ended June
30, 2000.
Juvenile division revenues increased 37.3% to $42.0 million for the six
months ended June 30, 2000 from $30.5 million for the six months ended June 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 the Cornell Abraxas of Ohio facilities due to facility expansions
competed 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.
Pre-release division revenues increased 56.3% to $24.1 million for the six
months ended June 30, 2000 from $15.4 million for the six months ended June 30,
1999 due principally to the operations of the pre- release programs and
facilities acquired from Interventions-Illinois in November 1999.
OPERATING EXPENSES. Operating expenses increased 35.4% to $84.8 million for
the six months ended June 30, 2000 from $62.6 million for the six months ended
June 30, 1999. For the six months ended June 30, 2000, operating expenses
included approximately $1.6 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 29.4% to
$31.4 million for the six months ended June 30, 2000 from $24.3 million for the
six months ended June 30, 1999 due principally to (a) increased occupancy at the
Big Spring Complex due to expansions completed in the fourth quarter of 1999 and
the first quarter of 2000 and (b) the opening of the additional 450 beds in the
first quarter of 1999 and the final 550 bed expansion late in the first quarter
of 2000 at the D. Ray James Prison. As a percentage of revenues, excluding
start-up operations, adult secure institutional division operating expenses were
73.6% for the six months ended June 30, 2000 compared to 69.2% for the six
months ended June 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 certain
facilities and (c) a reduction to operating expenses during the six months ended
June 30, 1999 of $1.0 million at the Santa Fe Adult Detention Facility resulting
from a cost-sharing agreement with the Company's construction contractor.
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Juvenile division operating expenses increased 32.2% to $35.3 million for the
six months ended June 30, 2000 from $26.7 million for the six months ended June
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 the Cornell Abraxas I and the Cornell
Abraxas of Ohio facilities due to facility expansions completed in the fourth
quarter of 1999, (c) the opening of the Cornell Abraxas Youth Center late in the
first quarter of 1999, (d) increased occupancy at certain facilities including
the Griffin Juvenile Facility and 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, juvenile division operating expenses were 84.1% for the six months
ended June 30, 2000 compared to 88.2% for the six months ended June 30, 1999.
The increase in the operating margin for the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999 was due principally to the higher
operating margins of the Interventions - Illinois programs, many of which are
owned facilities, and to certain new programs and expansions operating since the
first quarter of 1999. 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 55.4% to $18.0 million for
the six months ended June 30, 2000 from $11.6 million for the six months ended
June 30, 1999 due principally to the pre-release programs and facilities
acquired from Interventions - Illinois in November 1999. As a percentage of
revenue, excluding start-up operations, pre-release division operating expenses
were 74.7% for the six months ended June 30, 2000 compared to 75.5% for the six
months ended June 30, 1999. The improved operating margin for the six months
ended June 30, 2000 compared to the six months ended June 30, 1999 was due
principally to the higher operating margins of certain Interventions - Illinois
programs, many of which are owned 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. Start-up expenses were $543,000 for the
six months ended June 30, 2000 and were attributable to the start-up activities
of the final 550 beds in the D. Ray James Prison during the first quarter of
2000, the Moshannon Valley Correctional Center and the New Morgan Academy.
Pre-opening and start-up expenses were $2.3 million for the six months ended
June 30, 1999 and were attributable to the 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 16.9%
to $3.5 million for the six months ended June 30, 2000 from $3.0 million for the
six months ended June 30, 1999 due to (a) depreciation of buildings and
equipment acquired from Interventions-Illinois in November 1999, (b) 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, (c) the completion of the expansions at the Big Spring Complex, and (d)
various facility expansions. Depreciation decreased due to the sale and
leaseback of certain owned 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 7.1% to $5.7 million for the six months ended June 30, 2000 from $5.4
million for the six months ended June 30, 1999. The increase in general and
administrative expenses resulted principally from the centralization of certain
administrative functions. Additionally, for the six months ended June 30, 2000,
general and administrative expenses included approximately $413,000 of rent
expense from the sale and leaseback of certain owned furniture and equipment
during the fourth quarter of 1999.
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<PAGE>
INTEREST. Interest expense, net of interest income, increased to $7.3 million
for the six months ended June 30, 2000 from $3.4 million for the six months
ended June 30, 1999 due principally to (a) increased borrowings under the
Company's $50.0 million Bridge Facility to finance the acquisition of
Interventions- Illinois in November 1999 and for facility expansions in 1999 and
(b) increases in the prime and LIBOR base rates which affect the cost of
borrowings under the Company's revolving line of credit. Additionally, for the
six months ended June 30, 1999, the Company capitalized interest of $828,000
related to the costs for construction of the D. Ray James Prison.
INCOME TAXES. For the six months ended June 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 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.
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".
LONG-TERM CREDIT FACILITIES. At June 30, 2000, the Company had $55.0 million
outstanding under its 1998 Credit Facility. Effective July 21, 2000, the Company
formalized terms under the 2000 Credit Facility with a group of financial
institutions. The 2000 Credit Facility replaces 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 August 11, 2000, the Company had $55.0 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 $37.0 million has been utilized. The remaining capacity of
this lease financing arrangement
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<PAGE>
is expected to be utilized to complete the 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 expects the fair
market value of the leased facilities to substantially reduce or eliminate the
Company's payment under the residual value guarantee.
As of June 30, 2000, $40.0 million of borrowings were outstanding under the
Company's $50.0 million Bridge Facility. 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. Accordingly,
the $40.0 million of borrowings which were classified as a note payable have
been reclassified as long-term debt as of June 30, 2000. 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 through a full payment of cash to the
Company 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 six months ended June 30, 2000,
the Company reported net cash used in operating activities of $1.1 million. The
November 1999 acquisition of Interventions - Illinois 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 six
months ended June 30, 2000 was approximately $1.8 million.
CAPITAL EXPENDITURES. Capital expenditures for the six months ended June 30,
2000 were $4.6 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.
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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.
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. At June 30, 2000, the Subordinated Notes were not outstanding. The
Company's debt with variable interest is its revolving line of credit. At June
30, 2000, approximately 37.9% ($55.0 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 $540,000 for the six months ended June 30, 2000.
At June 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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries or for wrongful restriction of, or interference with, inmate
privileges. In the opinion of management of the Company, the outcome of the
proceedings to which the Company is currently a party will not have a material
adverse effect upon the Company's operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 2000, the Company held its 2000 Annual Meeting of Stockholders.
The matters voted on at the meeting and the results thereof are as follows:
Stockholders elected the persons listed below as directors whose terms expire
at the 2001 Annual Meeting of Stockholders. Results by nominee were:
AUTHORITY
VOTED FOR WITHHELD
--------- ----------
David M. Cornell............... 6,401,420 3,580
Steven W. Logan................ 6,401,631 3,369
Campbell A. Griffin, Jr........ 6,401,780 3,220
Peter A. Leidel................ 6,401,755 3,245
Arlene R. Lissner.............. 6,360,855 44,145
Tucker Taylor.................. 6,361,666 43,334
James H.S. Cooper.............. 6,401,780 3,220
Anthony R. Chase............... 6,400,975 4,025
Stockholders ratified the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year ending December 31, 2000,
with 6,357,160 shares voted for, 6,735 shares voted against, 5,480 abstentions
and 35,625 shares not voted.
Stockholders approved the amendment to the Company's Restated Certificate of
Incorporation to change the Company's name to Cornell Companies, Inc. There were
6,362,000 shares voted for, 3,045 shares voted against, 4,330 abstentions and
35,625 shares not voted.
Stockholders approved the Cornell Employee Stock Purchase Plan. There were
6,333,547 shares voted for, 27,493 shares voted against, 8,335 abstentions and
35,625 shares not voted.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Fourth Amended and Restated Credit Agreement among the
Company, certain subsidiaries of the Company, Atlantic
Financial Group, Ltd., the Lenders and ING (U.S.) Capital LLC,
as Administrative Agent, dated as of July 21, 2000.
10.2 Amended and Restated Master Agreement among the Company,
certain subsidiaries of the Company, Atlantic Financial Group,
Ltd., the Lenders, ING (U.S.) Capital LLC, as Administrative
Agent, Bank of America N.A., as Syndication Agent, and
Suntrust Equitable Securities Corporation, as Documentation
Agent, dated as of July 21, 2000.
10.3 Note and Equity Purchase Agreement among the Company, American
Capital Strategies, Ltd. and Teachers Insurance and Annuity
Association of America, dated as of July 21, 2000.
10.4 Warrant issued by the Company to American Capital Strategies,
Ltd. dated as of July 21, 2000.
10.5 Warrant issued by the Company to Teachers Insurance and
Annuity Association of America, dated as of July 21, 2000.
11.1 Statement Re: Computation of Per Share Earnings
27.1 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 COMPANIES, INC.
Date: August 14, 2000 By: /s/ STEVEN W. LOGAN
-------------------
STEVEN W. LOGAN
Chief Executive Officer
and President
(Principal Executive
Officer)
Date: August 14, 2000 By: /s/ JOHN L. HENDRIX
-------------------
JOHN L. HENDRIX
Vice President and
Chief Financial Officer
(Principal Financial
Officer)
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