Table of Contents
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, 2010
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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
of Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
1700 West Loop South, Suite 1500, Houston,
Texas
|
|
77027
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
Registrants Telephone Number, Including
Area Code:
(713) 623-0790
Indicate
by a check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files.) Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
|
|
Accelerated
filer
x
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
At
August 5, 2010, the registrant had 15,108,415 shares of common stock
outstanding.
Table of
Contents
Forward-Looking
Information
The statements included in
this quarterly report regarding future financial performance and results of
operations and other statements that are not historical facts are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements in this
quarterly report include, but are not limited to, statements about the
following subjects:
·
revenues,
·
revenue mix,
·
expenses, including personnel and medical
costs,
·
results of operations,
·
operating margins,
·
supply and demand,
·
market outlook in our various markets,
·
our other expectations with regard to market
outlook,
·
utilization,
·
parolee, detainee, inmate and youth offender
trends,
·
pricing and per diem rates,
·
contract commencements,
·
new contract opportunities,
·
our proposed merger transaction with The GEO
Group, Inc. (including, but not limited to, expected timing of completion
of the transaction and satisfaction of required closing conditions),
·
operations at, future contracts for, and
results from our Baker Community Correctional Facility, High Plains
Correctional Facility and Mesa Verde Community Correctional Facility,
·
operations at, future contracts for, and
results from our Regional Correctional Center and Great Plains Correctional
Facility,
·
the timing (including ramp of facility
population) and other aspects of our planned customer transition at our D. Ray
James Prison,
·
adequacy of insurance,
·
debt levels,
·
debt reduction,
·
the effect of income tax positions and
related assets and liabilities,
·
our effective tax rate,
·
tax assessments,
·
results and effects of legal proceedings and
governmental audits and assessments,
·
liquidity, including future liquidity and our
ability to obtain financing,
·
financial markets,
·
cash flow from operations,
·
adequacy of cash flow for our obligations,
·
capital requirements,
·
capital expenditures,
·
effects of accounting changes and adoption of
accounting policies,
·
changes in laws and regulations,
·
adoption of accounting policies,
·
benefit payments, and
·
changes in laws and regulations.
Forward-looking
statements in this quarterly report are identifiable by use of the following
words and other similar expressions among others:
·
anticipates
·
believes
·
budgets
·
could
·
estimates
·
expects
3
Table of
Contents
·
forecasts
·
intends
·
may
·
might
·
plans
·
predicts
·
projects
·
scheduled
·
should
Such
statements are subject to numerous risks, uncertainties and assumptions,
including, but not limited to:
·
those described (in the Companys 2009 Annual
Report on Form 10-K) under Item 1A. Risk Factors, as filed with the SEC,
·
the adequacy of sources of liquidity,
·
the effect and results of litigation, audits
and contingencies, and
·
other factors discussed in this quarterly
report and in the Companys other filings with the SEC, which are available
free of charge on the SECs website at
www.sec.gov
.
Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
indicated.
All
subsequent written and oral forward-looking statements attributable to the
Company or to persons acting on our behalf are expressly qualified in their
entirety by reference to these risks and uncertainties. You should not place
undue reliance on forward-looking statements. Each forward-looking statement
speaks only as of the date of the particular statement, and we undertake no
obligation to publicly update or revise any forward-looking statements.
4
Table
of Contents
PART I
FINANCIAL INFORMATION
ITEM 1
. Financial Statements.
CORNELL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
|
|
June 30,
2010
|
|
December 31,
2009
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,164
|
|
$
|
27,724
|
|
Accounts receivable trade (net of allowance for
doubtful accounts of $4,650 and $4,345, respectively)
|
|
63,739
|
|
59,496
|
|
Other receivables
|
|
2,814
|
|
1,587
|
|
Bond fund payment account and other restricted
assets
|
|
29,041
|
|
29,978
|
|
Deferred tax assets
|
|
10,081
|
|
9,843
|
|
Prepaid expenses and other
|
|
7,678
|
|
11,647
|
|
Total current assets
|
|
129,517
|
|
140,275
|
|
PROPERTY AND EQUIPMENT, net
|
|
460,421
|
|
455,523
|
|
OTHER ASSETS:
|
|
|
|
|
|
Debt service reserve fund and other restricted
assets
|
|
33,270
|
|
27,017
|
|
Goodwill
|
|
13,308
|
|
13,308
|
|
Intangible assets, net
|
|
922
|
|
1,185
|
|
Deferred costs and other
|
|
16,117
|
|
13,257
|
|
Total assets
|
|
$
|
653,555
|
|
$
|
650,565
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
60,850
|
|
$
|
62,287
|
|
Current portion of long-term debt
|
|
13,408
|
|
13,413
|
|
Total current liabilities
|
|
74,258
|
|
75,700
|
|
LONG-TERM DEBT, net of current
portion
|
|
287,332
|
|
289,841
|
|
DEFERRED TAX LIABILITIES
|
|
26,242
|
|
24,455
|
|
OTHER LONG-TERM LIABILITIES
|
|
2,125
|
|
1,831
|
|
Total liabilities
|
|
389,957
|
|
391,827
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY:
|
|
|
|
|
|
Preferred stock, $.001 par value, 10,000,000
shares authorized, none issued
|
|
|
|
|
|
Common stock, $.001 par value, 30,000,000 shares
authorized, 16,069,290 and 16,434,940 shares issued and 14,933,148 and
14,947,054 shares outstanding, respectively
|
|
16
|
|
16
|
|
Additional paid-in capital
|
|
163,904
|
|
168,852
|
|
Retained earnings
|
|
106,353
|
|
97,944
|
|
Accumulated other comprehensive income
|
|
1,295
|
|
1,422
|
|
Treasury stock (1,136,142 and 1,487,886 shares of
common stock, at cost, respectively)
|
|
(9,078
|
)
|
(11,888
|
)
|
Total Cornell
Companies, Inc. stockholders equity
|
|
262,490
|
|
256,346
|
|
Non-controlling interest
|
|
1,108
|
|
2,392
|
|
Total equity
|
|
263,598
|
|
258,738
|
|
Total liabilities and equity
|
|
$
|
653,555
|
|
$
|
650,565
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
5
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands,
except per share data)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
103,871
|
|
$
|
105,334
|
|
$
|
203,877
|
|
$
|
205,044
|
|
OPERATING
EXPENSES, EXCLUDING DEPRECIATION AND AMORTIZATION
|
|
74,793
|
|
74,734
|
|
151,476
|
|
147,627
|
|
DEPRECIATION
AND AMORTIZATION
|
|
4,555
|
|
4,740
|
|
9,254
|
|
9,633
|
|
GENERAL AND
ADMINISTRATIVE EXPENSES
|
|
8,001
|
|
6,270
|
|
13,760
|
|
12,408
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM
OPERATIONS
|
|
16,522
|
|
19,590
|
|
29,387
|
|
35,376
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
6,287
|
|
6,736
|
|
12,601
|
|
12,935
|
|
INTEREST
INCOME
|
|
(127
|
)
|
(160
|
)
|
(255
|
)
|
(406
|
)
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM
OPERATIONS BEFORE PROVISION FOR INCOME TAXES
|
|
10,362
|
|
13,014
|
|
17,041
|
|
22,847
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR
INCOME TAXES
|
|
4,646
|
|
5,386
|
|
7,477
|
|
9,487
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
5,716
|
|
7,628
|
|
9,564
|
|
13,360
|
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROLLING
INTEREST
|
|
586
|
|
398
|
|
1,155
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
AVAILABLE TO CORNELL COMPANIES, INC.
|
|
$
|
5,130
|
|
$
|
7,230
|
|
$
|
8,409
|
|
$
|
12,487
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER
SHARE ATTRIBUTABLE TO CORNELL COMPANIES, INC. STOCKHOLDERS:
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
.34
|
|
$
|
.49
|
|
$
|
.56
|
|
$
|
.84
|
|
DILUTED
|
|
$
|
.34
|
|
$
|
.48
|
|
$
|
.56
|
|
$
|
.84
|
|
|
|
|
|
|
|
|
|
|
|
NUMBER OF
SHARES USED IN PER SHARE COMPUTATION:
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
14,944
|
|
14,881
|
|
14,903
|
|
14,878
|
|
DILUTED
|
|
15,111
|
|
14,970
|
|
15,050
|
|
14,952
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,716
|
|
$
|
7,628
|
|
$
|
9,564
|
|
$
|
13,360
|
|
Comprehensive
income attributable to non-controlling interest
|
|
(586
|
)
|
(398
|
)
|
(1,155
|
)
|
(873
|
)
|
Comprehensive
income attributable to Cornell Companies, Inc.
|
|
$
|
5,130
|
|
$
|
7,230
|
|
$
|
8,409
|
|
$
|
12,487
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
6
Table of Contents
CORNELL COMPANIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
AND
COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2010
(Unaudited)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
Other
|
|
Non-
|
|
Total
|
|
|
|
|
|
|
|
Par
|
|
Paid-In
|
|
Retained
|
|
Treasury Stock
|
|
Comprehensive
|
|
Controlling
|
|
Stockholders
|
|
Comprehensive
|
|
|
|
Shares
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Cost
|
|
Income
|
|
Interest
|
|
Equity
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT DECEMBER 31, 2009
|
|
16,434,940
|
|
$
|
16
|
|
$
|
168,852
|
|
$
|
97,944
|
|
1,487,886
|
|
$
|
(11,888
|
)
|
$
|
1,422
|
|
$
|
2,392
|
|
$
|
258,738
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
|
|
|
8,409
|
|
|
|
|
|
|
|
1,155
|
|
9,564
|
|
8,409
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,409
|
|
DISTRIBUTION
TO MCF PARTNERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,439
|
)
|
(2,439
|
)
|
|
|
REPURCHASE
AND RETIREMENT OF COMMON STOCK
|
|
(145,473
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
EXERCISE
OF STOCK OPTIONS
|
|
625
|
|
|
|
251
|
|
|
|
(38,212
|
)
|
305
|
|
|
|
|
|
556
|
|
|
|
TAX
BENEFIT OF STOCK OPTION EXERCISES
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
AMORTIZATION
OF GAIN ON TERMINATION OF DERIVATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
(127
|
)
|
|
|
STOCK
BASED COMPENSATION
|
|
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
1,342
|
|
|
|
RESTRICTED
STOCK ACTIVITY
|
|
(221,384
|
)
|
|
|
(3,994
|
)
|
|
|
(282,655
|
)
|
2,258
|
|
|
|
|
|
(1,736
|
)
|
|
|
ISSUANCE
OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
169
|
|
|
|
(23,237
|
)
|
186
|
|
|
|
|
|
355
|
|
|
|
ISSUANCE
OF COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
582
|
|
|
|
195
|
|
|
|
(7,640
|
)
|
61
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT JUNE 30, 2010
|
|
16,069,290
|
|
$
|
16
|
|
$
|
163,904
|
|
$
|
106,353
|
|
1,136,142
|
|
$
|
(9,078
|
)
|
$
|
1,295
|
|
$
|
1,108
|
|
$
|
263,598
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
7
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
AND
COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2009
(Unaudited)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
Other
|
|
Non-
|
|
Total
|
|
|
|
|
|
|
|
Par
|
|
Paid-In
|
|
Retained
|
|
Treasury Stock
|
|
Comprehensive
|
|
Controlling
|
|
Stockholders
|
|
Comprehensive
|
|
|
|
Shares
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Cost
|
|
Income
|
|
Interest
|
|
Equity
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT DECEMBER 31, 2008
|
|
16,238,685
|
|
$
|
16
|
|
$
|
164,746
|
|
$
|
73,318
|
|
1,506,163
|
|
$
|
(12,034
|
)
|
$
|
1,676
|
|
$
|
445
|
|
$
|
228,167
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
|
|
|
12,487
|
|
|
|
|
|
|
|
873
|
|
13,360
|
|
12,487
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,487
|
|
EXERCISE
OF STOCK OPTIONS
|
|
2,550
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
INCOME
TAX BENEFIT FROM STOCK OPTION EXERCISES
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
STOCK
BASED COMPENSATION
|
|
|
|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
|
|
1,634
|
|
|
|
RESTRICTED
STOCK ACTIVITY
|
|
153,983
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
AMORTIZATION
OF GAIN ON TERMINATION OF DERIVATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
(127
|
)
|
|
|
ISSUANCE
OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
143
|
|
|
|
(18,277
|
)
|
146
|
|
|
|
|
|
289
|
|
|
|
ISSUANCE
OF COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
8,419
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT JUNE 30, 2009
|
|
16,403,637
|
|
$
|
16
|
|
$
|
166,441
|
|
$
|
85,805
|
|
1,487,886
|
|
$
|
(11,888
|
)
|
$
|
1,549
|
|
$
|
1,318
|
|
$
|
243,241
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
8
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
CASH FLOWS
FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
|
$
|
9,564
|
|
$
|
13,360
|
|
Adjustments
to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
Depreciation
|
|
8,990
|
|
8,737
|
|
Amortization
of intangibles
|
|
264
|
|
896
|
|
Amortization
of deferred financing costs
|
|
620
|
|
635
|
|
Amortization
of Senior Notes discount
|
|
92
|
|
92
|
|
Amortization
of gain on termination of derivative
|
|
(127
|
)
|
(127
|
)
|
Stock-based
compensation
|
|
1,342
|
|
1,634
|
|
Provision for
bad debts
|
|
685
|
|
1,265
|
|
(Gain)loss on
disposal of property and equipment
|
|
35
|
|
(349
|
)
|
Change in
assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(5,671
|
)
|
(354
|
)
|
Other restricted
assets
|
|
(6,723
|
)
|
(594
|
)
|
Deferred
income taxes
|
|
1,545
|
|
141
|
|
Other assets
|
|
896
|
|
1,759
|
|
Accounts
payable and accrued liabilities
|
|
(5,068
|
)
|
(9,041
|
)
|
Other liabilities
|
|
293
|
|
224
|
|
Net cash
provided by operating activities
|
|
6,737
|
|
18,278
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Capital
expenditures
|
|
(13,200
|
)
|
(9,493
|
)
|
Proceeds from
the sale/disposals of fixed assets
|
|
541
|
|
1,688
|
|
Proceeds from
(payments to) restricted debt payment account, net
|
|
1,407
|
|
(6,780
|
)
|
Net cash used
in investing activities
|
|
(11,252
|
)
|
(14,585
|
)
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from
line of credit
|
|
|
|
2,000
|
|
Payments of
line of credit
|
|
(2,600
|
)
|
(4,000
|
)
|
Distribution
to MCF partners
|
|
(2,439
|
)
|
|
|
Tax benefit
of stock option exercises
|
|
89
|
|
|
|
Payments of
capital lease obligations
|
|
(6
|
)
|
(7
|
)
|
Purchase and
retirement of common stock
|
|
(3,000
|
)
|
|
|
Proceeds from
exercise of stock options and employee stock purchase plan
|
|
911
|
|
321
|
|
Net cash used
in financing activities
|
|
(7,045
|
)
|
(1,686
|
)
|
|
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
(11,560
|
)
|
2,007
|
|
CASH AND CASH
EQUIVALENTS AT BEGINNING OF PERIOD
|
|
27,724
|
|
14,613
|
|
CASH AND CASH
EQUIVALENTS AT END OF PERIOD
|
|
$
|
16,164
|
|
$
|
16,620
|
|
|
|
|
|
|
|
OTHER
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
Common stock
issued for board of directors fees
|
|
$
|
256
|
|
$
|
228
|
|
Tax expense
of stock option exercises
|
|
|
|
(71
|
)
|
Purchases and
additions to property and equipment included in accounts payable and accrued
liabilities
|
|
1,264
|
|
1,253
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
9
Table
of Contents
CORNELL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of
Presentation
The
accompanying unaudited consolidated financial statements have been prepared by
Cornell Companies, Inc. (collectively with its subsidiaries and
consolidated special purpose entities, unless the context requires otherwise,
the Company, we, us or our) 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 in the United States (GAAP) have been condensed or omitted
pursuant to such rules and regulations.
The year-end consolidated balance sheet was derived from audited
financial statements but does not include all disclosures required by GAAP. In
the opinion of management, adjustments and disclosures necessary for a fair presentation
of these financial statements have been included. Estimates were used in the preparation of
these financial statements. Actual
results could differ from those estimates.
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys 2009 Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
2.
Accounting
Policies
See
a description of our accounting policies in the Notes to Consolidated Financial
Statements included in our 2009 Annual Report on Form 10-K.
3.
Merger
Agreement
On
April 18, 2010, the Company entered into an Agreement and Plan of Merger (Agreement)
with The GEO Group, Inc. (NYSE:GEO) (GEO), a private provider of
correctional, detention, and residential treatment services to federal, state
and local government agencies around the globe. Pursuant to the Agreement, GEO
will acquire Cornell for stock and/or cash at an estimated enterprise value of
$685 million based on the closing prices of both companies stock on
April 16, 2010, including the assumption of approximately $300 million in
Cornell debt, excluding cash.
Under
the terms of the definitive agreement, stockholders of Cornell will have the
option to elect to receive either (x) 1.3 shares of GEO common stock for
each share of Cornell common stock or (y) an amount of cash consideration
equal to the greater of (i) the fair market value of one share of GEO
common stock plus $6.00 or (ii) the fair market value of 1.3 shares of GEO
common stock. In order to preserve the tax-deferred treatment of the
transaction, no more than 20% of the outstanding shares of Cornell Common Stock
may be exchanged for the cash consideration. If elections are made such that
the aggregate cash consideration to be received by Cornell stockholders would
exceed $100 million in the aggregate, such excess amount may be paid at the
election of GEO in shares of GEO common stock or in cash. GEO has expressed the
intent to pay such excess amount in cash, as indicated in the definitive joint
proxy statement (Joint Proxy Statement) filed by GEO and Cornell with the SEC
on July 15, 2010.
The
merger is expected to close in the third quarter of 2010, subject to the
approval of the issuance of GEO common stock by GEOs shareholders, approval of
the transaction by Cornells stockholders and, as well as the fulfillment of
other customary conditions. The special meeting of Cornell stockholders to
consider and adopt the agreement and plan of merger will take place on
Thursday, August 12, 2010. The special meeting of GEO stockholders to
consider and vote upon the issuance of GEO common stock in connection with the
proposed merger is scheduled for the same day.
Upon
the consummation of the merger, GEO would honor the existing employment
agreements between Cornell and various members of Cornells executive
management. The merger would constitute a change of control for purposes
of these agreements and, would entitle said members to receive the severance
and other benefits in accordance with the terms of these agreements if their
employment is terminated. Please refer to the definitive Joint Proxy
Statement/Prospectus filed with the SEC on July 15, 2010, as supplemented
on July 22, 2010 for a more detailed discussion of employment and change
in control agreements.
Litigation Relating to the Merger
On
April 27, 2010, a putative stockholder class action was filed in the
District Court for Harris County, Texas by Todd Shelby against Cornell, members
of the Cornell board of directors, individually, and GEO. The complaint
alleged, among other things, that the Cornell directors breached their duties
by entering into the Agreement without first taking steps to obtain adequate,
fair and maximum consideration for Cornells stockholders by shopping the
company or initiating an auction process, by structuring the transaction to
take advantage of Cornells low current stock valuation, and by structuring the
transaction to benefit GEO while making an alternative transaction either
prohibitively expensive or otherwise impossible, and that Cornell and GEO have
aided and abetted such breaches by Cornells directors. The plaintiff filed an amended complaint on
May 28, 2010. The amended complaint added additional allegations
contending that the disclosures about the merger in the Joint Proxy Statement
were misleading and/or inadequate. Among
other things, the original complaint and the amended complaint seek to enjoin
Cornell, its directors and GEO from completing the merger and seek a
constructive trust over any benefits improperly received by the defendants as a
result of their alleged wrongful conduct.
The parties have reached a settlement of the litigation in principle (at
an amount immaterial to the consolidated financial position of the Company),
pursuant to which certain additional disclosures were included in the final
form of the Joint Proxy Statement. The
settlement did not alter the terms of the transaction or
10
Table of
Contents
the
consideration to be received by shareholders.
The settlement remains subject to confirmatory discovery, preparation
and execution of a formal stipulation of settlement, final court approval of
the settlement and dismissal of the action with prejudice.
4.
Stock-Based
Compensation
We have an employee stock purchase
plan
(ESPP)
under
which employees can make contributions to purchase our common stock.
Participation in the plan is elected annually by employees. The plan year
typically begins each January 1st (the Beginning Date) and ends on
December 31st (the Ending Date). Purchases of common stock are made at
the end of the year using the lower of the fair market value on either the
Beginning Date or Ending Date, less a 15% discount.
Under current authoritative
guidance our employee-stock purchase plan is considered to be a compensatory
ESPP, and therefore, we recognize compensation expense over the requisite
service period for grants made under the ESPP. Compensation expense of
approximately $0.03 million was recognized in the three months ended June 30,
2010 and 2009, respectively. Compensation expense of approximately $0.07
million and $0.05 million was recognized in the six months ended June 30,
2010 and 2009, respectively.
Our
stock incentive plans provide for the granting of stock options (both incentive
stock options and nonqualified stock options), stock appreciation rights,
restricted stock shares and other stock-based awards to officers, directors and
employees of the Company. Grants of stock options made to date under these
plans vest over periods up to seven years after the date of grant and expire no
more than 10 years after grant. Upon the occurrence of specified change of
control events (which would include consummation of the pending merger of the
Company with The GEO Group as discussed in Note 3), those awards outstanding
which have not previously vested will automatically vest.
At
June 30, 2009, 317,602 shares of restricted stock were outstanding subject
to performance-based vesting criteria (32,500 of these restricted shares were
considered market-based restricted stock under authoritative guidance). There
were also 6,260 stock options outstanding subject to performance-based vesting
criteria. We recognized $0.4 million and $0.5 million of expense associated
with these shares of restricted stock and stock options during the three and
six months ended June 30, 2009, respectively.
At
June 30, 2010, 414,488 shares of restricted stock were outstanding subject
to performance-based vesting criteria (22,500 of these restricted shares were
considered market-based restricted stock under authoritative guidance). There
were also stock options for 840 shares outstanding subject to performance-based
vesting criteria. We recognized $0.3 million and $0.4 million of expense
associated with these shares of restricted stock and stock options during the
three and six months ended June 30, 2010, respectively.
The amounts above relate to the
impact of recognizing compensation expense related to stock options and
restricted stock. Compensation expense related to stock options (840 shares)
and restricted stock (391,988 shares) that vest based upon performance
conditions is not recorded for such performance-based awards until it has been
deemed probable that the related performance targets allowing the vesting of
these options and restricted stock will be met. We are required to periodically
re-assess the probability that these options will vest and begin to record
expense at that point in time. During the six months ended June 30, 2010
and 2009, it was deemed probable that certain performance targets pertaining to
certain restricted stock and stock options would be achieved by their vesting
date. Accordingly, compensation expense of approximately $0.2 million and $0.4
million was recognized in the six months ended June 30, 2010 and 2009,
respectively, related to these performance-based awards.
We recognize expense for our
stock-based compensation over the vesting period, or in the case of
performance-based awards, during the service period for which the performance
target becomes probable of being met, which represents the period in which an
employee is required to provide service in exchange for the award. We recognize
compensation expense for stock-based awards immediately if the award has
immediate vesting.
Assumptions
The
fair values for the significant stock
option
awards granted
during the six months ended June 30, 2010 and 2009 were estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Risk-free rate of return
|
|
3.04
|
%
|
1.90
|
%
|
Expected life of award
|
|
6.0 years
|
|
6.0 years
|
|
Expected dividend yield of stock
|
|
0
|
%
|
0
|
%
|
Expected volatility of stock
|
|
41.89
|
%
|
50.49
|
%
|
Weighted-average fair value
|
|
$
|
10.34
|
|
$
|
8.89
|
|
|
|
|
|
|
|
|
|
11
Table of
Contents
The
expected volatility of stock assumption was derived by referring to changes in
the Companys historical common stock prices over a timeframe similar to that
of the expected life of the award. We do not believe that future stock
volatility will significantly differ from historical stock volatility.
Estimated forfeiture rates are derived from historical forfeiture patterns. We
believe the historical experience method is the best estimate of forfeitures
currently available.
Generally
we utilized the simplified method for plain vanilla options to estimate the
expected term of options granted during the periods noted (where
appropriate). For those grants during
these periods wherein we had sufficient historical or impartial data to better
estimate the expected term, we have done so.
Stock
option
award activity
during the six months ended June 30, 2010 was as follows (aggregate
intrinsic value in millions):
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
496,247
|
|
$
|
15.36
|
|
5.9
|
|
$
|
7.6
|
|
Granted
|
|
40,000
|
|
23.08
|
|
|
|
|
|
Exercised
|
|
(38,837
|
)
|
14.32
|
|
|
|
|
|
Canceled
|
|
(2,962
|
)
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010
|
|
494,448
|
|
$
|
16.09
|
|
5.8
|
|
$
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2010
|
|
493,484
|
|
$
|
16.08
|
|
5.8
|
|
$
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010
|
|
468,858
|
|
$
|
15.78
|
|
5.6
|
|
$
|
7.4
|
|
The
total intrinsic value of stock options exercised during the six months ended
June 30, 2010 and 2009 was $0.5 million and $0.01 million, respectively.
Net cash proceeds from the exercise of stock options were approximately $0.6
million and $0.03 million for the six months ended June 30, 2010 and 2009,
respectively.
We
recognized $0.2 million of expense associated with time-based stock options
during the six months ended June 30, 2010.
As of June 30, 2010, approximately $0.2 million of estimated
expense with respect to time-based nonvested stock-based awards has yet to be
recognized and will be amortized into expense over the employees remaining
requisite service period of approximately 2.5 months.
The
following table summarizes information with respect to stock options
outstanding and exercisable at June 30, 2010.
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.75 to $10.00
|
|
16,355
|
|
1.3
|
|
$
|
5.68
|
|
16,355
|
|
$
|
5.68
|
|
$10.01 to $13.50
|
|
129,225
|
|
4.1
|
|
12.84
|
|
129,225
|
|
12.84
|
|
$13.51 to $14.50
|
|
162,168
|
|
5.2
|
|
13.97
|
|
158,468
|
|
13.96
|
|
$14.51 to $25.00
|
|
186,700
|
|
7.8
|
|
21.09
|
|
164,810
|
|
20.83
|
|
|
|
494,448
|
|
5.8
|
|
$
|
16.09
|
|
468,858
|
|
$
|
15.78
|
|
12
Table of
Contents
Stock-based
award activity for nonvested awards during the six months ended June 30,
2010 is as follows:
|
|
Number
of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2009
|
|
20,510
|
|
$
|
20.32
|
|
Granted
|
|
40,000
|
|
23.08
|
|
Vested
|
|
(34,920
|
)
|
22.38
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2010
|
|
25,590
|
|
$
|
21.82
|
|
Restricted Stock
We have previously issued
restricted stock under certain employment agreements and stock incentive plans
which vests either over a specific period of time, generally three to five
years, or which will vest subject to certain market or performance
conditions. Those shares of restricted
common stock issued are subject to restrictions on transfer and certain
conditions to vesting. During the six
months ended June 30, 2010, we issued restricted stock as part of our
normal equity awards under our 2006 Incentive Plan.
Restricted stock activity
for the six months ended June 30, 2010 was as follows:
|
|
Number
of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2009
|
|
520,574
|
|
$
|
20.61
|
|
Granted
|
|
158,000
|
|
18.48
|
|
Vested
|
|
(193,024
|
)
|
22.80
|
|
Canceled
|
|
(16,875
|
)
|
22.07
|
|
|
|
|
|
|
|
Nonvested at June 30, 2010
|
|
468,675
|
|
$
|
18.94
|
|
We recognized $0.2
million and $0.6 million of expense associated with nonvested time-based
restricted stock awards during the three and six months ended June 30,
2010, respectively. As of June 30,
2010, approximately $1.0 million of estimated expense with respect to nonvested
time-based restricted stock awards had yet to be recognized and will be
amortized over a weighted average period of 1.86 years.
Approximately
$6.9 million of estimated expense with respect to nonvested performance-based
restricted stock option awards had yet to be recognized as of June 30,
2010.
5. Fair Value
Measurements
On
January 1, 2008, we adopted a newly issued accounting standard for fair
value measurements of financial assets and liabilities which did not have a
material financial impact on our consolidated results of operations or
financial condition. On January 1,
2009, we adopted the provisions of this new accounting pronouncement for
applying fair value to non-financial assets, liabilities and transactions on a
non-recurring basis. Adoption of the
provisions for the fair value measurements on a non-recurring basis did not
have a material effect on our financial position, results of operations or cash
flows.
As
defined in this accounting standard, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price). Additionally, this pronouncement requires disclosure
that establishes a framework for measuring fair value and expands disclosures
about fair value measurements.
Additionally, it requires that fair value measurements be classified and
disclosed in one of the following categories:
Level 1
Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level 2
Quoted prices
in markets that are not active, or inputs that are observable, either directly
or indirectly, for substantially the full term of the asset or liability; and
Level 3
Prices or
valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market
activity).
13
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As
required, financial assets and liabilities are classified based on the lowest
level of input that is significant for the fair value measurement. The following table summarizes the valuation
of our financial assets and liabilities by pricing levels as of June 30,
2010 and December 31, 2009:
|
|
Fair Value as of
June 30, 2010 (in thousands)
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
|
|
$
|
15,957
|
|
$
|
|
|
$
|
15,957
|
|
Money Market Funds
|
|
|
|
42,054
|
|
|
|
42,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
December 31, 2009 (in thousands)
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
|
|
$
|
9,813
|
|
$
|
|
|
$
|
9,813
|
|
Money Market Funds
|
|
|
|
43,351
|
|
|
|
43,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
corporate bonds and money market funds are carried in the bond fund payment
account and other restricted assets and also in the debt service reserve fund
and other restricted assets in the accompanying balance sheet. The fair value
measurements for corporate bonds and money-market funds are based upon the
quoted price for similar assets in markets that are not active, multiplied by
the number of shares owned, exclusive of any transaction costs and without any
adjustments to reflect discounts that may be applied to selling a large block
of securities at one time. We do not
believe that the changes in fair value of these assets will materially differ
from the amounts that could be realized upon settlement or that the changes in
fair value will have a material effect on our results of operations, liquidity
and capital resources.
This
accounting standard requires a reconciliation of the beginning and ending
balances for fair value measurements using Level 3 inputs. We had no such
assets or liabilities which were measured at fair value on a recurring basis
using significant unobservable inputs (level 3) during the six months ended
June 30, 2010. We evaluate our long-lived
assets for impairment using internally developed, unobservable inputs (Level 3
inputs in the fair value hierarchy of fair value accounting) based on the
projected cash flows of our idle facilities. Such inputs that may significantly
influence estimated future cash flows include the periods and levels of
occupancy for the facility, expected per diem or reimbursement rates,
assumptions regarding the levels of staffing, services and future operating and
capital expenditures necessary to generate forecasted revenues, related costs
for these activities and future rate of increases or decreases associated with
these factors. Information typically utilized will also include relevant terms
of existing contracts (for similar services and customers), market knowledge of
customer demand (both present and anticipated) and related pricing, market
competitors, and our historical experience (as to areas including customer
requirements, contract terms, operating requirements/costs, occupancy trends, etc.).
6. Recent Accounting
Standards
In
January 2010, the FASB issued an amendment to the disclosure requirement
related to Fair Value Measurements. The
amendment requires new disclosures related to transfers in and out of Levels 1
and 2 and activity in Level 3 fair value measurements. A reporting entity is required to disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the transfers. Additionally, in the reconciliation for fair
value measurements in Level 3, a reporting entity must present separately
information about purchases, sales, issuances and settlements (on a gross basis
rather than a net number). The new
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlements in the roll forward of activity in Level 3
fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. Our adoption of the provisions of this
amendment did not have a material affect on our financial position, results of
operations or cash flows.
In
June 2009, the FASB issued an amendment to the accounting and disclosure
requirements for transfers of financial assets.
This amendment applies to the financial reporting of a transfer of
financial assets; the effects of a transfer on an entitys financial position,
financial performance and cash flows; and a transferors continuing involvement,
if any, in transferred financial assets.
It eliminates (1) the exceptions for qualifying special-purpose
entities from the consolidation guidance and (2) the exception that
permitted sale accounting for certain mortgage securitizations when a transferor
has not surrendered control over the transferred financial assets. The provisions of this amendment must be
applied as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim periods within
that first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application was
prohibited. The requirements in the
amendment must be applied to transfers occurring on or after
14
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the
effective date. Our adoption of this amendment as of January 1, 2010 did
not have a material affect on our consolidated financial position, results of
operations or cash flows.
In June 2009, the FASB
also issued an amendment to the accounting and disclosure requirements for the
consolidation of variable interest entities (VIEs). This amendment requires
an enterprise to perform a qualitative analysis when determining whether or not
it must consolidate a VIE. The amendment
also requires an enterprise to continuously reassess whether it must
consolidate a VIE. Additionally, the
amendment requires enhanced disclosures about an enterprises involvement with
VIEs and any significant change in risk exposure due to that involvement, as
well as how its involvement with VIEs impacts the enterprises financial
statements. Finally, an enterprise will
be required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This amendment is effective for financial
statements issued for fiscal years beginning after November 15, 2009. Earlier application was prohibited. Our
adoption of this amendment as of January 1, 2010 did not have a material
affect on our consolidated financial position, results of operations or cash
flows; however, we have included the applicable disclosure requirements at Note
14 to the consolidated financial statements.
7. Intangible Assets
Intangible
assets at June 30, 2010 and December 31, 2009 consisted of the
following (in thousands):
|
|
June 30,
2010
|
|
December 31,
2009
|
|
|
|
|
|
|
|
Acquired contract value
|
|
$
|
6,240
|
|
$
|
6,240
|
|
Accumulated amortization acquired contract value
|
|
(5,318
|
)
|
(5,055
|
)
|
Identified intangibles, net
|
|
922
|
|
1,185
|
|
Goodwill
|
|
13,308
|
|
13,308
|
|
Total intangibles, net
|
|
$
|
14,230
|
|
$
|
14,493
|
|
There were no changes in the carrying
amount of our goodwill in the six months ended June 30, 2010.
Amortization expense for our acquired contract value was approximately
$0.1 million and $0.3 million for the three and six months ended June 30,
2010, respectively, and approximately $0.3 million and $0.5 million for the
three and six months ended June 30, 2009, respectively.
Our non-compete agreements were fully amortized as of December 31,
2009. Amortization expense for our non-compete agreements was approximately
$0.2 million and $0.4 million for the three and six months ended June 30,
2009, respectively.
8.
Credit
Facilities
Our
long-term debt consisted of the following (in thousands):
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Debt of Cornell
Companies, Inc.:
|
|
|
|
|
|
Senior Notes, unsecured, due July 2012 with
an interest rate of 10.75%, net of discount
|
|
$
|
111,632
|
|
$
|
111,540
|
|
Revolving Line of Credit due December 2011
with an interest rate of LIBOR plus 1.50% to 2.25% or prime plus 0.00%
to 0.75% (the Amended Credit Facility)
|
|
67,400
|
|
70,000
|
|
Capital lease obligations
|
|
8
|
|
14
|
|
Subtotal
|
|
179,040
|
|
181,554
|
|
|
|
|
|
|
|
Debt of Special Purpose Entity:
|
|
|
|
|
|
8.47% Bonds due 2016
|
|
121,700
|
|
121,700
|
|
|
|
|
|
|
|
Total consolidated debt
|
|
300,740
|
|
303,254
|
|
|
|
|
|
|
|
Less: current maturities
|
|
(13,408
|
)
|
(13,413
|
)
|
|
|
|
|
|
|
Consolidated long-term debt
|
|
$
|
287,332
|
|
$
|
289,841
|
|
15
Table of
Contents
Long-Term Credit Facilities.
Our Amended
Credit
Facility provides for borrowings up to $100.0 million (including letters of
credit) and matures in December 2011. At our election, outstanding
borrowings bear interest at either the LIBOR rate plus a margin ranging from
1.50% to 2.25% or a rate which ranges from 0.00% to 0.75% above the applicable
prime rate. The applicable margins are subject to adjustments based on our
total leverage ratio.
The available commitment under our Amended Credit
Facility was approximately $20.5 million at June 30, 2010. We had outstanding borrowings under our
Amended Credit Facility of $67.4 million and we had outstanding letters of
credit of approximately $12.1 million at June 30, 2010. Subject to certain requirements, we have the
right to increase the commitments under our Amended Credit Facility up to
$150.0 million, although the indenture for our Senior Notes limits our ability,
subject to certain conditions, to expand the Amended Credit Facility beyond
$100.0 million. We can provide no assurance that all of the banks that have
made commitments to us under our Amended Credit Facility would be willing to
participate in an expansion to the Amended Credit Facility should we desire to
do so. The Amended Credit Facility
is
collateralized by substantially all of our assets, including the assets and
stock of all of our subsidiaries. The Amended Credit Facility is not collateralized
by the assets of Municipal Corrections Finance, L.P. (MCF).
Our Amended Credit Facility contains
certain financial and other restrictive covenants that limit our ability to
engage in certain activities. Our ability to borrow under the Amended Credit
Facility is subject to compliance with certain financial covenants, including
bank leverage, total leverage and fixed charge coverage rates. At June 30,
2010, we were in compliance with all such covenants.
Our Amended
Credit Facility includes other restrictions that, among other things, limit our
ability to: incur indebtedness; grant liens; engage in mergers, consolidations
and liquidations; make investments, restricted payments and asset dispositions;
enter into transactions with affiliates; and engage in sale/leaseback
transactions.
MCF is obligated for the outstanding
balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47%
per annum and are payable in semi-annual installments of interest and annual installments
of principal. All unpaid principal and
accrued interest on the bonds is due on the earlier of August 1, 2016
(maturity) or as noted under the bond documents.
The bonds are limited, nonrecourse
obligations of MCF and secured by the property and equipment, bond reserves,
assignment of subleases and substantially all assets related to the facilities
included in the 2001 Sale and Leaseback Transaction (in which we sold eleven
facilities to MCF). The bonds are not
guaranteed by Cornell.
In June 2004, we issued $112.0
million in principal of 10.75% Senior Notes the (Senior Notes) due
July 1, 2012. The Senior Notes are
unsecured senior indebtedness and are guaranteed by all of our existing and
future subsidiaries (collectively, the Guarantors). The Senior Notes are not guaranteed by MCF
(the Non-Guarantor). Interest on the
Senior Notes is payable semi-annually on January 1 and July 1 of each
year, commencing January 1, 2005.
On or after July 1, 2008, we have the right to redeem all or a portion
of the Senior Notes at the redemption prices (expressed as a percentage of the
principal amount) listed below, plus accrued and unpaid interest, if any, on
the Senior Notes redeemed, to the applicable date of redemption, if redeemed
during the 12-month period commencing on July 1 of each of the remaining
years indicated below:
Year
|
|
Percentages
|
|
|
|
|
|
2010 and
thereafter
|
|
100.000
|
%
|
As
the Senior Notes are redeemable at our option (subject to the requirements
noted) we anticipate we will monitor the capital markets and continue to assess
(pending the merger) our capital needs and our capital structure, including a
potential refinancing of the Senior Notes.
Upon
the occurrence of specified change of control events (which would include
consummation of the pending merger with GEO), unless we have exercised our
option to redeem all the Senior Notes as described above, each holder will have
the right to require us to repurchase all or a portion of such holders Senior
Notes at a purchase price in cash equal to 101% of the aggregate principal
amount of the notes repurchased plus accrued and unpaid interest, if any, on
the Senior Notes repurchased, to the applicable date of purchase. The Senior Notes were issued under an
indenture which limits our ability and the ability of our Guarantors to, among
other things, incur additional indebtedness, pay dividends or make other
distributions, make other restricted payments and investments, create liens,
incur restrictions on the ability of the Guarantors to pay dividends or other
payments to us, enter into transactions with affiliates, and engage in mergers,
consolidations and certain sales of assets.
16
Table of
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9.
Income
Taxes
At
June 30, 2010, the total amount of our unrecognized tax benefits was
approximately $2.9 million.
We
are subject to income tax in the United States and many of the individual
states we operate in. We currently have
significant operations in Texas, California, Colorado, Oklahoma, Georgia, Illinois
and Pennsylvania. State income tax
returns are generally subject to examination for a period of three to five
years after filing. The state impact of
any changes made to the federal return remains subject to examination by
various states for a period up to one year after formal notification to the
state. We are open to United States
Federal Income Tax examinations for the tax years ended December 31, 2005
through December 31, 2009.
We
do not anticipate a significant change in the balance of our unrecognized tax
benefits within the next 12 months.
10.
Earnings
Per Share
Basic earnings per share (EPS) are
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period.
Diluted EPS
is computed by dividing net income by the weighted
average number of shares of common stock outstanding giving effect to all
potentially dilutive common shares outstanding during the period. Potentially
dilutive common shares include the dilutive effect of outstanding common stock
options and restricted common stock granted under our various option and other
incentive plans.
For the six months
ended June 30, 2010, there were 55,000 shares ($23.60 average price) of
stock options that were not included in the computation of diluted EPS because
to do so would have been anti-dilutive. There were no anti-dilutive shares for
the three months ended June 30, 2010.
For the three and six months ended June 30, 2009, there were
141,700 shares ($20.98 average price) of stock options that were not included
in the computation of diluted EPS because to do so would have been
anti-dilutive.
As of
January 1, 2009, instruments with
nonforfeitable
dividend rights
granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing EPS under the two-class method.
For our fiscal year beginning January 1, 2009, since our
restricted common stock grants (including both vested and those unvested due to
either time or performance requirements) convey nonforfeitable rights to
dividends while outstanding, they are included in both basic and fully diluted
ESP calculations.
All prior-period EPS data has been adjusted
retrospectively to conform to the calculation of EPS.
The following table summarizes the
calculation of net earnings and weighted average common shares and common
equivalent shares outstanding for purposes of the computation of earnings per
share (in thousands, except per share data):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to stockholders
|
|
$
|
5,130
|
|
$
|
7,230
|
|
$
|
8,409
|
|
$
|
12,487
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
14,944
|
|
14,881
|
|
14,903
|
|
14,878
|
|
Weighted
average common share equivalents outstanding
|
|
167
|
|
89
|
|
147
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares and common share equivalents outstanding
|
|
15,111
|
|
14,970
|
|
15,050
|
|
14,952
|
|
|
|
|
|
|
|
|
|
|
|
Basic income
per share
|
|
$
|
.34
|
|
$
|
.49
|
|
$
|
.56
|
|
$
|
.84
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share
|
|
$
|
.34
|
|
$
|
.48
|
|
$
|
.56
|
|
$
|
.84
|
|
11.
Commitments
and Contingencies
Financial Guarantees
During
the normal course of business, we enter into contracts that contain a variety
of representations and warranties and provide general indemnifications. Our
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against us that have not yet occurred. However,
based on experience, we believe the risk of loss to be remote.
17
Table of
Contents
Legal Proceedings
We
are party to various legal proceedings, including those noted below. While
management presently believes that the ultimate outcome of these proceedings
will not have a material adverse effect on our financial position, overall
trends in results of operations or cash flows, litigation is subject to
inherent uncertainties, and unfavorable rulings could occur. An unfavorable
ruling could include monetary damages or equitable relief, and could have a
material adverse impact on the net income of the period in which the ruling
occurs or in future periods.
Valencia County Detention Center
In
April 2007, a lawsuit was filed against the Company in the Federal
District Court in Albuquerque, New Mexico, by Joe Torres and Eufrasio Armijo,
who each alleged that he was strip searched at the Valencia County Detention
Center (VCDC) in New Mexico in violation of his federal rights under the
Fourth, Fourteenth and Eighth amendments to the U.S. Constitution. The
claimants also alleged violation of their rights under state law and sought to
bring the case as a class action on behalf of themselves and all detainees at
VCDC during the applicable statutes of limitation. The plaintiffs sought
damages and declaratory and injunctive relief. Valencia County is also a
named defendant in the case and operated the VCDC for a significantly greater
portion of the period covered by the lawsuit.
In
December 2008, the parties agreed to a proposed stipulation of settlement
and, in July 2009, the Court granted final approval of the
settlement. The settlement amount under
the terms of the agreement is $3.3 million.
Cornells portion of the stipulated settlement, based on the number of
inmates housed at VCDC during the time Cornell operated the facility in
comparison to the number of inmates housed at the facility during the time
Valencia County operated the facility, is $1.2 million and was funded
principally through our general liability and professional liability coverage.
The claims administration process is under way and we expect it to be completed
in the second half of 2010.
In
the year ended December 31, 2007, we previously provided insurance
reserves for this matter (as part of our regular review of reported and
unreported claims) totaling approximately $0.5 million. During the fourth quarter of 2008, we
recorded an additional settlement charge of approximately $0.7 million and the
related reimbursement from our general liability and professional liability
insurance. The charge and reimbursement
were recognized in general and administrative expenses for the year ended
December 31, 2008. The
reimbursement was funded by the insurance carrier in the first quarter of 2009
into a settlement account, where it will remain until payments are made to the
settlement class members.
Regional Correctional Center.
The Office of Federal Detention Trustee
(OFDT) holds the contract for the use of the RCC on behalf of ICE, USMS and the
BOP with Bernalillo County, New Mexico (the County) through an
intergovernmental services agreement, and we have an operating and management
agreement with the County. In
July 2007, we were notified by ICE that it was removing all ICE detainees
from the RCC and the removal was completed in early August 2007. The
facility is still being utilized by the USMS and since May 2008 by the
BOP, but not at its full capacity. In
February 2008, ICE informed us that it would not resume use of the
facility. In February 2008, OFDT
attempted to unilaterally amend its agreement with the County to reduce the
number of minimum annual guaranteed mandays under the agreement from 182,500 to
66,300. Neither we nor the County believe OFDT has the right to unilaterally
amend the contract in this manner, and OFDT has been informed of our position.
Although either party to the intergovernmental services agreement has the right
to terminate upon 180 days notice, neither party has exercised such right as of
June 30, 2010.
During
the third quarter of 2009, we filed a claim against the United States, acting
through the United States Department of Justice, OFDT and ICE (collectively,
Defendants) for breach of contract and breach of the duty of good faith and
fair dealing, arising out of the Defendants improper modification of the
intergovernmental services agreement (the Contract) and subsequent failure to
pay for the shortfalls in the 2007-2008 and 2008-2009 minimum annual guaranteed
mandays specified in the Contract. The United States Court of Federal Claims
issued an opinion on July 14, 2010 in Board of County Commissioners of the
County of Bernalillo, New Mexico, v. United States, Case No. 09-549 C,
overturning the governments decision to unilaterally reduce the number of
mandays it used at the RCC. Cornell and the County successfully argued that the
Contract with the OFDT obligated the government to utilize the RCC for an
agreed upon number of mandays, and the governments failure to meet that number
required the government to pay for unused beds. The OFDT argued that it
had properly partially terminated the Contract to reduce the number of mandays.
The Court will now decide damages for the governments breach of the
agreement. Cornell and the County believe that the government owes
approximately $4.2 million previously billed to the government for contract
years March 26, 2007 through March 25, 2008 and March 26, 2008 through March
25, 2009, plus appropriate Contract Disputes Act interest. The government has
the right to appeal the decision to the United States Court of Appeals for the
Federal Circuit.
18
Table of Contents
The
Company is currently in settlement negotiations on this matter. Based on the
recent legal ruling that affirmed that the agreement was not partially
terminated and therefore billings under the contract terms were appropriate as
well as our ongoing settlement discussions, Cornell recognized an additional
$2.7 million contract-based revenue adjustment in the quarter ended
June 30, 2010 related to the contract years March 26, 2007 through March
25, 2008 and March 26, 2008 through March 25, 2009.
Litigation Relating to the Merger
On
April 27, 2010, a putative stockholder class action was filed in the
District Court for Harris County, Texas by Todd Shelby against Cornell, members
of the Cornell board of directors, individually, and GEO. The complaint
alleged, among other things, that the Cornell directors breached their duties
by entering into the Agreement without first taking steps to obtain adequate,
fair and maximum consideration for Cornells stockholders by shopping the
company or initiating an auction process, by structuring the transaction to
take advantage of Cornells low current stock valuation, and by structuring the
transaction to benefit GEO while making an alternative transaction either
prohibitively expensive or otherwise impossible, and that Cornell and GEO have aided
and abetted such breaches by Cornells directors. The plaintiff filed an amended complaint on
May 28, 2010. The amended complaint added additional allegations
contending that the disclosures about the merger in the Joint Proxy Statement
were misleading and/or inadequate. Among
other things, the original complaint and the amended complaint seek to enjoin
Cornell, its directors and GEO from completing the merger and seek a
constructive trust over any benefits improperly received by the defendants as a
result of their alleged wrongful conduct.
The parties have reached a settlement of the litigation in principle (at
an amount immaterial to the consolidated financial position of the Company),
pursuant to which certain additional disclosures were included in the final
form of the Joint Proxy Statement. The
settlement did not alter the terms of the transaction or the consideration to
be received by shareholders. The
settlement remains subject to confirmatory discovery, preparation and execution
of a formal stipulation of settlement, final court approval of the settlement
and dismissal of the action with prejudice.
Other
We
hold insurance policies to cover potential director and officer liability, some
of which may limit our cash outflows in the event of a decision adverse to us
in the matter discussed above. However, if an adverse decision in the matter
exceeds the insurance coverage or if the insurance coverage is deemed not to
apply to the matter, it could have a material adverse effect on us, our financial
condition, results of operations and future cash flows.
We
currently and from time to time are 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 and
employment matters. If an adverse decision in these matters exceeds our
insurance coverage, or if our coverage is deemed not to apply to these matters,
or if the
underlying
insurance carrier was unable to fulfill its obligation under the insurance
coverage provided, it could have a material adverse effect on our financial
condition, results of operations or cash flows.
While
the outcome of such other matters cannot be predicted with certainty, based on
the information known to date, we believe that the ultimate resolution of these
matters will not have a material adverse effect on our financial condition, but
could be material to operating results or cash flows for a particular reporting
period.
12. Financial Instruments
The
carrying amounts of our financial instruments, including cash and cash
equivalents, investment securities, accounts receivable and accounts payable
and accrued expenses, approximate fair value due to the short term maturities
of these financial instruments. At
December 31, 2009, the carrying amount of consolidated debt was $303.3
million, and the estimated fair value was $309.1 million. At June 30, 2010, the carrying amount
was $300.7 million and the estimated fair value was $305.6 million. The estimated fair value of long-term debt is
based primarily on quoted market prices or discounted cash flow analysis for
the same or similar assets.
13.
Derivative
Financial Instruments And Guarantees
Debt Service Reserve Fund and Debt
Service Fund
In
August 2001, Municipal Corrections Finance, L.P. (MCF) completed a bond
offering to finance the 2001 Sale and Leaseback Transaction in which we sold
eleven facilities to MCF. In connection with this bond offering, two reserve
fund accounts were established by MCF pursuant to the terms of the indenture:
(1) MCFs Debt Service Reserve Fund, (as reported in Debt service reserve
fund and other restricted assets in our Consolidated Balance sheet) aggregating
$23.4 million at June 30, 2010, was established to: (a) make payments
on MCFs outstanding bonds in the event we (as lessee) should fail to make the
scheduled rental payments to MCF or (b) to the extent payments were not
made under (a), then to make final debt service payments on the then
outstanding bonds and (2) MCFs Bond Fund Payment Account, (as reported in
Bond fund payment account and other restricted assets in our Consolidated
Balance Sheet) aggregating $16.0 million at June 30, 2010, was established
to accumulate the monthly lease payments that MCF receives from us until such
funds are used to pay MCFs semi-annual bond interest and annual bond principal
payments, with any excess to pay certain other expenses and to make certain
transfers. These reserve funds are invested in money markets and short-term
commercial paper. Both reserve fund accounts were subject to agreements with
the MCF Equity Investors (Lehman Brothers, Inc. (Lehman)) whereby
guaranteed rates of return of 3.0% and 5.08%, respectively, were provided for
in the balance of the Debt Service Reserve Fund and the Bond Fund Payment
Account. The guaranteed rates of return were characterized as cash flow hedge
derivative instruments. At inception, the derivative instruments had an
aggregate fair value of $4.0 million, which was recorded as a decrease to the
equity investment in MCF made by the MCF Equity Investors (MCF non-controlling
interest) and is included in other long-term liabilities in our Consolidated
Balance Sheets. Changes in the fair value of the derivative instruments were recorded
as an adjustment to other long-term liabilities and reported as other
comprehensive income in our Consolidated Statements of Income and Comprehensive
Income. Due to the bankruptcy of Lehman in 2008, the derivative instruments no
longer qualified as a hedge and were de-designated. Amounts included in
accumulated other comprehensive income are reclassified into earnings during
the same periods in which interest is earned on debt service funds
(approximately $0.1 million was amortized and recognized in earnings in the six
months ended June 30, 2010). Changes in the fair value of these
derivatives after de-designation were recorded to earnings. The derivatives
were terminated in the first quarter of 2009 with a fair value of zero.
19
Table of Contents
In
accordance with the terms of its partnership agreement, MCF made a distribution
of $2.4 million to its partners in April 2010.
14.
Variable
Interest Entity
In
connection with the 2001 Sale and Leaseback Transaction with MCF, the Company
determined that MCF was a variable interest entity. The Company concluded that it is the primary
beneficiary of MCFs activities because substantially all of the operating
assets of MCF are utilized by the Company and the lease payments made by the
Company are the main source of cash available to fund the debt obligations of
MCF. As a result, our consolidated balance
sheet includes the assets and liabilities of MCF. The results of operations of
MCF are reflected in non-controlling interest in our Consolidated Statements of
Income and Comprehensive Income.
15.
Segment
Disclosure
Our
three operating divisions are our reportable segments. The Adult Secure
Services segment consists of the operations of secure adult incarceration
facilities. The Abraxas Youth and Family Services segment consists of providing
residential treatment and educational programs and non-residential
community-based programs to juveniles between the ages of 10 and 18 who have
either been adjudicated or suffer from behavioral problems. The Adult
Community-Based Services segment consists of providing pre-release
and
halfway house programs for adult offenders who are either on probation or
serving the last three to six-months of their sentences on parole and preparing
for re-entry into society at large as well as community-based treatment and
education programs as an alternative to incarceration. All of our customers and
long-lived assets are located in the United States of America. The accounting
policies of our reportable segments are the same as those described in the
summary of significant accounting policies in Note 2 in our 2009 Annual Report
on Form 10-K. Intangible assets are not included in each segments
reportable assets, and the amortization of intangible assets is not included in
the determination of a reportable segments operating income. We evaluate
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, debt service fund, deposits, property and equipment, deferred
taxes, deferred costs and other assets. Corporate and other expense from
operations primarily consists of depreciation and amortization on the corporate
office facilities and equipment and specific general and administrative charges
pertaining to corporate personnel and is presented separately as such charges
cannot be readily identified for allocation to a particular segment.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
61,149
|
|
$
|
59,272
|
|
$
|
119,969
|
|
$
|
116,130
|
|
Abraxas youth
and family services
|
|
24,682
|
|
27,711
|
|
48,156
|
|
53,399
|
|
Adult
community-based services
|
|
18,040
|
|
18,351
|
|
35,752
|
|
35,515
|
|
Total
revenues
|
|
$
|
103,871
|
|
$
|
105,334
|
|
$
|
203,877
|
|
$
|
205,044
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations:
|
|
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
17,528
|
|
$
|
17,493
|
|
$
|
31,030
|
|
$
|
34,608
|
|
Abraxas youth
and family services
|
|
1,125
|
|
3,197
|
|
949
|
|
3,931
|
|
Adult
community-based services
|
|
6,194
|
|
5,864
|
|
11,830
|
|
10,631
|
|
Subtotal
|
|
24,847
|
|
26,554
|
|
43,809
|
|
49,170
|
|
General and
administrative expense
|
|
(8,001
|
)
|
(6,270
|
)
|
(13,760
|
)
|
(12,408
|
)
|
Amortization
of intangibles
|
|
(132
|
)
|
(448
|
)
|
(263
|
)
|
(896
|
)
|
Corporate and
other
|
|
(192
|
)
|
(246
|
)
|
(399
|
)
|
(490
|
)
|
Total income
from operations
|
|
$
|
16,522
|
|
$
|
19,590
|
|
$
|
29,387
|
|
$
|
35,376
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Assets:
|
|
|
|
|
|
Adult secure services
|
|
$
|
373,157
|
|
$
|
356,247
|
|
Abraxas youth
and family services
|
|
100,160
|
|
103,276
|
|
Adult
community-based services
|
|
61,722
|
|
62,251
|
|
Intangible
assets, net
|
|
14,230
|
|
14,498
|
|
Corporate and
other
|
|
104,286
|
|
114,298
|
|
Total assets
|
|
$
|
653,555
|
|
$
|
650.565
|
|
20
Table of
Contents
16.
Guarantor Disclosures
We completed an offering of $112.0
million of Senior Notes in June 2004. The Senior Notes are guaranteed by
each of our 100% owned subsidiaries (Guarantor Subsidiaries). MCF does not
guarantee the Senior Notes (Non-Guarantor Subsidiary). These guarantees are
full and unconditional and are joint and several obligations of the Guarantor
Subsidiaries. The following condensed consolidating financial information
presents the financial condition, results of operations and cash flows for the
Parent, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary, together
with the consolidating adjustments necessary to present our results on a
consolidated basis.
Condensed Consolidating Balance Sheet as of
June 30, 2010 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
15,991
|
|
$
|
170
|
|
$
|
3
|
|
$
|
|
|
$
|
16,164
|
|
Accounts
receivable
|
|
1,954
|
|
64,529
|
|
70
|
|
|
|
66,553
|
|
Restricted
assets
|
|
|
|
4,300
|
|
24,741
|
|
|
|
29,041
|
|
Prepaids and
other
|
|
16,149
|
|
1,565
|
|
45
|
|
|
|
17,759
|
|
Total current
assets
|
|
34,094
|
|
70,564
|
|
24,859
|
|
|
|
129,517
|
|
Property and
equipment, net
|
|
178
|
|
328,861
|
|
136,959
|
|
(5,577
|
)
|
460,421
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
assets
|
|
|
|
|
|
33,270
|
|
|
|
33,270
|
|
Deferred
costs and other
|
|
69,849
|
|
23,091
|
|
4,470
|
|
(67,063
|
)
|
30,347
|
|
Investment in
subsidiaries
|
|
105,024
|
|
1,856
|
|
|
|
(106,880
|
)
|
|
|
Total assets
|
|
$
|
209,145
|
|
$
|
424,372
|
|
$
|
199,558
|
|
$
|
(179,520
|
)
|
$
|
653,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
41,197
|
|
$
|
14,489
|
|
$
|
4,361
|
|
$
|
803
|
|
$
|
60,850
|
|
Current
portion of long-term debt
|
|
|
|
8
|
|
13,400
|
|
|
|
13,408
|
|
Total current
liabilities
|
|
41,197
|
|
14,497
|
|
17,761
|
|
803
|
|
74,258
|
|
Long-term
debt, net of current portion
|
|
179,032
|
|
|
|
108,300
|
|
|
|
287,332
|
|
Deferred tax
liabilities
|
|
23,585
|
|
94
|
|
|
|
2,563
|
|
26,242
|
|
Other
long-term liabilities
|
|
5,881
|
|
9
|
|
67,339
|
|
(71,104
|
)
|
2,125
|
|
Intercompany
|
|
(304,148
|
)
|
305,310
|
|
|
|
(1,162
|
)
|
|
|
Total liabilities
|
|
(54,453
|
)
|
319,910
|
|
193,400
|
|
(68,900
|
)
|
389,957
|
|
Total Cornell Companies, Inc.
stockholders equity
|
|
262,490
|
|
104,462
|
|
6,158
|
|
(110,620
|
)
|
262,490
|
|
Non-controlling interest
|
|
1,108
|
|
|
|
|
|
|
|
1,108
|
|
Total equity
|
|
263,598
|
|
104,462
|
|
6,158
|
|
(110,620
|
)
|
263,598
|
|
Total liabilities and equity
|
|
$
|
209,145
|
|
$
|
424,372
|
|
$
|
199,558
|
|
$
|
(179,520
|
)
|
$
|
653,555
|
|
21
Table
of Contents
Condensed Consolidating Balance Sheet as of December 31, 2009 (in
thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,386
|
|
$
|
317
|
|
$
|
21
|
|
$
|
|
|
$
|
27,724
|
|
Accounts receivable
|
|
1,471
|
|
59,561
|
|
51
|
|
|
|
61,083
|
|
Restricted assets
|
|
|
|
3,831
|
|
26,147
|
|
|
|
29,978
|
|
Prepaids and other
|
|
20,024
|
|
1,466
|
|
|
|
|
|
21,490
|
|
Total current assets
|
|
48,881
|
|
65,175
|
|
26,219
|
|
|
|
140,275
|
|
Property and equipment, net
|
|
7
|
|
322,396
|
|
138,719
|
|
(5,599
|
)
|
455,523
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted assets
|
|
|
|
|
|
27,017
|
|
|
|
27,017
|
|
Deferred costs and other
|
|
66,623
|
|
20,029
|
|
4,758
|
|
(63,660
|
)
|
27,750
|
|
Investments in subsidiaries
|
|
98,003
|
|
1,856
|
|
|
|
(99,859
|
)
|
|
|
Total assets
|
|
$
|
213,514
|
|
$
|
409,456
|
|
$
|
196,713
|
|
$
|
(169,118
|
)
|
$
|
650,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
42,192
|
|
$
|
15,725
|
|
$
|
4,370
|
|
$
|
|
|
$
|
62,287
|
|
Current portion of long-term debt
|
|
|
|
13
|
|
13,400
|
|
|
|
13,413
|
|
Total current liabilities
|
|
42,192
|
|
15,738
|
|
17,770
|
|
|
|
75,700
|
|
Long-term debt, net of current portion
|
|
181,540
|
|
1
|
|
108,300
|
|
|
|
289,841
|
|
Deferred tax liabilities
|
|
21,710
|
|
94
|
|
|
|
2,651
|
|
24,455
|
|
Other long-term liabilities
|
|
5,766
|
|
|
|
63,750
|
|
(67,685
|
)
|
1,831
|
|
Intercompany
|
|
(296,432
|
)
|
297,594
|
|
|
|
(1,162
|
)
|
|
|
Total liabilities
|
|
(45,224
|
)
|
313,427
|
|
189,820
|
|
(66,196
|
)
|
391,827
|
|
Total Cornell Companies, Inc. stockholders
equity
|
|
256,346
|
|
96,029
|
|
6,893
|
|
(102,922
|
)
|
256,346
|
|
Non-controlling interest
|
|
2,392
|
|
|
|
|
|
|
|
2,392
|
|
Total equity
|
|
258,738
|
|
96,029
|
|
6,893
|
|
(102,922
|
)
|
258,738
|
|
Total liabilities and equity
|
|
$
|
213,514
|
|
$
|
409,456
|
|
$
|
196,713
|
|
$
|
(169,118
|
)
|
$
|
650,565
|
|
22
Table of
Contents
Condensed Consolidating Statement of Operations for the three
months ended June 30, 2010 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,502
|
|
$
|
118,937
|
|
$
|
4,502
|
|
$
|
(24,070
|
)
|
$
|
103,871
|
|
Operating
expenses, excluding depreciation and amortization
|
|
4,662
|
|
94,068
|
|
47
|
|
(23,984
|
)
|
74,793
|
|
Depreciation
and amortization
|
|
|
|
3,686
|
|
881
|
|
(12
|
)
|
4,555
|
|
General and
administrative expenses
|
|
7,982
|
|
|
|
19
|
|
|
|
8,001
|
|
Income (loss)
from operations
|
|
(8,142
|
)
|
21,183
|
|
3,555
|
|
(74
|
)
|
16,522
|
|
Overhead
allocations
|
|
(12,577
|
)
|
12,577
|
|
|
|
|
|
|
|
Interest, net
|
|
167
|
|
3,505
|
|
2,690
|
|
(202
|
)
|
6,160
|
|
Equity
earnings in subsidiaries
|
|
5,102
|
|
|
|
|
|
(5,102
|
)
|
|
|
Income before
provision for income taxes
|
|
9,370
|
|
5,101
|
|
865
|
|
(4,974
|
)
|
10,362
|
|
Provision for
income taxes
|
|
4,240
|
|
|
|
|
|
406
|
|
4,646
|
|
Net income
|
|
5,130
|
|
5,101
|
|
865
|
|
(5,380
|
)
|
5,716
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
586
|
|
586
|
|
Income
available to Cornell Companies, Inc.
|
|
$
|
5,130
|
|
$
|
5,101
|
|
$
|
865
|
|
$
|
(5,966
|
)
|
$
|
5,130
|
|
23
Table of
Contents
Condensed Consolidating Statement of Operations for
the three months ended June 30, 2009 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,502
|
|
$
|
117,983
|
|
$
|
4,502
|
|
$
|
(21,653
|
)
|
$
|
105,334
|
|
Operating
expenses, excluding depreciation and amortization
|
|
6,211
|
|
89,972
|
|
111
|
|
(21,560
|
)
|
74,734
|
|
Depreciation
and amortization
|
|
|
|
3,856
|
|
880
|
|
4
|
|
4,740
|
|
General and
administrative expenses
|
|
6,251
|
|
|
|
19
|
|
|
|
6,270
|
|
Income (loss)
from operations
|
|
(7,960
|
)
|
24,155
|
|
3,492
|
|
(97
|
)
|
19,590
|
|
Overhead
allocations
|
|
(11,221
|
)
|
11,221
|
|
|
|
|
|
|
|
Interest, net
|
|
(1,818
|
)
|
5,674
|
|
2,938
|
|
(218
|
)
|
6,576
|
|
Equity
earnings in subsidiaries
|
|
7,260
|
|
|
|
|
|
(7,260
|
)
|
|
|
Income before
provision for income taxes
|
|
12,339
|
|
7,260
|
|
554
|
|
(7,139
|
)
|
13,014
|
|
Provision for
income taxes
|
|
5,109
|
|
|
|
|
|
277
|
|
5,386
|
|
Net income
|
|
7,230
|
|
7,260
|
|
554
|
|
(7,416
|
)
|
7,628
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
398
|
|
398
|
|
Income
available to Cornel Companies, Inc.
|
|
$
|
7,230
|
|
$
|
7,260
|
|
$
|
554
|
|
$
|
(7,814
|
)
|
$
|
7,230
|
|
24
Table of
Contents
Condensed Consolidating Statement of Operations for the six
months ended June 30, 2010 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,004
|
|
$
|
234,086
|
|
$
|
9,004
|
|
$
|
(48,217
|
)
|
$
|
203,877
|
|
Operating
expenses, excluding depreciation and amortization
|
|
8,703
|
|
190,727
|
|
92
|
|
(48,046
|
)
|
151,476
|
|
Depreciation
and amortization
|
|
|
|
7,516
|
|
1,761
|
|
(23
|
)
|
9,254
|
|
General and
administrative expenses
|
|
13,722
|
|
|
|
38
|
|
|
|
13,760
|
|
Income (loss)
from operations
|
|
(13,421
|
)
|
35,843
|
|
7,113
|
|
(148
|
)
|
29,387
|
|
Overhead
allocations
|
|
(20,405
|
)
|
20,405
|
|
|
|
|
|
|
|
Interest, net
|
|
333
|
|
7,005
|
|
5,410
|
|
(402
|
)
|
12,346
|
|
Equity
earnings in subsidiaries
|
|
8,433
|
|
|
|
|
|
(8,433
|
)
|
|
|
Income before
provision for income taxes
|
|
15,084
|
|
8,433
|
|
1,703
|
|
(8,179
|
)
|
17,041
|
|
Provision for
income taxes
|
|
6,675
|
|
|
|
|
|
802
|
|
7,477
|
|
Net income
|
|
8,409
|
|
8,433
|
|
1,703
|
|
(8,981
|
)
|
9,564
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
1,155
|
|
1,155
|
|
Income
available to Cornell Companies, Inc.
|
|
$
|
8,409
|
|
$
|
8,433
|
|
$
|
1,703
|
|
$
|
(10,136
|
)
|
$
|
8,409
|
|
25
Table of
Contents
Condensed Consolidating Statement of Operations for
the six months ended June 30, 2009 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,004
|
|
$
|
235,803
|
|
$
|
9,004
|
|
$
|
(48,767
|
)
|
$
|
205,044
|
|
Operating
expenses, excluding depreciation and amortization
|
|
10,350
|
|
185,711
|
|
153
|
|
(48,587
|
)
|
147,627
|
|
Depreciation
and amortization
|
|
|
|
7,862
|
|
1,761
|
|
10
|
|
9,633
|
|
General and
administrative expenses
|
|
12,370
|
|
|
|
38
|
|
|
|
12,408
|
|
Income (loss)
from operations
|
|
(13,716
|
)
|
42,230
|
|
7,052
|
|
(190
|
)
|
35,376
|
|
Overhead
allocations
|
|
(19,598
|
)
|
19,598
|
|
|
|
|
|
|
|
Interest, net
|
|
136
|
|
7,011
|
|
5,820
|
|
(438
|
)
|
12,529
|
|
Equity
earnings in subsidiaries
|
|
15,621
|
|
|
|
|
|
(15,621
|
)
|
|
|
Income before
provision for income taxes
|
|
21,367
|
|
15,621
|
|
1,232
|
|
(15,373
|
)
|
22,847
|
|
Provision for
income taxes
|
|
8,880
|
|
|
|
|
|
607
|
|
9,487
|
|
Net income
|
|
12,487
|
|
15,621
|
|
1,232
|
|
(15,980
|
)
|
13,360
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
873
|
|
873
|
|
Income
available to Cornell Companies, Inc.
|
|
$
|
12,487
|
|
$
|
15,621
|
|
$
|
1,232
|
|
$
|
(16,853
|
)
|
$
|
12,487
|
|
26
Table of
Contents
Condensed Consolidating Statement of Cash Flows for the six
months ended June 30, 2010 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating activities
|
|
$
|
(6,795
|
)
|
$
|
12,518
|
|
$
|
1,014
|
|
$
|
6,737
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
(13,200
|
)
|
|
|
(13,200
|
)
|
Proceeds from
the sale of fixed assets
|
|
|
|
541
|
|
|
|
541
|
|
Proceeds from
restricted debt payment account, net
|
|
|
|
|
|
1,407
|
|
1,407
|
|
Net cash used
in investing activities
|
|
$
|
|
|
$
|
(12,659
|
)
|
$
|
1,407
|
|
$
|
(11,252
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments of
line of credit
|
|
(2,600
|
)
|
|
|
|
|
(2,600
|
)
|
Purchase and
retirement of common stock
|
|
(3,000
|
)
|
|
|
|
|
(3,000
|
)
|
Distribution
to MCF partners
|
|
|
|
|
|
(2,439
|
)
|
(2,439
|
)
|
Tax benefit
of stock option exercises
|
|
89
|
|
|
|
|
|
89
|
|
Payments on
capital lease obligations
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Proceeds from
exercise of stock options
|
|
911
|
|
|
|
|
|
911
|
|
Net cash used
in financing activities
|
|
(4,600
|
)
|
(6
|
)
|
(2,439
|
)
|
(7,045
|
)
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(11,395
|
)
|
(147
|
)
|
(18
|
)
|
(11,560
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
27,386
|
|
317
|
|
21
|
|
27,724
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
15,991
|
|
$
|
170
|
|
$
|
3
|
|
$
|
16,164
|
|
27
Table of
Contents
Condensed Consolidating Statement of Cash Flows for the six
months ended June 30, 2009 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
$
|
3,798
|
|
$
|
7,727
|
|
$
|
6,753
|
|
$
|
18,278
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
(9,493
|
)
|
|
|
(9,493
|
)
|
Proceeds from
the sale/disposals of property and equipment
|
|
|
|
1,688
|
|
|
|
1,688
|
|
Payments to
restricted debt payment account, net
|
|
|
|
|
|
(6,780
|
)
|
(6,780
|
)
|
Net cash used
in investing activities
|
|
$
|
|
|
$
|
(7,805
|
)
|
$
|
(6,780
|
)
|
$
|
(14,585
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from
line of credit
|
|
2,000
|
|
|
|
|
|
2,000
|
|
Payments of
line of credit
|
|
(4,000
|
)
|
|
|
|
|
(4,000
|
)
|
Payments on
capital lease obligations
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Proceeds from
exercise of stock options
|
|
321
|
|
|
|
|
|
321
|
|
Net cash used
in financing activities
|
|
(1,679
|
)
|
(7
|
)
|
|
|
(1,686
|
)
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
2,119
|
|
(85
|
)
|
(27
|
)
|
2,007
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
14,291
|
|
265
|
|
57
|
|
14,613
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,410
|
|
$
|
180
|
|
$
|
30
|
|
$
|
16,620
|
|
28
Table of Contents
ITEM 2.
Managements
Discussion and Analysis of Financial Condition and Results of Operations
General
Cornell
Companies, Inc. is a leading provider of correctional, detention,
educational, rehabilitation and treatment services outsourced by federal,
state, county and local government agencies. We provide a diversified portfolio
of services for adults and juveniles through our three operating divisions:
(1) Adult Secure Services; (2) Abraxas Youth and Family Services and
(3) Adult Community-Based Services. At June 30, 2010, we operated 62
facilities with a total service capacity of 20,259 and had six facilities with
a combined service capacity of 1,133 beds that were vacant. Our facilities are
located in 15 states and the District of Columbia.
The
following table sets forth for the periods indicated total residential service
capacity and contracted beds in operation at the end of the periods shown,
average contract occupancy percentages and total non-residential service
capacity.
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
Residential
|
|
|
|
|
|
Service
capacity (1)
|
|
19,284
|
|
18,334
|
|
Contracted
beds in operation (end of period) (2)
|
|
17,639
|
|
17,480
|
|
Average
contract occupancy based on contracted beds in operation (3) (4)
|
|
86.9
|
%
|
92.2
|
%
|
Non-Residential
|
|
|
|
|
|
Service
capacity (5)
|
|
2,108
|
|
2,558
|
|
(1)
Residential service capacity is comprised of the
number of beds currently available for service in our residential facilities.
(2)
At certain residential facilities, the contracted
capacity is lower than the facilitys service capacity. We could increase a facilitys contracted
capacity by obtaining additional contracts or by renegotiating existing
contracts to increase the number of beds covered. However, we may not be able to obtain
contracts that provide occupancy levels at a facilitys service capacity or be
able to maintain current contracted capacities in future periods.
(3)
Occupancy percentages reflect less than normalized
occupancy during the start-up phase of any applicable facility, resulting in a
lower average occupancy in periods when we have substantial start-up
activities.
(4)
Average contract occupancy percentages are
calculated based on actual occupancy for the period as a percentage of the
contracted capacity for residential facilities in operation. These percentages do not reflect the
operations of non-residential community-based programs. At certain residential facilities, our
contracted capacity is lower than the facilitys service capacity. Additionally, certain facilities have and are
currently operating above the contracted capacity. As a result, average contract occupancy
percentages can exceed 100% if the average actual occupancy exceeded contracted
capacity.
(5)
Service capacity for non-residential programs is
based on either contractual terms or an estimate of the number of clients to be
served. We update these estimates at
least annually based on the programs budget and other factors.
During
the six months ended June 30, 2010, we initiated the transition plan at our D.
Ray James Prison from our current customer, the Georgia Department of
Corrections (GADOC), to the Federal Bureau of Prisons (BOP) (anticipated to
take through the fourth quarter of 2010). This will include the ramp-down of
the current GADOC population, preparation of the facility for the BOP and subsequent
ramp-up of the BOP population. In the six months ended June 30, 2010, revenues
included approximately $2.7 million due to a contract-based revenue adjustment
resulting from the guaranteed population contract at the Regional Correctional
Center for the contract years March 26, 2007 through March 25, 2008 and March
26, 2008 through March 25, 2009.
Although
we believe we will continue to see steady, long-term demand across our various
business segments and customer base (federal, state and local), we are
monitoring the continuation of the negative/stagnant economic trends (which
began in 2008) and the related impact on government budget plans and the effect
tightened spending plans could have on our business (with respect to possible
areas including current utilization and per diem rates, among others) in the
near and short-term. We expect a key
area of focus for our performance in 2010 to include the transition of the
customer at our D. Ray James Prison from GADOC to the BOP (by the fourth
quarter of 2010). As noted, this will
include the ramp-down of the current GADOC population, preparation of the
facility for the BOP and subsequent ramp-up of the BOP population.
29
Table of
Contents
We
also plan to remain focused on our operating margins, on increasing utilization
(particularly in the Abraxas Youth and Family Services division and in our
Adult Secure division) and improving customer mix as we believe those
initiatives are the key elements of our financial performance.
Management Overview
Demand
.
Our business is driven generally by demand for incarceration or
treatment services, and specifically by demand for private incarceration or
treatment services, within our three primary business segments: Adult Secure
Services; Abraxas Youth and Family Services; and Adult Community-Based
Services. The demand for adult and juvenile corrections and treatment services
has generally increased at a steady rate over the past ten years, largely as a
result of increasing sentence terms and/or mandatory sentences for criminals
and as well a greater range of criminal acts, increasing demand for
incarceration of illegal aliens and a public recognition of the need to provide
services to juveniles that will improve the possibility that they will lead
productive lives. Moreover, demand for our services is also affected by the
amount of available capacity in the government systems to enable governments to
provide the services themselves, as well as desire and ability of these systems
to add additional capacity. Furthermore,
as a result of, among other things, recent economic developments, federal,
state and local governments have encountered, and may continue to encounter,
unusual budgetary constraints. As a result, a number of state and local
governments are under pressure to control additional spending or reduce current
levels of spending which could limit or eliminate appropriations for the
facilities that we operate, and thus reduce the near term demand for our
services.
In addition, the balance between
community-based corrections treatment of adults as an alternative to
traditional incarceration continues to be analyzed by many political and societal
parties. Among other things, we monitor
federal, state and industry communications and statistics relative to trends in
prison populations, juvenile justice statistics and initiatives, and
developments in alternatives to traditional incarceration or detention of
adults for opportunities to expand our scope or delivery of services.
The federal government contracts with
private providers for the incarceration of adults, whether they are serving
prison sentences, detained as illegal aliens, detained in anticipation of
pending judicial administration or transitioning from prison to society. Chief among the federal agencies which use
private providers are the Federal Bureau of Prisons (BOP), U.S. Immigration
and Customs Enforcement (ICE) and United States Marshalls Service (USMS).
We provide adult secure and adult community-based services to the federal
government. Most of the federal involvement in juvenile administration in the
federal system is handled via Medicare and Medicaid assistance to state governments.
Although there are circumstances in which we may contract with a federal agency
on a sole source basis, the primary means by which we secure a contract with a
federal agency is via the RFP bidding process.
From time to time, we contract to provide management services to a local
governmental unit who then bids on a federal contract.
States and smaller governmental units
remain divided on the issue of private prisons and private provision of
juvenile and community-based programs, although a majority of states permit
private provision for our services. We
anticipate that increasing budget pressure on states and smaller governmental
units may cause more states and smaller governmental units to consider future
utilization of private providers such as us to provide these services on a more
economical basis. We believe capital budget constraints among prison agencies
may encourage them to explore outsourcing to private operators as a future
alternative to deploying their own capital for prison construction or major
refurbishment. Although it varies from governmental unit to governmental unit,
the primary political forces who typically oppose privatization of prisons are
organized labor and religious groups.
Private juvenile and community-based
programs are utilized by states and local governmental units and are organized
on a profit and not-for-profit basis. We
monitor opportunities in these segments via our corporate and business division
development officers. Many opportunities
are not published in any manner and, accordingly, we believe that taking the
initiative at the state and local levels is key in developing sole source
opportunities.
Performance
.
We track a number of factors as we monitor
financial performance. Chief among them
are:
·
capacity (the number of beds
within each business segments facilities),
·
occupancy (utilization),
·
per diem reimbursement
rates,
·
revenues,
·
operating margins, and
·
operating expenses.
30
Table of
Contents
Capacity.
Capacity,
commonly expressed in terms of number of beds, is primarily impacted by the
number and size of the facilities we own or lease and the facilities we operate
on behalf of a third party owner or lessee.
We view capacity as one of the measures of our development efforts,
through which we may increase capacity by adding new projects or by expanding
existing projects (as we have done in 2007 through 2009 at several of our
facilities including Great Plains Correctional Facility, D. Ray James Prison
and the Hudson Correctional Facility).
As part of the evaluation of our development efforts, we will assess
(a) whether a given development project was brought into service in
accordance with our expectation as to time and expense; and (b) the number
of projects in development or under consideration at the relevant point in
time. In addition to the focus on new
projects, capacity will reflect our success in renewing and maintaining
existing contracts and facilities. It
will also reflect any closure of programs or facilities due to underutilization
or failure to earn an adequate risk-adjusted rate of return. We must also be cognizant of the possibility
that state or local budgetary limitations may cause the contractual commitment
to a given facility to be reduced or even eliminated, which would require us to
either secure an alternate customer or close the operation.
Occupancy.
Occupancy is typically expressed in terms of percentage of
contract capacity utilized. We look at
occupancy to assess the efficacy of both our efforts to market our facilities
and our efforts to retain existing customers or contracts. Because revenue varies directly with
occupancy, occupancy is a principal driver of our revenues. Our industry
experiences significant economies of scale, whereby as occupancy rises,
operating costs per resident decline. Some of our contracts are take-or-pay,
meaning that the agency making use of the facility is obligated to pay for beds
even though they are not used.
Historically, occupancy percentages in many of our facilities have been
high and we are mindful of the need to maintain such occupancy levels. As new development projects are brought into
service, occupancy percentages may decline until the projects reach full
utilization (as, for example, with the activation of the 1,100 bed expansion at
Great Plains Correctional Facility during the fourth quarter of 2008, the 700
bed expansion at D. Ray James Prison during the second quarter of 2009 and the
1,250 bed Hudson Correctional Facility during the fourth quarter of 2009).
Where we have commitments for utilization before the commencement of
operations, occupancy percentages reflect the speed at which a facility
achieves full service/implementation. However, we may decide to undertake
development projects without written commitments to make full use of a
facility. In these instances, we have performed our own assessment, based on
discussions with local government or other potential customer representatives
and analysis of other factors, of the demand for services at the facility. There is no assurance that we would recover
our initial investment in these projects.
We will monitor occupancy as a measure of the accuracy of our estimation
of the demand for the services of a development facility, and will incorporate
this information in future assessments of potential projects. In addition, the ramp phase for our youth
facilities is typically longer than that experienced in our adult facilities,
which will impact our occupancy in the Abraxas Youth and Family Services
division in a given period.
Per Diem Reimbursement Rates.
Per
diem reimbursement rates are another key element of our gross revenue and
operating margin since per diem contracts represent a majority of our revenues
(approximately 57.7% and 58.5% for the three and six months ended June 30,
2010, respectively). Per diem rates are
a function of negotiation between management and a governmental unit at the
inception of a contract or through the bidding process. Actual per diem rates vary dramatically
across our business segments, and within each business segment, depending upon
the particular service or program provided. The initial per diem rates often change
during the term of a contract in accordance with a schedule. The amount of the change can be a fixed
amount set forth within the contract, an amount determined by formulas set
forth within the contract or an amount determined by negotiations between
management and the governmental unit (often these negotiations are along the
same lines as the original per diem negotiation a review of expenses and
approval of an amount to recompense for expenses and assure the potential of an
operating profit). In recent years, as
budgetary pressures on governmental units have increased, some of our customers
have negotiated relief from formulaic increase provisions within their
agreements or have declined to include in their appropriation legislation
amounts that would increase the per diem rates payable under the contract.
Based on the economic turmoil which began in the second half of 2008, we are
expecting such pressures to continue in 2010 for many of our customers. In
similar prior situations we have attempted to mitigate the impact of these
developments by negotiating services provided, obtaining commitments for
increased volume and other measures.
Customers may choose to reduce per diem rates through the reduction of
services we may provide. We may also choose to consider terminating an existing
relationship at a given facility and replacing it with a new customer (as was
done with our Great Plains Correctional Facility in 2007 and as we are in the
process of doing with our D. Ray James Prison in 2010).
Revenues.
We derive
substantially all of our revenues from providing adult corrections and
treatment and juvenile justice, educational and treatment services outsourced
by federal, state and local government agencies in the United States. Revenues
for our services are generally recognized on a per diem rate based upon the
number of occupant days or hours served for the period, on a guaranteed
take-or-pay basis or on a cost-plus reimbursement basis. For the three months
ended June 30, 2010, our revenue base consisted of 57.7% for services provided
under per diem contracts, 37.6% for services provided under take-or-pay and
management contracts, 3.1% for services provided under cost-plus reimbursement
contracts and 1.6% for services provided under fee-for-service contracts. For
the three months ended June 30, 2009, our revenue base consisted of 62.0%
for services provided under per diem contracts, 32.5% for services provided
under take-or-pay and management contracts, 3.6% for services provided under
cost-plus reimbursement contracts, 1.8% for services provided under
fee-for-service contracts and 0.1% from other miscellaneous sources. For the six months ended June 30, 2010,
our revenue base consisted of 58.5% for services provided under per diem
contracts, 36.6% for
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services
provided under take-or-pay and management contracts, 3.3% for services provided
under cost-plus reimbursement contracts and 1.6% for services provided under
fee-for-service contracts. For the six months ended June 30, 2009 our
revenue base consisted of 61.8% for services provided under per diem contracts,
32.8% for services provided under take-or-pay and management contracts, 3.5%
for services provided under cost-plus reimbursement contracts, 1.8% for
services provided under fee-for-service contracts and 0.1% from other
miscellaneous sources. The increase in the services provided under take or pay
and management contracts for the three and six months ending June 30, 2010 was
principally due to the inclusion of approximately $2.7 million from a contract-based
revenue adjustment resulting from the guaranteed population contract at the
Regional Correctional Center for the contract years March 26, 2007 through
March 25, 2008 and March 26, 2008 through March 25, 2009.
Revenues can fluctuate from
period to period due to changes in government funding policies, changes in the
number or types of clients referred to our facilities by governmental agencies,
changes in the types of services delivered to our customers, the opening of new
facilities or the expansion of existing facilities and the termination of
contracts for a facility or the closure (or temporary program consolidation) of
a facility.
Factors considered in determining billing
rates to charge include: (1) the programs specified by the contract and
the related staffing levels; (2) wage levels customary in the respective
geographic areas; (3) whether the proposed facility is to be leased or
purchased; and (4) the anticipated average occupancy levels that could
reasonably be expected to be maintained and the duration of time required to
reach such occupancy levels.
Revenues-Adult Secure Services.
Revenues
for our Adult Secure Services division are primarily generated from per diem,
take-or-pay and management contracts.
For the three months ended June 30, 2010 and 2009, we realized
average per diem rates on our adult secure facilities of approximately $56.61
and $55.28, respectively. The average per diem rates for the three and six
months ended June 30, 2010 exclude the contract-based revenue adjustment
recognized of approximately $2.7 million pertaining to the RCC. For the six months ended June 30, 2010
and 2009, we realized average per diem rates of approximately $56.12 and
$54.52, respectively. The 2010 average
per diem rate benefited from the activation of our Hudson Correctional Facility
during the fourth quarter of 2009. We
periodically have experienced pressure from contracting governmental agencies
to limit or even reduce per diem rates. Many of these governmental entities are
under severe budget pressures and we anticipate that governmental agencies may
periodically approach us in 2010 about per diem rate concessions (or decline to
provide funding for contractual rate increases). Decreases in, or the lack of anticipated
increases in, per diem rates could adversely impact our operating margin.
Revenues-Abraxas Youth and Family Services.
Revenues
for our Abraxas Youth and Family Services division are primarily generated from
per diem, fee-for-service and cost-plus reimbursement contracts. For the three months ended June 30, 2010
and 2009, we realized average per diem rates on our residential youth and
family services facilities of approximately $194.97 and $194.53,
respectively. For the six months ended
June 30, 2010 and 2009, we realized average per diem rates of
approximately $194.82 and $195.96, respectively. For the three months ended June 30, 2010
and 2009, we realized average fee-for-service rates for our non-residential
community-based Abraxas Youth and Family Services facilities and programs,
including rates that are limited by Medicaid and other private insurance
providers, of approximately $46.15 and $45.17, respectively. For the six months
ended June 30, 2010 and 2009, we realized average fee for service rates of
approximately $47.28 and $45.12, respectively.
The changes in the average fee-for-service rates for are due to changes
in the mix of services provided at our non-residential facilities. The majority
of our Abraxas Youth and Family Services contracts renew annually.
Revenues-Adult Community-Based Services.
Revenues
for our Adult Community-Based Services division are primarily generated from
per diem and fee-for-service contracts. For the three months ended
June 30, 2010 and 2009, we realized average per diem rates on our
residential adult community-based facilities of approximately $71.35 and
$66.85, respectively. For the six months ended June 30, 2010 and 2009, we
realized average per diem rates on our residential Adult Community-Based
Services facilities of approximately $70.82 and $67.05, respectively. For the three months ended June 30, 2010
and 2009, we realized average fee-for-service rates on our non-residential
Adult Community-Based Services facilities and programs of approximately $10.05
and $10.35, respectively. For the six
months ended June 30, 2010 and 2009, we realized average fee-for-service
rates on our non-residential Adult Community-Based Services facilities and
programs of approximately $9.72 and $9.64, respectively. Our average fee-for-service rates fluctuate
from period to period principally due to changes in the mix of services
provided by our various Adult Community-Based Services programs and facilities.
Operating Margins.
We have
historically experienced higher operating margins in our Adult Secure Services
and Adult Community-Based Services divisions as compared to our Abraxas Youth
and Family Services division. Our operating margin, in a given period, will be
impacted by both utilization at active facilities as well as by those
facilities which may either be dormant or have been reactivated (or
deactivated) during the period. As previously discussed, we have expanded
several of our Adult Secure facilities (D. Ray James Prison, Great Plains
Correctional Facility and Walnut Grove Youth Correctional Facility, for
example), which provides the opportunity to leverage existing infrastructure. Operating margins will generally decline
during a customer transition phase as the original inmate population ramps
down, the facility is prepared, and the new customer population is received. We
would expect to
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experience
such an impact on our Adult Secure Services margins from our D. Ray James
Prison in 2010 due to its ongoing customer transition. Additionally, our operating margins within a
division can vary from facility to facility based on whether a facility is
owned or leased, the level of competition for the contract award, the proposed
length of the contract, the mix of services provided, the occupancy levels for
a facility, the level of capital commitment required with respect to a
facility, the anticipated changes in operating costs over the term of the
contract and our ability to increase a facilitys contract revenue.
Under
take-or-pay contracts, such as the contract at the Moshannon Valley
Correctional Center, operating margins are typically higher during the early
stages of the contract as the facilitys population ramps up (as revenues are
received at contract percentages regardless of actual occupancy). As the variable
costs (primarily resident-related and certain facility costs) increase with the
growth in population, operating margins will generally decline to a stabilized
level. Such an impact is anticipated at our D. Ray James Prison upon the
activation of its transition to the BOP (under its take-or-pay contract) in the
fourth quarter of 2010. A decline in
occupancy at our Abraxas Youth and Family Services facilities can have a more
significant impact on operating margins than our Adult Secure Services division
due to the longer periods typically required to ramp resident population at a
youth facility.
We have experienced and expect to
continue to experience interim period operating margin fluctuations due to
factors such as the number of calendar days in the period, higher payroll taxes
(generally in the first half of the year) and salary and wage increases and
insurance cost increases that are incurred prior to certain contract rate
increases. Periodically, many of the governmental agencies with whom we contract
may experience budgetary pressures and may approach us to limit or reduce per
diem rates (including contractual price increases as well). We experienced such
behavior in 2009 and we anticipate such customer behavior will continue in
2010. Decreases in, or the lack of anticipated increases in, per diem rates
could adversely impact our operating margin. Additionally, a decrease in per
diem rates without a corresponding decrease in operating expenses could also
adversely impact our operating margin.
Furthermore, our margins may be negatively impacted during a customer
transition at a facility due to required population ramp patterns and timing as
we change customers.
Operating Expenses.
We track several different areas
of our operating expenses. Foremost
among these expenses are employee compensation and benefits and expenses, risk
related areas such as general liability, medical and workers compensation,
client/inmate costs such as food, clothing, medical and programming costs,
financing costs and administrative overhead expenses. Increases or decreases in
one or more of these expenses, such as our experience with rising insurance
costs, can have a material effect on our financial performance. Operating expenses are also impacted by
decisions to close or terminate a particular program or facility. Such decisions are based on our assessments
of operating results, operating efficiency and risk-adjusted returns and are an
ongoing part of our portfolio management.
In addition, decisions to restructure employee positions will typically
increase period costs initially (at the time of such actions), but generally
reduce post-restructuring expense levels.
We are responsible for all facility
operating costs, except for certain debt service and interest or lease payments
for facilities where we have a management contract only. At these facilities,
the facility owner is responsible for all debt service and interest or lease
payments related to the facility. We are responsible for all other operating
expenses at these facilities. We operated 11 and 14 facilities under management
contracts at June 30, 2010 and 2009, respectively. Included in the 11
facilities under management contracts at June 30, 2010 were the Walnut
Grove Youth Correctional Facility and the eight Los Angeles County Jails, which
represented 1,714 beds of service capacity, or approximately 96.5%, of the
residential service capacity represented by management contracts.
A majority of our facility operating
costs consists of fixed costs. These fixed costs include lease and rental
expense, insurance, utilities and depreciation.
As a result, when we commence operation of new or expanded facilities,
fixed operating costs may increase. The amount of our variable operating costs,
including food, medical services, supplies and clothing, depend on occupancy
levels at the facilities. Our largest single operating cost, facility payroll
expense and related employment taxes and expenses, has both a fixed and a
variable component. We can adjust a facilitys staffing levels and the related
payroll expense to a certain extent based on occupancy at a facility; however a
minimum fixed number of employees are required to operate and maintain any
facility regardless of occupancy levels. Personnel costs are subject to increases
in tightening labor markets based on local economic environments and other
conditions.
We incur pre-opening and start-up
expenses including payroll, benefits, training and other operating costs prior
to opening a new or expanded facility (including customer transitions) and
during the period of operation while occupancy is ramping up. These costs vary
by contract (and the pace/scale of the activation and related population ramp).
We incurred such costs at our Hudson Correctional Facility in conjunction with
its activation during the fourth quarter of 2009 and would also expect to incur
similar costs in conjunction with the planned customer transition at our D. Ray
James Prison in the second half of 2010.
Since pre-opening and start-up costs are generally factored into the
revenue per diem rate that is charged to the contracting agency, we typically
expect to recover these upfront costs over the life of the contract. Because
occupancy rates during a facilitys start-up phase typically result in capacity
under-utilization for at least 90 to 180 days, we may incur additional
post-opening start-up costs. We do not
anticipate post-opening start-up costs at any adult secure facilities operated
under any future contracts with the BOP which are take-or-pay contracts,
meaning that the
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BOP will pay a certain percentage of the
contractual monthly revenue once the facility opens, regardless of actual
occupancy (with an adjusted percentage level (up to 90%) as the population
achieves certain thresholds). This should be the case when the transition
ramp-up of BOP inmates at D. Ray James Prison begins in the fourth quarter of
2010.
Newly
opened (or reactivated) facilities are staffed according to applicable
regulatory or contractual requirements when we begin receiving offenders or
clients. Offenders or clients are typically assigned to a newly opened facility
on a phased-in basis over a one- to six-month period. Our start-up period for
new juvenile operations is 12 months from the date we begin recognizing revenue
unless break-even occupancy levels are achieved before then. The actual time
required to ramp a juvenile facility (with an approximate capacity, for
example, of 100 to 200 beds) may be a period of one to three years. Our
start-up period for new adult operations is nine months from the date we begin
recognizing revenue unless break-even occupancy levels are achieved before
then. The approximate time to ramp an
adult facility of approximately 1,000 beds may be a period of three to six
months, depending upon the customer requirements. Although we typically recover these upfront
costs over the life of the contract, quarterly results can be substantially
affected by the timing of the commencement of operations as well as the
development and construction of new facilities.
Working capital requirements generally
increase immediately prior to commencing management of a new or expanded
facility as we incur start-up costs and purchase necessary equipment and
supplies before facility management revenue is realized.
General
and administrative expenses consist primarily of costs for corporate and
administrative personnel who provide senior management, legal, finance,
accounting, human resources, investor relations, payroll and information
systems, costs of business development and outside professional and consulting
fees.
Recent
Developments
Merger Agreement
On
April 18, 2010, the Company entered into an Agreement and Plan of Merger (Agreement)
with The GEO Group (NYSE:GEO) (GEO), a private provider of correctional,
detention, and residential treatment services to federal, state and local
government agencies around the globe. Pursuant to the Agreement, GEO will
acquire Cornell for stock and/or cash at an estimated enterprise value of
$685.0 million based on the closing prices of both companies stock on
April 16, 2010, including the assumption of approximately $300.0 million
in Cornell debt, excluding cash.
Under
the terms of the definitive agreement, stockholders of Cornell will have the
option to elect to receive either (x) 1.3 shares of GEO common stock for
each share of Cornell common stock or (y) an amount of cash consideration
equal to the greater of (i) the fair market value of one share of GEO
common stock plus $6.00 or (ii) the fair market value of 1.3 shares of GEO
common stock. In order to preserve the tax-deferred treatment of the
transaction, no more than 20% of the outstanding shares of Cornell Common Stock
may be exchanged for the cash consideration. If elections are made such that
the aggregate cash consideration to be received by Cornell stockholders would
exceed $100 million in the aggregate, such excess amount may be paid at the
election of GEO in shares of GEO common stock or in cash. GEO has expressed the
intent to pay such excess amount in cash, as indicated in the definitive joint
proxy statement (Joint Proxy Statement) filed by GEO and Cornell with the SEC
on July 15, 2010.
The
merger is expected to close in the third quarter of 2010, subject to the
approval of the issuance of GEO common stock by GEOs shareholders, approval of
the transaction by Cornells stockholders and, as well as the fulfillment of
other customary conditions. The special meeting of Cornell stockholders to
consider and adopt the agreement and plan of merger will take place on
Thursday, August 12, 2010. The special meeting of GEO stockholders to consider
and vote upon the issuance of GEO common stock in connection with the proposed
merger is scheduled for the same day.
Upon
the consummation of the merger, GEO would honor the existing employment
agreements between Cornell and various members of Cornells executive
management. The merger would constitute a change of control for purposes
of these agreements and, would entitle said members to receive the severance
and other benefits in accordance with the terms of these agreements if their
employment is terminated. Please refer to the definitive Joint Proxy
Statement/Prospectus filed with the SEC on July 15, 2010, as supplemented
on July 22, 2010 for a more detailed discussion of employment and change
in control agreements.
Litigation Relating to the Merger
On
April 27, 2010, a putative stockholder class action was filed in the
District Court for Harris County, Texas by Todd Shelby against Cornell, members
of the Cornell board of directors, individually, and GEO. The complaint
alleged, among other things, that the Cornell directors breached their duties
by entering into the Agreement without first taking steps to obtain adequate,
fair and maximum consideration for Cornells stockholders by shopping the
company or initiating an auction process, by structuring the transaction to
take advantage of Cornells low current stock valuation, and by structuring the
transaction to benefit GEO while making an alternative transaction either
prohibitively expensive or otherwise impossible, and that Cornell and GEO have
aided and abetted such breaches by Cornells directors. The plaintiff filed an amended complaint on
May 28, 2010. The amended complaint added additional allegations
contending that the disclosures about the merger in the Joint Proxy Statement
were misleading and/or inadequate. Among
other things, the original complaint and the amended complaint seek to enjoin
Cornell, its directors and GEO from completing the merger and seek a
constructive trust over any benefits improperly received by the defendants as a
result of their alleged wrongful conduct.
The parties have reached a settlement of the litigation in principle (at
an amount immaterial to the consolidated financial position of the Company),
pursuant to which certain additional
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disclosures
were included in the final form of the Joint Proxy Statement. The settlement did not alter the terms of the
transaction or the consideration to be received by shareholders. The settlement remains subject to
confirmatory discovery, preparation and execution of a formal stipulation of
settlement, final court approval of the settlement and dismissal of the action
with prejudice.
D. Ray James Prison
In
January 2010, we received a contract award from the BOP to house up to
2,507 low-security adult males at the facility. The contract has an anticipated
effective date of October 1, 2010 and has an initial four-year term with
three two-year option periods. We anticipate we will spend approximately $8.0
million prior to the effective date of the BOP contract in order to prepare the
facility for the BOP inmates. In conjunction with the preparations for the BOP
population during 2010, we will be transitioning from the Georgia Department of
Corrections inmates currently housed at this facility.
Liquidity and Capital
Resources
General
.
Our
primary capital requirements are for (1) purchases, construction or
renovation of new facilities, (2) expansions of existing facilities, (3) working
capital, (4) pre-opening and start-up costs related to new operating
contracts, (5) acquisitions, (6) information systems hardware and
software, and (7) furniture, fixtures and equipment. Working capital requirements generally increase
immediately prior to commencing management of a new (or activation of a
facility expansion) as we incur start-up costs and purchase necessary equipment
and supplies before facility management revenue is realized.
Cash
Flows From Operating Activities.
Cash provided by operations was
approximately $6.7 million for the six months ended June 30, 2010 compared to
$18.3 million for the six months ended June 30, 2009, principally due to:
(1) a reduction of approximately $3.8 million in net income during the six
months ended June 30, 2010 as compared to the same period of the prior year and
(2) an increase in restricted assets of approximately $6.7 million.
Cash
Flows From Investing Activities
.
Cash used in investing activities was
approximately $11.3 million for the six months ended June 30, 2010 due
primarily to capital expenditures of $13.2 million related to our Hudson
Correctional Facility as well as the renovations at the D. Ray James Prison as
we prepare for the transition of the facility to the BOP from the Georgia
Department of Corrections. These were
partially offset by proceeds from the sale of fixed assets of $0.5 million and
proceeds from the restricted debt payment account of $1.4 million. Cash used in investing activities was
approximately $14.6 million for the six months ended June 30, 2009 due to
capital expenditures of $9.5 million related to the facility expansion projects
at the D. Ray James Prison and Great Plains Correctional Facility, as well as
certain infrastructure work at our Hudson, Colorado facility offset by
insurance proceeds of $1.7 million (related to damages sustained at the Reid
Community Residential Facility during Hurricane Ike in September 2008) and net
payments to the restricted debt payment account of $6.8 million.
Cash
Flows From Financing Activities
.
Cash used in financing activities was
approximately $7.0 million for the six months ended June 30, 2010 due to
payments on our Amended Credit Facility of $2.6 million and the purchase and
retirement of $3.0 million of our common stock. Additionally, MCF made a
distribution to its partners of approximately $2.4 million. These were
partially offset by proceeds from the exercise of stock options and the
employee stock purchase plan of $0.9 million. Cash used in financing activities
was approximately $1.7 million for the six months ended June 30, 2009 due
primarily to borrowings of $2.0 million on our Amended Credit Facility offset
by payments on the Amended Credit Facility of $4.0 million and proceeds from
the exercise of stock options of $0.3 million.
Treasury
Stock Repurchases.
We repurchased 145,473 shares of common stock
in the six months ended June 30, 2010. All of these shares were retired. We did not purchase any of our common stock
in the six months ended June 30, 2009.
Under the terms of our Senior Notes and our Amended Credit Facility, we
can repurchase shares of our stock subject to certain cumulative restrictions.
Long-Term Credit Facilities.
Our Amended
Credit
Facility provides for borrowings up to $100.0 million (including letters of
credit) and matures in December 2011. At our election, outstanding
borrowings bear interest, at either the LIBOR rate plus a margin ranging from
1.50% to 2.25% or a rate which ranges from 0.00% to 0.75% above the applicable
prime rate. The applicable margins are
subject to adjustments based on our total leverage ratio.
The available
commitment under our Amended Credit Facility was approximately $20.5 million at
June 30, 2010. We had outstanding
borrowings under our Amended Credit Facility of $67.4 million and we had
outstanding letters of credit of approximately $12.1 million at June 30,
2010. Subject to certain requirements,
we have the right to increase the commitments under our Amended Credit Facility
up to $150.0 million, although the indenture for our Senior Notes limits our
ability, subject to certain conditions, to expand the Amended Credit Facility
beyond $100.0 million. We can provide no
assurance that all of the banks that have made commitments to us under our
Amended Credit Facility would be willing to participate in an expansion to the
Amended Credit Facility should we desire to do so. The Amended Credit Facility
is collateralized by substantially all of our assets, including
the assets and stock of all of our subsidiaries. The Amended Credit Facility is
not secured by the assets of MCF.
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Our
Amended Credit Facility contains financial and other restrictive covenants that
limit our ability to engage in certain activities. Our ability to borrow under the Amended
Credit Facility is subject to compliance with certain financial covenants, including
bank leverage, total leverage and fixed charge coverage ratios. At
June 30, 2010, we were in compliance with all such covenants. Our Amended
Credit Facility includes other restrictions that, among other things, limit our
ability to incur indebtedness; grant liens; engage in mergers, consolidations
and liquidations; make investments, restricted payments and asset dispositions;
enter into transactions with affiliates; and engage in sale/leaseback
transactions.
MCF is obligated for the outstanding
balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47%
per annum and are payable in semi-annual installments of interest and annual
installments of principal. All unpaid principal
and accrued interest on the bonds is due on the earlier of August 1, 2016 (maturity)
or as noted under the bond documents.
The bonds are limited, nonrecourse
obligations of MCF and secured by the property and equipment, bond reserves,
assignment of subleases and substantially all assets related to the facilities
included in the 2001 Sale and Leaseback Transaction (in which we sold eleven
facilities to MCF). The bonds are not
guaranteed by Cornell.
In
June 2004, we issued $112.0 million in principal of 10.75% Senior Notes
the (Senior Notes) due July 1, 2012.
The Senior Notes are unsecured senior indebtedness and are guaranteed by
all of our existing and future subsidiaries (collectively, the Guarantors). The Senior Notes are not guaranteed by MCF
(the Non-Guarantor). Interest on the
Senior Notes is payable semi-annually on January 1 and July 1 of each
year, commencing January 1, 2005.
On or after July 1, 2008, we have the right to redeem all or a
portion of the Senior Notes at the redemption prices (expressed as a percentage
of the principal amount) listed below, plus accrued and unpaid interest, if
any, on the Senior Notes redeemed, to the applicable date of redemption, if
redeemed during the 12-month period commencing on July 1 of each of the
years indicated below:
Year
|
|
Percentages
|
|
|
|
|
|
2010 and
thereafter
|
|
100.000
|
%
|
As
the Senior Notes are redeemable at our option (subject to the requirements
noted) we anticipate we will monitor the capital markets and continue to assess
(pending the Merger) our capital needs and our capital structure, including
potential refinancing of the Senior Notes.
Upon
the occurrence of specified change of control events, (which would include
consummation of the pending merger with GEO) unless we have exercised our
option to redeem all the Senior Notes as described above, each holder will have
the right to require us to repurchase all or a portion of such holders Senior
Notes at a purchase price in cash equal to 101% of the aggregate principal
amount of the notes repurchased plus accrued and unpaid interest, if any, on
the Senior Notes repurchased, to the applicable date of purchase. The Senior Notes were issued under an
indenture which limits our ability and the ability of our Guarantors to, among
other things, incur additional indebtedness, pay dividends or make other
distributions, make other restricted payments and investments, create liens,
incur restrictions on the ability of the Guarantors to pay dividends or other
payments to us, enter into transactions with affiliates, and engage in mergers,
consolidations and certain sales of assets.
Future Liquidity
Our
shelf registration statement under Form S-3 for potential offerings from
time to time of up to $75.0 million in gross proceeds of debt securities,
common stock, preferred stock, warrants or certain other securities was
declared effective by the Securities and Exchange Commission in
September 2008.
We
expect to use existing cash balances, internally generated cash flows and
borrowings from our Amended Credit Facility to fulfill anticipated obligations
such as capital expenditures, working-capital needs and scheduled debt
maturities over at least the next twelve months. As of June 30,
2010, we had approximately $20.5 million of available capacity under our
Amended Credit Facility. We will continue to analyze our capital
structure, including a potential refinancing of our Senior Notes and financing
for our expected future capital expenditures, including any potential
acquisitions. We will consider potential acquisitions from time to
time. Our principal focus for acquisitions is anticipated to be in our
Adult Secure and Adult Community-Based divisions, although we would also pursue
attractively priced acquisitions in our Abraxas Youth and Family Services
division. We may decide to use internally generated funds, bank financing,
equity issuances, debt issuances or a combination of any of the foregoing to
finance our future capital needs. We may also seek, from time to time, to
retire or purchase some of our common stock and/or outstanding debt through
cash purchases in open market purchases, privately negotiated transactions or
otherwise. Such repurchases, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions and other
factors. In July 2009, our Board of
Directors authorized a stock repurchase program which provides for up to $10.0
million in purchases through December 2010.
In
36
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Contents
September
2009, we adopted a 10b5-1 Plan to facilitate purchases of our common stock
pursuant to such stock repurchase plan.
As noted, we purchased approximately $3.0 million of our common stock
during the six months ended June 30, 2010.
The Company may also repurchase our common stock in open market
purchases. As a result of the proposed
Merger with GEO, we terminated the 10b5-1 Plan and we do not intend to
repurchase further shares of our common stock pending the Merger. At June 30, 2010, we believe we have sufficient
liquidity necessary to complete those projects (including the facility
maintenance improvements to be performed in association with the contract
transition preparation at D. Ray James Prison) for which we have outstanding
commitments (as contained in Item 2. Managements Discussion and Analysis of
Financial Conditions and Results of Operations-Contractual Obligations and
Commercial Commitments).
Our
internally generated cash flow is directly related to our business. Should the
private corrections and juvenile businesses deteriorate, or should we
experience poor results in our operations, cash flow from operations may be
reduced. We have, however, continued to generate positive cash flow from
operating activities over recent years and expect that cash flow will continue
to be positive over the next year. Our access to debt and equity markets may be
reduced or closed to us due to a variety of events, including, among others,
industry conditions, general economic conditions, market conditions, credit rating
agency downgrades of our debt and/or market perceptions of us and our
industry. The volatility seen in the financial markets which began in the
third quarter of 2008 and has continued into 2010 (to varying degrees) is
expected to be present (at some level) for the near term. Such volatility
could result in decreased availability of capital at economical terms (or at
various times) and could also put additional financial and budgetary pressure
on our customers. Such conditions could potentially result in our
inability to pursue additional future growth opportunities (such as facility
expansions or new facility construction) and, if coupled with unexpected
client, operational or other issues affecting our cash flow, in a need to seek
additional financing at terms we would otherwise not accept.
In
addition, our accounts receivable are with federal, state, county and local
government agencies, which we believe generally reduces our credit risk.
However, it is possible that situations such as continuing budget resolutions,
delayed passage of budgets or budget pressures may increase the length of
repayment of certain of these receivables. For example, during 2009 the State
of California notified vendors providing services to the state that it will
temporarily issue IOUs. We received IOUs
from the State of California which were subsequently paid in full during the
third quarter of 2009. We do not
currently hold any IOUs from the State of California. In addition, delays in the passage of budgets
(such as experienced in the State of Pennsylvania in 2009) may lead to
temporary delays in the repayment of our receivables from operations in such
states. This would lead to a temporary
increase in our receivables, as evidenced by the increase in our accounts
receivable trade in the third quarter of 2009. As the State of Pennsylvania did not pass a
fiscal 2010 budget until mid-October 2009, the majority of the cities and
counties in Pennsylvania chose to defer their payments (during the state budget
impasse present through the third quarter of 2009) until the state budget had
been adopted. Subsequent to the passage
of the states fiscal 2010 budget, our various Pennsylvania customers returned
to their historic payment patterns. Budgetary pressures, such as those being
experienced in states including Illinois, may also lead to a temporary increase
in our accounts receivable, due to a lengthening of the payment of outstanding
billings. While we will closely monitor
such situations, we do not currently expect this to have a significant negative
impact on the repayment of our receivables related to our facilities in such
locations.
37
Table of Contents
Results of
Operations
The following table sets forth for the
periods indicated the percentages of revenue represented by certain items in our
historical consolidated statements of operations.
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Operating
expenses, excluding depreciation and amortization
|
|
72.0
|
|
70.9
|
|
74.3
|
|
72.0
|
|
Depreciation
and amortization
|
|
4.4
|
|
4.5
|
|
4.5
|
|
4.7
|
|
General and
administrative expenses
|
|
7.7
|
|
6.0
|
|
6.8
|
|
6.1
|
|
Income from
operations
|
|
15.9
|
|
18.6
|
|
14.4
|
|
17.2
|
|
Interest
expense, net
|
|
5.9
|
|
6.2
|
|
6.1
|
|
6.1
|
|
Income from
operations before provision for income taxes
|
|
10.0
|
|
12.4
|
|
8.3
|
|
11.1
|
|
Provision for
income taxes
|
|
4.5
|
|
5.1
|
|
3.6
|
|
4.6
|
|
Net income
|
|
5.5
|
|
7.3
|
|
4.7
|
|
6.5
|
|
Non-controlling
interest
|
|
0.6
|
|
0.4
|
|
0.6
|
|
0.4
|
|
Income
available to Cornell Companies, Inc.
|
|
4.9
|
%
|
6.9
|
%
|
4.1
|
%
|
6.1
|
%
|
Three
Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009
Revenues
.
Revenues decreased approximately $1.4
million, or 1.3%, to $103.9 million for the three months ended June 30, 2010
from $105.3 million for the three months ended June 30, 2009.
Adult Secure Services.
Adult Secure Services revenues increased approximately $1.9
million, or 3.2%, to $61.2 million for the three months ended June 30, 2010
from $59.3 million for the three months ended June 30, 2009 due primarily
to (1)
revenues of $4.8 million at the Hudson Correctional Facility which
began operations in November 2009 and (2) an increase in revenues of $3.7
million at the Regional Correctional Center (RCC) due primarily to a $2.7
million contract-based revenue adjustment for the contract years March 26, 2007
through March 25, 2008 and March 26, 2008 through March 25, 2009. The increase
in revenues due to the above, was offset by (1) a decrease in revenues of $3.5
million at the D. Ray James Prison due to reduced occupancy as we ramp down the
population to transition the facility to the Federal Bureau of Prisons (BOP)
from the Georgia Department of Corrections ( GADOC) and (2) a decrease in
revenues of $0.9 million and $1.4 million, respectively, due to the termination
of our contracts for the Baker Community Correctional Facility (Baker) and
the Mesa Verde Community Correctional Facility (Mesa Verde) in December
2009. The remaining net change in
revenues of approximately $0.8 million was due to various fluctuations in
revenues at our other Adult Secure Facilities.
At
June 30, 2010, we operated eight Adult Secure Services facilities with an
aggregate service capacity of 13,897.
Additionally, we had three vacant facilities with a combined service
capacity of 894 beds at June 30, 2010. Average
contract occupancy was 80.4% for the three months ended June 30, 2010
compared to 87.3% for the three months ended June 30, 2009. The decrease
in the average contract occupancy is primarily due to the under-utilization at
our two facilities in California as a result of the termination of our
contracts for these facilities in December 2009, and as well as reduced
occupancy at the D. Ray James Prison due to its ongoing transition from GADOC
to the BOP. The average per diem rate
for our Adult Secure Services facilities was approximately $56.61 and $55.28
for the three months ended June 30, 2010 and 2009, respectively. The
average per diem rate for the three months ended June 30, 2010 excludes the
contract-based revenue adjustment noted above pertaining to the RCC.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services revenues decreased
approximately $3.0 million, or 10.8%, to $24.7 million for the three months
ended June 30, 2010 from $27.7 million for the three months ended June 30,
2009 due primarily to (1) a net decrease in revenues of $0.5 million due
to the consolidation of the Texas Adolescent Treatment Center (TATC)
operations with our Hector Garza Residential Treatment Center (Hector Garza)
in late November 2009, (2) a decrease in revenues of $0.6 million at the
Cornell Abraxas Center for Adolescent Females (ACAF) due to a reduction in
occupancy, (3) a decrease in revenues of $0.5 million at the Cornell Abraxas of
Ohio facility due to reduced occupancy and (4) a decrease in revenues of $0.5
million due to the termination of our management contracts for the Lebanon
Alternative Education Program in August 2009 and the State Reintegration
Program as of June 2009. The remaining
net decrease in revenues of $0.9 million was due to various fluctuations in
revenues at our other Abraxas Youth and Family Services facilities and
programs.
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Table
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At
June 30, 2010, we operated 15 residential
Abraxas
Youth and Family Services
facilities and nine non-residential
community-based programs with an aggregate service capacity of 2,804.
Additionally, we had three vacant facilities with a combined service capacity
of 239 beds. Average contract occupancy
for the three months ended June 30, 2010 was 92.8% compared to 89.4% for
the three months ended June 30, 2009.
The increase in occupancy for the three months ended June 30, 2010 also
reflects the decreased service capacity at June 30, 2010 of 3,043 as compared
to 3,391 at June 30, 2009.
The
average per diem rate for our residential
Abraxas
Youth and Family Services
facilities was approximately $194.97 for the
three months ended June 30, 2010 compared to $194.53 for the three months
ended June 30, 2009. Our average
fee-for-service rate for our non-residential
Abraxas
Youth and Family Services
community-based facilities and programs was
approximately $46.15 for the three months ended June 30, 2010 compared to
$45.17 for the three months ended June 30, 2009. Our average
fee-for-service rate can fluctuate from period-to-period depending on the mix
of services provided at our various
Abraxas
Youth and Family Services
facilities and programs.
Adult Community-Based Services.
Adult
Community-Based Services revenues decreased approximately $0.4 million, or
2.2%, to $18.0 million for the three months ended June 30, 2010 from $18.4
million for the three months ended June 30, 2009 due primarily to the
termination of our management contract for the Dallas County Judicial Treatment
Center (Dallas) in late November 2009 which decreased revenues by $1.1
million. The remaining net increase in
revenues of approximately $0.7 million was due to various fluctuations in
revenues at our other Adult Community-Based Services facilities and programs.
At June 30, 2010, we operated 27
residential Adult Community-Based Services facilities and three non-residential
Adult Community-Based Services programs with an aggregate service capacity of
3,558. Average contract occupancy was 115.5%
for the three months ended June 30, 2010 compared to 111.3% for the three
months ended June 30, 2009. The
average per di
em rate for our residential Adult Community-Based
Services facilities was approximately $71.35 for the three months ended
June 30, 2010 compared to $66.85 for the three months ended June 30,
2009. The average fee-for-service rate
for our non-residential Adult Community-Based Services programs was
approximately $10.05 for the three months ended June 30, 2010 compared to
$10.35 for the three months ended June 30, 2009. Our average
fee-for-service rates fluctuate as a result of changes in the mix of services
provided by our various Adult Community-Based Services programs and facilities.
Operating
Expenses
.
Operating
expenses increased approximately $0.1 million, or 0.1%, to $74.8 million for
the three months ended June 30, 2010 from $74.7 million for the three
months ended June 30, 2009.
Adult Secure Services.
Adult Secure Services operating expenses increased approximately
$1.6 million, or 4.1%, to $40.5 million for the three months ended June 30,
2010 from $38.9 million for the three months ended June 30, 2009 due primarily
to operating expenses of $5.9 million at the Hudson Correctional Facility which
began operations in November 2009. This
increase in operating expenses was offset, in part, by (1) a combined decrease
in operating expenses of $1.6 million due to the termination of our management
contracts for Baker and Mesa Verde in December 2009 and (2) a decrease in
operating expenses of $1.2 million at the D. Ray James Prison due to the
reduced population in conjunction with the facility transition in process from
GADOC to the BOP. The remaining net
decrease in operating expenses of $1.5 million was due to various fluctuations
in operating expense at our other Adult Secure Services facilities.
As
a percentage of segment revenues, Adult Secure Services operating expenses were
66.2% for the three months ended June 30, 2010 compared to 65.6% for the
three months ended June 30, 2009.
The decrease in our operating margin for the three months ended June 30,
2010 was primarily to (1) the activation of our Hudson Correctional Facility in
November 2009 (which is currently operating with available capacity), (2) those
expenses related to our closed Baker and Mesa Verde facilities and (3) the
customer transition in process at our D. Ray James Prison.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services division operating expenses decreased
approximately $1.0 million, or 4.2%, to $22.9 million for the three months
ended June 30, 2010 from $23.9 million for the three months ended June 30,
2009 due primarily to the consolidation of TATC operations with our Hector
Garza facility in late November 2009 which decreased operating expenses by
approximately $0.7 million. The
remaining net decrease in operating expenses of $0.3 million was due to various
fluctuations in operating expenses at our other Abraxas Youth and Family
Services facilities and programs.
As a percentage of segment revenues, Abraxas
Youth and Family Services operating expenses were 92.6% for the three months
ended June 30, 2010 compared to 85.8% for the three months ended June 30,
2009. The decrease in our operating margin
in the three months ended June 30, 2010 was due primarily to the decrease in
revenues as noted above (reflective of occupancy and customer mix at certain
facilities).
39
Table of Contents
Adult Community-Based Services.
Adult Community-Based Services operating expenses decreased
approximately $0.6 million, or 5.0% to $11.5 million for the three months ended
June 30, 2010 from $12.1 million for the three months ended June 30, 2009
due primarily to the termination of our management contract for Dallas in late
November 2009 which decreased operating expenses by approximately $0.9
million. The remaining net increase in
operating expenses of approximately $0.3 million was due to various
fluctuations in operating expenses at our other Adult Community-Based
facilities and programs.
As a percentage of segment revenues,
Adult Community-Based Services operating expenses were 63.6% for the three
months ended June 30, 2010 compared to 65.7% for the three months ended
June 30, 2009.
Depreciation
and Amortization
.
Depreciation and amortization expense was approximately $4.5
million and $4.7 million for the three months ended June 30, 2010 and 2009,
respectively. Amortization of
intangibles was approximately $0.1 million and $0.5 million for the three
months ended June 30, 2010 and 2009, respectively. The decrease in amortization expense in the
three months ended June 30, 2010 was due to the full amortization of our
non-compete agreements as of December 2009.
General
and Administrative Expenses.
General and administrative expenses increased approximately $1.7 million, or
26.9%, to $8.0 million for the three months ended June 30, 2009 compared to
$6.3 million for the three months ended June 30, 2009 due primarily to
legal and other professional advisory expenses incurred related to the Merger
Agreement in the three months ended June 30, 2010 of approximately $2.3
million.
Interest.
Interest expense, net of interest income, decreased to approximately
$6.2 million for the three months ended June 30, 2010 from $6.6 million
for the three months ended June 30, 2009. The decrease was primarily due
to both lower average borrowings outstanding as well as lower average interest
rates during the 2010 period.
Income
Taxes.
For the three
months ended June 30, 2010, we recognized a provision for income taxes at
an estimated effective rate of 44.8%. For the three months ended
June 30, 2009, we recognized a provision for income taxes at an estimated
effective rate of 41.4%. The change in our estimated effective tax rate
in 2010 was related to a decrease in operating income across certain of our
business segments and the increased impact of certain non-deductible expenses
(including those attributable to certain stock-based awards).
Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
Revenues
.
Revenues decreased approximately $1.1 million, or 0.5%, to $203.9 million for
the six months ended June 30, 2010 from $205.0 million for the six months
ended June 30, 2009.
Adult Secure Services.
Adult Secure Services revenues increased approximately $3.9
million, or 3.4%, to $120.0 million for the six months ended June 30, 2010
from $116.1 million for the six months ended June 30, 2009 due primarily
to (1) revenues of $9.4 million at the Hudson Correctional Facility which began
operations in November 2009
and (2) an increase in revenues of $4.3
million at RCC due primarily to a contract-based revenue adjustment of $2.7
million related to the contract years March 26, 2007 through March 25, 2008 and
March 26, 2008 through March 25, 2009.
This increase in revenues was offset by (1) a decrease in revenues of
$2.1 million and $2.9 million, respectively, due to the termination of our
contracts at Baker and Mesa Verde in December 2009 and (2) a decrease in
revenues of $4.3 million due to the reduced population at the D. Ray James Prison
due reduced occupancy as we transition the facility over to the BOP from the GADOC. The remaining net decrease in revenues of
$0.5 million was due to increases in our other Adult Secure Facilities,
primarily the Big Spring Correctional Center.
Average
contract occupancy for the six months ended June 30, 2010 was 81.9% compared
to 89.6% for the six months ended June 30, 2009. The decrease in the
average contract occupancy is primarily due to the under-utilization at our two
facilities in California as a result of the termination of our contracts for
these facilities in December 2009 as well as reduced occupancy at the D. Ray
James Prison in conjunction with its transition from GADOC to the BOP. The
average per diem rate for our Adult Secure Services facilities was
approximately $56.12 and $54.52 for the six months ended June 30, 2010 and
2009, respectively. The average per diem rate for the six months ended June 30,
2010 excludes the contract-based revenue adjustment noted above pertaining to
the RCC.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services revenues decreased
approximately $5.2 million, or 9.7%, to $48.2 million for the six months ended
June 30, 2010 from $53.4 million for the six months ended June 30,
2009 due to (1) a decrease in revenues of $0.8 million due to the consolidation
of TATC operations with our Hector Garza facility in late November 2009, (2) a
decrease in revenues of $1.0 million at the Cornell Abraxas Academy due to
reduced occupancy, (3) a decrease in
40
Table of Contents
revenues of $0.9 million at ACAF due to
reduced occupancy, (4) a decrease in revenues of $0.7 million due to the
termination of management contract for the Lebanon Alternative Education Program
in August 2009 and (5) a decrease in revenues of $0.6 million due to the
termination of our management contract for the State Reintegration Program as
of June 30, 2009. The remaining net
decrease in revenues of $1.2 million was due to various fluctuations in
revenues at our other Abraxas Youth and Family Services facilities and
programs.
Average
contract occupancy was 89.9% and 86.8% for the six months ended June 30,
2010 and 2009, respectively. The increase in occupancy for the six months ended
June 30, 2010 is also reflective of the decreased service capacity at June 30,
2010 of 3,043 as compared to 3,391 at June 30, 2009. The average per diem rate
for our residential Abraxas Youth and Family Services facilities was
approximately $194.82 and $195.96 for the six months ended June 30, 2010
and 2009, respectively. The average
fee-for-service rate for our non-residential Abraxas Youth and Family Services
community-based facilities and programs was approximately $47.28 and $45.12 for
the six months ended June 30, 2010 and 2009, respectively.
Adult Community-Based Services.
Adult Community-Based Services revenues increased approximately
$0.3 million, or 0.8 %, to $35.8 million for the six months ended June 30,
2010 from $35.5 million for the six months ended June 30, 2009. Revenues decreased approximately $2.1 million
due to the termination of our management contract for the Dallas County
Judicial Treatment Center in late November 2009. This decrease in revenues was offset by
various increases in revenues at our other Adult Community-Based Services
facilities and programs, including among other facilities, an increase in
revenues of $0.7 million at the Reid Community Residential Center and an
increase in revenues of $0.4 million at the Grossman Center due to improved
occupancy.
Average
contract occupancy was 115.4% and 107.4% for the six months ended June 30,
2010 and 2009. The average per diem rate
for our residential Adult Community-Based Services facilities was $70.82 and
$67.05 for the six months ended June 30, 2010 and 2009, respectively. The average fee-for-service rate for our
non-residential Adult Community-Based Services programs was $9.72 and $9.64 for
the six months ended June 30, 2010 and 2009, respectively.
Operating
Expenses.
Operating
expenses increased approximately $3.9 million, or 2.6%, to $151.5 million for
the six months ended June 30, 2010 from $147.6 million for the six months
ended June 30, 2009.
Adult Secure Services.
Adult Secure Services operating expenses increased approximately
$6.9 million, or 9.1%, to $82.5 million for the six months ended June 30,
2010 from $75.6 million for the six months ended June 30, 2009 due
primarily to operating expenses of $11.7 million at the Hudson Correctional
Facility which began operations in November 2009. This increase in operating expenses was
offset by (1) a combined decrease in operating expenses of $3.2 million due to
the termination of our contracts at Baker and Mesa Verde in December 2009 and
(2) a decrease in operating expenses of $1.4 million at the D. Ray James Prison
due to reduced occupancy.
The remaining net decrease in operating
expenses of $0.2 million was due to various fluctuations in operating expenses
at our other Adult Secure Services facilities.
As a percentage of segment revenues, Adult
Secure Services operating expenses were 68.8% for the six months ended June 30,
2010 compared to 65.1% for the six months ended June 30, 2009.
The decrease in
our operating margin for the six months ended June 30, 2010 was primarily to
(1) the activation of our Hudson Correctional Facility in November 2009 (which
is currently operating with available capacity), (2) those expenses related to
our closed Baker and Mesa Verde facilities and (3) the customer transition in
process at our D. Ray James Prison.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services operating expenses decreased
approximately $2.2 million, or 4.6%, to $45.8 million for the six months ended
June 30, 2010 from $48.0 million for the six months ended June 30, 2009
due primarily to (1) a decrease in operating expenses of $1.2 million due to
the consolidation of TATC operations with our Hector Garza facility in late
November 2009, (2) a decrease in operating expenses of $0.5 million due to the
termination of our management contract for the Lebanon Alternative Education
Program in August 2009 and (3) a decrease in operating expenses of $0.5 million
due to the termination of the State Reintegration Program as of June 30, 2009.
As a percentage of segment revenues, Abraxas
Youth and Family Services operating expenses were 95.2% and 89.9% for the six
months ended June 30, 2010 and 2009, respectively. The decrease in our operating margin for the
six months ended June 30, 2010 was due primarily to the decrease in revenues as
noted above (reflective of occupancy and customer mix at certain facilities).
Adult Community-Based Services.
Adult Community-Based Services operating expenses decreased
approximately $0.8 million, or 3.3%, to $23.2 million for the six months ended June 30,
2010 from $24.0 million for the six months ended June 30, 2009 due
primarily to a
decrease in operating expenses of $1.5 million due to the termination of our
management contract for the Dallas County Judicial Treatment Center in late
November 2009. The remaining net
increase in operating expenses of $0.7 million was due to various fluctuations
in operating expenses at our other Adult Community-Based Services facilities
and programs.
41
Table
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As
a percentage of segment revenues, Adult Community-Based Services operating
expenses were 64.8% for the six months ended June 30, 2010 compared to
67.7% for the six months ended June 30, 2009.
Depreciation
and Amortization
.
Depreciation and amortization expense was
approximately $9.3 million and $9.6 million for the six months ended June 30,
2010 and 2009, respectively.
Amortization of intangibles was approximately $0.3 million and $0.9
million for the six months ended June 30, 2010 and 2009,
respectively. The decrease in
amortization expense in the six months ended June 30, 2010 was due to the full
amortization of our non-compete agreements as of December 2009.
General
and Administrative Expenses.
General and administrative expenses increased approximately $1.4 million, or
11.3%, to approximately $13.8 million for the six months ended June 30, 2010
from $12.4 million for the six months ended June 30, 2009
due primarily to
an increase in legal and other professional advisory expenses related the
Merger Agreement (of approximately $2.3 million) in the 2010 period.
Interest.
Interest expense, net of interest income, decreased to
approximately $12.3 million for the six months ended June 30, 2010 from $12.5
million for the six months ended June 30, 2009 due primarily to lower
interest income in the six months ended June 30, 2010. The decrease in interest
expense was due to both lower average interest rates as well as decreased
borrowings outstanding in the 2010 period. We did not capitalize any interest
in the six months ended June 30, 2010.
For the six months ended June 30, 2009, we capitalized interest of
$0.7 million related to the 700 bed facility expansion project at the D. Ray
James Prison.
Income
Taxes.
For the six months ended
June 30, 2010, we recognized a provision for income taxes at an estimated
effective rate of 43.9%. For the six months ended June 30, 2009, we
recognized a provision for income taxes at an estimated effective rate of
41.5%. The change in our estimated effective tax rate in 2010 was related
to a decrease in operating income across certain of our business segments and
the increased impact of certain non-deductible expenses (including those attributable
to certain stock-based awards).
Contractual
Uncertainties Related to Certain Facilities
Regional Correctional Center.
The Office of Federal Detention Trustee (OFDT)
holds the contract for the use of the RCC on behalf of ICE, USMS and the BOP
with Bernalillo County, New Mexico (the County) through an intergovernmental
services agreement, and we have an operating and management agreement with the
County. In July 2007, we were
notified by ICE that it was removing all ICE detainees from the RCC and the
removal was completed in early August 2007. The facility is still
being utilized by the USMS and since May 2008 by the BOP, but not at its
full capacity. In February 2008,
ICE informed us that it would not resume use of the facility. In February 2008, OFDT attempted to
unilaterally amend its agreement with the County to reduce the number of
minimum annual guaranteed mandays under the agreement from 182,500 to
66,300. Neither we nor the County believe OFDT has the right to
unilaterally amend the contract in this manner, and OFDT has been informed of
our position. Although either party to the intergovernmental services agreement
has the right to terminate upon 180 days notice, neither party has exercised
such right as of June 30, 2010.
During
the third quarter of 2009, we filed a claim against the United States, acting
through the United States Department of Justice, OFDT and ICE (collectively, Defendants)
for breach of contract and breach of the duty of good faith and fair dealing,
arising out of the Defendants improper modification of the intergovernmental
services agreement (the Contract) and subsequent failure to pay for the
shortfalls in the 2007-2008 and 2008-2009 minimum annual guaranteed mandays
specified in the Contract. The United States Court of Federal Claims issued an
opinion on July 14, 2010 in Board of County Commissioners of the County of
Bernalillo, New Mexico, v. United States, Case No. 09-549 C, overturning the
governments decision to unilaterally reduce the number of mandays it used at
the RCC. Cornell and the County successfully argued that the Contract with the
OFDT obligated the government to utilize the RCC for an agreed upon number of
mandays, and the governments failure to meet that number required the
government to pay for unused beds. The OFDT argued that it had properly
partially terminated the Contract to reduce the number of mandays. The Court
will now decide damages for the governments breach of the agreement.
Cornell and the County believe that the government owes approximately $4.2
million previously billed to the government for contract years March 26, 2007
through March 25, 2008 and March 26, 2008 through March 25, 2009, plus
appropriate Contract Disputes Act interest. The government has the right to
appeal the decision to the United States Court of Appeals for the Federal
Circuit.
The
Company is currently in settlement negotiations on this matter. Based on the
recent legal ruling that affirmed that the agreement was not partially
terminated and therefore billings under the contract terms were appropriate as
well as our ongoing settlement discussions, Cornell recognized an additional
$2.7 million contract-based revenue adjustment in the quarter ended
June 30, 2010 related to the contract years March 26, 2007 through March
25, 2008 and March 26, 2008 through March 25, 2009.
42
Table of
Contents
There
is a pending lawsuit against the County concerning the County jail system, know
as the McClendon case. In 1994,
plaintiffs sued the County in federal district court in the District of New
Mexico over conditions at the county jail, which was then located at what is
now the RCC and run by the Company. The
County subsequently built their new Metropolitan Detention Center to house the
County inmates and also negotiated two stipulated agreements in 2004 designed
to end the McClendon lawsuit. These
stipulated settlements covered the Metropolitan Detention Facility and were
approved by the Court in 2005 (the 2005 settlement agreements).
In
March 2009, the Federal Judge presiding over the case issued an Order
based on motions filed by Plaintiffs class counsel asking the Judge to reform
the 2005 settlement agreements to allow for access to the RCC. In those
motions, the Plaintiffs also requested alternative relief in the form of
withdrawal of the Courts approval of the 2005 settlement agreements. Based on our interpretation of the Order, the
Judge denied Plaintiffs request for access to the RCC, granted the alternative
relief requested, withdrew her approval of the 2005 settlement agreements and
granted the option to Plaintiffs to rescind their 2005 settlement
agreements. The Plaintiffs chose to
rescind the 2005 settlement agreements.
In the Order, the Judge concluded that the RCC, at least to the extent
it is used to house detainees by Bernalillo County pursuant to the
intergovernmental services agreement, is part of the county jail system. The County has informed us that it does not
believe McClendon should apply to the RCC and the County has filed an appeal of
the Order to the U.S. Court of Appeals for the Tenth Circuit. We are not party to this lawsuit and the
ramifications of the Courts Order to our operation of the RCC are unclear.
The
2005 settlement agreements imposed various conditions on the Metropolitan
Detention Center that resulted in material increases to its operating
costs. The effect of the rescission of
the 2005 settlement agreements is unclear since those settlement agreements
replaced prior settlement agreements approved in 1996. We do not believe we are contractually
obligated to bear any incremental costs of complying with any settlement
agreements in the McClendon case although the County has expressed to us that
it may want us to absorb a portion of any costs that would be incurred. We currently plan to continue to operate the
facility and also continue with our marketing plans for the RCC.
Revenues
for this facility were approximately $10.7 million (including the previously
noted $2.7 million contract-based revenue adjustment) and $6.4 million for the
six months ended June 30, 2010 and 2009, respectively. The net carrying value of the leasehold
improvements for this facility was approximately $0.2 million and $0.6 million
at June 30, 2010 and December 31, 2009, respectively. Our lease for this
facility requires monthly rent payments of approximately $0.13 million for the
remaining term of the lease (which was extended through June 2011). To
date, although we have several federal agencies using the RCC, the facility
still has available capacity. Our
inability to expand the existing population with current or new customers or
any disruption of our operations due to activity in the McClendon case could
have an adverse effect on our financial condition, results of operations and
cash flows. We believe there has been no
impairment to the carrying value of the leasehold improvements at this
facility.
California Facilities.
In
October 2009, we were notified by the CDCR that they were terminating our
contracts at our two small California male community correctional facilities,
(Baker Community Correctional Facility (Baker) and Mesa Verde Community
Correctional Facility (Mesa Verde)) which represent a combined 622 beds of
service capacity.
Revenues
for Baker were approximately $0.9 million and $2.1 million for the three and
six months ended June 30, 2009. There
were no revenues in the three and six months ended June 30, 2010. The net
carrying value of this owned facility was approximately $2.8 million at June
30, 2010 and December 31, 2009. We
are considering potential alternate customers for this facility (including the
procurement in process for female low-security beds by the CDCR (for which this
facility would qualify)), but we can make no assurances as to who the customer
will be or what the possible timing might be. We believe that there has been no
impairment to the carrying value of this facility.
Revenues
for Mesa Verde were $1.4 million and $2.9 million for the three and six months
ended June 30, 2009. There were no
revenues for the three and six months ended June 30, 2010. The net carrying
value of the leasehold improvements for this facility was approximately $0.5
million and $0.6 million at June 30, 2010 and December 31, 2009, respectively.
Our lease for this facility requires monthly rent payments ranging from
approximately $0.14 million to $0.16 million over the remaining term of the
lease through June 2015. We are considering potential alternate customers
for this facility (including the procurement in process for female low-security
beds by the CDCR (for which this facility would qualify)), which we believe
will ultimately result in the recovery of our investment in this facility.
However, we can make no assurances as to who the customer will be (or what the
possible timing might be). We believe that there has been no impairment to the
carrying value of the leasehold improvements at this facility.
Great Plains Correctional Facility.
On August 6,
2010, we announced that we had received notification from the Arizona
Department of Corrections (AZDOC) of its election not to renew its contract
at our 2,048 bed Great Plains Correctional Facility (Great Plains) in Hinton,
Oklahoma, which is scheduled to expire on September 12, 2010. The Company will be working with Arizona to
determine the schedule for the transfer of inmates, which the Company expects
to complete in 2010.
Revenues
for Great Plains were approximately $8.6 million and $9.8 million for the three
months ended June 30, 2010 and 2009, respectively. Revenues were
approximately $17.3 million and $19.7 million for the six months ended June 30,
2010 and 2009, respectively. The net carrying value of this owned facility was
approximately $80.5 million at June 30, 2010 and $81.5 million at December 31,
2009. We are considering potential alternate customers for this facility
(including several procurements in-process or pending for which this facility
would qualify), but we can make no assurances as to who the customer will be or
what the possible timing might be. We believe that there has been no impairment
to the carrying value of this facility.
43
Table of
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Realization of long-lived assets
We
review our long-lived assets (including our facilities at a
facility-by-facility level) for impairment at least annually or when changes in
circumstances or a triggering event indicates that the carrying amount of the
asset may not be recoverable in accordance with GAAP. GAAP requires that long-lived assets to be
held and used recognize an impairment loss only if the carrying amount of the
long-lived asset is not recoverable from its estimated future undiscounted cash
flows and to measure an impairment loss as the difference between the carrying
value and the fair value of the asset. Assets to be disposed of by sale are
recorded at the lower of their carrying amount or fair value less estimated
selling costs. We estimate projections of undiscounted cash flows, and also
fair value, based upon the best information available, which may include
expected future discounted cash flows to be produced by the asset and/or
available market prices. Factors that significantly influence estimated future
cash flows include the periods and levels of occupancy for the facility,
expected per diem or reimbursement rates, assumptions regarding the levels of staffing,
services and future operating and capital expenditures necessary to generate
forecasted revenues, related costs for these activities and future rate of
increases or decreases associated with these factors. Information typically
utilized will also include relevant terms of existing contracts (for similar
services and customers), market knowledge of customer demand (both present and
anticipated) and related pricing, market competitors, and our historical
experience (as to areas including customer requirements, contract terms,
operating requirements/costs, occupancy trends, etc.). We may also consider the
results of any appraisals if a fair value is necessary. Estimates for factors
such as per diem or reimbursement rates may be highly subjective, particularly
in circumstances where there is no current operating contract in place and
changes in the assumptions and estimates could result in the recognition of
impairment charges.
We
may be required to record an impairment charge in the future if we are unable
to successfully negotiate a replacement contract on any of our facilities for
which we currently have an operating contract.
Contractual Obligations and Commercial
Commitments
We have assumed various financial
obligations and commitments in the ordinary course of conducting our
business. We have contractual
obligations requiring future cash payments, such as management and consulting
agreements.
We maintain operating leases in the
ordinary course of our business activities.
These leases include those for operating facilities, office space and
office and operating equipment, and the agreements expire between 2010 and
2075. As of June 30, 2010, our total commitment under these operating leases
was approximately $125.8 million.
The
following table details the known future cash payments (on an undiscounted
basis) related to our various contractual obligations as of June 30, 2010 (in
thousands):
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
2011 -
|
|
2013 -
|
|
|
|
|
|
Total
|
|
2010
|
|
2012
|
|
2014
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt principal
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
$
|
112,000
|
|
$
|
|
|
$
|
112,000
|
|
$
|
|
|
$
|
|
|
·
Special Purpose Entity
|
|
121,700
|
|
13,400
|
|
30,400
|
|
35,800
|
|
42,100
|
|
Long-term debt interest
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell Companies, Inc.
|
|
24,080
|
|
6,020
|
|
18,060
|
|
|
|
|
|
·
Special Purpose Entity
|
|
39,424
|
|
5,154
|
|
17,110
|
|
11,740
|
|
5,420
|
|
Revolving line of credit-principal
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
67,400
|
|
|
|
67,400
|
|
|
|
|
|
Revolving line of credit-interest
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
2,157
|
|
724
|
|
1,433
|
|
|
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
8
|
|
8
|
|
|
|
|
|
|
|
Construction commitments
|
|
2,758
|
|
2,758
|
|
|
|
|
|
|
|
Operating leases
|
|
125,757
|
|
8,761
|
|
29,648
|
|
27,585
|
|
59,763
|
|
Total contractual cash obligations
|
|
$
|
495,284
|
|
$
|
36,825
|
|
$
|
276,051
|
|
$
|
75,125
|
|
$
|
107,283
|
|
44
Table of
Contents
Approximately
$2.9 million of unrecognized tax benefits have been recorded as liabilities as
of June 30, 2010 but are not included in the contractual obligations table
above because we are uncertain as to if or when such amounts may be
settled. Related to the unrecognized tax
benefits not included in the table above, we have also recorded a liability for
potential penalties of approximately $0.1 million and for interest of
approximately $0.2 million as of June 30, 2010.
We
enter into letters of credit in the ordinary course of operating and financing
activities. As of June 30, 2010, we
had outstanding letters of credit of approximately $12.1 million primarily for
certain workers compensation insurance and other operating obligations. The following table details our letters of
credit commitments as of June 30, 2010 (in thousands):
|
|
Total
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Amounts
|
|
Less than
|
|
|
|
|
|
More Than
|
|
|
|
Committed
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
12,101
|
|
$
|
12,101
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
In
the normal course of business, we are exposed to market risk, primarily from
changes in interest rates. We continually monitor exposure to market risk and
develop appropriate strategies to manage this risk. We are not exposed to any
other significant market risks, including commodity price risk or, foreign
currency exchange risk or interest rate risks from the use of derivative
financial instruments.
Credit Risk
Due
to the short duration of our investments, changes in market interest rates
would not have a significant impact on their fair value. In addition, our
accounts receivables are with federal, state, county and local government
agencies, which we believe reduces our credit risk. However, it is possible
that such situations as continuing budget resolutions, delayed passage of
budgets or budget pressures may increase the length of repayment of certain
receivables. During the third quarter of
2009 the State of California notified vendors providing services to the state
that it would temporarily issue IOUs.
We received IOUs from the State of California which were subsequently
repaid prior to September 30, 2009, and we do not presently hold any IOUs
from the State of California as of December 31, 2009. In addition, delays in the passage of budgets
(such as experienced in the State of Pennsylvania in 2009) may lead to
temporary delays in the repayment of our receivables from operations in such states.
As the State of Pennsylvania did not pass a fiscal 2010 budget until
mid-October 2009, the majority of the cities and counties in Pennsylvania
chose to defer their payments (during the state budget impasse through the
third quarter 2009) until the state budget had been adopted. Subsequent to the
passage of the states fiscal 2010 budget, our various Pennsylvania customers
returned to their historic payment patterns. Budgetary pressures, such as those
being experienced in states including Illinois, may also lead to a temporary
increase in our accounts receivable, due to a lengthening of the payment of
outstanding billings. While we closely monitor such situations, we do not
currently expect this to have a permanent impact on the repayment of our receivables
related to our facilities.
Interest Rate Exposure
Our exposure to changes in interest rates
primarily results from our Amended Credit Facility, as these borrowings have
floating interest rates. The debt on our
consolidated financial statements at June 30, 2010 with fixed interest rates
consist of the 8.47% Bonds issued by MCF, in August 2001 in connection
with the 2001 Sale and Leaseback Transaction and $112.0 million of Senior
Notes. The detrimental effect of a
hypothetical 100 basis point increase in interest rates on our current
borrowings under our Amended Credit Facility would be to reduce income before
provision for income taxes by approximately $0.3 million for the six months ended
June 30, 2010. At June 30, 2010, the
fair value of our consolidated debt was approximately $305.6 million based upon
quoted market prices or discounted future cash flows using the same or similar
securities.
Inflation
Other than personnel,
offender medical costs at certain facilities, and employee medical and workers
compensation insurance costs, we believe that inflation has not had a material
effect on our results of operations during the past two years. We have experienced significant increases in
resident/inmate medical costs and employee medical and workers compensation
insurance costs, and we have also experienced higher personnel costs during the
past two years. Most of our facility contracts provide for payments of either
fixed per diem fees or per diem fees that increase by only small amounts during
the term of the contracts. Inflation could substantially increase our personnel
costs (the largest component of our operating expenses), medical and insurance
costs or other operating expenses at rates faster than any increases in
contract revenues. Food costs (part of
our resident/inmate care costs) were also
45
Table of Contents
subject to rising prices in 2009 and 2010. We believe we have limited our exposure
through long-term contracts with fixed term pricing.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information disclosed in our annual and periodic reports is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules and forms. In addition,
we designed these disclosure controls and procedures to ensure that this
information is accumulated and communicated to management, including the chief
executive officer (CEO) and chief financial officer (CFO), to allow timely
decisions regarding required disclosures. SEC rules require that we
disclose the conclusions of our CEO and CFO about the effectiveness of our
disclosure controls and procedures.
We do not expect that our disclosure
controls and procedures will prevent all errors or fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitation in a cost-effective control system,
misstatements due to error or fraud could occur and not be detected.
Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, and as required by
paragraph (b) of Rules 13a-15 and 15d-15 of the Exchange Act, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act) as of the end of the period required by
this report. Based on that evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective at a reasonable assurance level as of that date.
Changes in Internal Control over Financial Reporting
In connection with the
evaluation as required by paragraph (d) of Rules 13a-15 and 15d-15 of
the Exchange Act, we have not identified any change in our internal control
over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under Exchange Act) that occurred
during our fiscal quarter ended June 30, 2010 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
46
Table
of Contents
PART II
OTHER INFORMATION
ITEM 1.
Legal Proceedings.
See
Part I, Item 1. Note 9 to the Consolidated Financial Statements, which is
incorporated herein by reference.
ITEM 1A.
Risk Factors.
The
risk factors as previously discussed in our Form 10-K for the fiscal year
ended December 31, 2009 are incorporated herein by this reference.
Risks Related to the Merger
There can be no assurance that the
proposed merger of The GEO Group and Cornell will be consummated. The
announcement and pendency of the Merger, or the failure of the Merger to be
consummated, could have an adverse effect on Cornells stock price, business,
financial condition, results of operations or prospects.
We
have entered into an Agreement and Plan of Merger with The GEO Group, Inc.
(GEO) and GEO Acquisition III, Inc. (Merger Sub), dated April 18,
2010, as amended on July 22, 2010 (the Merger Agreement), pursuant to which
GEO will acquire the Company (the Merger). The Merger is subject to a number
of conditions to closing, including (i) the approval of the issuance of
shares of GEO common stock in accordance with the terms of the Merger
Agreement, (ii) the adoption of the Merger Agreement by the Cornell
stockholders, (iii) the expiration or termination of the waiting period
(and any extension thereof) or the resolution of any litigation instituted
applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the HSR Act) or any other applicable federal or state
statute or regulation, (iv) no temporary restraining order, preliminary or
permanent injunction or other order shall have been issued (and remain in
effect) by a court or other governmental entity having the effect of making the
merger illegal or otherwise prohibiting the consummation of the Merger,
(v) the approval for listing on the New York Stock Exchange of the shares
of GEO common stock issuable in connection with the Merger, and (vi) the
receipt of certain third party contractual approvals that are required as a
result of the Merger.
If
the stockholders of GEO fail to approve the GEO share issuance or if Cornell
stockholders fail to adopt the Merger Agreement, we will not be able to
complete the Merger. Additionally, if the other closing conditions are
not met or waived, we will not be able to complete the Merger. As a
result, there can be no assurance that the Merger will be completed in a timely
manner or at all.
Further,
the announcement and pendency of the Merger could disrupt our businesses, in
any of the following ways, among others:
·
Our employees may
experience uncertainty about their future roles with the combined company,
which might adversely affect our ability to retain and hire key managers and
other employees;
·
the attention
of our management may be directed toward the completion of the merger and
transaction-related considerations and may be diverted from the day-to-day
business operations of Cornell; and
·
customers,
suppliers or others may seek to modify or terminate their business
relationships with us.
We
may face additional challenges in competing for new business and retaining or
renewing business. These disruptions could be exacerbated by a delay in
the completion of the Merger or termination of the Merger Agreement.
For
the foregoing reasons, there can be no assurance that the announcement and
pendency of the Merger, or the failure of the Merger to be consummated, will
not have an adverse effect on our stock price, business, financial condition,
results of operations or prospects.
47
Table of
Contents
The Merger Agreement limits our
ability to pursue an alternative acquisition proposal and requires us to pay a
termination fee of $12 million, plus expenses, if it does.
The Merger Agreement
prohibits us from soliciting, initiating or encouraging alternative merger or
acquisition proposals with any third party. The Merger Agreement also
provides for the payment by us to GEO of a termination fee of $12 million, plus
up to $2 million in fees and expenses, if the Merger Agreement is terminated in
certain circumstances in connection with a competing acquisition proposal for
us or the withdrawal by our board of directors of its recommendation that our
stockholders vote in favor of the proposals required to consummate the Merger,
as the case may be.
There may be a delay between GEO and
Cornell each receiving the necessary stockholder approvals for the Merger and
the closing of the transaction, during which time we will lose the ability to
consider and pursue alternative acquisition proposals, which might otherwise be
superior to the Merger.
Following
the GEO shareholder and Cornell stockholder approvals, the Merger Agreement
prohibits us from taking any actions to review, consider or recommend any
alternative acquisition proposals, including those that could provide a
superior benefit to our stockholders when compared to the Merger. Given
that there could be a delay between stockholder approval and closing, the time
during which we could be prevented from reviewing, considering or recommending
such proposals could be significant.
A lawsuit has been filed against Cornell, members
of Cornells board of directors and GEO challenging the Merger, and an
unfavorable judgment or ruling in this lawsuit could prevent or delay the
consummation of the Merger, result in substantial costs or both.
Cornell, its directors and GEO were named in a
purported stockholder class action complaint filed in Texas state court. The
complaint, as amended, alleged, among other things, that Cornells
directors breached their fiduciary duties by entering into the Merger Agreement
without first taking steps to obtain adequate, fair and maximum consideration
for Cornells stockholders by shopping the company or initiating an auction
process, by structuring the transaction to take advantage of Cornells current
low stock valuation, and by structuring the transaction to benefit GEO while
making an alternative transaction either prohibitively expensive or otherwise
impossible, that the disclosures about the Merger in the Joint Proxy
Statement were misleading and/or inadequate, and that the corporate defendants
aided and abetted such breaches by Cornells directors. The
plaintiffs sought, among other things, both an injunction prohibiting the
Merger and a constructive trust in an unspecified amount. As described in
Part II, Item 1. Legal Proceedings above, the parties have reached a settlement
in principle resolving this litigation. However, the settlement remains
subject to confirmatory discovery, preparation and execution of a formal
stipulation of settlement, final court approval of the settlement and dismissal
of the action with prejudice, and there can be no assurance that such
conditions will be satisfied.
ITEM 2.
Unregistered
Sales of Equity
Securities and Use of Proceeds.
None
ITEM 3.
Defaults Upon Senior Securities.
None.
ITEM 4.
Removed and Reserved.
None.
ITEM 5.
Other Information.
None.
48
Table
of Contents
ITEM 6.
Exhibits.
2.1
Amendment to Agreement and
Plan of Merger dated as of July 22, 2010, by and among Cornell
Companies, Inc., The GEO Group and GEO Acquisition III, Inc.
(incorporated by reference from Exhibit 2.1 to the Companys Current
Report on Form 8-K filed with the SEC on July 22, 2010).
10.1
Form of 2010 Restricted
Stock Award Agreement (Profitability and Time Based) (incorporated by reference
from Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the
SEC on March 26, 2010).
10.2
Form of 2010 Restricted
Stock Award Agreement (Performance Based) (incorporated by reference from
Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the SEC on
March 26, 2010.
31.1*
Section 302
Certification of Chief Executive Officer
31.2*
Section 302
Certification of Chief Financial Officer
32.1**
Section 906
Certification of Chief Executive Officer
32.2**
Section 906
Certification of Chief Financial Officer
*
|
Filed
herewith
|
**
|
Furnished
herewith
|
49
Table
of Contents
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 9,
2010
|
By:
|
/s/
James E. Hyman
|
|
|
JAMES
E. HYMAN
|
|
|
Chief
Executive Officer, President and Chairman of the Board (Principal Executive
Officer)
|
|
|
|
|
|
|
Date: August 9,
2010
|
By:
|
/s/
John R. Nieser
|
|
|
JOHN
R. NIESER
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Senior
Vice President, Chief Financial Officer and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
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50
Cornell (NYSE:CRN)
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Cornell (NYSE:CRN)
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