-----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, Mmk3UgWlkZcALj5KdJJVzWYO1f12KEDFBEXxOrS9PRMRqA8wJbWH0aSeKL9klo/L 8/CNqPhGGp7acPJftOLkZg== 0000890566-97-002232.txt : 19971022 0000890566-97-002232.hdr.sgml : 19971022 ACCESSION NUMBER: 0000890566-97-002232 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19971021 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: SEC FILE NUMBER: 333-35807 FILM NUMBER: 97698412 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 PROSPECTUS October 17, 1997 - -------------------------------------------------------------------------------- 2,920,000 CORNELL CORRECTIONS, INC. Common Shares - -------------------------------------------------------------------------------- Of the 2,920,000 shares of Common Stock, par value $.001 per share (the "Common Stock"), offered hereby (the "Offering"), 2,250,000 shares are being offered by Cornell Corrections, Inc. (the "Company"), and 670,000 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. The Common Stock is listed on the American Stock Exchange (the "AMEX") under the symbol "CRN." On October 16, 1997, the last reported sales price of the Common Stock on the AMEX was $20 1/8 per share. See "Price Range of Common Stock and Dividend Policy." FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 8-14. 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.
Price to Underwriting Discounts Proceeds to Proceeds to Public and Commissions(1) Company(2) Selling Stockholders - ----------------------------------------------------------------------------------------------------------------------- Per Common Share $19.625 $1.08 $18.546 $18.546 - ----------------------------------------------------------------------------------------------------------------------- Total(3) $57,305,000 $3,151,775 $41,727,656 $12,425,569 - -----------------------------------------------------------------------------------------------------------------------
(1) 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." (2) BEFORE DEDUCTING ESTIMATED EXPENSES OF THE OFFERING OF $500,000 WHICH WILL BE PAID BY THE COMPANY. (3) THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO 412,500 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 $65,400,313, THE TOTAL UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE $3,597,017 AND THE TOTAL PROCEEDS TO THE SELLING STOCKHOLDERS WILL BE $20,075,639. 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 SBC Warburg Dillon Read Inc., New York, New York, on or about October 22, 1997. The Underwriters include: SBC WARBURG DILLON READ INC. EQUITABLE SECURITIES CORPORATION WASSERSTEIN PERELLA SECURITIES, INC. Inside Front Cover [Map of United States and facility locations] o The Company and its predecessors have over 10 years experience in the secure institutional market. o Contracts to operate six residential facilities with a total offender capacity of 3,882. o Programs include general educational and substance abuse programs, certain transportation services and institutional food services. o The Company and its predecessors have over 20 years experience in the pre-release market. o Contracts to operate 14 residential facilities with a total offender capacity of 1,324. o Focus is upon rehabilitation and re-entry into society at large. o Programs include life skills and employment training and job placement assistance. o The Company and its predecessors have over 24 years experience in the juvenile market. o Contracts to operate 10 residential and 11 non-residential facilities with a total offender capacity of 1,866. o Programs include counseling, wilderness, medical and accredited educational programs tailored to meet the special needs of juveniles. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING TRANSACTIONS IN THE COMMON STOCK AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 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; (III) ALL REFERENCES TO NUMBER OF BEDS WITH RESPECT TO THE COMPANY'S RESIDENTIAL FACILITIES ARE TO DESIGN CAPACITY AND (IV) ALL REFERENCES TO TOTAL OFFENDER CAPACITY INCLUDE DESIGN CAPACITY BEDS PLUS THE PROGRAM CAPACITY OF THE COMPANY'S NON-RESIDENTIAL, COMMUNITY-BASED OPERATIONS. THE COMPANY The Company is one of the leading providers of privatized correctional, detention and pre-release services in the United States based on total offender capacity. The Company is the successor to entities that began developing secure institutional correctional and detention facilities in 1987, pre-release facilities in 1977 and juvenile facilities in 1973. The Company has significantly expanded its operations through acquisitions and internal growth and is currently operating or developing facilities in 10 states and the District of Columbia. As of September 9, 1997, the Company has contracts to operate 41 facilities with a total offender capacity of 7,072, which has significantly increased from 3,577 offenders at December 31, 1996. For the six months ended June 30, 1997, the Company's revenues were $28.0 million, representing an increase of 147% from $11.3 million for the six months ended June 30, 1996. The Company had net income of $1.3 million compared to a net loss of $710,000 for the same respective six month periods. The Company provides integrated facility development, design, construction and operational services to governmental agencies 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. Secure 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 offenders who are either on probation or serving the last three to six months of their sentences on parole and preparing for re-entry into society at large. Juvenile correctional and detention services primarily consist of providing residential treatment and educational programs and non-residential community-based programs to juvenile offenders between the ages of 10 and 17 who have either been adjudicated or suffer from behavioral problems. At the adult 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 include counseling, wilderness, medical and accredited educational 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, state and local governmental agencies in the United States. Of the facilities operated by the Company, 11 are owned, 26 are leased and four are operated or currently under development through other arrangements. See "Business -- Properties." In the United States, there is a growing trend toward privatization of government services and functions, including correctional and detention services, as governments of all types face continuing pressure to control costs and improve the quality of services. According to the Private Adult Correctional Facility Census dated March 15, 1997 ("1996 Facility Census"), the design capacity of privately managed adult secure institutional correctional and detention facilities in operation or under construction worldwide increased from 10,973 beds at December 31, 1989 to 85,201 beds at December 31, 1996, a compound annual growth rate of 34%. In addition, the design capacity of privately managed adult secure institutional correctional and detention facilities increased 34% in the last year. 3 The United States leads the world in private prison management contracts. The 1996 Facility Census reports that at December 31, 1996 there were private adult secure institutional correctional and detention facilities in operation or under construction in 25 states, the District of Columbia and Puerto Rico. According to reports issued by the United States Department of Justice, Bureau of Justice Statistics (the "BJS"), the number of adult offenders housed in United States federal and state prison facilities and in local jails increased from 744,208 at December 31, 1985 to 1,630,940 at June 30, 1996, a compound annual growth rate of 7.8%. Management believes that the increase in the demand for privatized adult secure institutional correctional and detention facilities is also a result, in large part, of the general shortage of beds available in United States adult secure institutional correctional and detention facilities. The pre-release correctional services industry has experienced substantial growth. According to the BJS, the number of parolees increased from 220,438 at December 31, 1980 to 690,159 at December 31, 1994, a compound annual growth rate of 8.5%. During the same period, the number of individuals on probation increased from 1.1 million to approximately 3.0 million, a compound annual growth rate of 7.4%. The probation and parole populations represent approximately 71% of the total number of adults under correctional supervision in the United States. The pre-release correctional services industry is extremely fragmented with several thousand providers across the country, most of which are small and operate in a specific geographic area. The juvenile corrections industry has also expanded rapidly in recent years as the need for services for at-risk and adjudicated youth has risen. According to the Criminal Justice Institute, the population in the juvenile correctional system, both residential and non-residential community-based, has increased from 62,268 youths at January 1, 1988 to 102,582 youths at January 1, 1995, a compound annual growth rate of 7.4%. In 1994, there were approximately 2.7 million juvenile arrests and 5.3 million youths in special education programs. The juvenile corrections industry is also fragmented with several thousand providers across the country, most of which are small and operate in a specific geographic area. OPERATING STRATEGIES The Company's objective is to enhance its position as one of the leading providers of privatized correctional, detention and pre-release services. The Company is committed to the following operating strategies: (i) diversifying its business within all three areas of its operational focus; (ii) delivering cost effective and quality management programs in all of its markets and (iii) providing specialized and innovative services to address the unique needs of governmental agencies and certain segments of the offender population. 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. The Company continues to seek to increase revenues by pursuing the following growth strategies: (i) selectively pursuing opportunities to obtain contract awards for new privatized facilities; (ii) increasing design capacity and program capacity at existing facilities and (iii) pursuing strategic acquisitions. By expanding the number of beds under contract and its program capacities, the Company increases economies of scale and purchasing power and enhances its opportunities for larger contract awards. 4 RECENT DEVELOPMENTS ACQUISITIONS The Company has completed four acquisitions since May 1996 and believes that the private correctional and detention industry is positioned for further consolidation. The Company believes that the larger, better capitalized providers will continue to acquire smaller providers that are insufficiently capitalized to pursue the industry's growth opportunities. The Company intends to pursue selective acquisitions of other operators of private correctional and detention facilities in secure institutional, pre-release and juvenile areas of operational focus to enhance its position in its current markets, to expand into new markets and to broaden the types of services which the Company can provide. In addition, the Company believes there are opportunities to eliminate costs through consolidation and coordination of the Company's current and subsequently acquired operations. In September 1997, the Company acquired substantially all of the assets of The Abraxas Group, Inc. and four related entities (collectively, "Abraxas"). Abraxas is a non-profit provider of residential and non-residential community-based juvenile programs, serving approximately 1,400 juvenile offenders throughout Pennsylvania, Ohio, Delaware and the District of Columbia. In January 1997, the Company acquired substantially all of the assets of Interventions Co. ("Interventions"), a non-profit operator of a 300 bed adult residential pre-release facility in Dallas, Texas and a 150 bed capacity residential transitional living center for juveniles in San Antonio, Texas. During 1996 the Company acquired (i) a 310 bed adult residential pre-release facility located in Houston, Texas (the "Reid Center") and (ii) substantially all of the assets of MidTex Detentions, Inc. ("MidTex"), a private correctional operator for the Federal Bureau of Prisons ("FBOP"). MidTex operated secure institutional facilities in Big Spring, Texas with a design capacity of 1,305 beds (the "Big Spring Complex"). NEW CONTRACT AWARDS In June 1997, the Company was awarded a contract with the State of Georgia to design, build, finance and operate a 550 bed minimum to medium security adult correctional facility. The facility will be owned and financed by the Company, and is scheduled to be completed during the third quarter of 1998. In February 1997, the Company received an award from Santa Fe County to design, build and operate a 760 total bed project in Santa Fe, New Mexico, which will be completed in phases. The Company took over the operation of an existing 240 bed adult and juvenile jail on July 1, 1997, with construction of a new 604 bed adult detention facility currently scheduled to be completed during the second quarter of 1998. The 240 bed jail will subsequently be converted into a 156 bed residential juvenile detention facility and is scheduled to be completed during the fourth quarter of 1998. INTERNAL EXPANSION In addition to smaller expansions within certain of its existing facilities, the Company recently began construction of a 516 bed expansion of the Big Spring Complex. This expansion is scheduled to be completed during the second quarter of 1998 and will bring the total design capacity at the Big Spring Complex to 1,868 beds, making it one of the largest correctional facilities operated by a private provider in the State of Texas. EXPANDED CREDIT FACILITY To fund its growth and operating strategies, in September 1997 the Company entered into a new $60 million revolving line of credit (the "1997 Credit Facility"), which replaced its prior $15 million revolving line of credit (the "1996 Credit Facility"). The 1997 Credit Facility, which matures in 2003, will be used by the Company for acquisitions and working capital purposes. ------------------------ The Company's principal executive offices are located at 4801 Woodway, Suite 100E, Houston, Texas 77056, and its telephone number at such address is (713) 623-0790. 5 THE OFFERING Common Stock offered by the Company............................ 2,250,000 shares Common Stock offered by the Selling Stockholders....................... 670,000 shares(1) --------- Total Common Stock offered...... 2,920,000 shares ========= Common Stock to be outstanding after the Offering....................... 9,355,404 shares(2) Use of Proceeds by the Company....... For repayment of borrowings, future acquisitions, working capital and general corporate purposes. See "Use of Proceeds." American Stock Exchange symbol....... CRN - ------------ (1) An aggregate of 209,073 of the shares of Common Stock offered by the Selling Stockholders results from warrant exercises immediately prior to the Offering. See "Principal and Selling Stockholders." (2) Excludes an aggregate of: (i) 594,498 shares of Common Stock reserved for issuance upon exercise of outstanding stock options granted under the Company's 1996 Stock Option Plan (the "Stock Option Plan"); (ii) 295,856 shares of Common Stock reserved for issuance upon exercise of outstanding stock options and warrants not included under the Stock Option Plan and (iii) 354,334 shares of Common Stock to be reserved for issuance upon the exercise of long-term incentive stock options proposed to be granted by the Company's Board of Directors which grants will be subject to approval by the stockholders of an amendment to the Stock Option Plan or the adoption of a new stock option plan (the "Long-Term Incentive Options"). See "Management -- Stock Option Plan," "Management -- Proposed Stock Option Grants" and Note 6 of Notes to the Company's Consolidated Financial Statements. 6 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, 1996 and for the six months ended June 30, 1997 and the Pro Forma Balance Sheet Data as of June 30, 1997 reflect the results of operations and consolidated financial position of the Company and its subsidiaries as if: (i) the acquisitions by the Company in 1996 and 1997; (ii) the exercise of outstanding warrants relating to the shares of Common Stock to be sold by the Selling Stockholders in the Offering and (iii) 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, 1996, and, in the case of the Balance Sheet Data, on June 30, 1997.
HISTORICAL ---------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- --------------------- 1992 1993 1994(1) 1995 1996(2) 1996 1997 --------- --------- ------- --------- ------- --------- --------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues........................... $ 2,540 $ 3,198 $15,689 $ 20,692 $32,327 $ 11,337 $28,041 Income (loss) from operations...... 910 (960) (343) (10) 339 (263) 2,147 Interest expense(3)................ -- -- 294 1,115 2,810 498 209 Income (loss) before income taxes............................. 940 (915) (499) (989) (2,304) (710) 2,024 Net income (loss).................. 940 (915) (600) (989) (2,379) (710) 1,295 Earnings (loss) per share.......... $ .38 $ (.34) $ (.16) $ (.25) $ (.53) $ (.20) $ .18 Number of shares used in per share computation(4).................... 2,491 2,695 3,811 3,983 4,466 3,523 7,139 OPERATING DATA: Total offender capacity: Residential...................... -- 302 1,281 1,640 3,577 2,044 5,872 Non-residential community- based........................... -- -- -- -- -- -- -- Total........................ -- 302 1,281 1,640 3,577 2,044 5,872 Beds under contract (end of period)........................... -- 282 1,155 1,478 3,254 1,796 5,367 Contracted beds in operation (end of period)........................ -- 282 1,155 1,135 2,899 1,561 3,541 Average occupancy based on contracted beds in operation(5)... -- -- 92.1% 98.9% 97.0% 95.8% 96.4%
PRO FORMA ------------------------ YEAR SIX MONTHS ENDED ENDED DECEMBER 31, JUNE 30, 1996 1997 ------------ ----------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues........................... $ 80,385 $45,165 Income (loss) from operations...... 4,500 3,347 Interest expense(3)................ 177 88 Income (loss) before income taxes............................. 4,504 3,345 Net income (loss).................. 2,702 2,141 Earnings (loss) per share.......... $ .32 $ .25 Number of shares used in per share computation(4).................... 8,526 8,546 OPERATING DATA: Total offender capacity: Residential...................... 4,527 6,372 Non-residential community- based........................... 900 900 Total........................ 5,427 7,272 Beds under contract (end of period)........................... 4,098 5,867 Contracted beds in operation (end of period)........................ 3,743 4,041 Average occupancy based on contracted beds in operation(5)... 92.7% 95.1% JUNE 30, 1997 ------------------------- HISTORICAL PRO FORMA ---------- --------- (UNAUDITED) BALANCE SHEET DATA: Working capital.................... $ 5,318 $32,032 Total assets....................... 53,282 98,100 Long-term debt, including current portion........................... 2,592 592 Stockholders' equity............... 42,537 84,181 - ------------ (1) Includes operations purchased by the Company in March 1994. (2) Includes operations purchased by the Company in May and July 1996. (3) Interest expense for 1996 includes a $1.3 million non-recurring charge ($726,000 of which was non-cash) to expense deferred financing costs associated with the early retirement of debt. (4) 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. (5) For any applicable residential 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. 7 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 Although the Company reported net income of $1.3 million for the six months ended June 30, 1997, the Company incurred net losses of $600,000, $989,000 and $2.4 million for the years ended December 31, 1994, 1995 and 1996, respectively. No assurance can be given that the Company will not incur losses in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." ACQUISITION RISKS; INTEGRATION OF ACQUISITIONS 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 possible adverse effects 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 integrate 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. As a result of the acquisitions of Interventions and Abraxas (the "1997 Acquisitions"), total offender capacity has increased by approximately 1,850 since December 31, 1996. Prior to the 1997 Acquisitions, both Interventions and Abraxas were operated as non-profit organizations. Consequently, no assurance can be given that the Company will be able to successfully integrate the operations and personnel of the 1997 Acquisitions with those of the Company on a profitable basis, and the Company's 1997 pro forma financial information 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 1997 Acquisitions 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 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 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 8 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 institutional adult facilities, the extent to which the Company is able to effectively compete with the two companies now holding the major share of contracts for currently privatized adult facilities. No assurance can be given that the Company will be able to obtain additional contracts to develop or operate new facilities on favorable terms. 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 secure 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 necessary to finance acquisitions or the construction of new facilities. 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. FACILITY OCCUPANCY LEVELS AND CONTRACT DURATION A substantial portion of the Company's revenues are generated under residential facility management contracts that specify a rate per day per offender ("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 the contracting governmental agency or agencies to supply the facility with a sufficient number of offenders 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 certain cases, soliciting additional offenders 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 offenders serving relatively short sentences or only the last three to six months of their sentences, the high turnover rate of offenders requires a constant influx of new offenders 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 typically result in capacity underutilization for a one-to three-month period after the facilities first receive offenders. 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." 9 FIXED REVENUE STRUCTURE Most of the Company's facility management contracts provide for payments to the Company of either fixed per diem rates or per diem rates 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 rates, then the Company's results of operations would be adversely affected. POSSIBLE LOSS OF LEASE RIGHTS The site of the Big Spring Complex (1,352 beds, currently being expanded to 1,868 beds) 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 by the United States government in 1978. The document conveying the Larger Tract to the City of Big Spring (the "Conveyance") contains certain restrictive covenants relating to the use of the Larger Tract that apply to the City of Big Spring 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 of Big Spring and the Company which permit the Company to operate the Big Spring Complex and advised the City of Big Spring in writing that it had no objections to the execution thereof by the parties thereto. While the Company believes that (i) the City of Big Spring 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 of Big Spring and its lessees, the FAA could assert that such uses of the Larger Tract violate the Conveyance. In addition, the City of Big Spring 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 of Big Spring (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 of Big Spring do not give the Company recourse against the City of Big Spring 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 Larger Tract, or in any case in which the United States government or the FAA has superior rights to use the Larger Tract, the continued ability of the Company to lease and use the Big Spring Complex could be subject to the discretion of the United States government or the FAA. The inability of the Company to continue to operate the Big Spring Complex would have a material adverse effect on the Company's financial condition and results of operations. BUSINESS CONCENTRATION Contracts with the FBOP and the California Department of Corrections ("CDC") currently account for approximately 58% of the Company's revenues. The loss of, or a significant decrease in, business from one or both of these governmental agencies would have a material adverse effect on the Company's financial condition and results of operations. 10 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 many 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 private bank debt, 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 secure 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 offender'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 as labor unions, local sheriffs' 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 11 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 offenders that can be placed 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, internal incident or other 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 offenders 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. Although the Company has not experienced any material adverse effect on its business or results of operations as a result of previous escapes or absconsions, no assurance can be given that any future escapes or absconsions would not have a material adverse effect on the Company's business or 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 offenders or other persons for personal injury or other damages resulting from contact with Company-operated facilities, programs, personnel or offenders, including damages arising from an offender's escape or absconscion or from a disturbance or riot at a Company-operated facility. The U.S. Supreme Court has recently held that prison guards employed by private firms are not entitled to qualified immunity from suit by prisoners for violations of their rights. 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 offenders 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 other 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"), Youth Services International, Inc. and Correctional Services Corporation. At December 31, 1996, CCA and WHC accounted for more than 75% of the privatized secure institutional adult beds under contract in the United States, according to the 1996 Facility Census. The Company also competes in some markets with small local companies that 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 companies may have greater financial resources than the Company to finance 12 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 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 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, 9,355,404 shares of Common Stock will be outstanding, and 890,354 shares will be issuable upon exercise of outstanding warrants and stock options. The 2,920,000 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. A total of 2,047,067 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 2,246,201 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." In 1996, the Company filed 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. The Company and persons who will beneficially own in the aggregate 2,547,083 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 90 days following the date of this Prospectus without the prior written consent of SBC Warburg Dillon Read Inc. ("SBC Warburg Dillon Read"), subject to certain exceptions. See "Underwriting." 13 POSSIBLE VOLATILITY OF STOCK PRICE 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 $11.27 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") authorizes 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 Certain current stockholders of the Company (the "Applicable Stockholders"), who beneficially own in the aggregate approximately 10.2% of the outstanding Common Stock following completion of the Offering assuming exercise of their outstanding stock options, are parties to a Stockholders Agreement (the "Stockholders Agreement"). The Stockholders Agreement provides that the Applicable Stockholders agree to vote all shares of Common Stock owned by them to elect two directors out of a six-member Board of Directors of the Company. Consequently, the Applicable Stockholders, through their Common Stock holdings and representation on the Board of Directors of the Company, will be able to exercise influence over the policies and direction of the Company. The Stockholders Agreement will terminate upon the first to occur of (i) October 7, 2000 or (ii) an Applicable Stockholder owning less than 350,000 shares of the outstanding Common Stock (including shares of Common Stock issuable upon the exercise of currently vested options). See "Certain Relationships and Related Party Transactions -- Stockholders Agreement" and "Principal and Selling Stockholders." 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,250,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $41.2 million at a public offering price of $19 5/8 per share and 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. The net proceeds received by the Company in the Offering will be used to repay the outstanding borrowings under the 1997 Credit Facility, which amounts can be reborrowed from time to time after the Offering. Remaining proceeds will be used for future acquisitions, partial repayment of new construction financings, working capital and general corporate purposes. As of October 16, 1997, the outstanding borrowings under the 1997 Credit Facility totaled $18.0 million, with a stated interest rate of 8.5%. The Company used borrowings under the 1997 Credit Facility to finance the 1997 Acquisitions and to fund a portion of the construction financing for the expansion of the Big Spring Complex and the development of the facility in Charlton County, Georgia (the "Charlton County Facility"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock of the Company is currently listed on the AMEX under the symbol "CRN." On October 16, 1997, the last reported sales price for the Common Stock on the AMEX was $20 1/8 per share. As of October 15, 1997, there were approximately 43 record holders of the Common Stock. The high and low sales prices for the Common Stock on the AMEX since the Common Stock began trading on October 3, 1996 are shown below: HIGH LOW ------- ------- 1996: Fourth Quarter (from October 3).............. $12 3/4 $ 8 7/8 1997: First Quarter................................ 11 5/8 9 Second Quarter............................... 18 9 Third Quarter................................ 16 5/8 14 7/16 Fourth Quarter (through October 16).......... 20 3/4 15 3/4 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 and restrictions, if any, imposed by financing commitments and legal requirements. The 1997 Credit Facility contains restrictions on the payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 15 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company: (i) as of June 30, 1997; (ii) on a pro forma basis to give effect to the Abraxas acquisition and (iii) on a pro forma basis adjusted to give effect to the Offering and the application of the estimated net proceeds therefrom and the exercise of outstanding warrants relating to the shares of Common Stock to be sold by the Selling Stockholders in the Offering. See "Use of Proceeds." 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, 1997 ---------------------------------------- PRO FORMA HISTORICAL PRO FORMA AS ADJUSTED ---------- --------- ----------- (DOLLARS IN THOUSANDS) Long-term debt, including current portion: Credit Facility.................... $ 2,000 $21,000 $ -- Other.............................. 592 592 592 ---------- --------- ----------- Total long-term debt, including current portion.................... 2,592 21,592 592 ---------- --------- ----------- Stockholders' equity: Preferred Stock, par value $.001 per share, 10,000,000 shares authorized, none issued and outstanding..................... -- -- -- Common Stock, par value $.001 per share, 30,000,000 shares authorized, 7,413,384 shares issued and outstanding historical and 9,872,457 shares issued and outstanding pro forma as adjusted(1).................. 7 7 10 Additional paid-in capital......... 47,753 47,753 89,394 Stock option loans................. (455) (455) (455) Accumulated deficit................ (2,415) (2,415) (2,415) Treasury stock (555,000 shares of Common Stock, at cost).......... (2,353) (2,353) (2,353) ---------- --------- ----------- Total stockholders' equity.... 42,537 42,537 84,181 ---------- --------- ----------- Total capitalization....... $ 45,129 $64,129 $84,773 ========== ========= =========== - ------------ (1) Excludes: (i) 594,498 shares of Common Stock reserved for issuance upon exercise of outstanding stock options granted under the Stock Option Plan; (ii) 295,856 shares of Common Stock reserved for issuance upon exercise of other outstanding stock options and warrants and (iii) shares issuable with respect to the Long-Term Incentive Options. See "Management -- Stock Option Plan" and Note 6 of Notes to the Company's Consolidated Financial Statements. 16 DILUTION The pro forma net tangible book value of the Common Stock as of June 30, 1997 was $36,243,000, or approximately $5.28 per share. Pro forma net tangible book value 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 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 per share of Common Stock immediately after completion of the Offering. After giving effect to the Offering at the public offering price of $19 5/8 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, 1997 would have been $77,887,000, or approximately $8.36 per share. This represents an immediate increase in pro forma net tangible book value of $3.08 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $11.27 per share to new investors in the Offering. The following table illustrates this per share dilution: Public offering price per share...... $ 19.63 Pro forma net tangible book value per share before the Offering.......... $ 5.28 Increase per share attributable to the Offering....................... 3.08 --------- Pro forma net tangible book value per share after the Offering........... 8.36 --------- Dilution of net tangible book value per share to new investors......... $ 11.27 ========= The following table sets forth, on an unaudited pro forma basis at June 30, 1997, 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 public offering price of $19 5/8 per share.
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- -------------- ------- ------------- Existing stockholders................ 6,858,384 75.3% $ 47,760,000 52.0% $ 6.96 New investors........................ 2,250,000 24.7 44,156,250 48.0 19.63 ---------- ------- -------------- ------- Total......................... 9,108,384 100.0% $ 91,916,250 100.0% ========== ======= ============== =======
The foregoing table excludes: (i) 594,498 shares of Common Stock reserved for issuance upon exercise of outstanding stock options granted under the Stock Option Plan; (ii) 295,856 shares of Common Stock reserved for issuance upon exercise of other outstanding stock options and warrants and (iii) shares issuable with respect to the Long-Term Incentive Options. See "Management -- Stock Option Plan" and Note 6 of Notes to the Company's Consolidated Financial Statements. 17 PRO FORMA FINANCIAL DATA The following unaudited pro forma condensed consolidated balance sheet as of June 30, 1997 and the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1996 and for the six months ended June 30, 1997 reflect the consolidated financial position and results of operations, respectively, of the Company and its subsidiaries as if: (i) the acquisition of Abraxas by the Company; (ii) the exercise of outstanding warrants relating to the shares of Common Stock to be sold by the Selling Stockholders in the Offering and (iii) the Offering and the application of the estimated net proceeds therefrom, had occurred, in the case of the balance sheet, on June 30, 1997, and, in the case of the statements of operations, on January 1, 1996. In addition, the unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1996 and for the six months ended June 30, 1997 reflect the results of operations as if the Company's initial public offering in October 1996 ("IPO") and the acquisitions by the Company in 1996 and the acquisition of Interventions had occurred on January 1, 1996. 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. 18 CORNELL CORRECTIONS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (DOLLARS IN THOUSANDS)
HISTORICAL ------------------- PRO FORMA PRO FORMA AS THE PRO FORMA FOR THE OFFERING ADJUSTED FOR COMPANY ABRAXAS ADJUSTMENTS ACQUISITION ADJUSTMENTS THE OFFERING -------- -------- -------- -------- -------- -------- ASSETS: Current Assets: Cash and cash equivalents ....... $ 1,579 $ 1,607 $ (853)(1) $ 2,333 $ 20,226 (10) $ 22,977 418 (11) Receivables, net ................ 8,383 8,398 -- 16,781 -- 16,781 Other current assets ............ 3,071 829 (737)(2) 3,163 -- 3,163 -------- -------- -------- -------- -------- -------- Total current assets ....... 13,033 10,834 (1,590) 22,277 20,644 42,921 Property and equipment, net ......... 31,743 12,380 1,950 (3) 46,073 -- 46,073 Intangibles ......................... 5,694 -- 600 (4) 6,294 -- 6,294 Other assets ........................ 2,812 2,261 (2,261)(2) 2,812 -- 2,812 -------- -------- -------- -------- -------- -------- Total assets ............... $ 53,282 $ 25,475 $ (1,301) $ 77,456 $ 20,644 $ 98,100 ======== ======== ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Accounts payable and accrued liabilities ................... $ 5,432 $ 3,752 $ 1,422 (5) $ 10,606 $ -- $ 10,606 Current portion of long-term debt .......................... 2,283 3,154 (3,154)(6) 283 -- 283 (2,000)(7) -------- -------- -------- -------- -------- -------- Total current liabilities .. 7,715 6,906 (3,732) 10,889 -- 10,889 Other long-term liabilities ......... 2,721 -- -- 2,721 -- 2,721 Long-term debt, excluding current portion ........................... 309 12,364 (12,364)(6) 21,309 (21,000)(10) 309 2,000 (7) 19,000 (8) Stockholders' equity ................ 42,537 6,205 (6,205)(9) 42,537 41,226 (10) 84,181 418 (11) -------- -------- -------- -------- -------- -------- Total liabilities and stockholders' equity ............................ $ 53,282 $ 25,475 $ (1,301) $ 77,456 $ 20,644 $ 98,100 ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited pro forma condensed consolidated balance sheet. 19 CORNELL CORRECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (1) Records a reduction to cash used to fund a portion of the Abraxas acquisition costs. (2) Records an adjustment to eliminate a reserve fund and other assets not acquired in the Abraxas acquisition. (3) Records a net increase in the carrying value of Abraxas property and equipment to estimated fair value. (4) Records the cost of a non-compete agreement with the President of Abraxas. (5) Records accrued transaction costs and other Abraxas acquisition related liabilities. (6) Records the elimination of Abraxas current and non-current debt which was not assumed by the Company in the Abraxas acquisition. (7) Records the reclassification of the Company's current portion of long-term debt to long-term debt as a result of refinancing amounts due under the 1996 Credit Facility with the 1997 Credit Facility. (8) Records the increase in long-term debt related to financing the Abraxas acquisition. (9) Records the elimination of net assets of Abraxas prior to the acquisition. (10) Records the sale of 2,250,000 shares of Common Stock, par value $.001 per share, at $19 5/8 per share, net of underwriting discounts and commissions and aggregate offering expenses of $500,000, the use of $21.0 million of the net proceeds thereof to repay outstanding indebtedness, and the use of the remaining proceeds of $20.2 million as an increase to cash. (11) Records the proceeds upon the exercise, concurrently with the Offering, of stock warrants by certain Selling Stockholders in order to purchase 209,073 shares of Common Stock that will be sold by such Selling Stockholders in the Offering. 20 CORNELL CORRECTIONS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL --------------------------------------------------- TOTAL PRO FORMA THE REID INTER- PRO FORMA FOR THE OFFERING COMPANY MIDTEX CENTER VENTIONS ABRAXAS ADJUSTMENTS ACQUISITIONS ADJUSTMENTS -------- ------- ------ ------- -------- ------- -------- ------- Revenues ......................... $ 32,327 $ 8,603 $1,131 $ 7,244 $ 31,080 $ -- $ 80,385 $ -- Operating expenses ............... 26,038 5,774 997 5,608 23,543 5,359 (1) 67,927 -- 500 (2) 108 (3) Depreciation and amortization .... 1,390 407 22 162 1,316 (866)(4) 2,387 -- 60 (5) (18)(6) (97)(7) 11 (8) General and administrative expenses ....................... 4,560 672 -- 644 5,054 (5,359)(1) 5,571 -- -------- ------- ------ ------- -------- ------- -------- ------- Income from operations ........... 339 1,750 112 830 1,167 302 4,500 -- Interest expense ................. 2,810 843 -- 173 1,226 939 (9) 1,671 (1,494)(14) (1,281)(10) (3,039)(11) Interest income .................. (167) (14) -- (300) -- 300 (12) (181) -- -------- ------- ------ ------- -------- ------- -------- ------- Income (loss) before provision for income taxes ................... (2,304) 921 112 957 (59) 3,383 3,010 1,494 Provision for income taxes ....... 75 -- -- -- -- 1,129 (13) 1,204 598 (13) -------- ------- ------ ------- -------- ------- -------- ------- Net income (loss) ................ $ (2,379) $ 921 $ 112 $ 957 $ (59) $ 2,254 $ 1,806 $ 896 ======== ======= ====== ======= ======== ======= ======== ======= Earnings (loss) per share ........ $ (.53) $ .25 ======== ======== Number of shares used in per share computation (thousands)(15) .... 4,466 7,119 ======== ========
PRO FORMA AS ADJUSTED FOR THE OFFERING ------------ Revenues............................. $ 80,385 Operating expenses................... 67,927 Depreciation and amortization........ 2,387 General and administrative expenses........................... 5,571 ------------ Income from operations............... 4,500 Interest expense..................... 177 Interest income...................... (181) ------------ Income (loss) before provision for income taxes....................... 4,504 Provision for income taxes........... 1,802 ------------ Net income (loss).................... $ 2,702 ============ Earnings (loss) per share............ $ .32 ============ Number of shares used in per share computation (thousands)(15)........ 8,526 ============ See accompanying notes to unaudited pro forma condensed consolidated statement of operations. 21 CORNELL CORRECTIONS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL -------------------- PRO FORMA PRO FORMA AS THE PRO FORMA FOR THE OFFERING ADJUSTED FOR COMPANY ABRAXAS ADJUSTMENTS ACQUISITION ADJUSTMENTS THE OFFERING -------- -------- -------- -------- -------- -------- Revenues ......................... $ 28,041 $ 17,124 $ -- $ 45,165 $ -- $ 45,165 Operating expenses ............... 22,556 13,060 1,860 (1) 37,726 -- 37,726 250 (2) Depreciation and amortization .... 1,120 601 (376)(4) 1,375 -- 1,375 30 (5) General and administrative expenses ....................... 2,218 2,359 (1,860)(1) 2,717 -- 2,717 -------- -------- -------- -------- -------- -------- Income from operations ........... 2,147 1,104 96 3,347 -- 3,347 Interest expense ................. 209 606 314 (9) 1,129 (1,041)(14) 88 Interest Income .................. (86) -- -- (86) -- (86) -------- -------- -------- -------- -------- -------- Income (loss) before provision for income taxes ................... 2,024 498 (218) 2,304 1,041 3,345 Provision for income taxes ....... 729 -- 100 (13) 829 375 (13) 1,204 -------- -------- -------- -------- -------- -------- Net income ....................... $ 1,295 $ 498 $ (318) $ 1,475 $ 666 $ 2,141 ======== ======== ======== ======== ======== ======== Earnings per share ............... $ .18 $ .21 $ .25 ======== ======== ======== Number of shares used in per share computation (thousands) (15) ... 7,139 7,139 8,546 ======== ======== ========
See accompanying notes to unaudited pro forma condensed consolidated statement of operations. 22 CORNELL CORRECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (1) Records reclassification of general and administrative expenses for Abraxas, Interventions and MidTex to operating expenses to conform to the Company's policy. (2) Records an adjustment to operating expenses to reflect estimated property taxes for land and buildings acquired from Abraxas which were tax-exempt prior to the acquisition. (3) Records an adjustment to operating expenses to reflect annual payments in lieu of property taxes to the City of Big Spring resulting from the acquisition of substantially all the assets of MidTex. (4) Records adjustments to depreciation expense for revised basis in depreciable assets as follows for Abraxas: YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ---------------- (DOLLARS IN THOUSANDS) Elimination of historical depreciation expense............... $(1,316) $ (601) Depreciation expense for revised basis in depreciable assets........ 450 225 -------- ------ $ (866) $ (376) ======== ====== (5) Records amortization expense of $60,000 for the year ended December 31, 1996 and $30,000 for the six months ended June 30, 1997 for the non-compete agreement with the President of Abraxas. (6) Records adjustments to depreciation expense for revised basis in depreciable assets for Interventions. (7) Records adjustments to depreciation and amortization as follows for MidTex: YEAR ENDED DECEMBER 31, 1996 ---------------------- (DOLLARS IN THOUSANDS) Elimination of historical depreciation and amortization expense............................ $ (407) Amortization of prepaid facility use costs.............................. 310 ------ $ (97) ====== (8) Records adjustments to depreciation expense for the revised basis in depreciable assets for the Reid Center. (9) Records additional interest expense for the year ended December 31, 1996 on bank borrowings of $50.8 million incurred to consummate the Abraxas, Interventions, MidTex and Reid Center acquisitions and additional interest expense for the six months ended June 30, 1997 on bank borrowings of $19.0 million incurred to consummate the acquisition of Abraxas based on a stated interest rate of 8.00%, plus amortization of debt issuance costs incurred under terms of the 1997 Credit Facility. (10) Records an adjustment to reverse a $1.3 million non-recurring charge in 1996 to expense deferred financing costs associated with the 1996 Credit Facility. (11) Records a reduction in interest expense of $3.0 million to reduce assumed indebtedness with proceeds of $38.0 million from the IPO. (12) Records an adjustment to eliminate investment income earned on investments not acquired in the Interventions acquisition. (13) Records adjustments to record the income tax effects of the foregoing adjustments. (14) Records a reduction in interest expense of $1.5 million of the year ended December 31, 1996 and $1.0 million for the six months ended June 30, 1997 as a result of the repayment in full of borrowing outstanding under the 1997 Credit Facility from the net proceeds of the Offering. (15) Pro forma shares for the Offering include only 1,407,000 of the 2,459,073 shares (which includes 209,073 shares issued upon the exercise of warrants) sold in the Offering. The 1,052,073 shares represent shares assumed repurchased with the excess cash proceeds received by the Company. 23 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, 1996 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 1994, 1995 and 1996 are included elsewhere in this Prospectus. The selected consolidated 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, 1996 and 1997 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, 1997 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, 1996 and the six months ended June 30, 1997 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 by the Company in 1996 and 1997; (ii) the exercise of warrants relating to the shares of Common Stock to be sold by the Selling Stockholders in the Offering and (iii) the Offering and the application of the estimated net proceeds therefrom to the Company, as if such events had occurred on January 1, 1996. The pro forma Balance Sheet Data as of June 30, 1997 gives effect to such events as if they had occurred on June 30, 1997. 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 at the beginning of the period or on the date indicated, nor are they intended to project the Company's results of operations or financial position for any future period or date. 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 -------------------------------------------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------------------- -------------------- 1992 1993 1994(1) 1995 1996(2) 1996 1997 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues ......................... $ 2,540 $ 3,198 $ 15,689 $ 20,692 $ 32,327 $ 11,337 $ 28,041 Operating expenses ............... -- 2,827 12,315 16,351 26,038 9,461 22,556 Depreciation and amortization .... 3 16 758 820 1,390 510 1,120 General and administrative expenses ....................... 1,627 1,315 2,959 3,531 4,560 1,629 2,218 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations ..................... 910 (960) (343) (10) 339 (263) 2,147 Interest expense(3) .............. -- -- 294 1,115 2,810 498 209 Interest income .................. (30) (45) (138) (136) (167) (51) (86) -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes .......................... 940 (915) (499) (989) (2,304) (710) 2,024 Provision for income taxes(4) .... -- -- 101 -- 75 -- 729 -------- -------- -------- -------- -------- -------- -------- Net income (loss) ................ $ 940 $ (915) $ (600) $ (989) $ (2,379) $ (710) $ 1,295 ======== ======== ======== ======== ======== ======== ======== Earnings (loss) per share ........ $ .38 $ (.34) $ (.16) $ (.25) $ (.53) $ (.20) $ .18 ======== ======== ======== ======== ======== ======== ======== Number of shares used in per share computation(5) ................. 2,491 2,695 3,811 3,983 4,466 3,523 7,139
PRO FORMA ------------------------ SIX YEAR MONTHS ENDED ENDED DECEMBER 31, JUNE 30, 1996 1997 ---------- ---------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues ............................. $ 80,385 $ 45,165 Operating expenses ................... 67,927 37,726 Depreciation and amortization ........ 2,387 1,375 General and administrative expenses ........................... 5,571 2,717 ---------- ---------- Income (loss) from operations ......................... 4,500 3,347 Interest expense(3) .................. 177 88 Interest income ...................... (181) (86) ---------- ---------- Income (loss) before income taxes .............................. 4,504 3,345 Provision for income taxes(4) ........ 1,802 1,204 ---------- ---------- Net income (loss) .................... $ 2,702 $ 2,141 ========== ========== Earnings (loss) per share ............ $ .32 $ .25 ========== ========== Number of shares used in per share computation(5) ..................... 8,526 8,546 (TABLE CONTINUED ON FOLLOWING PAGE) 24
HISTORICAL ------------------------------------------------------------------------------ SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------------ -------------------- 1992 1993 1994(1) 1995 1996(2) 1996 1997 -------- -------- -------- -------- -------- -------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) OPERATING DATA: Total offender capacity: Residential ................... -- 302 1,281 1,640 3,577 2,044 5,872 Non-residential community-based ............. -- -- -- -- -- -- -- Total ....................... -- 302 1,281 1,640 3,577 2,044 5,872 Beds under contract (end of period) ....................... -- 282 1,155 1,478 3,254 1,796 5,367 Contracted beds in operation (end of period) .................... -- 282 1,155 1,135 2,899 1,561 3,541 Average occupancy based on contracted beds in operation(6) .................. -- -- 92.1% 98.9% 97.0% 95.8% 96.4% BALANCE SHEET DATA: Working capital ................. $ 812 $ 810 $ 2,015 $ 1,525 $ 7,747 $ 2,098 $ 5,318 Total assets .................... 1,300 2,048 13,095 14,184 46,824 19,773 53,282 Long-term debt .................. -- -- 3,447 7,649 745 13,868 2,592 Stockholders' equity ............ 896 1,085 6,631 3,053 41,051 2,367 42,537
PRO FORMA ------------------------ SIX YEAR MONTHS ENDED ENDED DECEMBER 31, JUNE 30, 1996 1997 ---------- ---------- (UNAUDITED) OPERATING DATA: Total offender capacity: Residential ........................ 4,527 6,372 Non-residential community-based .................. 900 900 Total ............................ 5,427 7,272 Beds under contract (end of period) ............................ 4,098 5,867 Contracted beds in operation (end of period) ......................... 3,743 4,041 Average occupancy based on contracted beds in operation(6) ....................... 92.7% 95.1% BALANCE SHEET DATA: Working capital ...................... $ 32,032 Total assets ......................... 98,100 Long-term debt ....................... 592 Stockholders' equity ................. 84,181 - ------------ (1) Includes operations purchased by the Company in March 1994. (2) Includes operations purchased by the Company in May and July 1996. (3) Interest expense for 1996 includes a $1.3 million non-recurring charge ($726,000 of which was non-cash) to expense deferred financing costs associated with the early retirement of debt. (4) 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 prior to March 31, 1994 because the Company was organized as a partnership until that time. (5) 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. (6) 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. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company provides integrated facility development, design, construction and operational services to governmental agencies within three areas of operational focus. The following table sets forth the number of facilities and beds under contract or award at the end of the periods shown. DECEMBER 31, ------------------------------- JUNE 30, 1994 1995 1996 1997 --------- --------- --------- -------- Facilities in operation(1)........... 13 12 16 21 Total offender capacity: Residential..................... 1,281 1,640 3,577 5,872 Non-residential community-based............... -- -- -- -- Total...................... 1,281 1,640 3,577 5,872 Beds under contract (end of period)............................ 1,155 1,478 3,254 5,367 Contracted beds in operation (end of period)............................ 1,155 1,135 2,899 3,541 Average occupancy based on contracted beds in operation(2)............... 92.1% 98.9% 97.0% 96.4% - ------------ (1) As of September 9, 1997, the Company had 39 facilities in operation and contracts to operate two additional facilities under development. Of the 41 facilities, 11 are non-residential community-based facilities. (2) For any applicable facilities, includes reduced occupancy during the start-up phase. 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 generally recognized on a per diem rate based upon the number of occupant days for the period. 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 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 secure institutional, pre-release or juvenile) based on the terms negotiated with each contracting governmental agency, which terms depend 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 facilities for which the Company has only a management contract (two facilities in operation at June 30, 1997). 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, has both a fixed and a variable component. The Company can adjust the staffing and payroll to a certain extent based on occupancy at a facility, but a minimum fixed number of employees is required to operate and maintain any facility regardless of occupancy levels. Since a majority of the Company's operating expenses are fixed, to the extent that the Company can increase revenues at a facility through 26 higher occupancy or expansion of the number of beds under contact, 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 offenders. Offenders are typically assigned to a newly opened facility on a phased-in 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 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 requests for proposals ("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. RESULTS OF OPERATIONS The Company's historical operating results reflect that the Company has significantly expanded its business since 1993. 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's income from operations as a percentage of revenues 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. The following table sets forth for the periods indicated the percentages of revenues represented by certain items in the Company's historical consolidated statements of operations.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------- ----------------- 1994 1995 1996 1996 1997 ------ ------ ------ ------ ------ Revenues .......................... 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses ................ 78.5 79.0 80.5 83.5 80.4 Depreciation and amortization ..... 4.8 4.0 4.3 4.5 4.0 General and administrative expenses ........................ 18.9 17.0 14.1 14.3 7.9 ------ ------ ------ ------ ------ Income (loss) from operations ..... (2.2) 0.0 1.1 (2.3) 7.7 Interest expense (income) ......... 1.0 4.8 8.2 4.0 0.5 ------ ------ ------ ------ ------ Income (loss) before income taxes . (3.2) (4.8) (7.1) (6.3) 7.2 Provision for income taxes ........ 0.6 0.0 0.2 0.0 2.6 ------ ------ ------ ------ ------ Net income (loss) ................. (3.8)% (4.8)% (7.3)% (6.3)% 4.6% ====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 REVENUES. Revenues increased by 147.3% to $28.0 million for the six months ended June 30, 1997 from $11.3 million for the six months ended June 30, 1996. The increase in revenues of $16.7 million was due principally to the acquisition of MidTex in July 1996, the acquisition of the Reid Center in May 1996, 27 the acquisition of Interventions in January 1997, and the opening of two new juvenile facilities and one new pre-release center during the first quarter of 1997. OPERATING EXPENSES. Operating expenses increased by 138.4% to $22.6 million for the six months ended June 30, 1997 from $9.5 million for the six months ended June 30, 1996. The increase in operating expenses was due principally to the acquisition of MidTex in July 1996, the acquisition of the Reid Center in May 1996, the acquisition of Interventions in January 1997, and the opening of two new juvenile facilities and one new pre-release center during the first quarter of 1997. As a percentage of revenues, operating expenses decreased to 80.4% from 83.5%. The decrease in operating expenses as a percentage of revenues is principally due to higher operating margins at the Big Spring Complex which was acquired in July 1996, and improved occupancy of certain facilities as compared to the prior year period. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $1.1 million for the six months ended June 30, 1997 from $510,000 for the six months ended June 30, 1996. The increase was due principally to the amortization of prepaid facility use costs of the Big Spring Complex acquired in July 1996, depreciation of the Reid Center acquired in May 1996 and the 150 bed capacity transitional living center for juveniles located in San Antonio, Texas (the "Griffin Juvenile Facility") acquired in January 1997, and depreciation and amortization of deferred start-up costs of the three new facilities opened during the first quarter of 1997. In addition, amortization costs include approximately $187,000 to expense start-up costs related to the non-renewal of a 120 bed juvenile contract as of June 30, 1997. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by 36.2% to $2.2 million for the six months ended June 30, 1997 from $1.6 million for the six months ended June 30, 1996. The increase in general and administrative expenses resulted from adding corporate and administrative personnel, including a new chief operating officer, to manage the increased business of the Company, and from additional costs of administering the Company as a result of the IPO in the fourth quarter of 1996. As a percentage of revenues, general and administrative expenses decreased to 7.9% from 14.3% due principally to spreading fixed costs over a larger revenue base. INTEREST. Interest expense, net of interest income, decreased to $123,000 for the six months ended June 30, 1997 from $447,000 for the six months ended June 30, 1996. The decrease in net interest expense was principally due to lower outstanding borrowings under the Company's 1996 Credit Facility and 1995 credit facility (the "1995 Credit Facility") for the respective periods. INCOME TAXES. For the six months ended June 30, 1997, the Company recognized a provision for income taxes at an estimated effective annual rate of 36.0% compared to no provision for income taxes for the six months ended June 30, 1996 due to a loss. The effective income tax rate applied in 1997 includes a benefit for the reversal of previously reserved deferred tax assets resulting from prior net operating losses which are expected to be utilized in 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 REVENUES. Revenues increased by 56.2% to $32.3 million for the year ended December 31, 1996 from $20.7 million for the year ended December 31, 1995. The increase in occupancy fees of $11.3 million, or 54.8%, was due principally to the acquisition of MidTex in July 1996, the opening of two new pre-release facilities during the first quarter of 1996, and the acquisition of the Reid Center in May 1996. The increase in other income for the year ended December 31, 1996 to $450,000 from $98,000 for the year ended December 31, 1995 was due principally to the recognition of revenue related to a previously reserved note receivable of $206,000 pertaining to 1994 operations of the 302 bed medium and maximum security facility operated primarily for the U.S. Marshals Service (the "USMS") in Central Falls, Rhode Island (the "Wyatt Facility"), the realization of which improved from prior periods due to payments received on the note and due to the additional operating experience with the facility. Additional other income related to commissary operations and commissions earned at the Big Spring Complex. OPERATING EXPENSES. Operating expenses increased by 59.2% to $26.0 million for the year ended December 31, 1996 from $16.4 million for the year ended December 31, 1995. This increase was principally attributable to the acquisition of MidTex in July 1996, the opening of two new pre-release 28 facilities during the first quarter of 1996, and the acquisition of the Reid Center in May 1996. As a percentage of revenues, operating expenses increased to 80.5% from 79.0% due primarily to the relative increase in secure institutional operations. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 69.5% to $1.4 million for the year ended December 31, 1996 from $820,000 for the year ended December 31, 1995. The increase was due principally to the amortization of prepaid facility use costs of the Big Spring Complex, the opening of two new pre-release facilities in January 1996, and the acquisition of the Reid Center in May 1996. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by 29.1% to $4.6 million for the year ended December 31, 1996 from $3.5 million for the year ended December 31, 1995. Included in general and administrative expenses for the year ended December 31, 1996 was a non- recurring, non-cash charge of $870,000 in connection with the July 1996 grant of certain options to purchase shares of the Company's Common Stock. As a percentage of revenues, excluding the non-recurring charge, general and administrative expenses decreased to 11.4% from 17.0% due principally to spreading fixed costs over a larger revenue base. INTEREST. Interest expense, net of interest income, increased to $2.6 million for the year ended December 31, 1996 from $979,000 for the year ended December 31, 1995. The increase in net interest expense was due principally to the $1.3 million non-recurring charge ($726,000 of which was non-cash) to expense deferred financing costs associated with the early retirement of significant portions of the 1996 Credit Facility, borrowings under the Company's 1995 Credit Facility and the 1996 Credit Facility related to the acquisition of MidTex in July 1996, the Company's financing of the purchase of certain outstanding stock in November 1995, the construction and development of the two new pre-release facilities which opened during the first quarter of 1996 and the acquisition of the Reid Center in May 1996. INCOME TAXES. The Company did not recognize any provision for federal income taxes due to a taxable loss in both years. The Company recognized a provision for state income taxes of $75,000 for the year ended December 31, 1996. As of December 31, 1996, the Company had recognized a deferred tax asset of $608,000. Management of the Company believes that this deferred tax asset is realizable. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 REVENUES. Revenues increased 31.9% to $20.7 million for the year ended December 31, 1995 from $15.7 million for the year ended December 31, 1994. The revenue increase was due principally to the recognition of occupancy fees for a full 12 months in 1995 related to the acquisition of Eclectic Communications, Inc. ("Eclectic") versus the recognition of nine months in 1994. Additionally, an increase in occupancy fees of approximately $1.1 million was attributable to the Wyatt Facility principally as a result of a higher occupancy and per diem rate in 1995 compared to 1994. OPERATING EXPENSES. Operating expenses increased 32.8% to $16.4 million for the year ended December 31, 1995 from $12.3 million for the year ended December 31, 1994. The increase in operating expenses was due principally to the recognition of operating expenses of Eclectic for a full 12 months in 1995. As a percentage of revenues, operating expenses increased to 79.0% from 78.5% principally for the same reason. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by 8.2% to $820,000 for the year ended December 31, 1995 from $758,000 for the year ended December 31, 1994. The increase was due principally to recognizing 12 months of contract value and goodwill amortization in 1995 as compared to nine months of amortization in 1994 resulting from the acquisition of Eclectic, offset in part by an accounting adjustment in the first quarter of 1995 to adjust depreciation expense in prior periods. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 19.3% to $3.5 million for the year ended December 31, 1995 from $3.0 million for the year ended December 31, 1994. The increase in general and administrative expenses was due principally to the addition of the operations of Eclectic and an increase in RFP and development costs. Development costs increased by $457,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. As a percentage of 29 revenues, general and administrative expenses decreased to 17.0% from 18.9% due principally to spreading fixed costs over a larger revenue base. INTEREST. Interest expense, net of interest income, increased to $979,000 for the year ended December 31, 1995 from $156,000 for the year ended December 31, 1994. The increase resulted from the expensing of debt issuance costs and commitment fees of $472,000 associated with the 1995 Credit Facility, the incurrence of $4.0 million of debt and other long-term obligations in connection with the acquisition of Eclectic and increased borrowings under the 1995 Credit Facility to purchase treasury stock. INCOME TAXES. There was no provision for income taxes for the year ended December 31, 1995 due to a taxable loss. The Company recognized a provision for income taxes of $101,000 for the year ended December 31, 1994, even though the Company incurred a loss for financial reporting purposes in 1994, principally because certain goodwill amortization contributing to the loss for financial reporting purposes was not deductible for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES GENERAL. The Company's primary capital requirements are for working capital, start-up costs related to new operating contracts, furniture, fixtures and equipment, supply purchases, new facility renovations and acquisitions. 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 (through occupancy fees) is realized. Some of the Company's management contracts have required the Company to make substantial initial expenditures of cash in connection with the opening or renovating of a facility. Substantially all of these start-up expenditures are fully or partially recoverable as pass-through costs or are reimbursable from the contracting governmental agency over the term of the contract. CHANGES IN FINANCIAL POSITION. As of June 30, 1997, total assets had increased $6.5 million to $53.3 million since December 31, 1996. The increase related principally to the acquisition of Interventions in January 1997. The Company paid $6.0 million for substantially all of the assets of Interventions, including the retirement of $2.3 million of pre-acquisition bank debt. The purchase price was paid with $2.0 million of borrowings from the 1996 Credit Facility, and the remainder with cash. As of December 31, 1996, total assets had increased $32.6 million to $46.8 million since December 31, 1995. The increase related principally to the acquisitions of MidTex and the Reid Center for which total consideration was $25.7 million, and excess cash proceeds from the IPO. Total stockholders' equity increased by $38.0 million to $41.1 million as of December 31, 1996, largely as a result of the IPO and certain other equity transactions. The Company utilized the net proceeds from the IPO to retire all of its then outstanding borrowings. Therefore, immediately following the consummation of the IPO, the Company had no material debt. The Company used borrowings under the 1996 Credit Facility to refinance outstanding borrowings under the 1995 Credit Facility, to finance a portion of the MidTex acquisition and for working capital. As of June 30, 1997, the Company had $2.0 million outstanding under the 1996 Credit Facility. WORKING CAPITAL. The Company's working capital decreased to $5.3 million at June 30, 1997 from $7.7 million at December 31, 1996. This decrease was principally due to the use of cash to fund a portion of the Interventions acquisition in January 1997 and the classification of $2.0 million of borrowings outstanding under the 1996 Credit Facility as current at June 30, 1997. Increases to working capital include increased receivables resulting from newly opened facilities and the timing of certain collections, and a $2.0 million cash advance from the State of Georgia to be applied toward the construction and development of the newly awarded 550 bed contract at the Charlton County Facility. The Company's working capital increased to $7.7 million at December 31, 1996 from $1.5 million at December 31, 1995. This increase was principally due to excess cash proceeds from the IPO after repayment of borrowings, and an increase in receivables resulting from the acquisitions of MidTex in July 1996 and the Reid Center in May 1996. EXISTING CREDIT FACILITY. In September 1997, the Company entered into the 1997 Credit Facility, which is a $60.0 million revolving line of credit, the availability of which is determined by the Company's 30 projected pro forma cash flow. The amount currently available under the 1997 Credit Facility is approximately $48.0 million. The 1997 Credit Facility matures in 2003 and bears interest at rates ranging from LIBOR plus 1.75% to 2.50%. In January 1997, the Company financed the acquisition of substantially all of the assets of Interventions with, among other things, $2.0 million of borrowings under the 1996 Credit Facility. In September 1997, the Company purchased substantially all of the assets of Abraxas. The Company financed the $19.8 million purchase price with $19.0 million of borrowings under the 1997 Credit Facility, and the remainder with cash. In addition, the $2.0 million of outstanding borrowings under the 1996 Credit Facility was refinanced with borrowings under the 1997 Credit Facility. See Note 8 to the Company's Consolidated Financial Statements. CAPITAL EXPENDITURES. Capital expenditures for the six months ended June 30, 1997 of $1.8 million were related to construction-in-progress for the 516 bed expansion of the Big Spring Complex and the 550 bed Charlton County Facility, improvements and furniture and equipment at the newly opened facilities and normal replacement of furniture and equipment at various facilities. The Company anticipates expending an additional $28.0 million through 1998 to complete the Big Spring Complex expansion and the development of the Charlton County Facility, and is currently seeking to obtain additional long-term project financing in the amount of approximately $25.0 million