-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I8PIB3T7YqxVy7G0sjTaSwaTQfheZ7hDoD/QrutPWj2njGoh7tpSeeXGEAPox32m SByNDtN2R+k04sFNje5+aQ== 0000890566-96-001533.txt : 19961007 0000890566-96-001533.hdr.sgml : 19961007 ACCESSION NUMBER: 0000890566-96-001533 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19961004 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNELL CORRECTIONS INC CENTRAL INDEX KEY: 0001016152 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 760433642 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-08243 FILM NUMBER: 96639238 BUSINESS ADDRESS: STREET 1: 4801 WOODWAY STREET 2: STE 400W CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7136230790 MAIL ADDRESS: STREET 1: 4801 WOODWAY STREET 2: STE 400W CITY: HOUSTON STATE: TX ZIP: 77056 424B1 1 [LOGO] 4,000,000 SHARES CORNELL CORRECTIONS, INC. COMMON STOCK Of the 4,000,000 shares of Common Stock, par value $.001 per share (the "Common Stock"), offered hereby, 3,523,103 shares are being offered by Cornell Corrections, Inc. (the "Company"), and 476,897 shares are being offered by the Selling Stockholders. See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock. See "Underwriting" for the factors considered in determining the initial public offering price. The Common Stock has been approved for listing on the American Stock Exchange under the symbol "CRN." For a discussion of certain risks of an investment in the shares of Common Stock offered hereby, see "Risk Factors" on pages 7 - 13. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions* Company+ Stockholders Per Share............................ $12.00 $0.84 $11.16 $11.16 Total++.............................. $48,000,000 $3,360,000 $39,317,829 $5,322,171
- ------------ * The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." + Before deducting estimated expenses of the offering of $750,000 which will be paid by the Company. ++ Certain stockholders of the Company have granted the Underwriters a 30-day option to purchase up to 600,000 additional shares of Common Stock on the same terms per share solely to cover over-allotments, if any. If such option is exercised in full, the total price to public will be $55,200,000, the total underwriting discounts and commissions will be $3,864,000 and the total proceeds to Selling Stockholders will be $12,018,171. See "Underwriting." ------------------------ The Common Stock is being offered by the Underwriters as set forth under "Underwriting" herein. It is expected that the delivery of the certificates therefor will be made at the offices of Dillon, Read & Co. Inc., New York, New York on or about October 8, 1996. The Underwriters include: DILLON, READ & CO. INC. EQUITABLE SECURITIES CORPORATION ING BARINGS The date of this Prospectus is October 3, 1996. [GRAPHICS - MAP SHOWING LOCATION OF COMPANY-OPERATED FACILITIES AND PICTURES OF FACILITIES AND PERSONNEL OF THE COMPANY] ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE INDICATES: (I) ALL REFERENCES TO THE "COMPANY" INCLUDE CORNELL CORRECTIONS, INC. AND ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS, (II) THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND GIVES EFFECT TO THE RECLASSIFICATION OF THE COMPANY'S CAPITAL STOCK (THE "RECLASSIFICATION") (SEE "CAPITALIZATION") TO BE EFFECTED AS OF OR PRIOR TO THE COMPLETION OF THE OFFERING BEING MADE HEREBY (THE "OFFERING") AND (III) ALL REFERENCES TO NUMBER OF BEDS WITH RESPECT TO THE COMPANY'S FACILITIES ARE TO DESIGN CAPACITY. THE COMPANY The Company is one of the leading providers of privatized correctional, detention and pre-release services in the United States based on contracted design capacity. The Company is the successor to entities that began developing institutional correctional and detention facilities in Massachusetts and Rhode Island in 1991 and pre-release facilities in California in 1977. The Company has rapidly expanded its operations through acquisitions and internal growth and is currently developing or operating facilities in California, Texas, Rhode Island, Utah and North Carolina. As of September 1, 1996, the Company has contracts to operate 20 private correctional, detention and pre-release facilities with an aggregate design capacity of 3,349 beds. Of these facilities, 18 are currently in operation (3,114 beds) and two are under development (235 beds). See "Business -- General." The Company provides to governmental agencies the integrated development, design, construction and operation of facilities within three areas of operational focus: (i) secure institutional correctional and detention services, (ii) pre-release correctional services and (iii) juvenile correctional and detention services. See "Business -- Facility Design, Construction and Finance." Institutional correctional and detention services primarily consist of the operation of secure adult incarceration facilities. Pre-release correctional services primarily consist of providing pre-release and halfway house programs for adult inmates serving the last three to six months of their sentences and preparing for re-entry into society at large. The Company is currently developing and constructing a 160-bed juvenile short-term correctional and detention facility scheduled to commence operations in the first quarter of 1997. At the facilities it operates, the Company generally provides maximum and medium security incarceration and minimum security residential services, institutional food services, certain transportation services, general education programs (such as high school equivalency and English as a second language programs), health care (including medical, dental and psychiatric services), work and recreational programs and chemical dependency and substance abuse programs. Additional services provided in the Company's pre-release facilities typically include life skills and employment training and job placement assistance. Juvenile services provided by the Company will include medical, educational and counseling programs tailored to meet the special needs of juveniles. The Company derives substantially all its revenues from operating correctional, detention and pre-release facilities for federal and state governmental agencies in the United States. Of the facilities operated by the Company, two are owned by the Company, 16 are leased by the Company and two are operated through other arrangements. See "Business -- Properties." There is a growing trend in the United States toward privatization of governmental correctional and detention services and functions. Generally, this trend results from continuing pressures faced by governments to control costs and improve service efficiency as a result of the rapidly growing inmate population in the United States. According to reports issued by the United States Department of Justice, Bureau of Justice Statistics ("BJS"), the number of adult inmates in United States federal and state prison facilities increased from 503,601 at December 31, 1985 to 1,104,074 at June 30, 1995, an increase of more than 119%. According to the Private Adult Correctional Facility Census, prepared by the Private Corrections Project Center for Studies in Criminology & Law, University of Florida (which is funded in part from contributions from participants in the privatized correctional and detention services industry, including the Company) (the "Private Correctional Facility Census"), the design capacity of privately managed adult correctional and detention facilities in the United States increased from 26 facilities with a design capacity of 10,973 beds at December 31, 1989 to 92 facilities with a design capacity of 57,609 beds at December 31, 1995. Even after such growth, according to the Private Correctional Facility Census, less than five percent of adult inmates in United States correctional and detention facilities were housed in privately managed facilities. 3 OPERATING STRATEGIES The Company's objective is to enhance its position as one of the leading providers of private correctional, detention and pre-release services. The Company is committed to the following operating strategies: PURSUE DIVERSE MARKETS. The Company intends to continue to diversify its business within three areas of operational focus. Historically, the Company primarily provided pre-release services and believes that it has a long-standing reputation as an effective manager of such facilities. However, after giving effect to the Company's acquisition of substantially all the assets of MidTex Detentions, Inc. ("MidTex") in July 1996, a majority of the Company's facility capacity and revenues will be concentrated in the institutional correctional and detention service area. In addition, the Company is currently developing a juvenile correctional and detention facility and intends to pursue additional contracts to provide juvenile correctional and detention services. The Company believes that, by being a diversified provider of services, the Company will be able to compete for more types of contract awards and adapt to changes in demands within its industry for varying categories of services. DELIVER COST EFFECTIVE AND QUALITY MANAGEMENT PROGRAMS. The Company intends to position itself as a low cost, high quality provider of services in all its markets. The Company will focus on improving operating performance and efficiency through standardization of practices, programs and reporting procedures, efficient staffing and attention to productivity standards. The Company also emphasizes quality of services by providing trained personnel and effective programs designed to meet the needs of contracting governmental agencies. PROVIDE INNOVATIVE SERVICES. The Company intends to implement specialized and innovative services to address unique needs of governmental agencies and certain segments of the inmate population. For example, certain facilities of the Company are equipped with interactive satellite links to courtrooms and judges that should reduce the time, effort and expense related to transporting inmates to offsite courtrooms. The Company also intends to actively pursue contracts to provide services for specialized segments of the inmate population categorized by age (such as services for aging inmates or juvenile offenders), medical status, gender or security needs. GROWTH STRATEGIES The Company expects the growth in privatization of correctional, detention and pre-release facilities by governmental agencies to continue in the foreseeable future. By expanding the number of beds under contract, the Company should be able to increase economies of scale and purchasing power and qualify to be considered for additional contract awards. The Company will seek to increase revenues by pursuing the following growth strategies: BID FOR NEW CONTRACT AWARDS. The Company will selectively pursue opportunities to obtain contract awards for new privatized facilities. As of September 1, 1996, the Company has submitted written bids to operate four new projects with an aggregate design capacity of 760 beds. Awards for these projects should be made by the applicable governmental agencies by the end of 1996. The Company is also currently considering two additional projects with an aggregate design capacity of 1,000 beds for which it may submit written bids before the end of 1996. INCREASE BED CAPACITY OF EXISTING FACILITIES. The Company has the potential for substantial capacity expansion at certain existing facilities with modest capital investment. As a result, the Company intends to pursue expansion of such facilities by obtaining awards of additional or supplemental contracts to provide services at these facilities. PURSUE STRATEGIC ACQUISITIONS. The Company believes that the private correctional and detention industry is consolidating. The Company believes that the larger, better capitalized providers will acquire smaller providers that are typically too undercapitalized to pursue the industry's growth opportunities. The Company intends to pursue selective acquisitions of other operators or developers of private correctional and detention facilities in institutional, pre-release and juvenile areas of operational focus to enhance its position in its current 4 markets, to acquire operations in new markets and to acquire operations that will broaden the types of services which the Company can provide. The Company believes there are opportunities to eliminate costs through consolidation and coordination of the Company's current and subsequently acquired operations. RECENT EXPANSION During 1996, the Company has added the management of 2,002 beds through opening or contracting to open four new facilities (387 beds) and two acquisitions (1,615 beds). In May 1996, the Company completed the acquisition of a 310-bed pre-release facility located in Houston, Texas (the "Reid Center") previously operated by the Texas Alcoholism Foundation, Inc. and The Texas House Foundation, Inc. The Company believes that the Reid Center is the largest single facility pre-release center in Texas and that its acquisition enhances the Company's position as one of the leaders in providing pre-release services. In July 1996, the Company completed the acquisition of substantially all the assets of MidTex, an operator of three secure institutional facilities (the "Big Spring Facilities") with an aggregate design capacity of 1,305 beds for the United States Department of Justice, Federal Bureau of Prisons ("FBOP") in Big Spring, Texas. The MidTex acquisition more than doubled the number of institutional facility beds managed by the Company, and the Company believes that the acquisition provides a basis for continued expansion of the Company's institutional area of operational focus. As of September 1, 1996, the Company operated six facilities (2,165 beds) that provide secure institutional correctional and detention services, operated or had contracted to operate 13 facilities (1,024 beds) that provide pre-release correctional services, and had contracted to operate one facility (160 beds) that will provide juvenile short-term correctional and detention services. On a combined pro forma basis, after giving effect to the Company's acquisitions of the Reid Center and substantially all the assets of MidTex (the "Acquisitions"), for the year ended December 31, 1995 and for the six months ended June 30, 1996, respectively, 71.0% and 72.0% of the Company's revenues were derived from the operation of institutional correctional and detention facilities, and 29.0% and 28.0% of the Company's revenues were derived from the operation of pre-release correctional facilities. ------------------------ The Company's principal executive offices are located at 4801 Woodway, Suite 400W, Houston, Texas 77056, and its telephone number at such address is (713) 623-0790. THE OFFERING Common Stock offered by the Company..................................... 3,523,103 shares Common Stock offered by the Selling Stockholders........................ 476,897 shares ----------- Total Common Stock offered......................................... 4,000,000 shares =========== Common Stock to be outstanding after the Offering....................... 6,765,398 shares(1) Use of Proceeds by the Company.......................................... For repayment of indebtedness and general corporate purposes. See "Use of Proceeds." American Stock Exchange symbol.......................................... CRN
- ------------ (1) Excludes an aggregate of 353,498 shares of Common Stock reserved for issuance after completion of the Offering upon exercise of outstanding stock options granted under the Company's 1996 Stock Option Plan (the "Stock Option Plan") and 624,611 shares of Common Stock reserved for issuance upon exercise of outstanding stock options and warrants not included under the Stock Option Plan. See "Management -- Stock Option Plan" and Note 4 of Notes to the Company's Consolidated Financial Statements. 5 SUMMARY CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The summary consolidated financial data set forth below should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto, "Pro Forma Financial Data" and "Selected Consolidated Historical and Pro Forma Financial Data" included elsewhere in this Prospectus. The Pro Forma Statement of Operations Data for the year ended December 31, 1995 and for the six months ended June 30, 1996 and the Pro Forma Balance Sheet Data as of June 30, 1996 reflect the results of operations and consolidated financial position of the Company and its subsidiaries as if (i) the acquisitions of MidTex and the Reid Center, (ii) the issuance by the Company of shares, and options and warrants to purchase shares, of Class A Common Stock ("Class A Common Stock") and Class B Common Stock ("Class B Common Stock") of the Company after June 30, 1996, (iii) the Reclassification, (iv) the exercise of outstanding stock options or warrants relating to the shares of Common Stock to be sold by the Selling Stockholders in the Offering, and (v) the Offering and the application of the estimated net proceeds therefrom by the Company, had occurred, in the case of the Statement of Operations Data, on January 1, 1995, and, in the case of the Balance Sheet Data, on June 30, 1996.
HISTORICAL PRO FORMA --------------------------------------------------------------------------- ------------ SIX MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ----------------------------------------------------- -------------------- ------------ 1991 1992 1993 1994(1) 1995 1995 1996 1995 --------- --------- --------- --------- --------- --------- --------- ------------ (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenues............. $ 235 $ 2,540 $ 3,198 $ 15,689 $ 20,692 $ 10,107 $ 11,337 $ 38,716 Income (loss) from operations............... (736) 910 (960) (343) (10) 159 (263) 3,182 Interest expense........... 7 -- -- 294 1,115 269 498 -- Income (loss) before income taxes.................... (742) 940 (915) (499) (989) (40) (710) 3,327 Net income (loss).......... (742) 940 (915) (600) (989) (40) (710) 1,981 Earnings (loss) per share.................... $ (.31) $ .38 $ (.34) $ (.16) $ (.25) $ (.01) $ (.20) $ .26 Number of shares used in per share computation(2)........... 2,388 2,491 2,695 3,811 3,983 4,084 3,523 7,506 Supplemental earnings (loss) per share(3)...... $ .03 $ (.05) OPERATING DATA: Beds under contract (end of period).................. -- -- 282 1,155 1,478 1,135 1,796 3,093 Contracted beds in operation (end of period).................. -- -- 282 1,155 1,135 1,135 1,561 2,750 Average occupancy based on contracted beds in operation(4)............. -- -- -- 92.1% 98.9% 97.8% 95.8% 91.8% (Table continued below)
PRO FORMA ------------ SIX MONTHS ENDED JUNE 30, ------------ 1996 ------------ STATEMENT OF OPERATIONS DATA: Total revenues............. $ 21,071 Income (loss) from operations............... 1,427 Interest expense........... -- Income (loss) before income taxes.................... 1,492 Net income (loss).......... 867 Earnings (loss) per share.................... $ .12 Number of shares used in per share computation(2)........... 7,204 Supplemental earnings (loss) per share(3)...... OPERATING DATA: Beds under contract (end of period).................. 3,101 Contracted beds in operation (end of period).................. 2,866 Average occupancy based on contracted beds in operation(4)............. 94.1% JUNE 30, 1996 ----------------------- HISTORICAL PRO FORMA ---------- --------- (UNAUDITED) BALANCE SHEET DATA: Working capital.................... $ 2,098 $ 8,128 Total assets....................... 19,773 47,103 Long-term debt, including current portion.......................... 13,868 68 Stockholders' equity............... 2,367 41,340 - ------------ (1) Includes operations purchased by the Company on March 31, 1994. (2) Prior to March 31, 1994, the Company was organized as a partnership. For purposes of computing average shares outstanding for the period prior to March 31, 1994, the partnership units were converted to common shares using a one-to-one unit-to-share conversion ratio. (3) Supplemental per share data is presented to show what the earnings (loss) would have been if the repayment of debt with proceeds from the Offering had taken place at the beginning of the respective periods. (4) For any applicable facilities, includes reduced occupancy during the start-up phase. See "Business -- Facility Management Contracts." For the year ended December 31, 1993, occupancy did not commence until December 1993. 6 RISK FACTORS ANY INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, WHICH CAN AFFECT THE COMPANY'S CURRENT POSITION AND FUTURE PROSPECTS, IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, IN CONNECTION WITH ANY INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. HISTORY OF LOSSES The Company incurred net losses of $915,000, $600,000 and $989,000 for the years ended December 31, 1993, 1994 and 1995, respectively, and a net loss of $710,000 for the six-month period ended June 30, 1996. No assurance can be given that the Company will not continue to incur losses in future periods. The Company expects to charge $1.3 million of total deferred financing costs, of which $726,000 will be noncash, to interest expense prior to December 31, 1996 in connection with the early retirement of certain indebtedness using the net proceeds to be received by the Company in the Offering. The Company also expects to record noncash compensation expense of $870,000 during the third quarter of 1996 in connection with the grant of stock options to certain officers of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." ABSENCE OF COMBINED OPERATING HISTORY As a result of the Acquisitions, the number of beds under the Company's management has almost doubled since December 31, 1995. Prior to the Acquisitions, the Reid Center was operated as a nonprofit organization, and substantially all the MidTex employees were employed by the City of Big Spring, Texas. Consequently, no assurance can be given that the Company will be able to successfully integrate the operations and personnel of the Reid Center and MidTex with those of the Company on a profitable basis, and the pro forma financial information of the Reid Center and MidTex may not be indicative of the future financial condition or performance of those entities when combined with the Company. See "Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." The inability of the Company to successfully integrate the businesses and operations of the Reid Center and MidTex could have a material adverse effect on the Company's financial condition and results of operations. REVENUE AND PROFIT GROWTH DEPENDENT ON EXPANSION The internal growth of the Company will depend on its ability to obtain additional management contracts for privatized correctional and detention facilities. The Company's ability to obtain new contracts will depend on the extent to which federal, state and local governmental agencies turn to the private sector in general and the Company in particular for the management of new or existing facilities or the rehabilitation or expansion of existing facilities. Additionally, since contracts to operate existing public facilities have historically not been offered to private operators, the Company's growth rate will generally be heavily dependent on the construction and operation of new correctional and detention facilities. Because correctional and detention services are essential public services, governmental agencies (and, in many states, state legislatures as well) will have to be persuaded that privatization will result in high-quality services at less cost than that which the agencies themselves could provide. The Company's ability to obtain new contracts also will depend on the extent to which the Company is able to secure awards in competition with other private-sector providers. Factors that will affect the Company's ability to compete effectively in bidding against other providers will include (i) the price and other terms of the Company's bids, (ii) the financial ability of the Company to make capital investments or post bonds or other credit support which may be required and (iii) particularly in the case of secure adult facilities, the extent to which the Company is perceived as a credible, reliable alternative to other providers, including the two companies now holding the major share of contracts for currently privatized facilities. Prior to 1995, the Company had limited success in obtaining new management contracts, and the Company's success for the most part was confined to contracts for management of pre-release centers. No assurance can be given that the Company will be able to obtain additional contracts to develop or operate new facilities on favorable terms. 7 ACQUISITION RISKS The Company's business strategy includes growth through acquisitions. This strategy presents risks that, singly or in any combination, could materially adversely affect the Company's business and financial performance. These risks include the possibility of the adverse effect of acquisitions on existing operations of the Company, the diversion of management attention and resources to acquisitions, the dependence on retaining key personnel, the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, acquired businesses and the possible adverse earnings effects resulting from the amortization of goodwill and other intangible assets. The success of the Company's acquisition strategy will depend on the extent to which it is able to acquire, successfully absorb and profitably operate additional businesses, and no assurance can be given that the Company's strategy will succeed. In addition, no assurance can be given that the Company can acquire additional businesses at prices and on terms the Company deems reasonable. In this regard, the Company likely will be competing with other potential acquirers, some of which are larger and have greater resources than the Company, and the cost of acquiring businesses could increase materially. NEED FOR ADDITIONAL FINANCING The Company's ability to compete effectively in bidding for new contracts will depend on certain factors, including, in certain circumstances, the ability of the Company to make capital investments and finance construction costs relating to institutional contract awards. In addition, the Company's acquisition strategy will require the Company to obtain financing for such acquisitions on terms the Company deems acceptable. The Company currently intends to use debt to finance such activities although, in certain circumstances, the Company may use shares of its Common Stock in making future acquisitions. No assurance can be given that the Company will be able to obtain debt financing on terms it considers acceptable or in the amounts it would need to finance construction of new facilities or acquisitions. The extent to which the Company will be able or willing to use Common Stock as a financing source for acquisitions will depend on its market value from time to time and the willingness of potential sellers to accept it as full or partial payment. The use of a significant amount of debt financing would increase interest expense and could adversely affect operating results. In the event the Company issues additional Common Stock in connection with future acquisitions, purchasers of Common Stock in the Offering may experience further dilution in the net tangible book value per share of the Common Stock. The Company is currently seeking to obtain a new credit facility (the "New Credit Facility") upon completion of the Offering. The New Credit Facility, together with cash provided from operations, is anticipated to provide sufficient liquidity to meet the Company's working capital requirements over the next 24 months. No assurance can be given, however, that the Company will be able to enter into the New Credit Facility on terms the Company deems acceptable. FACILITY OCCUPANCY LEVELS AND CONTRACT DURATION A substantial portion of the Company's revenues are generated under facility management contracts that specify a rate per day per inmate ("per diem rate"), while a substantial portion of the Company's cost structure is fixed. Under a per diem rate structure, a decrease in occupancy rates would cause a decrease in revenues and profitability. For each of its facilities, the Company is, therefore, dependent on a single contracting governmental agency (or, in the case of four of its facilities, two contracting governmental agencies) to supply the facility with a sufficient number of inmates to meet and exceed the facility's break-even design capacities, and in most cases the applicable governmental agency or agencies are under no obligation to do so. In most cases, soliciting additional inmates from other governmental agencies to meet capacity shortfalls in Company facilities is not a viable alternative. Moreover, because many of the Company's facilities have inmates serving relatively short sentences or only the last three to six months of their sentences, the high turnover rate of inmates requires a constant influx of new inmates from the relevant governmental agencies to provide sufficient occupancies to achieve profitability. A failure of a governmental agency to supply sufficient occupancies for any reason may cause the Company to forego revenues and income. Moreover, occupancy rates during the "start-up" phase when facilities are first opened 8 typically result in capacity underutilization for a one-to three-month period after the facilities first receive inmates. As a result, as the Company opens or begins operating new facilities under new contracts, there may be a delay in reaching sufficient occupancies to meet the break-even level of the facilities' design capacities, and the Company may incur operating losses at such new facilities until these occupancy levels are reached. The Company's facility management contracts typically have terms ranging from one to five years, and renewal is at the option of the contracting governmental agency. No assurance can be given that any agency will exercise a renewal option in the future. Additionally, contracting governmental agencies typically may terminate a facility contract without cause by giving the Company adequate written notice. Any such termination could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Facility Management Contracts." FIXED REVENUE STRUCTURE Most of the Company's facility management contracts provide for payments to the Company of either fixed per diem fees or per diem fees that increase by only small amounts during the terms of the contracts. If, as a result of inflation or other causes, the Company experiences increases in personnel costs (the largest component of facility management expense) or other operating expenses at rates faster than increases, if any, in per diem fees, then the Company's results of operations would be adversely affected. POSSIBLE LOSS OF LEASE RIGHTS The site of the Airpark Unit (397 beds) and the Flightline Unit (560 beds) of the Big Spring Facilities (1,305 beds) (the "Airpark / Flightline Site") is part of a larger tract of land (the "Larger Tract"), which was formerly part of a United States Air Force base conveyed to the City of Big Spring (the "City") by the United States government in 1978. The document conveying the Larger Tract to the City (the "Conveyance") contains certain restrictive covenants relating to the use of the Larger Tract that apply to the City and its lessees and any successors and assigns to the ownership of the Larger Tract. These restrictive covenants include provisions generally requiring use of the Larger Tract for public airport purposes unless otherwise consented in writing by the Federal Aviation Administration (the "FAA"), requiring certain maintenance of facilities on the Larger Tract and requiring the availability of the Larger Tract for use by federal aircraft. The Conveyance also permits the United States government to use the Larger Tract in the case of a national emergency and permits the FAA to be furnished portions of the Larger Tract and any structures located thereon for use in construction, operation or maintenance of facilities for air traffic control activities. The Conveyance further provides that, at the option of the grantor, title to the Larger Tract would revert to the grantor upon any breach of the provisions of the Conveyance, following notice of breach by the FAA and a 60-day grace period to cure any such breach. The FAA reviewed the operating agreement and the related agreements between the City and the Company which permit the Company to assume the operation of the Big Spring Facilities and advised the City in writing that it has no objections to the execution thereof by the parties thereto. While the Company believes that (i) the City is in substantial compliance with the terms of the Conveyance, and (ii) even if not in substantial compliance, the FAA is aware of (and has not objected to) all past and present uses of the Larger Tract by the City and its lessees, the FAA could assert that such uses of the Larger Tract violate the Conveyance. In addition, the City has used and leased, and may in the future use or lease, other portions of the Larger Tract for other purposes with respect to which the Company is not involved and may not be aware. The continued compliance by the City of Big Spring (or its successors or assigns or other lessees) with the terms of the Conveyance is not within the control of the Company, and any breach by the City (or its successors or assigns or other lessees) could result in reversion of title of all or a portion of the Larger Tract to the United States government. The agreements between the Company and the City do not give the Company recourse against the City in the case of such a reversion. In addition, the Company does not have any assurances from the FAA that it would give effect to the Company's lease rights in the event of such a reversion. Accordingly, in the case of a reversion of the Airpark / Flightline Site, or in any case in which the United States government or the FAA has superior rights to use the Airpark / Flightline Site, the continued 9 ability of the Company to lease and use the Airpark / Flightline Site could be subject to the discretion of the United States government or the FAA. The inability of the Company to continue to operate the Airpark/Flightline Site would have a material adverse effect on the Company's financial condition and results of operations. BUSINESS CONCENTRATION Contracts with the FBOP, the California Department of Corrections ("CDC") and the United States Marshals Service (the "U.S. Marshals Service") account for substantially all the Company's revenues. The loss of, or a significant decrease in, business from one or more of these governmental agencies would have a material adverse effect on the Company's financial condition and results of operations. CONTRACTS SUBJECT TO GOVERNMENT FUNDING The Company's facility management contracts are subject to either annual or bi-annual governmental appropriations. A failure by a governmental agency to receive such appropriations could result in termination of the contract by such agency or a reduction of the management fee payable to the Company. In addition, even if funds are appropriated, delays in payments may occur which could negatively affect the Company's cash flow. See "Business -- Facility Management Contracts." Furthermore, in certain cases the development and construction of facilities to be managed by the Company are subject to obtaining permanent facility financing. Such financing currently may be obtained through a variety of means, including the sale of tax-exempt bonds or other obligations or direct government appropriation. The sale of tax-exempt bonds or other obligations may be adversely affected by changes in applicable tax laws or adverse changes in the market for such securities. The Company has in the past worked with governmental agencies and placement agents to obtain and structure financing for construction of facilities. In some cases, an unrelated special purpose corporation is established to incur borrowings to finance construction and, in other cases, the Company directly incurs borrowings for construction financing. A growing trend in the privatization industry is the requirement by governmental agencies that private operators make capital investments in new facilities and enter into direct financing arrangements in connection with the development of such facilities. There can be no assurance that the Company will have available capital if and when required to make such an investment to secure a contract for developing a facility. See "Business -- Facility Design, Construction and Finance." GOVERNMENT REGULATION: OVERSIGHT, AUDITS AND INVESTIGATIONS The Company's business is highly regulated by a variety of governmental authorities which continuously oversee the Company's business and operations. For example, the contracting governmental agency typically assigns full-time, on-site personnel to institutional facilities to monitor the Company's compliance with contract terms and applicable regulations. Failure by the Company to comply with contract terms or regulations could expose it to substantial penalties, including the loss of a management contract. In addition, changes in existing regulations could require the Company to modify substantially the manner in which it conducts business and, therefore, could have a material adverse effect on the Company. Additionally, the Company's contracts give the contracting agency the right to conduct audits of the facilities and operations managed by the Company for the agency, and such audits occur routinely. An audit involves a governmental agency's review of the Company's compliance with the prescribed policies and procedures established with respect to the facility. The Company also may be subject to investigations as a result of an audit, an inmate's complaint or other causes. ACCEPTANCE OF PRIVATIZED CORRECTIONAL AND DETENTION FACILITIES Management of correctional and detention facilities by private entities has not achieved acceptance by many governmental agencies. Some sectors of the federal government and some state governments are legally unable to delegate their traditional management responsibilities for correctional and detention facilities to private companies. The operation of correctional and detention facilities by private entities is a relatively new concept, is not widely understood and has encountered resistance from certain groups, such 10 as labor unions, local sheriff's departments and groups that believe correctional and detention facility operations should be conducted only by governmental agencies. Such resistance may cause a change in public and government acceptance of privatized correctional facilities. In addition, changes in political parties in any of the markets in which the Company operates could result in significant changes in elected officials' previously established views of privatization in such markets. OPPOSITION TO FACILITY LOCATION AND ADVERSE PUBLICITY The Company's success in obtaining new awards and contracts may depend in part upon its ability to locate land that can be leased or acquired on economically favorable terms by the Company or other entities working with the Company in conjunction with the Company's proposal to construct and/or manage a facility. Some locations may be in or near populous areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site. The Company's business is subject to public scrutiny. Typically, the Company must obtain and comply with zoning approvals and/or land use permits from local governmental entities with respect to a facility. These approvals and permits provide for the type of facility and, in certain cases, the types of inmates that can be housed in the facility. In certain circumstances, public hearings are required before obtaining such approvals and permits. In addition to possible negative publicity about privatization in general, an escape, riot or other similar disturbance at a Company-operated facility or another privately operated facility, or placement of one or more notorious offenders or criminal or violent actions by inmates or residents at a Company-operated facility may result in publicity adverse to the Company and its industry, which could materially adversely affect the Company's business. In February 1996, four inmates escaped from the Company's Donald W. Wyatt Federal Detention Facility in Central Falls, Rhode Island (the "Wyatt Facility"). The inmates were apprehended within 48 hours. Although the Company did not experience any material adverse effect on its business or results of operations as a result of the escape from the Wyatt Facility, should escapes occur in the future, no assurance can be given that such escapes would not have a material adverse effect on the Company's business or its results of operations. POTENTIAL LEGAL LIABILITY The Company's management of correctional, detention and pre-release facilities exposes it to potential third-party claims or litigation by inmates or other persons for personal injury or other damages resulting from contact with Company-operated facilities, programs, personnel or inmates, including damages arising from an inmate's escape or from a disturbance or riot at a Company-operated facility. In addition, certain of the Company's correctional, detention and pre-release centers (including certain of the Company's medium and minimum security facilities) contain a high-risk population, many of whom have been convicted of or charged with violent offenses. As a result, certain inmates or residents at Company-operated facilities could pose risks to the public at large for which it may be alleged that the Company should be held liable. Moreover, the Company's management contracts generally require the Company to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or certain liability risks faced by the Company, including personal or bodily injury, death or property damage to a third party if the Company is found to be negligent. Insurance is a pre-requisite for obtaining and maintaining the Company's management contracts. While insurance is currently readily available to the Company, there can be no assurance that insurance will continue to be available on commercially reasonable terms or will be adequate to cover all potential claims. See "Business -- Insurance." In addition, the Company is involved in certain litigation matters resulting from the ordinary course of business at its facilities. In the opinion of management of the Company, the outcome of the proceedings to which the Company is currently a party, in the aggregate, will not have a material adverse effect upon the Company's operations or financial condition. See "Business -- Litigation." COMPETITION The Company competes with a number of companies, including, but not limited to, Corrections Corporation of America ("CCA"), Wackenhut Corrections Corporation ("WHC") and U.S. Corrections Corporation ("USCC"). At December 31, 1995, CCA and WHC accounted for more than 70% of the privatized secure adult beds under contract in the United States, according to the Private Correctional 11 Facility Census. Therefore, certain competitors of the Company are larger and may have greater resources than the Company. The Company also competes in some markets with small local companies that may have better knowledge of the local conditions and may be better able to gain political and public acceptance. Although certain states require substantial capital investments in new projects, other states may allow potential competitors to enter the Company's business without substantial capital investment or previous experience in the management of correctional and detention facilities. In addition, the Company may compete in some markets with governmental agencies that operate correctional and detention facilities. The Company believes its industry is subject to consolidation on both a national and a regional scale. Other companies having growth objectives similar to the Company's objectives may enter the industry. These entrants may have greater financial resources than the Company to finance acquisition and internal growth opportunities. Consequently, the Company may encounter significant competition in its efforts to achieve its growth strategy. See "Business -- Competition." ECONOMIC RISKS ASSOCIATED WITH DEVELOPMENT ACTIVITIES When the Company is engaged to act as project manager for the design and construction of a facility, the Company typically acts as the primary contractor and subcontracts with other parties that act as the general contractors. As primary contractor, the Company is subject to the various risks of construction (including shortages of labor and materials, work stoppages, labor disputes and weather interference) which could cause construction delays, and the Company is subject to the risk that the general contractor will be unable to complete construction at the budgeted costs or to fund any excess construction costs. Under such contracts the Company is ultimately liable for all late delivery penalties and cost overruns. DEPENDENCE ON EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES The Company depends greatly on the efforts of its executive officers and key personnel to obtain new contracts, to make acquisitions and to manage the Company's operations. The loss or unavailability of any of the Company's executive officers (David M. Cornell, Chairman of the Board, President and Chief Executive Officer of the Company, Marvin H. Wiebe, Jr., Vice President of the Company, and Steven W. Logan, Chief Financial Officer, Treasurer and Secretary of the Company) could have an adverse effect on the Company. The Company's ability to perform under current and new contracts will depend, in part, on its ability to attract and retain additional qualified senior executives and operating personnel. There is significant competition for qualified facility administrators, managers, counselors and other key personnel, and no assurance can be given that the Company will be successful in recruiting or training a sufficient number of officers or employees of the requisite caliber to enable the Company to operate its business and implement its growth strategy as planned. See "Management." POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK Sales of a substantial number of shares of Common Stock in the public market following the Offering, or the perception that such sales could occur, could have an adverse effect on the market price of the Common Stock. Upon completion of the Offering, 6,765,398 shares of Common Stock will be outstanding, and 978,109 shares will be issuable upon exercise of outstanding warrants and stock options. The 4,000,000 shares of Common Stock sold in the Offering will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except for any shares purchased by an "affiliate" of the Company (as that term is defined under the Securities Act), which will be subject to the resale limitations of Securities Act Rule 144. Substantially all the remaining 3,743,507 outstanding shares of Common Stock (including shares issuable upon exercise of outstanding options and warrants) held by the Company's current stockholders will be "restricted securities" (within the meaning of Rule 144) and, therefore, will not be eligible for sale to the public unless they are sold in transactions registered under the Securities Act or pursuant to an exemption from Securities Act registration, including pursuant to Rule 144. The Company has agreed to provide holders of 3,437,726 of these shares (including shares issuable upon exercise of outstanding options and warrants) with certain rights to have their shares registered under the Securities Act for public resale. See "Certain Relationships and Related Party Transactions -- Registration Rights Agreement." The Company intends to file a registration statement on Form S-8 under the Securities Act to register 880,000 shares of Common Stock reserved or to be available for issuance pursuant to the Stock Option Plan. 12 The Company and persons who will beneficially own in the aggregate 3,556,393 shares of Common Stock (including shares issuable upon exercise of outstanding options and warrants) upon completion of the Offering, including the Company's directors and executive officers, have agreed not to offer or sell any shares of Common Stock prior to the expiration of at least 180 days following the date of this Prospectus without the prior written consent of Dillon, Read & Co. Inc. ("Dillon Read"), subject to certain exceptions. See "Underwriting." NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, no public market for the Common Stock has existed, and the initial public offering price, which will be determined by negotiation between the Company and representatives of the Underwriters, may not be indicative of the price at which the Common Stock will trade after the Offering. See "Underwriting" for the factors that will be considered in determining the initial public offering price. Application has been made for quotation of the Common Stock on the American Stock Exchange, Inc., but no assurance can be given that an active trading market for the Common Stock will develop or, if developed, continue after the Offering. The market price of the Common Stock after the Offering may be subject to significant fluctuations from time to time in response to numerous factors, including variations in the reported periodic financial results of the Company, changing conditions in the economy in general or in the Company's industry in particular and unfavorable publicity affecting the Company or its industry. In addition, stock markets generally, and the stock prices of competitors in the Company's industry, experience significant price and volume volatility from time to time which may affect the market price of the Common Stock for reasons unrelated to the Company's performance. IMMEDIATE SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will experience an immediate and substantial dilution of $6.54 in the pro forma net tangible book value per share of their investment. In the event the Company issues additional Common Stock in the future, including Common Stock that may be issued in connection with future acquisitions, purchasers of Common Stock in the Offering may experience further dilution in the net tangible book value per share of the Common Stock. See "Dilution." POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK The Company's Restated Certificate of Incorporation (the "Certificate of Incorporation") will authorize the Board of Directors to issue, without stockholder approval, one or more series of preferred stock having such preferences, powers and relative, participating, optional and other rights (including preferences over the Common Stock respecting dividends and distributions and voting rights) as the Board of Directors may determine. See "Description of Capital Stock -- Preferred Stock." POTENTIAL ADVERSE EFFECTS OF CONTROL OF COMPANY BY EXISTING STOCKHOLDERS Simultaneously with the completion of the Offering, certain current stockholders of the Company (the "Applicable Stockholders"), who will beneficially own in the aggregate approximately 41.6% of the outstanding Common Stock assuming exercise of their outstanding stock options (and 33.2% of the outstanding Common Stock if the Underwriters exercise their over-allotment option in full), will enter into a stockholders agreement. The agreement will provide that the Applicable Stockholders agree to vote all shares of Common Stock owned by them to elect three directors out of a five-member Board of Directors of the Company. The stockholders agreement will provide that the number of directors may only be increased by vote of a majority of the Board of Directors. Consequently, the Applicable Stockholders, through their Common Stock holdings and representation on the Board of Directors of the Company, which will initially include a majority of directors designated by the Applicable Shareholders, will be able to exercise significant influence over the policies and direction of the Company. The stockholders agreement will terminate upon the first to occur of (i) four years from the date of the completion of the Offering or (ii) the Applicable Stockholders collectively owning less than 25% of the outstanding Common Stock. The stockholders agreement will also terminate as to any Applicable Stockholder upon such stockholder owning less than 5% of the outstanding Common Stock. See "Certain Relationships and Related Party Transactions -- Stockholders Agreement" and "Principal and Selling Stockholders." 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,523,103 shares of Common Stock offered by the Company hereby are estimated to be approximately $38.6 million after deducting underwriting discounts and commissions and estimated offering expenses. The Company will not receive any of the net proceeds from the sale of Common Stock by the Selling Stockholders. Substantially all the net proceeds received by the Company in the Offering will be used to repay all the Company's borrowings outstanding under a credit agreement dated July 3, 1996 (the "1996 Credit Facility") with Internationale Nederlanden (U.S.) Capital Corporation ("ING") and a short-term convertible note dated July 3, 1996 and issued by the Company to ING (the "Convertible Bridge Note"). As of September 1, 1996, the outstanding borrowings under the 1996 Credit Facility and the balance on the Convertible Bridge Note in the aggregate were $34.9 million. Any remaining proceeds will be used for working capital and general corporate purposes. The Convertible Bridge Note has an outstanding principal amount of $6.0 million, bears interest at 9.5% per annum and matures December 30, 1996. If not then paid and the conversion date is not extended, the Convertible Bridge Note and any accrued interest thereon will convert into Common Stock at a conversion rate of $5.64 per share. The Company used the proceeds of the Convertible Bridge Note to finance a portion of the MidTex acquisition. As of September 1, 1996, the outstanding indebtedness under the 1996 Credit Facility totaled $28.9 million, of which $3.7 million will be due within one year of the date of this Prospectus and the balance will be due in subsequent installments with a final maturity date of December 31, 2002. As of September 1, 1996, the weighted average stated interest rate on the debt outstanding under the 1996 Credit Facility was approximately 10.0%. The Company used borrowings under the 1996 Credit Facility to refinance outstanding borrowings under a credit agreement dated March 14, 1995, as amended (the "1995 Credit Facility"), to finance a portion of the MidTex acquisition and for working capital. The Company used borrowings under the 1995 Credit Facility for consolidation of various prior debt facilities, expansion funding for new projects, the repurchase of shares of Common Stock from a former officer of the Company, the acquisition of the Reid Center and working capital purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company does not currently intend to use any of the net proceeds from the Offering for additional acquisitions. The Company has in the past engaged in preliminary discussions with several other companies managing private correctional and detention facilities concerning the acquisition of all or a portion of their operations, but no agreements have been reached, and the Company is not currently involved in any negotiations for acquisitions. DIVIDEND POLICY The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain excess cash flow, if any, for use in the operation and expansion of its business and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will be dependent upon, among other factors, the Company's results of operations, financial condition, capital requirements, restrictions, if any, imposed by financing commitments and legal requirements. The Company expects to enter into a new revolving credit facility that will contain restrictions on payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 14 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company (i) as of June 30, 1996, (ii) on a pro forma consolidated basis to give effect to the Acquisitions and the issuance by the Company of shares, and options and warrants to purchase shares, of Class A Common Stock and Class B Common Stock after June 30, 1996 and (iii) on such pro forma basis as adjusted for the Reclassification, the exercise of outstanding stock options or warrants relating to the shares of Common Stock to be sold by the Selling Stockholders in the Offering and the sale of the 3,523,103 shares of Common Stock offered by the Company hereby at an offering price of $12.00 per share (after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company) and the application of the net proceeds therefrom. See "Use of Proceeds." As of or prior to the completion of the Offering, the Company will effect the Reclassification, whereby each share of Class A Common Stock and Class B Common Stock will be reclassified into one share of Common Stock. This table should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto and "Pro Forma Financial Data" included elsewhere in this Prospectus. JUNE 30, 1996 ------------------------------------ PRO FORMA HISTORICAL PRO FORMA AS ADJUSTED ---------- --------- ----------- (DOLLARS IN THOUSANDS) Long-term debt, including current portion: 1995 Credit Facility............... $ 13,800 $ -- $ -- 1996 Credit Facility............... -- 28,027 -- Other.............................. 68 68 68 ---------- --------- ----------- Total long-term debt, including current portion.................... 13,868 28,095 68 ---------- --------- ----------- Convertible Bridge Note................. -- 6,000 -- Stockholders' equity: Preferred Stock, par value $.001 per share, 10,000,000 shares authorized pro forma as adjusted, none issued and outstanding....... -- -- -- Common stock: Class A Common Stock, par value $.001 per share, 9,000,000 shares authorized historical and pro forma, 3,194,042 shares issued and outstanding historical and 3,226,792 shares issued and outstanding pro forma(1)... 3 3 -- Class B Common Stock, par value $.001 per share, 3,000,000 shares authorized historical and pro forma, none issued and outstanding historical and 277,441 shares issued and outstanding pro forma(2)... -- -- -- Common Stock, par value $.001 per share, 30,000,000 shares authorized pro forma as adjusted, 7,320,398 shares issued and outstanding(3)............. -- -- 7 Additional paid-in capital......... 7,008 7,989 47,238 Retained deficit................... (2,041) (2,041) (3,302) Treasury stock (555,000 shares of Class A Common Stock, at cost)... (2,603) (2,603) (2,603) ---------- --------- ----------- Total stockholders' equity.... 2,367 3,348 41,340 ---------- --------- ----------- Total capitalization..... $ 16,235 $37,443 $41,408 ========== ========= =========== - ------------ (1) Par value decreased from $.01 to $.001 per share on July 3, 1996. Excludes 147,062 shares (historical) and 134,312 shares (pro forma) of Class A Common Stock reserved for issuance upon exercise of outstanding stock options and warrants. (2) The number of authorized shares of Class B Common Stock increased from 1,000,000 to 3,000,000 and par value decreased from $.01 to $.001 per share on July 3, 1996. Excludes 717,500 shares (historical) and 1,106,859 shares (pro forma) of Class B Common Stock reserved for issuance upon exercise of outstanding stock options and warrants. (3) Excludes 353,498 shares of Common Stock reserved for issuance after completion of the Offering upon exercise of outstanding stock options granted under the Stock Option Plan and 624,611 shares of Common Stock reserved for issuance upon exercise of outstanding stock options and warrants not included under the Stock Option Plan. See "Management -- Stock Option Plan" and Note 4 of Notes to the Company's Consolidated Financial Statements. 15 DILUTION The deficit in the pro forma net tangible book value of the Common Stock as of June 30, 1996 (pro forma for the Acquisitions) was $(2,737,000), or approximately $(.93) per share. Pro forma net tangible book value (deficit) per share represents the amount of the Company's total tangible assets less total liabilities, divided by the pro forma number of shares of Common Stock outstanding. Pro forma net tangible book value (deficit) dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering and the pro forma net tangible book value (deficit) per share of Common Stock immediately after completion of the Offering. After giving effect to the sale by the Company of the 3,523,103 shares of Common Stock offered hereby at the initial public offering price of $12.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, the pro forma net tangible book value of the Company as of June 30, 1996 would have been $35,255,000, or approximately $5.46 per share. This represents an immediate increase in pro forma net tangible book value of $6.39 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $6.54 per share to new investors in the Offering. The following table illustrates this per share dilution: Public offering price per share......... $ 12.00 Pro forma net tangible book value (deficit) per share before the Offering.......................... $ (.93) Increase per share attributable to new investors............................. 6.39 --------- Pro forma net tangible book value per share after the Offering.............. 5.46 --------- Dilution per share to new investors..... $ 6.54 ========= The following table sets forth, on an unaudited pro forma basis at June 30, 1996, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing holders of Common Stock and by the new investors, before deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company at the initial public offering price of $12.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing stockholders................... 2,932,104 45.4% $ 8,051,000 16.0% $ 2.75 New investors........................... 3,523,103 54.6 42,277,000 84.0 12.00 --------- ------- ----------- ------- Total.............................. 6,455,207 100.0% $50,328,000 100.0% ========= ======= =========== =======
The foregoing table excludes 353,498 shares of Common Stock reserved for issuance after completion of the Offering upon exercise of outstanding stock options granted under the Stock Option Plan and 624,611 shares of Common Stock reserved for issuance upon exercise of outstanding stock options and warrants not included under the Stock Option Plan. See "Management -- Stock Option Plan" and Note 4 of Notes to the Company's Consolidated Financial Statements. 16 PRO FORMA FINANCIAL DATA UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated balance sheet as of June 30, 1996 and the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1995 and for the three months ended June 30, 1996, reflect the consolidated financial position and results of operations, respectively, of the Company and subsidiaries as if (i) the Acquisitions, (ii) the issuance by the Company of shares, and options and warrants to purchase shares, of Class A Common Stock and Class B Common Stock after June 30, 1996, (iii) the Reclassification, (iv) the exercise of outstanding stock options and warrants relating to the shares of Common Stock to be sold by the Selling Stockholders in the Offering and (v) the Offering and the application of the estimated net proceeds therefrom, had occurred, in the case of the balance sheet, on June 30, 1996, and, in the case of the statements of operations, on January 1, 1995. These statements do not purport to be indicative of the consolidated results of operations of the Company that might have been obtained had these events actually then occurred or of the Company's future results. The pro forma condensed consolidated financial statements are based on certain assumptions and estimates which are subject to change. 17 CORNELL CORRECTIONS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (DOLLARS IN THOUSANDS)
HISTORICAL --------------------- PRO FORMA PRO FORMA OFFERING THE COMPANY MIDTEX ADJUSTMENTS FOR THE ACQUISITIONS ADJUSTMENTS ----------- ------- ----------- -------------------- ----------- ASSETS: Current assets: Cash and cash equivalents............. $ 556 $ 952 $ (466)(1) $ 1,297 $ 3,280(9) 255(2) 685(10) Receivables, net...................... 4,206 2,726 -- 6,932 -- Other current assets.................. 592 755 -- 1,347 -- ----------- ------- ----------- -------- ----------- Total current assets........... 5,354 4,433 (211) 9,576 3,965 Property and equipment, net: Prepaid facility use.................. -- -- 21,710(3) 21,710 -- Other................................. 4,241 22,127 (22,117)(4) 4,251 -- Goodwill.............................. 6,034 -- -- 6,034 -- Other assets............................ 4,144 5 (2,182)(5) 1,967 (400)(9) ----------- ------- ----------- -------- ----------- Total assets........................ $19,773 $26,565 $ (2,800) $ 43,538 $ 3,565 =========== ======= =========== ======== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable and accrued liabilities......................... $ 3,232 $ 2,022 $ 535(6) $ 5,789 $ (400)(9) Current portion of capital lease obligations......................... -- 1,254 (1,254)(7) -- -- Current portion of long-term debt..... 24 -- 3,743(6) 3,767 (3,743)(9) ----------- ------- ----------- -------- ----------- Total current liabilities...... 3,256 3,276 3,024 9,556 (4,143) Long-term capital lease obligations..... -- 15,110 (15,110)(7) -- -- Other long-term liabilities............. 306 -- -- 306 -- Long-term debt, excluding current portion............................... 13,844 -- 10,484(6) 24,328 (24,284)(9) Convertible bridge note................. -- -- 6,000(6) 6,000 (6,000)(9) Stockholders' equity.................... 2,367 8,179 726(6) 3,348 37,307(9) (8,179)(8) 685(10) 255(2) ----------- ------- ----------- -------- ----------- Total liabilities and stockholders' equity......... $19,773 $26,565 $ (2,800) $ 43,538 $ 3,565 =========== ======= =========== ======== =========== (Table continued below)
PRO FORMA AS ADJUSTED FOR THE OFFERING ---------------- ASSETS: Current assets: Cash and cash equivalents............. $ 5,262 Receivables, net...................... 6,932 Other current assets.................. 1,347 -------- Total current assets........... 13,541 Property and equipment, net: Prepaid facility use.................. 21,710 Other................................. 4,251 Goodwill.............................. 6,034 Other assets............................ 1,567 -------- Total assets........................ $ 47,103 ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable and accrued liabilities......................... $ 5,389 Current portion of capital lease obligations......................... -- Current portion of long-term debt..... 24 -------- Total current liabilities...... 5,413 Long-term capital lease obligations..... -- Other long-term liabilities............. 306 Long-term debt, excluding current portion............................... 44 Convertible bridge note................. -- Stockholders' equity.................... 41,340 -------- Total liabilities and stockholders' equity......... $ 47,103 ======== See accompanying notes to unaudited pro forma condensed consolidated balance sheet. 18 CORNELL CORRECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (1) Records the adjustment to eliminate cash not acquired in the MidTex acquisition. (2) Records the increase to equity from the proceeds of the issuance of 90,331 shares to existing stockholders in connection with the financing for the MidTex Acquisition. (3) Reflects an allocation of $21.7 million of the purchase price to property and equipment for the Company's prepaid right to use the three detention facilities retained by the City of Big Spring for 19, 20 and 23 years, respectively, plus three five-year extensions, which may be exercised unilaterally by the Company. The Company currently intends to exercise these extensions. (4) Records a reduction in net property and equipment of $22.1 million due to the elimination of capital leases related to the three detention facilities (see Note 7 below). (5) Reflects an adjustment to eliminate $2.2 million of deferred MidTex acquisition costs. (6) Reflects the increase in long-term debt of $20.2 million, net of $1.3 million of deferred financing costs ($726,000 of which are noncash), which relates to financing the MidTex acquisition. (7) Records the elimination of capital leases of $1.3 million (current) and $15.1 million (long-term) resulting from the MidTex acquisition. (8) Records the elimination of net assets of MidTex prior to the acquisition. (9) Records the sale of 3,523,103 shares of Common Stock, par value $.001 per share, at $12.00 per share, net of estimated aggregate offering expenses of $3.7 million, the use of $35.3 million of the net proceeds thereof to repay outstanding indebtedness, and the use of the remaining proceeds of $3.3 million as an increase to cash. Deferred financing costs of $1.3 million are charged to retained earnings as a result of retiring the outstanding indebtedness. Deferred offering costs of $400,000 as of June 30, 1996 are reclassified to equity. (10) Records the assumed proceeds upon the exercise, concurrently with the Offering, of stock options and warrants by certain Selling Stockholders in order to purchase shares of Common Stock that will be sold by such Selling Stockholders in the Offering. Reference is made to Note 7 of Notes to the Company's Consolidated Financial Statements for a summary of the consideration paid and estimated fair market value of the assets acquired and liabilities assumed related to the MidTex and Reid Center acquisitions. 19 CORNELL CORRECTIONS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL --------------------------------- REID PRO FORMA PRO FORMA OFFERING THE COMPANY MIDTEX CENTER ADJUSTMENTS FOR THE ACQUISITIONS ADJUSTMENTS ----------- ------- ------- ----------- -------------------- ----------- Revenues................................ $ 20,692 $14,682 $ 3,342 $ -- $ 38,716 $ -- Operating expenses...................... 16,351 9,007 3,562 164(1) 30,327 -- 1,527(2) (284)(3) Depreciation and amortization........... 820 682 71 (211)(4) 1,376 -- (6)(5) 20(6) General and administrative expenses..... 3,531 1,527 -- (1,527)(2) 3,531 300(10) ----------- ------- ------- ----------- -------------------- ----------- Income (loss) from operations........... (10) 3,466 (291) 317 3,482 (300) Interest expense........................ 1,115 1,456 -- 728(7) 3,508 (3,508)(11) 209(8) Interest income......................... (136) (9) -- -- (145) -- ----------- ------- ------- ----------- -------------------- ----------- Income (loss) before provision for income taxes... (989) 2,019 (291) (620) 119 3,208 Provision for income taxes.............. -- -- -- 127(9) 127 1,219(9) ----------- ------- ------- ----------- -------------------- ----------- Net income (loss)....................... $ (989) $ 2,019 $ (291) $ (747) $ (8) $ 1,989 =========== ======= ======= =========== ==================== =========== Earnings (loss) per share............... $ (.25) $ .00 =========== ==================== Number of shares used in per share computation (thousands)............... 3,983 3,983 =========== ==================== (Table continued below)
PRO FORMA AS ADJUSTED FOR THE OFFERING ---------------- Revenues................................ $ 38,716 Operating expenses...................... 30,327 Depreciation and amortization........... 1,376 General and administrative expenses..... 3,831 ---------------- Income (loss) from operations........... 3,182 Interest expense........................ -- Interest income......................... (145) ---------------- Income (loss) before provision for income taxes... 3,327 Provision for income taxes.............. 1,346 ---------------- Net income (loss)....................... $ 1,981 ================ Earnings (loss) per share............... $ .26 ================ Number of shares used in per share computation (thousands)............... 7,506 ================ See accompanying notes to unaudited pro forma condensed consolidated statements of operations. 20 CORNELL CORRECTIONS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ------------------------------ REID PRO FORMA PRO FORMA OFFERING THE COMPANY MIDTEX CENTER ADJUSTMENTS FOR THE ACQUISITIONS ADJUSTMENTS ----------- ------ ------ ----------- -------------------- ----------- Revenues................................ $11,337 $8,603 $1,131 $ -- $ 21,071 $ -- Operating expenses...................... 9,461 5,774 997 108(1) 17,012 -- 672(2) Depreciation and amortization........... 510 407 22 (97)(4) 853 -- 1(5) 10(6) General and administrative expenses..... 1,629 672 -- (672)(2) 1,629 150(10) ----------- ------ ------ ----------- -------- ----------- Income (loss) from operations........... (263) 1,750 112 (22) 1,577 (150) Interest expense........................ 498 843 -- 579(7) 2,003 (2,003)(11) 83(8) Interest income......................... (51) (14 ) -- -- (65) -- ----------- ------ ------ ----------- -------- ----------- Income (loss) before provision for income taxes.......................... (710) 921 112 (684) (361) 1,853 Provision for income taxes.............. -- -- -- --(9) -- 625(9) ----------- ------ ------ ----------- -------- ----------- Net income (loss)....................... $ (710) $ 921 $ 112 $(684) $ (361) $ 1,228 =========== ====== ====== =========== ======== =========== Earnings (loss) per share............... $ (.20) $ (.10) =========== ======== Number of shares used in per share computation (thousands)............... 3,523 3,523 =========== ======== (Table continued below)
PRO FORMA AS ADJUSTED FOR THE OFFERING ---------------- Revenues................................ $ 21,071 Operating expenses...................... 17,012 Depreciation and amortization........... 853 General and administrative expenses..... 1,779 -------- Income (loss) from operations........... 1,427 Interest expense........................ -- Interest income......................... (65) -------- Income (loss) before provision for income taxes.......................... 1,492 Provision for income taxes.............. 625 -------- Net income (loss)....................... $ 867 ======== Earnings (loss) per share............... $ .12 ======== Number of shares used in per share computation (thousands)............... 7,204 ======== See accompanying notes to unaudited pro forma condensed consolidated statements of operations. 21 CORNELL CORRECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (1) Records adjustments to operating expenses to reflect annual payments in lieu of property taxes to the City of Big Spring, Texas resulting from the acquisition of substantially all the assets of MidTex. Such payments were not incurred by MidTex and were negotiated between the Company and the City of Big Spring. (2) Records reclassification of MidTex's general and administrative expenses to operating expenses to conform to the Company's policy. (3) Records an adjustment to reduce operating expenses for the compensation of a MidTex executive less the cost of a new management advisory services consulting agreement for such executive, which was entered into as part of the closing of the acquisition of substantially all the assets of MidTex. The duties of the executive have been and will continue to be primarily developing contracts and maintaining relationships with governmental officials. Management of the Company does not anticipate the permanent replacement of the executive nor does management of the Company believe an adjustment to revenues is necessary as a result of the absence of this executive. (4) Records adjustments to depreciation and amortization as follows for MidTex: YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ---------------- (DOLLARS IN THOUSANDS) Elimination of historical depreciation and amortization expense.............. $(682) $ (407) Amortization of prepaid facility use costs................................. 471 310 ------ ------ $(211) $ (97) ====== ====== (5) Records adjustments to depreciation for revised basis in depreciable assets as follows for Reid Center: YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ---------------- (DOLLARS IN THOUSANDS) Elimination of historical depreciation expense............................... $ (71) $(22) Depreciation expense for revised basis in depreciable assets................. 65 23 ----- ----- $ (6) $ 1 ===== ===== (6) Records additional depreciation expense based upon the Company's revised estimate of the useful lives of the Reid Center facilities from 30 to 20 years (facilities are currently 30 or more years old and in management's opinion have a remaining life of approximately 20 years) as follows: YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ---------------- (DOLLARS IN THOUSANDS) Elimination of historical depreciation expense of the buildings.............. $ (55) $(27) Depreciation expense based on revised useful lives of the buildings......... 75 37 ----- ----- $ 20 $ 10 ===== ===== (7) Records additional interest expense on the bank borrowings incurred to consummate the MidTex acquisition based on an average effective interest rate of 12.0% on average total borrowings of $18.2 million and $23.7 million for the year ended December 31, 1995, and for the six months ended June 30, 1996, respectively. The assumed weighted average borrowings by MidTex for the year ended December 31, 1995 were reduced by the cost of a new MidTex facility which was placed in service during 1995. (8) Records additional interest expense on the bank borrowings incurred to consummate the Reid Center acquisition based on an average interest rate of 10% on average total borrowings of $2.1 million for the year ended December 31, 1995 and for the six months ended June 30, 1996. (9) Records adjustments to record income tax effects of the foregoing adjustments. (10) Records adjustments to increase general and administrative expenses of $300,000 for the year ended December 31, 1995, and $150,000 for the six months ended June 30, 1996, to reflect estimated cost increases associated with the Company becoming publicly held. (11) Reflects a reduction in interest expense of $3.2 million for the year ended December 31, 1995, and $1.8 million for the six months ended June 30, 1996, as a result of the repayment in full of borrowings outstanding under the 1996 Credit Facility and under the Convertible Bridge Note from the net proceeds of the Offering. Reference is made to Note 7 of Notes to the Company's Consolidated Financial Statements for a discussion of certain financing and compensation charges that will be recorded subsequent to June 30, 1996 related to the Company's issuance of certain equity securities. In March 1996, MidTex amended its contract with the FBOP to decrease per diem rates from $36.92 to $34.92. In connection with this decrease, management anticipates a corresponding reduction in revenues. The Company's negotiated purchase price for the acquisition of substantially all the assets of MidTex took into consideration the per diem rate reduction. Management is considering certain cost reduction strategies in connection with the MidTex acquisition which are expected to substantially mitigate the reduction in revenues. The impact on income from operations is not expected to be significant. 22 SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA The selected consolidated financial data for the Company set forth below with respect to the Statement of Operations Data and Balance Sheet Data as of and for the five years ended December 31, 1995 is derived from the consolidated financial statements of the Company, which statements have been audited by Arthur Andersen LLP, independent public accountants, and of which the statements relating to 1993, 1994 and 1995 are included elsewhere in this Prospectus. The selected financial data with respect to the Statement of Operations Data and Balance Sheet Data as of and for the six month periods ended June 30, 1995 and 1996 is derived from the unaudited consolidated financial statements of the Company which, in the opinion of management of the Company, reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of such data. The data for the six months ended June 30, 1996 is not necessarily indicative of the results that may be expected for the entire year. The pro forma financial data of the Company as of and for the year ended December 31, 1995 and the six months ended June 30, 1996 is derived from the pro forma financial statements of the Company that appear elsewhere in this Prospectus. The pro forma Statement of Operations Data gives effect to (i) the Acquisitions, (ii) the issuance by the Company of shares, and options and warrants to purchases shares, of Class A Common Stock and Class B Common Stock after June 30, 1996, (iii) the Reclassification, (iv) the exercise of outstanding stock options and warrants relating to the shares of Common Stock to be sold by the Selling Stockholders in the Offering, and (v) the Offering and the application of the estimated net proceeds therefrom to the Company, as if such events had occurred on January 1, 1995. The pro forma Balance Sheet Data as of June 30, 1996 gives effect to such events as if they had occurred on June 30, 1996. The pro forma financial information does not purport to represent what the Company's results of operations or financial position actually would have been had these events, in fact, occurred on the date or at the beginning of the period indicated, nor are they intended to project the Company's results of operations or financial position for any future date or period. The selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
HISTORICAL PRO FORMA --------------------------------------------------------------------------- ------------ SIX MONTHS ENDED YEAR ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ----------------------------------------------------- -------------------- ------------ 1991 1992 1993 1994(1) 1995 1995 1996 1995 --------- --------- --------- --------- --------- --------- --------- ------------ (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Occupancy fees................... $ -- $ -- $ 107 $ 15,389 $ 20,594 $ 10,104 $ 10,967 $ 37,229 Other income..................... 235 2,540 3,091 300 98 3 370 1,487 --------- --------- --------- --------- --------- --------- --------- ------------ Total revenues............... 235 2,540 3,198 15,689 20,692 10,107 11,337 38,716 Operating expenses................. -- -- 2,827 12,315 16,351 8,030 9,461 30,327 Depreciation and amortization...... 3 3 16 758 820 367 510 1,376 General and administrative expenses......................... 968 1,627 1,315 2,959 3,531 1,551 1,629 3,831 --------- --------- --------- --------- --------- --------- --------- ------------ Income (loss) from operations...... (736) 910 (960) (343) (10) 159 (263) 3,182 Interest expense................... 7 -- -- 294 1,115 269 498 -- Interest income.................... (1) (30) (45) (138) (136) (70) (51) (145) --------- --------- --------- --------- --------- --------- --------- ------------ Income (loss) before income taxes............................ (742) 940 (915) (499) (989) (40) (710) 3,327 Provision for income taxes(2)...... -- -- -- 101 -- -- -- 1,346 --------- --------- --------- --------- --------- --------- --------- ------------ Net income (loss).................. $ (742) $ 940 $ (915) $ (600) $ (989) $ (40) $ (710) $ 1,981 ========= ========= ========= ========= ========= ========= ========= ============ Earnings (loss) per share.......... $ (.31) $ .38 $ (.34) $ (.16) $ (.25) $ (.01) $ (.20) $ .26 ========= ========= ========= ========= ========= ========= ========= ============ Number of shares used in per share computation(3)................... 2,388 2,491 2,695 3,811 3,983 4,084 3,523 7,506 Supplemental earnings (loss) per share(4)......................... $ .03 $ (.05) ========= ========= OPERATING DATA: Beds under contract (end of period).......................... -- -- 282 1,155 1,478 1,135 1,796 3,093 Contracted beds in operation (end of period)....................... -- -- 282 1,155 1,135 1,135 1,561 2,750 Average occupancy based on contracted beds in operation(5)..................... -- -- -- 92.1% 98.9% 97.8% 95.8% 91.8% BALANCE SHEET DATA: Working capital (deficit).......... $ (293) $ 812 $ 810 $ 2,015 $ 1,525 $ 2,479 $ 2,098 Total assets....................... 44 1,300 2,048 13,095 14,184 13,847 19,773 Long-term debt..................... -- -- -- 3,447 7,649 4,685 13,868 Stockholders' equity (deficit)..... (289) 896 1,085 6,631 3,053 6,591 2,367 (Table continued below)
PRO FORMA --------- SIX MONTHS ENDED JUNE 30, --------- 1996 --------- STATEMENT OF OPERATIONS DATA: Revenues: Occupancy fees................... $20,701 Other income..................... 370 --------- Total revenues............... 21,071 Operating expenses................. 17,012 Depreciation and amortization...... 853 General and administrative expenses......................... 1,779 --------- Income (loss) from operations...... 1,427 Interest expense................... -- Interest income.................... (65) --------- Income (loss) before income taxes............................ 1,492 Provision for income taxes(2)...... 625 --------- Net income (loss).................. $ 867 ========= Earnings (loss) per share.......... $ .12 ========= Number of shares used in per share computation(3)................... 7,204 Supplemental earnings (loss) per share(4)......................... OPERATING DATA: Beds under contract (end of period).......................... 3,101 Contracted beds in operation (end of period)....................... 2,866 Average occupancy based on contracted beds in operation(5)..................... 94.1% BALANCE SHEET DATA: Working capital (deficit).......... $ 8,128 Total assets....................... 47,103 Long-term debt..................... 68 Stockholders' equity (deficit)..... 41,340 - ------------ (1) Includes operations purchased by the Company on March 31, 1994. (2) Although the Company incurred a loss for financial reporting purposes for the year ended December 31, 1994, a provision was recognized for taxable income resulting principally from adding back nondeductible amortization of goodwill to the loss for financial reporting purposes. There was no provision for income taxes for the year ended December 31, 1993 because the Company was organized as a partnership prior to March 31, 1994. (3) Prior to March 31, 1994, the Company was organized as a partnership. For purposes of computing average shares outstanding for the period prior to March 31, 1994, the partnership units were converted to common shares using a one-to-one unit-to-share conversion ratio. (4) Supplemental per share data is presented to show what the earnings (loss) would have been if the repayment of debt with proceeds from the Offering had taken place at the beginning of the respective periods. (5) For any applicable facilities, includes reduced occupancy during the start-up phase. See "Business -- Facility Management Contracts." For the year ended December 31, 1993, occupancy did not commence until December 1993. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company was formed in March 1994 as the successor to a partnership co-founded by David M. Cornell, the Company's Chairman, Chief Executive Officer and President. In March 1994, the Company acquired Eclectic, which began developing pre-release facilities in California in 1977. The acquisition of Eclectic added 11 privatized institutional and pre-release facilities with an aggregate design capacity of 979 beds. The following table sets forth the number of facilities under contract or award at the end of the periods shown.
DECEMBER 31, --------------------------------- JUNE 30, 1993 1994 1995 1996 ----------- --------- --------- --------- Contracts (1)........................... 1 16 19 23 Facilities in operation................. 1 13 12 15 Design capacity of facilities in operation............................. 302 1,281 1,347 1,809 Beds under contract (end of period)..... 282 1,155 1,478 1,796 Contracted beds in operation (end of period)............................... 282 1,155 1,135 1,561 Average occupancy based on contracted beds in operation(2).................. -- 92.1% 98.9% 95.8%
- ------------ (1) Consists of facilities in operation, facilities under development and facilities for which awards have been obtained. (2) For any applicable facilities, includes reduced occupancy during the start-up phase. See "Business -- Facility Management Contracts." For the year ended December 31, 1993, occupancy did not commence until December 1993. During 1996, the Company has added the management of 2,002 beds through opening or contracting to open four new facilities (387 beds) and the Acquisitions (1,615 beds). As of September 30, 1996, the Company has 24 contracts to operate 20 private correctional, detention and pre-release facilities with an aggregate design capacity of 3,349 beds. Of these facilities, 18 are currently in operation (3,114 beds) and two are under development (235 beds). One of the two facilities under development is scheduled to commence operations during the fourth quarter of 1996, and the other is scheduled to commence operations during the first quarter of 1997. In addition, as of September 1, 1996, the Company has submitted written bids to operate four new projects with an aggregate design capacity of 760 beds in response to governmental agencies' pending Requests For Proposals ("RFPs"). The Company derives substantially all its revenues from operating correctional, detention and pre-release facilities for federal and state governmental agencies in the United States. Revenues for operation of correctional, detention and pre-release facilities are recognized on a per diem rate based upon the number of occupant days for the period. In addition, contracts for seven facilities provide for direct reimbursement by the contracting governmental agency of facility rent and certain types of insurance. On a combined pro forma basis, after giving effect to the Acquisitions, for the year ended December 31, 1995 and for the six months ended June 30, 1996, respectively, 71.0% and 72.0% of the Company's revenues were derived from the operation of institutional correctional and detention facilities, and 29.0% and 28.0% of the Company's revenues were derived from the operation of pre-release correctional facilities. In 1992 and 1993, the Company recognized substantial development fees related to the development, design and supervision of facility construction activities. Since that time, competitive bidding practices in the industry have required the Company to submit bids that include no fee or only a minimal fee for development activities. Future development fee revenues are not anticipated to be significant. As such, the Company currently derives revenues from development, design and construction activities primarily through occupancy fees that are paid over the term of the contract once a facility begins operations. See "-- Liquidity and Capital Resources -- General." Factors which the Company considers in determining the per diem rate to charge include (i) the programs specified by the contract and the related staffing levels, (ii) wage levels customary in the respective geographic areas, (iii) whether the proposed facility is to be leased or purchased and (iv) if the 24 contract is currently being operated by a competitor, the historical average occupancy levels maintained or, if a new contract, the anticipated average occupancy levels which the Company believes could reasonably be maintained. The Company's operating margins generally vary from facility to facility (regardless of whether the facility is institutional, pre-release or juvenile) depending on the terms negotiated with each contracting governmental agency. The Company does not have a target margin that it uses when it submits bids to operate facilities. The margins that are included and implicit in bids and that may subsequently result from contract awards vary depending on factors such as the level of competition for the contract award, the proposed length of the contract, the historical (for existing facilities) or anticipated (for new facilities) occupancy levels for a facility, the level of capital commitment required with respect to a facility and the anticipated changes in operating costs, if any, over the term of the contract. The Company incurs all facility operating expenses, except for certain debt service and lease payments with respect to two facilities for which the Company has only a management contract. The Company owns two facilities, the Peter A. Leidel Community Corrections Center (the "Leidel Center") and the Reid Center, both located in Houston, Texas. In connection with the acquisition of substantially all the assets of MidTex, and as part of the purchase price therefor, the Company prepaid a majority of the facility use cost of the Big Spring Facilities through at least the year 2030. See "Risk Factors -- Possible Loss of Lease Rights." MidTex generated income from operations of $2.0 million, $1.8 million and $3.5 million for the fiscal years ended September 30, 1993, 1994 and 1995, respectively, and $3.1 million for the nine months ended June 30, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- MidTex and BSCC -- Combined Results of Operations-MidTex and BSCC." The addition of the operations of MidTex to the Company should improve the Company's results of operations in future periods. A majority of the Company's facility operating expenses consist of fixed costs. These fixed costs include lease and rental expense, insurance, utilities and depreciation. As a result, when the Company commences operation of new or expanded facilities, fixed operating expenses increase. The amount of the Company's variable operating expenses depends on occupancy levels at the facilities operated by the Company. These variable operating expenses include food, medical services, supplies and clothing. The Company's largest single operating expense, facility payroll expense and related employment taxes and costs, have both a fixed and a variable component. The Company can adjust the staffing and payroll to a certain extent based on occupancy at a facility, but a minimum fixed number of employees is required to operate and maintain any facility regardless of occupancy levels. Since a majority of the Company's operating expenses are fixed, to the extent that the Company can increase revenues at a facility through higher occupancy or expansion of the number of beds under contract, the Company should be able to improve operating results. General and administrative expenses consist primarily of salaries of the Company's corporate and administrative personnel who provide senior management, accounting, finance, personnel and other services and costs of developing new contracts. Newly opened facilities are staffed according to contract requirements when the Company begins receiving residents or inmates. Residents or inmates are typically assigned to a newly opened facility on a structured basis over a one-to three-month period. The Company may incur operating losses at new facilities until break-even occupancy levels are reached. However, the Company does not have a calculable break-even occupancy level for the Company as a whole. Quarterly results can be substantially affected by the timing of the commencement of operations as well as development and construction of new facilities and by expenses incurred by the Company (including the cost of options to purchase or lease proposed facility sites and the cost of engaging outside consultants and legal experts related to submitting responses to RFPs). Working capital requirements generally increase immediately prior to the Company commencing management of a new facility as the Company incurs start-up costs and purchases necessary equipment and supplies before facility management revenue is realized. 25 As a result of the Company's existing indebtedness, including indebtedness incurred in the acquisition of substantially all assets of MidTex, the Company is incurring monthly interest expense of approximately $300,000. The Company will utilize the net proceeds from the Offering to retire the outstanding borrowings under the 1996 Credit Facility and the Convertible Bridge Note. See "Use of Proceeds." Therefore, immediately following the consummation of the Offering, the Company will have no significant debt. The substantial reduction in outstanding indebtedness will substantially reduce interest expense and improve the Company's results of operations. In addition to a substantial reduction in interest expense after the completion of the Offering, the addition of the operations of MidTex, which generated income from operations of $3.5 million for the fiscal year ended September 30, 1995 and $3.1 million for the nine months ended June 30, 1996 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- MidTex and BSCC -- Combined Results of Operations-MidTex and BSCC"), and the operations of the Reid Center should allow the Company to spread its general and administrative expenses over a larger operating base of revenues, thereby improving the Company's operating results. See "Pro Forma Financial Data." RESULTS OF OPERATIONS The Company's historical operating results reflect that the Company has expanded its business since 1993 from correctional, detention and pre-release facility development and consulting into operation of correctional, detention and pre-release facilities. Material fluctuations in the Company's results of operations are principally the result of the timing and effect of acquisitions and the level of development activity conducted by the Company and occupancy rates at Company-operated facilities. The Company's acquisitions to date have been accounted for using the purchase method of accounting, whereby the operating results of the acquired businesses have been reported in the Company's operating results since the date of acquisition. The Company earned its first occupancy fee revenue in December 1993 upon the opening of the Wyatt Facility. The Company's operations grew significantly with the March 1994 acquisition of Eclectic. See " -- General." The operations of Eclectic were included in the Company's results of operations for nine months in 1994 and a full twelve months in 1995. The Company's acquisition of the Reid Center in May 1996 and MidTex in July 1996 will significantly increase 1996 revenues over 1995 and have a greater impact in 1997 once such operations are included in the Company's reported results of operations for a full year. The Company's income from operations as a percentage of revenues will fluctuate depending on the relative mix of operating contracts among the Company's three areas of operational focus. See "Business -- General." Since pre-release facilities involve contracts with a fewer number of beds than secure institutions, fluctuations in the occupancy levels in such facilities have a more significant impact on their operating margins. Subsequent to June 30, 1996, in connection with the 1996 Credit Facility, the Company incurred expenses, issued certain options and warrants, and sold shares of Class B Common Stock, for which the Company recognized total deferred financing costs of $1.3 million, of which $726,000 was noncash, to be amortized over the life of the 1996 Credit Facility. Since the use of proceeds from the Offering is intended to retire the outstanding indebtedness under the 1996 Credit Facility, the total deferred financing costs are expected to be charged to interest expense prior to December 31, 1996 in connection with the early retirement of the borrowings under the 1996 Credit Facility. In addition, the Company will recognize noncash compensation expense of $870,000 during the third quarter of 1996 in connection with options to purchase shares of Common Stock granted in July 1996 to certain officers of the Company based upon the estimated valuation of the shares of Common Stock compared to the exercise price on the date of grant. 26 The following table sets forth for the periods indicated the percentages of total revenue represented by certain items in the Company's historical consolidated statement of operations.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Total revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses...................... 88.4 78.5 79.0 79.5 83.5 Depreciation and amortization........... 0.5 4.8 4.0 3.6 4.5 General and administrative expenses..... 41.1 18.9 17.0 15.3 14.3 --------- --------- --------- --------- --------- Income (loss) from operations........... (30.0) (2.2) 0.0 1.6 (2.3) Interest expense (income)............... (1.4) 1.0 4.8 2.0 4.0 --------- --------- --------- --------- --------- Income (loss) before income taxes....... (28.6) (3.2) (4.8) (0.4) (6.3) Provision for income taxes.............. 0.0 0.6 0.0 0.0 0.0 --------- --------- --------- --------- --------- Net income (loss)....................... (28.6) (3.8) (4.8) (0.4) (6.3) ========= ========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 TOTAL REVENUES. Total revenues increased by 12.2% to $11.3 million for the six months ended June 30, 1996 from $10.1 million for the six months ended June 30, 1995. The increase in occupancy fees of $863,000, or 8.5%, was due principally to the opening of two new pre-release facilities during the first quarter of 1996 and the acquisition of the Reid Center effective as of May 1, 1996. Revenues were lower than expected as a result of lower than anticipated occupancy levels at the Wyatt Facility during the first quarter of 1996 and certain pre-release facilities. The increase in other income for the six months ended June 30, 1996 to $370,000 from $3,000 for the six months ended June 30, 1995 was due primarily to the recognition of the revenue related to a previously reserved note receivable of $206,000 pertaining to 1994 operations of the Wyatt Facility, the realization of which has improved from prior periods due to payments received on the note and due to the additional operating experience with the facility. OPERATING EXPENSES. Operating expenses increased by 17.8% to $9.5 million for the six months ended June 30, 1996 from $8.0 million for the six months ended June 30, 1995. This increase is principally attributable to the opening of two new pre-release facilities during the first quarter of 1996 and