Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
|
For the Quarterly Period Ended June 30, 2009
|
|
|
OR
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the transition period from
to
Commission File Number 1-14472
CORNELL
COMPANIES, INC.
(Exact Name of Registrant as Specified in Its
Charter)
Delaware
|
76-0433642
|
(State or Other Jurisdiction
of Incorporation or Organization)
|
(I.R.S. Employer
Identification No.)
|
|
|
1700 West Loop South, Suite 1500, Houston,
Texas
|
77027
|
(Address of Principal Executive Offices)
|
(Zip Code)
|
Registrants Telephone Number, Including Area Code:
(713) 623-0790
Indicate
by a check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files.) Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
Accelerated filer
x
|
|
|
Non-accelerated filer
o
|
Smaller reporting
company
o
|
(Do not check if a
smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes
o
No
x
At August 5, 2009, the registrant had 16,412,802 shares of common
stock outstanding.
Table of Contents
Forward-Looking Information
The statements included in this quarterly report regarding future
financial performance and results of operations and other statements that are
not historical facts are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Forward-looking statements
in this quarterly report include, but are not limited to, statements about the
following subjects:
·
revenues,
·
revenue mix,
·
expenses, including personnel and medical
costs,
·
results of operations,
·
operating margins,
·
supply and demand,
·
market outlook in our various markets,
·
our other expectations with regard to
market outlook,
·
utilization,
·
parolee, detainee, inmate and youth
offender trends,
·
pricing and per diem rates,
·
contract commencements,
·
new contract opportunities,
·
operations at, future contracts for, and
results from our Regional Correctional Center,
·
the timing (including ramp of facility
population) and other aspects of planned expansions, including without
limitation the D. Ray James Prison and Walnut Grove Youth Correctional Facility
expansions, and client contracts for such facilities,
·
the construction
and
lease of the new facility in Hudson,
Colorado and our contracts with the Colorado Department of Corrections,
·
adequacy of insurance,
·
debt levels,
·
debt reduction,
·
common stock repurchases,
·
the effect of FIN No. 48,
·
our effective tax rate,
·
tax assessments,
·
results and effects of legal proceedings
and governmental audits and assessments,
·
liquidity, including future liquidity and
our ability to obtain financing,
·
financial markets,
·
cash flow from operations,
·
adequacy of cash flow for our
obligations,
·
capital requirements,
·
capital expenditures,
·
effects of accounting changes and
adoption of accounting policies,
·
changes in laws and regulations,
·
adoption of accounting policies,
·
benefit payments, and
·
changes in laws and regulations.
Forward-looking
statements in this quarterly report are identifiable by, but not limited to,
the use of the following words and other similar expressions among others:
·
anticipates
·
believes
·
budgets
·
could
·
estimates
·
expects
·
forecasts
3
Table of Contents
·
intends
·
may
·
might
·
plans
·
predicts
·
projects
·
scheduled
·
should
Such statements are subject to numerous risks,
uncertainties and assumptions, including, but not limited to:
·
those described (in the Companys 2008
Annual Report on Form 10-K) under Item 1A. Risk Factors, as filed with
the SEC,
·
the adequacy of sources of liquidity,
·
the effect and results of litigation,
audits and contingencies, and
·
other factors discussed in this quarterly
report and in the Companys other filings with the SEC, which are available
free of charge on the SECs website at
www.sec.gov
.
Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those indicated.
All subsequent written
and oral forward-looking statements attributable to the Company or to persons
acting on our behalf are expressly qualified in their entirety by reference to
these risks and uncertainties. You should not place undue reliance on
forward-looking statements. Each forward-looking statement speaks only as of
the date of the particular statement, and we undertake no obligation to
publicly update or revise any forward-looking statements.
4
Table of
Contents
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CORNELL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
|
|
June 30,
2009
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,620
|
|
$
|
14,613
|
|
Accounts receivable trade (net of allowance for
doubtful accounts of $5,527 and $4,272, respectively)
|
|
64,565
|
|
64,622
|
|
Other receivables (net of allowance for doubtful
accounts of $4,926)
|
|
1,681
|
|
4,766
|
|
Bond fund payment account and other restricted
assets
|
|
38,299
|
|
31,370
|
|
Deferred tax assets
|
|
10,097
|
|
9,151
|
|
Prepaid expenses and other
|
|
5,886
|
|
6,368
|
|
Total current assets
|
|
137,148
|
|
130,890
|
|
PROPERTY AND EQUIPMENT, net
|
|
450,850
|
|
450,354
|
|
OTHER ASSETS:
|
|
|
|
|
|
Debt service reserve fund
|
|
24,195
|
|
23,750
|
|
Goodwill, net
|
|
13,308
|
|
13,308
|
|
Intangible assets, net
|
|
1,423
|
|
2,320
|
|
Deferred costs and other
|
|
17,022
|
|
16,299
|
|
Total assets
|
|
$
|
643,946
|
|
$
|
636,921
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
61,575
|
|
$
|
69,093
|
|
Current portion of long-term debt
|
|
12,413
|
|
12,412
|
|
Total current liabilities
|
|
73,988
|
|
81,505
|
|
LONG-TERM DEBT, net of current
portion
|
|
306,156
|
|
308,070
|
|
DEFERRED TAX LIABILITIES
|
|
18,649
|
|
17,491
|
|
OTHER LONG-TERM LIABILITIES
|
|
1,912
|
|
1,688
|
|
Total liabilities
|
|
400,705
|
|
408,754
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
Preferred stock, $.001 par value, 10,000,000
shares authorized, none issued
|
|
|
|
|
|
Common stock, $.001 par value, 30,000,000 shares
authorized, 16,403,637 and 16,238,685 shares issued and 14,915,751 and
14,732,522 shares outstanding, respectively
|
|
16
|
|
16
|
|
Additional paid-in capital
|
|
166,441
|
|
164,746
|
|
Retained earnings
|
|
85,805
|
|
73,318
|
|
Accumulated other comprehensive income
|
|
1,549
|
|
1,676
|
|
Treasury stock (1,487,886 and 1,506,163 shares of
common stock, at cost, respectively)
|
|
(11,888
|
)
|
(12,034
|
)
|
Total Cornell
Companies, Inc.
|
|
241,923
|
|
227,722
|
|
Non-controlling interest
|
|
1,318
|
|
445
|
|
Total stockholders equity
|
|
243,241
|
|
228,167
|
|
Total liabilities and
stockholders equity
|
|
$
|
643,946
|
|
$
|
636,921
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
5
Table of Contents
CORNELL COMPANIES,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands,
except per share data)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
105,334
|
|
$
|
94,646
|
|
$
|
205,044
|
|
$
|
190,038
|
|
OPERATING EXPENSES, EXCLUDING DEPRECIATION AND AMORTIZATION
|
|
74,734
|
|
68,280
|
|
147,627
|
|
138,491
|
|
DEPRECIATION AND AMORTIZATION
|
|
4,740
|
|
4,220
|
|
9,633
|
|
8,377
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
6,270
|
|
7,232
|
|
12,408
|
|
13,766
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
19,590
|
|
14,914
|
|
35,376
|
|
29,404
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
6,736
|
|
6,307
|
|
12,935
|
|
12,912
|
|
INTEREST INCOME
|
|
(160
|
)
|
(740
|
)
|
(406
|
)
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES AND
NON-CONTROLLING INTEREST
|
|
13,014
|
|
9,347
|
|
22,847
|
|
17,542
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
5,386
|
|
4,002
|
|
9,487
|
|
7,563
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
7,628
|
|
5,345
|
|
13,360
|
|
9,979
|
|
|
|
|
|
|
|
|
|
|
|
NON-CONTROLLING INTEREST
|
|
398
|
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME AVAILABLE TO STOCKHOLDERS
|
|
$
|
7,230
|
|
$
|
5,345
|
|
$
|
12,487
|
|
$
|
9,979
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
.49
|
|
$
|
.36
|
|
$
|
.84
|
|
$
|
.68
|
|
DILUTED
|
|
$
|
.48
|
|
$
|
.36
|
|
$
|
.84
|
|
$
|
.67
|
|
|
|
|
|
|
|
|
|
|
|
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
14,881
|
|
14,707
|
|
14,878
|
|
14,700
|
|
DILUTED
|
|
14,970
|
|
14,854
|
|
14,952
|
|
14,840
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,628
|
|
$
|
5,345
|
|
$
|
13,360
|
|
$
|
9,979
|
|
Other comprehensive income, net of tax: Unrealized gain (loss)
on derivative instruments, net of tax (benefit) provision of ($429) and $83
in 2008
|
|
|
|
(618
|
)
|
|
|
117
|
|
Total other comprehensive income, net of tax
|
|
7,628
|
|
4,727
|
|
13,360
|
|
10,096
|
|
Comprehensive income attributable to non-controlling interest
|
|
(398
|
)
|
|
|
(873
|
)
|
|
|
Comprehensive income attributable to Cornell Companies, Inc.
|
|
$
|
7,230
|
|
$
|
4,727
|
|
$
|
12,487
|
|
$
|
10,096
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
6
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
AND
COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2009
(Unaudited)
(in thousands, except share data)
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
Non-
|
|
Total
|
|
|
|
|
|
|
|
Par
|
|
Paid-In
|
|
Retained
|
|
Treasury Stock
|
|
Comprehensive
|
|
Controlling
|
|
Stockholders
|
|
Comprehensive
|
|
|
|
Shares
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Cost
|
|
Income
|
|
Interest
|
|
Equity
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT DECEMBER 31, 2008
|
|
16,238,685
|
|
$
|
16
|
|
$
|
164,746
|
|
$
|
73,318
|
|
1,506,163
|
|
$
|
(12,034
|
)
|
$
|
1,676
|
|
$
|
445
|
|
$
|
228,167
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
|
|
|
12,487
|
|
|
|
|
|
|
|
873
|
|
13,360
|
|
12,487
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,487
|
|
EXERCISE
OF STOCK OPTIONS
|
|
2,550
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
INCOME
TAX BENEFIT FROM STOCK OPTION EXERICES
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
DEFERRED
AND OTHER STOCK COMPENSATION
|
|
153,983
|
|
|
|
1,363
|
|
|
|
|
|
|
|
|
|
|
|
1,363
|
|
|
|
AMORTIZATION
OF GAIN ON TERMINATION OF DERIVATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
(127
|
)
|
|
|
ISSUANCE
OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
143
|
|
|
|
(18,277
|
)
|
146
|
|
|
|
|
|
289
|
|
|
|
ISSUANCE
OF COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
8,419
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT JUNE 30, 2009
|
|
16,403,637
|
|
$
|
16
|
|
$
|
166,441
|
|
$
|
85,805
|
|
1,487,886
|
|
$
|
(11,888
|
)
|
$
|
1,549
|
|
$
|
1,318
|
|
$
|
243,241
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
7
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
AND
COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Unaudited)
(in thousands, except share data)
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
Non-
|
|
Total
|
|
|
|
|
|
|
|
Par
|
|
Paid-In
|
|
Retained
|
|
Treasury Stock
|
|
Comprehensive
|
|
Controlling
|
|
Stockholders
|
|
Comprehensive
|
|
|
|
Shares
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Cost
|
|
Income
|
|
Interest
|
|
Equity
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT DECEMBER 31, 2007
|
|
16,068,677
|
|
$
|
16
|
|
$
|
160,319
|
|
$
|
51,127
|
|
1,515,046
|
|
$
|
(12,105
|
)
|
$
|
1,092
|
|
$
|
|
|
$
|
200,449
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
|
|
|
9,979
|
|
|
|
|
|
|
|
|
|
9,979
|
|
9,979
|
|
UNREALIZED
GAIN ON DERIVATIVE INSTRUMENTS, NET OF TAXES OF $83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
|
|
117
|
|
117
|
|
COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,096
|
|
EXERCISE
OF STOCK OPTIONS
|
|
2,325
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
INCOME
TAX BENEFIT FROM STOCK OPTION EXERCISES
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
DEFERRED
AND OTHER STOCK COMPENSATION
|
|
139,637
|
|
|
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
1,712
|
|
|
|
ISSUANCE
OF COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
83
|
|
|
|
(8,883
|
)
|
71
|
|
|
|
|
|
154
|
|
|
|
ISSUANCE
OF COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
7,595
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES
AT JUNE 30, 2008
|
|
16,218,234
|
|
$
|
16
|
|
$
|
162,414
|
|
$
|
61,106
|
|
1,506,163
|
|
$
|
(12,034
|
)
|
$
|
1,209
|
|
$
|
|
|
$
|
212,711
|
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
8
Table of Contents
CORNELL
COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
CASH FLOWS
FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
|
$
|
13,360
|
|
$
|
9,979
|
|
Adjustments
to reconcile net income to net cash provided by operating activities -
|
|
|
|
|
|
Depreciation
|
|
8,737
|
|
7,404
|
|
Amortization
of intangibles and other assets
|
|
896
|
|
973
|
|
Impairment of
long-lived assets
|
|
|
|
250
|
|
Amortization
of deferred financing costs
|
|
635
|
|
725
|
|
Amortization
of Senior Notes discount
|
|
92
|
|
92
|
|
Amortization
of gain on termination of derivative
|
|
(127
|
)
|
|
|
Stock-based
compensation
|
|
1,634
|
|
1,888
|
|
Provision for
bad debts
|
|
1,265
|
|
1,651
|
|
(Gain)loss on
sale/disposals of property and equipment
|
|
(349
|
)
|
33
|
|
Deferred
income taxes
|
|
141
|
|
692
|
|
Change in
assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
Accounts
receivable
|
|
(354
|
)
|
2,176
|
|
Other restricted
assets
|
|
(594
|
)
|
(362
|
)
|
Other assets
|
|
1,759
|
|
(476
|
)
|
Accounts
payable and accrued liabilities
|
|
(9,041
|
)
|
1,450
|
|
Other
long-term liabilities
|
|
224
|
|
(8
|
)
|
Net cash
provided by operating activities
|
|
18,278
|
|
26,467
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Capital
expenditures
|
|
(9,493
|
)
|
(38,996
|
)
|
Sales of
investment securities
|
|
|
|
250
|
|
Proceeds from
the sale/disposals of fixed assets
|
|
1,688
|
|
17
|
|
Payments to restricted
debt payment account, net
|
|
(6,780
|
)
|
(7,425
|
)
|
Net cash used
in investing activities
|
|
(14,585
|
)
|
(46,154
|
)
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from
line of credit
|
|
2,000
|
|
17,500
|
|
Payments of
line of credit
|
|
(4,000
|
)
|
|
|
Tax benefit
of stock option exercises
|
|
|
|
3
|
|
Payments of
capital lease obligations
|
|
(7
|
)
|
(5
|
)
|
Proceeds from
exercise of stock options
|
|
321
|
|
182
|
|
Net cash
provided by (used in) financing activities
|
|
(1,686
|
)
|
17,680
|
|
|
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
2,007
|
|
(2,007
|
)
|
CASH AND CASH
EQUIVALENTS AT BEGINNING OF PERIOD
|
|
14,613
|
|
3,028
|
|
CASH AND CASH
EQUIVALENTS AT END OF PERIOD
|
|
$
|
16,620
|
|
$
|
1,021
|
|
|
|
|
|
|
|
OTHER
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
$
|
|
|
$
|
117
|
|
Common stock
issued for board of directors fees
|
|
228
|
|
268
|
|
Purchases and
additions to property and equipment included in accounts payable and accrued
liabilities
|
|
1,253
|
|
9,392
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
9
Table of
Contents
CORNELL
COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of
Presentation
The
accompanying unaudited consolidated financial statements have been prepared by
Cornell Companies, Inc. (collectively with its subsidiaries and
consolidated special purpose entities, unless the context requires otherwise,
the Company, we, us or our) pursuant to the rules and regulations
of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the United States (GAAP) have been condensed or omitted
pursuant to such rules and regulations.
The year-end consolidated balance sheet was derived from audited
financial statements but does not include all disclosures required by GAAP. In
the opinion of management, adjustments and disclosures necessary for a fair
presentation of these financial statements have been included. Estimates were used in the preparation of
these financial statements. Actual
results could differ from those estimates.
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys 2008 Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
2.
Accounting
Policies
See
a description of our accounting policies in the Notes to Consolidated Financial
Statements included in our 2008 Annual Report on Form 10-K.
3.
Stock-Based
Compensation
We have an employee stock purchase plan
(ESPP)
under which
employees can make contributions to purchase our common stock. Participation in
the plan is elected annually by employees. The plan year typically begins each January 1st
(the Beginning Date) and ends on December 31st (the Ending Date).
Purchases of common stock are made at the end of the year using the lower of
the fair market value on either the Beginning Date or Ending Date, less a 15%
discount.
Under SFAS No. 123R
our employee-stock purchase plan is considered to be a compensatory ESPP, and
therefore, we recognize compensation expense over the requisite service period
for grants made under the ESPP.
Our stock incentive plans
provide for the granting of stock options (both incentive stock options and
nonqualified stock options), stock appreciation rights, restricted stock shares
and other stock-based awards to officers, directors and employees of the
Company. Grants of stock options made to date under these plans vest over
periods up to seven years after the date of grant and expire no later than 10
years after grant.
At June 30, 2008,
200,000 shares of restricted stock were outstanding subject to
performance-based vesting criteria (32,500 of these restricted shares were
considered market-based restricted stock under SFAS No. 123R). There were
also 52,700 stock options outstanding subject to performance-based vesting
criteria. We recognized $0.14 million and $0.6 million of expense associated
with these shares of restricted stock and stock options during the three and
six months ended June 30, 2008, respectively.
At June 30, 2009,
317,602 shares of restricted stock were outstanding subject to
performance-based vesting criteria (32,500 of these restricted shares were
considered market-based restricted stock under SFAS No. 123R). There were
also 6,260 stock options outstanding subject to performance-based vesting
criteria. We recognized $0.4 million and $0.5 million of expense associated
with these shares of restricted stock and stock options during the three and
six months ended June 30, 2009, respectively.
The amounts above relate to the impact of recognizing
compensation expense related to stock options and restricted stock. Compensation
expense related to stock options (6,260 shares) and restricted stock (285,102
shares) that vest based upon performance conditions is not recorded for such
performance-based awards until it has been deemed probable that the related
performance targets allowing the vesting of these options and restricted stock
will be met. We are required to periodically re-assess the probability that
these performance-based awards will vest and record expense at that point in
time. During the six months ended June 30, 2009 it was deemed probable
that certain performance targets pertaining to certain restricted stock and
stock options would be achieved by their vesting date. Accordingly,
compensation expense of approximately $0.4 million was recognized in the six months
ended June 30, 2009 related to these stock-based awards.
10
Table of Contents
We recognize expense for
our stock-based compensation over the vesting period, or in the case of
performance-based awards, over the remaining vesting period once the
performance target becomes probable of being met, which represents the period
in which an employee is required to provide service in exchange for the award.
We recognize compensation expense for stock-based awards immediately if the
award has immediate vesting.
Assumptions
The
fair values for the significant stock-based awards granted during the six
months ended June 30, 2009 and 2008 were estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Risk-free rate of return
|
|
1.90
|
%
|
3.35
|
%
|
Expected life of award
|
|
6.0 years
|
|
5.67 years
|
|
Expected dividend yield of stock
|
|
0
|
%
|
0
|
%
|
Expected volatility of stock
|
|
50.49
|
%
|
38.74
|
%
|
Weighted-average fair value
|
|
$
|
8.89
|
|
$
|
9.46
|
|
|
|
|
|
|
|
|
|
The
expected volatility of stock assumption was derived by referring to changes in
the Companys historical common stock prices over a timeframe similar to that
of the expected life of the award. We do not believe that future stock
volatility will significantly differ from historical stock volatility.
Estimated forfeiture rates are derived from historical forfeiture patterns. We
believe the historical experience method is the best estimate of forfeitures
currently available.
In
accordance with SAB 107, we generally considered the simplified method for plain
vanilla options to estimate the expected term of options granted during 2009
and 2008 (where appropriate). For those
grants during these periods wherein we had sufficient historical or impartial
data to better estimate the expected term, we have done so.
Stock-based
award activity during the six months ended June 30, 2009 was as follows
(aggregate intrinsic value in millions):
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
485,699
|
|
$
|
15.03
|
|
6.5
|
|
$
|
7.3
|
|
Granted
|
|
40,000
|
|
17.98
|
|
|
|
|
|
Exercised
|
|
(2,550
|
)
|
12.71
|
|
|
|
|
|
Canceled
|
|
(8,467
|
)
|
14.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
514,682
|
|
$
|
15.29
|
|
6.4
|
|
$
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2009
|
|
512,679
|
|
$
|
15.26
|
|
6.4
|
|
$
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009
|
|
467,467
|
|
$
|
14.96
|
|
6.2
|
|
$
|
7.0
|
|
The
total intrinsic value of stock options exercised during the six months ended June 30,
2009 and 2008 was $0.01 million and $0.03 million, respectively. Net cash proceeds
from the exercise of stock options were approximately $0.03 million for the six
months ended June 30, 2009 and 2008.
As
of June 30, 2009, approximately $0.1 million of estimated expense with
respect to time-based nonvested stock-based awards has yet to be recognized and
will be amortized into expense over the employees remaining requisite service
period of approximately 6.2 months.
11
Table of
Contents
The
following table summarizes information with respect to stock options
outstanding and exercisable at June 30, 2009.
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.75 to $10.00
|
|
18,865
|
|
2.3
|
|
$
|
5.72
|
|
18,865
|
|
$
|
5.72
|
|
$10.01 to $13.50
|
|
150,917
|
|
5.2
|
|
12.83
|
|
146,697
|
|
12.83
|
|
$13.51 to $14.50
|
|
193,200
|
|
6.2
|
|
13.95
|
|
185,540
|
|
13.93
|
|
$14.51 to $25.00
|
|
151,700
|
|
8.3
|
|
20.62
|
|
116,365
|
|
20.79
|
|
|
|
514,682
|
|
6.4
|
|
$
|
15.29
|
|
467,467
|
|
$
|
14.96
|
|
Stock-based
award activity for nonvested awards during the six months ended June 30,
2009 is as follows:
|
|
Number
of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2008
|
|
95,118
|
|
$
|
16.09
|
|
Granted
|
|
40,000
|
|
17.98
|
|
Vested
|
|
(87,903
|
)
|
15.67
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009
|
|
47,215
|
|
$
|
18.48
|
|
Restricted Stock
We have previously issued
restricted stock under certain employment agreements and stock incentive plans
which vests either over a specific period of time, generally three to five
years, or which will vest subject to certain market or performance
conditions. During the six months ended June 30,
2009, we issued restricted stock as part of our normal equity awards under our
2006 Incentive Plan. These shares of
restricted common stock are subject to restrictions on transfer and certain
conditions to vesting.
Restricted stock activity
for the six months ended June 30, 2009 was as follows:
|
|
Number
of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2008
|
|
403,124
|
|
$
|
22.44
|
|
Granted
|
|
176,800
|
|
16.81
|
|
Vested
|
|
(55,693
|
)
|
21.95
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009
|
|
524,231
|
|
$
|
20.59
|
|
We recognized $0.4
million and $0.8 million of expense associated with nonvested time-based
restricted stock awards during the three and six months ended June 30,
2009, respectively. As of June 30,
2009, approximately $2.4 million of estimated expense with respect to nonvested
time-based restricted stock awards had yet to be recognized and will be
amortized over a weighted average period of 2.1 years.
Approximately
$5.4 million of estimated expense with respect to nonvested performance-based
restricted stock option awards had yet to be recognized as of June 30,
2009.
12
Table of
Contents
4.
Intangible
Assets
Intangible
assets at June 30, 2009 and December 31, 2008 consisted of the
following (in thousands):
|
|
June 30,
2009
|
|
December 31,
2008
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
8,200
|
|
$
|
8,200
|
|
Accumulated amortization non-compete agreements
|
|
(7,970
|
)
|
(7,595
|
)
|
Acquired contract value
|
|
6,240
|
|
6,240
|
|
Accumulated amortization contract value
|
|
(5,047
|
)
|
(4,525
|
)
|
Identified intangibles, net
|
|
1,423
|
|
2,320
|
|
Goodwill, net
|
|
13,308
|
|
13,308
|
|
Total intangibles, net
|
|
$
|
14,731
|
|
$
|
15,628
|
|
There were no changes in the carrying
amount of goodwill in the six months ended June 30, 2009.
Amortization
expense for our non-compete agreements was approximately $0.2 million for the
three months ended June 30, 2009 and 2008 and approximately $0.4 million
for the six months ended June 30, 2009 and 2008.
Amortization
expense for our acquired contract value was approximately $0.3 million for each
of the three months ended June 30, 2009 and 2008 and approximately $0.5
million for each of the six months ended June 30, 2009 and 2008.
5.
New
Accounting Pronouncements
Statement
of Financial Accounting Standards (SFAS) No. 157
In September 2006,
the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a framework for
measuring fair value within generally accepted accounting principles and
expands disclosures about fair value measurements for financial assets and
liabilities, as well as for any other assets and liabilities that are carried
at fair value on a recurring basis in the financial statements. SFAS No. 157
became effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. This statement applies
prospectively to financial assets and liabilities.
In February 2008, the
FASB issued (FSP) 157-2, which delayed the effective date of SFAS No. 157
by one year for nonfinancial assets and liabilities. Our adoption of SFAS No. 157 on January 1,
2008 with respect to financial assets and liabilities did not have a material
financial impact on our consolidated results of operations or financial
condition. Our adoption of SFAS No. 157
on January 1, 2008 with respect to financial assets and liabilities did
not have a material financial impact on our consolidated results of operations
or financial condition. On January 1,
2009, we adopted the provisions of SFAS No. 157 for applying fair value to
assets, liabilities and transactions on a non-recurring basis. Adoption of SFAS No. 157 for fair value
measurements on a non-recurring basis did not have a material effect on the
Companys financial position, results of operations or cash flows.
We
adopted SFAS No. 157 on January 1, 2008 for our financial assets and
liabilities measured on a recurring basis.
As defined in SFAS No. 157, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price). SFAS No. 157 requires disclosure that
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157
requires that fair value measurements be classified and disclosed in one of the
following categories:
Level 1
Unadjusted
quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2
Quoted prices
in markets that are not active, or inputs that are observable, either directly
or indirectly, for substantially the full term of the asset or liability; and
Level 3
Prices or
valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market
activity).
13
Table of
Contents
As
required by SFAS No. 157, financial assets and liabilities are classified
based on the lowest level of input that is significant for the fair value
measurement. The following table
summarizes the valuation of our financial assets and liabilities by pricing
levels, as defined by the provisions of SFAS No. 157, as of June 30,
2009:
|
|
Fair Value as of June 30, 2009 (in thousands)
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Corporate Bonds
|
|
|
|
15,881
|
|
|
|
15,881
|
|
Money Market Funds
|
|
|
|
43,032
|
|
|
|
43,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
corporate bonds and money market funds are carried in debt service fund and
other restricted assets and the debt service reserve fund in the accompanying
balance sheet. The fair value measurements for corporate bonds and money-market
funds are based upon the quoted price for similar assets in markets that are
not active, multiplied by the number of shares owned, exclusive of any
transaction costs and without any adjustments to reflect discounts that may be
applied to selling a large block of the securities at one time. The Company
does not believe that the changes in fair value of these assets will materially
differ from the amounts that could be realized upon settlement or that the
changes in fair value will have a material effect on the Companys results of
operations, liquidity and capital resources.
SFAS No. 157 requires a reconciliation of the
beginning and ending balances for fair value measurements using Level 3
inputs. We had no such assets or
liabilities which were measured at fair value on a recurring basis using
significant unobservable inputs (level 3) during the three and six months ended
June 30, 2009.
Statement
of Financial Accounting Standards No. 141 (Revised)
In December 2007,
the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS
No. 141R). SFAS No. 141R
significantly changes the accounting for business combinations. Under SFAS No. 141R, an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value with limited
exceptions. SFAS No. 141R changes
the accounting treatment for certain specific items, including acquisition
costs, noncontrolling interests, acquired contingent liabilities, in-process
research and development costs, restructuring costs and changes in deferred tax
asset valuation allowances and income tax uncertainties subsequent to the
acquisition date. SFAS No. 141R
applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. Our
adoption of SFAS No. 141 on January 1, 2009 did not have any impact
on our consolidated results of operations or financial condition as we did not
have any business combination activity in the six months ended June 30,
2009.
FASB Staff Position No. FAS 142-3
This
FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (Revised 2007), Business
Combinations and other U.S. generally accepted accounting principles. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years.
Our adoption of this FSP on January 1, 2009 did not have a significant
impact on our consolidated financial position, results of operations or cash
flows.
Statement of Financial Accounting Standards No. 160
In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes new accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary.
SFAS No. 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. This statement clarifies that changes in a
parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain
or loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date.
SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
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interest. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15,
2008. We adopted SFAS No. 160 on January 1,
2009 and applied the provisions to our 2009 financial statements and
retroactively to all prior periods presented.
Statement of Financial Accounting Standards No. 161
In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities an Amendment of FASB Statement
133 (SFAS No. 161). SFAS No. 161
is intended to improve financial reporting about derivatives and hedging
activities by requiring enhanced qualitative and quantitative disclosures
regarding derivative instruments, gains and losses on such instruments and
their effects on an entitys financial position, financial performance and cash
flows. SFAS No. 161 is effective
for fiscal years and interim periods beginning after November 15, 2008.
Our adoption of SFAS No. 161 on January 1, 2009 did not have a
significant impact on our consolidated financial position, results of
operations or cash flows.
Statement of Financial Accounting Standards No. 162
In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States of America. SFAS No. 162
is effective sixty days following the SECs approval of Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect this pronouncement to have a
significant impact on our consolidated financial position, results of
operations or cash flows.
FASB Staff Position No. EITF 03-6-1
This
FSP addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, need to be
included in the earnings allocation in computing earnings per share (EPS)
under the two-class method described in FASB Statement No. 128, Earnings
Per Share. This FSP is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and the interim periods within those years. All prior-period EPS data is adjusted
retrospectively (including interim financial statements, summaries of earnings,
and selected financial data) to conform to the provisions of this FSP. Our adoption of this FSP in January 2009
did not have a significant impact on our earnings per share.
Statement of Financial Accounting Standards No. 165
In
May 2008, the FASB issued SFAS No. 165, Subsequent Events (SFAS No
165). SFAS No. 165 establishes
general standards of accounting and disclosure of events that occur after the
balance sheet date but before the financial statements are issued. SFAS No. 165 sets forth (1) the
period after the balance sheet date during which management should evaluate
events or transactions that may occur for potential recognition or disclosure
in the financial statements, (2) the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
and (3) the disclosures an entity should make about such events or
transactions. SFAS No. 165 is
applicable to both interim and annual financial statements ending after June 15,
2009. Management has performed a review of our subsequent events and
transactions through August 7, 2009, which is the date the financial statements
are issued.
New Accounting Pronouncement Not Yet Adopted
Statement of Financial Accounting Standards No. 166
In
June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets an amendment of FASB Statement No. 140 (SFAS No. 166). SFAS No. 166 applies to the financial
reporting of a transfer of financial assets; the effects of a transfer on an
entitys financial position, financial performance and cash flows; and a
transferors continuing involvement, if any, in transferred financial
assets. SFAS No. 166 eliminates (1) the
exceptions for qualifying special-purpose entities from the consolidation guidance
and (2) the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. SFAS No. 166
must be applied as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual
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reporting
periods thereafter. Earlier application
is prohibited. SFAS No. 166 must be
applied to transfers occurring on or after the effective date. We are currently
evaluating the impact, if any, that such statement may have on our financial
statements once adopted.
Statement of Financial Accounting Standards No. 167
In
June 2009, the FASB issued SFAS No. 167, Amendments to FASB
Interpretation No. 46(R) (SFAS No. 167). SFAS No. 167 amends Interpretation 46(R) to
replace the quantitative-based risks and rewards calculation for determining
which enterprise, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which enterprise has
the power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and (1) the
obligation to absorb losses of the entity and (2) the right to receive
benefits from the entity. SFAS No. 167
requires an additional reconsideration event when determining whether an entity
is a variable interest entity when changes in facts and circumstances occur
such that the holders of the equity investment at risk, as a group, lose the
power from voting rights or similar rights of those investments to direct the
activities of the entity that most significantly impact the entitys economic
performance. It also requires ongoing
assessments of whether an enterprise is the primary beneficiary of a variable
interest entity. SFAS No. 167 is
effective as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim periods within
that first annual reporting period, and for interim and annual reporting
periods thereafter. Earlier application
is prohibited. We are currently evaluating the impact, if any, that such
statement may have on our financial statements once adopted.
Statement of Financial Accounting Standards No. 168
In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 168). SFAS No. 168
establishes the FASB Accounting Standards Codification (Codification), which
officially commenced July 1, 2009, to become the source of authoritative
US GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal
securities laws are also sources of authoritative US GAAP for SEC
registrants. The subsequent issuances of
new standards will be in the form of Accounting Standards Updates that will be
included in the Codification. Generally,
the Codification is not expected to change US GAAP. All other accounting literature excluded from
the Codification will be considered nonauthoritative. SFAS No. 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. We will adopt SFAS No. 168
for our quarter ending September 30, 2009.
We are currently evaluating the effect on our financial statement
disclosures as all future references to authoritative accounting literature
will be referenced in accordance with the Codification.
6.
Credit
Facilities
At
June 30, 2009 and December 31, 2008, our long-term debt consisted of
the following (in thousands):
|
|
June 30,
2009
|
|
December 31,
2008
|
|
|
|
|
|
|
|
Debt of Cornell
Companies, Inc.:
|
|
|
|
|
|
Senior Notes, unsecured, due July 2012 with
an interest rate of 10.75%, net of discount
|
|
$
|
111,448
|
|
$
|
111,356
|
|
Revolving Line of Credit due December 2011
with an interest rate of LIBOR plus 1.50% to 2.25% or prime plus 0.00% to
0.75% (the Amended Credit Facility)
|
|
73,000
|
|
75,000
|
|
Capital lease obligations
|
|
21
|
|
26
|
|
Subtotal
|
|
184,469
|
|
186,382
|
|
|
|
|
|
|
|
Debt of Special Purpose Entity:
|
|
|
|
|
|
8.47% Bonds due 2016
|
|
134,100
|
|
134,100
|
|
|
|
|
|
|
|
Total consolidated debt
|
|
318,569
|
|
320,482
|
|
|
|
|
|
|
|
Less: current maturities
|
|
(12,413
|
)
|
(12,412
|
)
|
|
|
|
|
|
|
Consolidated long-term debt
|
|
$
|
306,156
|
|
$
|
308,070
|
|
Long-Term Credit Facilities.
Our Amended
Credit
Facility provides for borrowings up to $100.0 million (including letters of
credit) and matures in December 2011. At our election, outstanding
borrowings bear interest at either the LIBOR rate plus a margin ranging from
1.50% to 2.25% or a rate which ranges from 0.00% to 0.75% above the applicable
prime rate. The applicable margins are
subject to adjustments based on our total leverage ratio.
The available
commitment under our Amended Credit Facility was approximately $11.6 million at
June 30, 2009. We had outstanding
borrowings under our Amended Credit Facility of $73.0 million and we had
outstanding letters of credit of approximately $15.4 million at June 30,
2009. Subject to certain requirements,
we have the right to increase the commitments under our Amended Credit Facility
up to $150.0 million,
although the indenture for our Senior Notes limits
our ability, subject to certain conditions, to expand the Amended Credit
Facility beyond $100.0 million. We can
provide no assurance that all of the banks that have made commitments to us
under our Amended Credit Facility would be willing to participate in an
expansion to the Amended Credit Facility should we desire to do so.
The Amended
Credit Facility
is
collateralized by substantially all of our assets, including the assets and
stock of all of our subsidiaries. The Amended Credit Facility is not secured by
the assets of Municipal Corrections Finance, LP, a special purpose entity (MCF).
Our
Amended Credit Facility contains financial and other restrictive covenants that
limit our ability to engage in certain activities. Our ability to borrow under the Amended
Credit Facility is subject to compliance with certain financial covenants,
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including
bank leverage, total leverage and fixed charge coverage ratios. At June 30,
2009, we were in compliance with all such covenants. Our Amended Credit
Facility includes other restrictions that, among other things, limit our
ability to incur indebtedness; grant liens; engage in mergers, consolidations
and liquidations; make investments, restricted payment and asset dispositions;
enter into transactions with affiliates; and engage in sale/leaseback
transactions.
MCF is obligated for the outstanding
balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47%
per annum and are payable in semi-annual installments of interest and annual
installments of principal. All unpaid
principal and accrued interest on the bonds is due on the earlier of August 1,
2016 (maturity) or as noted under the bond documents.
The bonds are limited, nonrecourse
obligations of MCF and secured by the property and equipment, bond reserves,
assignment of subleases and substantially all assets related to the facilities
included in the 2001 Sale and Leaseback Transaction (in which we sold eleven
facilities to MCF). The bonds are not
guaranteed by Cornell.
In June 2004, we issued $112.0
million in principal of 10.75% Senior Notes the (Senior Notes) due July 1,
2012. The Senior Notes are unsecured
senior indebtedness and are guaranteed by all of our existing and future
subsidiaries (collectively, the Guarantors).
The Senior Notes are not guaranteed by MCF (the Non-Guarantor). Interest on the Senior Notes is payable
semi-annually on January 1 and July 1 of each year, commencing January 1,
2005. On or after July 1, 2008, we
may redeem all or a portion of the Senior Notes at the redemption prices
(expressed as a percentage of the principal amount) listed below, plus accrued
and unpaid interest, if any, on the Senior Notes redeemed, to the applicable
date of redemption, if redeemed during the 12-month period commencing on July 1
of each of the years indicated below:
Year
|
|
Percentages
|
|
|
|
|
|
2008
|
|
105.375
|
%
|
2009
|
|
102.688
|
%
|
2010 and
thereafter
|
|
100.000
|
%
|
Upon
the occurrence of specified change of control events, unless we have exercised
our option to redeem all the Senior Notes as described above, each holder will
have the right to require us to repurchase all or a portion of such holders
Senior Notes at a purchase price in cash equal to 101% of the aggregate
principal amount of the notes repurchased plus accrued and unpaid interest, if
any, on the Senior Notes repurchased, to the applicable date of purchase. The Senior Notes were issued under an
indenture which limits our ability and the ability of our Guarantors to, among
other things, incur additional indebtedness, pay dividends or make other
distributions, make other restricted payments and investments, create liens,
incur restrictions on the ability of the Guarantors to pay dividends or other
payments to us, enter into transactions with affiliates, and engage in mergers,
consolidations and certain sales of assets.
7.
Income
Taxes
At December 31,
2008, the total amount of our unrecognized tax benefit was approximately $2.5
million. There were no material changes
to the total amount of our unrecognized tax benefits in the three and six
months ended June 30, 2009.
Estimated interest and
penalties related to the underpayment of income taxes are classified as a
component of income tax expense in the accompanying Consolidated Statements of
Income and Comprehensive Income. There
were no material changes to our accrued interest and penalties in the three and
six months end June 30, 2009.
Accrued interest and penalties were approximately $0.3 million and $0.2
million at June 30, 2009 and December 31, 2008, respectively.
We are subject to income
tax in the United States and many of the individual states we operate in. We currently have significant operations in
Texas, California, Oklahoma, Georgia, Illinois and Pennsylvania. State income tax returns are generally
subject to examination for a period of three to five years after filing. The state impact of any changes made to the
17
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federal return remains
subject to examination by various states for a period up to one year after
formal notification to the state. We are
open to United States Federal Income Tax examinations for the tax years December 31,
2005 through December 2008. The
audit of our 2006 federal income tax return by the Internal Revenue Service was
recently concluded without material findings.
We
have state operating loss carryforwards of approximately $34.4 million on which
we have provided a valuation allowance of $3.0 million. These net operating losses expire beginning
in 2008 through 2032.
We do not anticipate a
significant change in the balance of our unrecognized tax benefits within the
next 12 months.
8.
Earnings
Per Share
Basic earnings per share (EPS) are
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period.
Diluted EPS is computed by dividing net income by the weighted average
number of shares of common stock outstanding after giving effect to all
potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include
the dilutive effect of outstanding common stock options and restricted common
shares granted under our various option and other incentive plans. In
accordance with FSP EITF 03-6-1, for our fiscal year beginning January 1,
2009, since our restricted common stock grants (including both vested and those
unvested due to either time or performance requirements) convey nonforfeitable
rights to dividends while outstanding, they are included in both basic and
fully diluted ESP calculations. For the
three months ended June 30, 2009 and 2008, there were 141,700 shares
($20.98 average price) and 64,200 shares ($23.24 average price), respectively,
of stock options that were not included in the computation of diluted EPS
because to do so would have been anti-dilutive. For the six months ended June 30,
2009 and 2008, there were 141,700 shares ($20.98 average price) and 64,200
shares ($23.24 average price), respectively, of stock options that were not
included in the computation of diluted EPS because to do so would have been
anti-dilutive.
The following table summarizes the
calculation of net earnings and weighted average common shares and common
equivalent shares outstanding for purposes of the computation of earnings per
share (in thousands, except per share data):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Net income
available to stockholders
|
|
$
|
7,230
|
|
$
|
5,345
|
|
$
|
12,487
|
|
$
|
9,979
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
14,881
|
|
14,707
|
|
14,878
|
|
14,700
|
|
Weighted
average common share equivalents outstanding
|
|
89
|
|
147
|
|
74
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares and common share equivalents outstanding
|
|
14,970
|
|
14,854
|
|
14,952
|
|
14,840
|
|
|
|
|
|
|
|
|
|
|
|
Basic income
per share
|
|
$
|
.49
|
|
$
|
.36
|
|
$
|
.84
|
|
$
|
.68
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share
|
|
$
|
.48
|
|
$
|
.36
|
|
$
|
.84
|
|
$
|
.67
|
|
9.
Commitments
and Contingencies
Financial
Guarantees
During the normal course of business, we enter into
contracts that contain a variety of representations and warranties and provide
general indemnifications. Our maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against us that
have not yet occurred. However, based on experience, we believe the risk of
loss to be remote.
Legal Proceedings
We are party to various legal proceedings, including
those noted below. While management presently believes that the ultimate
outcome of these proceedings will not have a material adverse effect on our
financial position, overall trends in results of operations or cash flows,
litigation is subject to inherent uncertainties, and unfavorable rulings could
occur. An unfavorable ruling could include monetary damages or equitable relief
and could have a material adverse impact on the net income of the period in
which the ruling occurs or in future periods.
18
Table of Contents
Valencia County Detention Center
In April 2007, a
lawsuit was filed against the Company in the Federal District Court in
Albuquerque, New Mexico, by Joe Torres and Eufrasio Armijo, who each alleged
that he was strip searched at the Valencia County Detention Center (VCDC) in
New Mexico in violation of his federal rights under the Fourth, Fourteenth and
Eighth amendments to the U.S. Constitution. The claimants also alleged
violation of their rights under state law and sought to bring the case as a
class action on behalf of themselves and all detainees at VCDC during the
applicable statutes of limitation. The plaintiffs sought damages and
declaratory and injunctive relief. Valencia County is also a named
defendant in the case and operated the VCDC for a significantly greater portion
of the period covered by the lawsuit.
In December 2008, the
parties agreed to a proposed stipulation of settlement and, in July 2009,
the Court granted final approval of the settlement. The settlement amount under the terms of the
agreement is $3.3 million.
Cornells portion of the stipulated
settlement, based on the number of inmates housed at VCDC during the time
Cornell operated the facility in comparison to the number of inmates housed at
the facility during the time Valencia County operated the facility, is $1.2
million and was funded principally through our general liability and
professional liability coverage. The
claims administration process is underway and we expect it to be completed in
the fourth quarter of 2009.
In
the year ended December 31, 2007, we previously provided insurance
reserves for this matter (as part of our regular review of reported and
unreported claims) totaling approximately $0.5 million. During the fourth
quarter of 2008, we recorded an additional settlement charge of approximately
$0.7 million and the related reimbursement from our general liability and
professional liability insurance. The charge and reimbursement were recognized
in general and administrative expenses for the year ended December 31,
2008. The reimbursement was funded by the insurance carrier in the first
quarter of 2009 into
a
settlement account, where it will remain until payments are made to the
settlement class members.
Shareholder Lawsuits
On
October 19, 2006, a purported class action complaint was filed in the
District Court of Harris County, Texas, 269th Judicial District (No. 2006-67413)
by Ted Kinbergy, an alleged stockholder of Cornell. The complaint named as
defendants Cornell and each member of the board of directors at the time of the
suit, as well as Veritas Capital Fund III, L.P. (Veritas). The complaint
alleged, among other things, that (i) the defendants breached fiduciary
duties allegedly owed to our stockholders in connection with our entering into
the Agreement and Plan of Merger, dated as of October 6, 2006, with
Veritas, Cornell Holding Corp., and CCI Acquisition Corp., and (ii) the
merger consideration was unfair and inadequate.
The Plaintiffs sought, among other things, an injunction against the
consummation of the merger. The proposed
merger was rejected at a special meeting of our stockholders held on January 23,
2007. In April 2009, the Court
granted an Unopposed Motion for Dismissal with Prejudice of this complaint and
dismissed all claims with prejudice.
10.
FINANCIAL INSTRUMENTS
The carrying amounts of our
financial instruments, including cash and cash equivalents, investment
securities, accounts receivable and accounts payable and accrued expenses,
approximate fair value due to the short term maturities of these financial
instruments. At December 31, 2008,
the carrying amount of consolidated debt was $320.5 million, and the estimated
fair value was $308.0 million. At June 30,
2009, the carrying amount was $318.6 million, and the estimated fair value was
$323.5 million. The estimated fair value
of long-term debt is based primarily on quoted market prices or discounted cash
flow analysis for the same or similar assets.
11.
Derivative Financial Instruments And
Guarantees
Debt Service Reserve Fund and Bond Fund
Payment Account
In
August 2001, MCF, a special purpose entity, completed a bond offering to
finance the 2001 Sale and Leaseback Transaction in which we sold eleven
facilities to MCF. In connection with
this bond offering, two reserve fund accounts were established by MCF pursuant
to the terms of the indenture: (1) MCFs Debt Service Reserve Fund,
aggregating approximately $24.2 million at June 30, 2009, was established
to: (a) make payments on MCFs outstanding bonds in the event we (as
lessee) should fail to make the scheduled rental payments to MCF or (b) to
the extent payments were not made under (a), then to make final debt service
payments on the then outstanding bonds and (2) MCFs Bond Fund Payment
Account (as reported in Bond Fund Payment Account and other restricted assets
in our Consolidated Balance Sheet) aggregating approximately $15.9 million at June 30,
2009, was established to accumulate the monthly lease payments that MCF
receives from us until such funds are used to pay MCFs semi-annual bond
interest payments and annual bond principal payments, with any excess to pay
certain other expenses and to make certain transfers. These reserve funds are invested in
short-term money markets and commercial paper.
Both reserve fund accounts were subject to agreements with the MCF
Equity Investors (Lehman Brothers, Inc. (Lehman)) whereby guaranteed
rates of return of 3.0% and 5.08%, respectively, were provided for the balances
in the Debt Service Reserve Fund and the Bond Fund Payment Account. The guaranteed rates of return were
characterized as cash flow hedge derivative instruments. At inception, the derivatives instruments had
an aggregate fair value of $4.0 million, which was recorded as a decrease to
the equity investment in MCF made by the MCF Equity Investors (MCF minority
interest) and as a liability in our Consolidated Balance Sheets. Changes in the
fair value of the derivative instruments were recorded as an adjustment to
other long-term liabilities and reported as other comprehensive income (loss)
in our Consolidated Statements of Operations and Comprehensive Income.
Due to the bankruptcy of
Lehman in 2008, the derivative instruments no longer qualified as a hedge and
were de-designated. Amounts included in
accumulated other comprehensive income are reclassified into earnings during
the same periods in which interest is earned on debt service reserve
funds. Changes in the fair value of
these derivatives after de-designation were recorded to earnings. At December
19
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31,
2008, the fair value was determined to be zero.
The derivatives were terminated in the first quarter of 2009 with a fair
value of zero.
In
connection with MCFs bond offering, Lehman also provided a guarantee of the
Debt Service Reserve Fund if a bankruptcy of the Company were to occur and a
trustee for the estate of the Company were to include the Debt Service Reserve
Fund as an asset of the Companys estate.
This guarantee was characterized as an insurance contract and its fair
value was being amortized to expenses over the life of the debt. Due to the bankruptcy of Lehman in 2008, the
full carrying value of the insurance guarantee was determined to be
unrecoverable. Accordingly, we recorded
a charge of $1.3 million in the year ended December 31, 2008.
12.
Segment Disclosure
Our three operating divisions are our reportable
segments. The Adult Secure Services segment consists of the operations of
secure adult incarceration facilities. The Abraxas Youth and Family Services
segment consists of providing residential treatment and educational programs
and non-residential community-based programs to juveniles between the ages of
10 and 17 who have either been adjudicated or suffer from behavioral problems.
The Adult Community-Based Services segment consists of providing pre-release
and halfway house programs for adult offenders who are either on probation or
serving the last three to six-months of their sentences on parole and preparing
for re-entry into society at large as well as community-based treatment and
education programs as an alternative to incarceration. All of our customers and
long-lived assets are located in the United States of America. The accounting
policies of our reportable segments are the same as those described in the
summary of significant accounting policies in Note 2 in our 2008 Annual Report
on Form 10-K. Intangible assets are not included in each segments
reportable assets, and the amortization of intangible assets is not included in
the determination of a reportable segments operating income. We evaluate
performance based on income or loss from operations before general and
administrative expenses, amortization of intangibles, interest and income
taxes. Corporate and other assets are comprised primarily of cash, investment
securities available for sale, accounts receivable, debt service and debt
service reserve funds, deposits, property and equipment, deferred taxes,
deferred costs and other assets. Corporate and other expense from operations
primarily consists of depreciation and amortization on the corporate office
facilities and equipment and specific general and administrative charges
pertaining to corporate personnel. Such expenses are presented separately, as
they cannot be readily identified for allocation to a particular segment.
20
Table of Contents
The only significant non-cash item
reported in the respective segments income from operations is depreciation and
amortization (excluding intangibles) (in thousands).
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
59,272
|
|
$
|
50,305
|
|
$
|
116,130
|
|
$
|
100,204
|
|
Abraxas youth
and family services
|
|
27,711
|
|
26,886
|
|
53,399
|
|
54,659
|
|
Adult
community-based services
|
|
18,351
|
|
17,455
|
|
35,515
|
|
35,175
|
|
Total
revenues
|
|
$
|
105,334
|
|
$
|
94,646
|
|
$
|
205,044
|
|
$
|
190,038
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations:
|
|
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
17,493
|
|
$
|
15,627
|
|
$
|
34,608
|
|
$
|
30,884
|
|
Abraxas youth
and family services
|
|
3,197
|
|
2,526
|
|
3,931
|
|
4,132
|
|
Adult
community-based services
|
|
5,864
|
|
4,666
|
|
10,631
|
|
9,487
|
|
Subtotal
|
|
26,554
|
|
22,819
|
|
49,170
|
|
44,503
|
|
General and
administrative expense
|
|
(6,270
|
)
|
(7,232
|
)
|
(12,408
|
)
|
(13,766
|
)
|
Amortization
of intangibles
|
|
(448
|
)
|
(484
|
)
|
(896
|
)
|
(973
|
)
|
Corporate and
other
|
|
(246
|
)
|
(189
|
)
|
(490
|
)
|
(360
|
)
|
Total income
from operations
|
|
$
|
19,590
|
|
$
|
14,914
|
|
$
|
35,376
|
|
$
|
29,404
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
|
2009
|
|
2008
|
|
Assets:
|
|
|
|
|
|
|
|
Adult secure services
|
|
|
|
$
|
359,705
|
|
$
|
358,406
|
|
Abraxas youth
and family services
|
|
|
|
104,327
|
|
105,991
|
|
Adult
community-based services
|
|
|
|
60,296
|
|
60,170
|
|
Intangible
assets, net
|
|
|
|
14,731
|
|
15,628
|
|
Corporate and
other
|
|
|
|
104,887
|
|
96,726
|
|
Total assets
|
|
|
|
$
|
643,946
|
|
$
|
636,921
|
|
13.
Guarantor Disclosures
We completed an offering of $112.0
million in principal of 10.75% Senior Notes in June 2004 that are due July 1,
2012. The Senior Notes are guaranteed by
each of our subsidiaries (the Guarantor Subsidiaries). These guarantees are joint and several
obligations of the Guarantor Subsidiaries. MCF does not guarantee the Senior
Notes (Non-Guarantor Subsidiary). The following condensed consolidating
financial information presents the financial condition, results of operations
and cash flows of the Guarantor Subsidiaries and the Non-Guarantor Subsidiary,
together with the consolidating adjustments necessary to present our results on
a consolidated basis.
21
Table of
Contents
Condensed Consolidating Balance Sheet as of June 30,
2009 (in thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
16,410
|
|
$
|
180
|
|
$
|
30
|
|
$
|
|
|
$
|
16,620
|
|
Accounts
receivable
|
|
1,644
|
|
64,569
|
|
33
|
|
|
|
66,246
|
|
Restricted
assets
|
|
|
|
3,581
|
|
34,718
|
|
|
|
38,299
|
|
Prepaids and
other
|
|
14,316
|
|
1,667
|
|
|
|
|
|
15,983
|
|
Total current
assets
|
|
32,370
|
|
69,997
|
|
34,781
|
|
|
|
137,148
|
|
Property and
equipment, net
|
|
|
|
314,823
|
|
140,481
|
|
(4,454
|
)
|
450,850
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Debt service
reserve fund
|
|
|
|
|
|
24,195
|
|
|
|
24,195
|
|
Deferred
costs and other
|
|
63,546
|
|
23,590
|
|
5,032
|
|
(60,415
|
)
|
31,753
|
|
Investment in
subsidiaries
|
|
80,950
|
|
1,856
|
|
|
|
(82,806
|
)
|
|
|
Total assets
|
|
$
|
176,866
|
|
$
|
410,266
|
|
$
|
204,489
|
|
$
|
(147,675
|
)
|
$
|
643,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
43,612
|
|
$
|
12,280
|
|
$
|
4,754
|
|
$
|
929
|
|
$
|
61,575
|
|
Current
portion of long-term debt
|
|
|
|
13
|
|
12,400
|
|
|
|
12,413
|
|
Total current
liabilities
|
|
43,612
|
|
12,293
|
|
17,154
|
|
929
|
|
73,988
|
|
Long-term
debt, net of current portion
|
|
184,447
|
|
9
|
|
121,700
|
|
|
|
306,156
|
|
Deferred tax
liabilities
|
|
17,492
|
|
94
|
|
|
|
1,063
|
|
18,649
|
|
Other
long-term liabilities
|
|
5,899
|
|
119
|
|
60,342
|
|
(64,448
|
)
|
1,912
|
|
Intercompany
|
|
(316,507
|
)
|
316,512
|
|
|
|
(5
|
)
|
|
|
Total
liabilities
|
|
(65,057
|
)
|
329,027
|
|
199,196
|
|
(62,461
|
)
|
400,705
|
|
Total Cornell Companies, Inc.
stockholders equity
|
|
241,923
|
|
81,239
|
|
5,293
|
|
(86,532
|
)
|
241,923
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
1,318
|
|
1,318
|
|
Total
stockholders equity
|
|
241,923
|
|
81,239
|
|
5,293
|
|
(85,214
|
)
|
243,241
|
|
Total liabilities and stockholders equity
|
|
$
|
176,866
|
|
$
|
410,266
|
|
$
|
204,489
|
|
$
|
(147,675
|
)
|
$
|
643,946
|
|
22
Table of
Contents
Condensed
Consolidating Balance Sheet as of December 31, 2008 (in thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,291
|
|
$
|
265
|
|
$
|
57
|
|
$
|
|
|
$
|
14,613
|
|
Accounts receivable
|
|
2,045
|
|
66,921
|
|
422
|
|
|
|
69,388
|
|
Restricted assets
|
|
|
|
3,432
|
|
27,938
|
|
|
|
31,370
|
|
Prepaids and other
|
|
13,875
|
|
1,644
|
|
|
|
|
|
15,519
|
|
Total current assets
|
|
30,211
|
|
72,262
|
|
28,417
|
|
|
|
130,890
|
|
Property and equipment, net
|
|
101
|
|
312,446
|
|
141,975
|
|
(4,168
|
)
|
450,354
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Debt service reserve fund
|
|
|
|
|
|
23,750
|
|
|
|
23,750
|
|
Deferred costs and other
|
|
60,322
|
|
23,267
|
|
5,367
|
|
(57,029
|
)
|
31,927
|
|
Investments in subsidiaries
|
|
73,197
|
|
1,856
|
|
|
|
(75,053
|
)
|
|
|
Total assets
|
|
$
|
163,831
|
|
$
|
409,831
|
|
$
|
199,509
|
|
$
|
(136,250
|
)
|
$
|
636,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
48,373
|
|
$
|
15,515
|
|
$
|
4,883
|
|
$
|
322
|
|
$
|
69,093
|
|
Current portion of long-term debt
|
|
|
|
12
|
|
12,400
|
|
|
|
12,412
|
|
Total current liabilities
|
|
48,373
|
|
15,527
|
|
17,283
|
|
322
|
|
81,505
|
|
Long-term debt, net of current portion
|
|
186,356
|
|
14
|
|
121,700
|
|
|
|
308,070
|
|
Deferred tax liabilities
|
|
16,246
|
|
94
|
|
|
|
1,151
|
|
17,491
|
|
Other long-term liabilities
|
|
5,851
|
|
113
|
|
56,733
|
|
(61,009
|
)
|
1,688
|
|
Intercompany
|
|
(320,717
|
)
|
320,722
|
|
|
|
(5
|
)
|
|
|
Total liabilities
|
|
(63,891
|
)
|
336,470
|
|
195,716
|
|
(59,541
|
)
|
408,754
|
|
Total Cornell Companies, Inc. stockholders
equity
|
|
227,722
|
|
73,361
|
|
3,793
|
|
(77,154
|
)
|
227,722
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
445
|
|
445
|
|
Total stockholders equity
|
|
227,722
|
|
73,361
|
|
3,793
|
|
(76,709
|
)
|
228,167
|
|
Total liabilities and stockholders equity
|
|
$
|
163,831
|
|
$
|
409,831
|
|
$
|
199,509
|
|
$
|
(136,250
|
)
|
$
|
636,921
|
|
23
Table of Contents
Condensed Consolidating Statement of Operations for the three
months ended June 30, 2009
(in
thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,502
|
|
$
|
117,983
|
|
$
|
4,502
|
|
$
|
(21,653
|
)
|
$
|
105,334
|
|
Operating
expenses
|
|
6,211
|
|
89,972
|
|
111
|
|
(21,560
|
)
|
74,734
|
|
Depreciation
and amortization
|
|
|
|
3,856
|
|
880
|
|
4
|
|
4,740
|
|
General and
administrative expenses
|
|
6,251
|
|
|
|
19
|
|
|
|
6,270
|
|
Income (loss)
from operations
|
|
(7,960
|
)
|
24,155
|
|
3,492
|
|
(97
|
)
|
19,590
|
|
Overhead
allocations
|
|
(11,221
|
)
|
11,221
|
|
|
|
|
|
|
|
Interest, net
|
|
(1,818
|
)
|
5,674
|
|
2,938
|
|
(218
|
)
|
6,576
|
|
Equity
earnings in subsidiaries
|
|
7,260
|
|
|
|
|
|
(7,260
|
)
|
|
|
Income before
provision for income taxes
|
|
12,339
|
|
7,260
|
|
554
|
|
(7,139
|
)
|
13,014
|
|
Provision for
income taxes
|
|
5,109
|
|
|
|
|
|
277
|
|
5,386
|
|
Net income
|
|
7,230
|
|
7,260
|
|
554
|
|
(7,416
|
)
|
7,628
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
398
|
|
398
|
|
Income available
to stockholders
|
|
$
|
7,230
|
|
$
|
7,260
|
|
$
|
554
|
|
$
|
(7,814
|
)
|
$
|
7,230
|
|
24
Table of
Contents
Condensed Consolidating Statement of Operations for the three
months ended June 30, 2008
(in
thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,502
|
|
$
|
107,749
|
|
$
|
4,502
|
|
$
|
(22,107
|
)
|
$
|
94,646
|
|
Operating
expenses, excluding depreciation
|
|
4,104
|
|
86,177
|
|
18
|
|
(22,019
|
)
|
68,280
|
|
Depreciation
and amortization
|
|
|
|
3,324
|
|
1,055
|
|
(159
|
)
|
4,220
|
|
General and
administrative expenses
|
|
7,216
|
|
|
|
16
|
|
|
|
7,232
|
|
Income (loss)
from operations
|
|
(6,818
|
)
|
18,248
|
|
3,413
|
|
71
|
|
14,914
|
|
Overhead
allocations
|
|
(4,317
|
)
|
4,317
|
|
|
|
|
|
|
|
Interest, net
|
|
1,819
|
|
1,274
|
|
2,536
|
|
(62
|
)
|
5,567
|
|
Equity
earnings in subsidiaries
|
|
13,253
|
|
|
|
|
|
(13,253
|
)
|
|
|
Income from
provision for income taxes
|
|
8,933
|
|
12,657
|
|
877
|
|
(13,120
|
)
|
9,347
|
|
Provision for
income taxes
|
|
3,588
|
|
|
|
|
|
414
|
|
4,002
|
|
Net income
|
|
5,345
|
|
12,657
|
|
877
|
|
(13,534
|
)
|
5,345
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to stockholders
|
|
$
|
5,345
|
|
$
|
12,657
|
|
$
|
877
|
|
$
|
(13,534
|
)
|
$
|
5,345
|
|
25
Table of
Contents
Condensed Consolidating Statement of Operations for the six
months ended June 30, 2009
(in
thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,004
|
|
$
|
235,803
|
|
$
|
9,004
|
|
$
|
(48,767
|
)
|
$
|
205,044
|
|
Operating
expenses
|
|
10,350
|
|
185,711
|
|
153
|
|
(48,587
|
)
|
147,627
|
|
Depreciation
and amortization
|
|
|
|
7,862
|
|
1,761
|
|
10
|
|
9,633
|
|
General and
administrative expenses
|
|
12,370
|
|
|
|
38
|
|
|
|
12,408
|
|
Income (loss)
from operations
|
|
(13,716
|
)
|
42,230
|
|
7,052
|
|
(190
|
)
|
35,376
|
|
Overhead
allocations
|
|
(19,598
|
)
|
19,598
|
|
|
|
|
|
|
|
Interest, net
|
|
136
|
|
7,011
|
|
5,820
|
|
(438
|
)
|
12,529
|
|
Equity
earnings in subsidiaries
|
|
15,621
|
|
|
|
|
|
(15,621
|
)
|
|
|
Income before
provision for income taxes
|
|
21,367
|
|
15,621
|
|
1,232
|
|
(15,373
|
)
|
22,847
|
|
Provision for
income taxes
|
|
8,880
|
|
|
|
|
|
607
|
|
9,487
|
|
Net income
|
|
12,487
|
|
15,621
|
|
1,232
|
|
(15,980
|
)
|
13,360
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
873
|
|
873
|
|
Income
available to stockholders
|
|
$
|
12,487
|
|
$
|
15,621
|
|
$
|
1,232
|
|
$
|
(16,853
|
)
|
$
|
12,487
|
|
26
Table of
Contents
Condensed Consolidating Statement of Operations for the six
months ended June 30, 2008
(in
thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,004
|
|
$
|
216,245
|
|
$
|
9,004
|
|
$
|
(44,215
|
)
|
$
|
190,038
|
|
Operating
expenses
|
|
7,192
|
|
175,312
|
|
30
|
|
(44,043
|
)
|
138,491
|
|
Depreciation
and amortization
|
|
|
|
6,584
|
|
2,111
|
|
(318
|
)
|
8,377
|
|
General and
administrative expenses
|
|
13,731
|
|
|
|
35
|
|
|
|
13,766
|
|
Income (loss)
from operations
|
|
(11,919
|
)
|
34,349
|
|
6,828
|
|
146
|
|
29,404
|
|
Overhead
allocations
|
|
(17,659
|
)
|
17,659
|
|
|
|
|
|
|
|
Interest, net
|
|
3,887
|
|
2,547
|
|
5,552
|
|
(124
|
)
|
11,862
|
|
Equity
earnings in subsidiaries
|
|
15,055
|
|
|
|
|
|
(15,055
|
)
|
|
|
Income before
provision for income taxes
|
|
16,908
|
|
14,143
|
|
1,276
|
|
(14,785
|
)
|
17,542
|
|
Provision for
income taxes
|
|
6,929
|
|
|
|
|
|
634
|
|
7,563
|
|
Net income
|
|
9,979
|
|
14,143
|
|
1,276
|
|
(15,419
|
)
|
9,979
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to stockholders
|
|
$
|
9,979
|
|
$
|
14,143
|
|
$
|
1,276
|
|
$
|
(15,419
|
)
|
$
|
9,979
|
|
27
Table of
Contents
Condensed Consolidating Statement of Cash Flows for the six
months ended June 30, 2009 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
$
|
3,798
|
|
$
|
7,727
|
|
$
|
6,753
|
|
$
|
18,278
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
(9,493
|
)
|
|
|
(9,493
|
)
|
Proceeds from
the sale/disposals of property and equipment
|
|
|
|
1,688
|
|
|
|
1,688
|
|
Payments to
restricted debt payment account, net
|
|
|
|
|
|
(6,780
|
)
|
(6,780
|
)
|
Net cash used
in investing activities
|
|
$
|
|
|
$
|
(9,493
|
)
|
$
|
(6,780
|
)
|
$
|
(14,585
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from
line of credit
|
|
2,000
|
|
|
|
|
|
2,000
|
|
Payments of
line of credit
|
|
(4,000
|
)
|
|
|
|
|
(4,000
|
)
|
Payments on
capital lease obligations
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Proceeds from
exercise of stock options
|
|
321
|
|
|
|
|
|
321
|
|
Net cash used
in financing activities
|
|
(1,679
|
)
|
(7
|
)
|
|
|
(1,686
|
)
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
2,119
|
|
(85
|
)
|
(27
|
)
|
2,007
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
14,291
|
|
265
|
|
57
|
|
14,613
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,410
|
|
$
|
180
|
|
$
|
30
|
|
$
|
16,620
|
|
28
Table of Contents
Condensed Consolidating Statement of Cash Flows for the six
months ended June 30, 2008 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating activities
|
|
$
|
(19,730
|
)
|
$
|
38,791
|
|
$
|
7,406
|
|
$
|
26,467
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
(38,996
|
)
|
|
|
(38,996
|
)
|
Sales of
investment securities
|
|
250
|
|
|
|
|
|
250
|
|
Proceeds from
the sale of fixed assets
|
|
|
|
17
|
|
|
|
17
|
|
Payments to
restricted debt payment account, net
|
|
|
|
|
|
(7,425
|
)
|
(7,425
|
)
|
Net cash
provided by (used in) investing activities
|
|
$
|
250
|
|
$
|
(38,979
|
)
|
$
|
(7,425
|
)
|
$
|
(46,154
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from
line of credit
|
|
17,500
|
|
|
|
|
|
17,500
|
|
Tax benefit
of stock option exercises
|
|
3
|
|
|
|
|
|
3
|
|
Payments on
capital lease obligations
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Proceeds from
exercise of stock options
|
|
182
|
|
|
|
|
|
182
|
|
Net cash
provided by (used in) financing activities
|
|
17,685
|
|
(5
|
)
|
|
|
17,680
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(1,795
|
)
|
(193
|
)
|
(19
|
)
|
(2,007
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
2,565
|
|
408
|
|
55
|
|
3,028
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
770
|
|
$
|
215
|
|
$
|
36
|
|
$
|
1,021
|
|
29
Table of Contents
ITEM 2.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
General
Cornell
Companies, Inc. is a leading provider of correctional, detention,
educational, rehabilitation and treatment services outsourced by federal,
state, county and local government agencies. We provide a diversified portfolio
of services for adults and juveniles through our three operating divisions: (1) Adult
Secure Services; (2) Abraxas Youth and Family Services and (3) Adult
Community-Based Services. At June 30, 2009, we operated 69 facilities with
a total service capacity of 20,822
and had one vacant facility
with a service capacity of 70 beds.
Our facilities are located
in 15 states and the District of Columbia.
The following table sets
forth for the periods indicated total residential service capacity and
contracted beds in operation at the end of the periods shown, average contract
occupancy percentages and total non-residential service capacity.
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
Residential
|
|
|
|
|
|
Service
capacity (1)
|
|
18,334
|
|
16,147
|
|
Contracted
beds in operation (end of period) (2)
|
|
17,480
|
|
15,298
|
|
Average
contract occupancy based on contracted beds in operation (3) (4)
|
|
92.2
|
%
|
94.3
|
%
|
Non-Residential
|
|
|
|
|
|
Service
capacity (5)
|
|
2,558
|
|
2,753
|
|
(1)
R
esidential
service capacity is comprised of the number of beds currently available for
service in our residential facilities.
(2)
At certain
residential facilities, the contracted capacity is lower than the facilitys
service capacity. We could increase a
facilitys contracted capacity by obtaining additional contracts or by
renegotiating existing contracts to increase the number of beds covered. However, we may not be able to obtain
contracts that provide occupancy levels at a facilitys service capacity or be
able to maintain current contracted capacities in future periods.
(3)
Occupancy
percentages reflect less than normalized occupancy during the start-up phase of
any applicable facility, resulting in a lower average occupancy in periods when
we have substantial start-up activities.
(4)
Average
contract occupancy percentages are calculated based on actual occupancy for the
period as a percentage of the contracted capacity for residential facilities in
operation. These percentages do not
reflect the operations of non-residential community-based programs. At certain residential facilities, our
contracted capacity is lower than the facilitys service capacity. Additionally, certain facilities have and are
currently operating above the contracted capacity. As a result, average contract occupancy
percentages can exceed 100% if the average actual occupancy exceeded contracted
capacity.
(5)
Service capacity for non-residential programs is
based on either contractual terms or an estimate of the number of clients to be
served. We update these estimates at
least annually based on the programs budget and other factors.
Our
operating results for the six months ended June 30, 2009 were impacted by
a few significant events. We completed the 700 bed expansion at D. Ray
James Prison at the beginning of April 2009 and continued construction on
a new 1,250 bed facility in Hudson, Colorado.
Our 2008 results of operation were positively affected by a 300 bed
expansion at the D. Ray James Prison which we activated in February 2008. In addition, in the six months ended June 30,
2008, we recorded a contract-based revenue adjustment of approximately $1.5
million at the Regional Correctional Center (RCC) for the contract year ended
March 2008.
Although
we believe we will continue to see steady, demand across our various business
segments and customer base (federal, state and local) in 2009, we are
monitoring the declining economic trends and related government budget plans
and the effect tightened spending plans could have on our business (with
respect to possible areas including utilization, per diem rates, etc.) We expect one of the areas of focus for our
performance in 2009 to be our ability to manage our various facility expansions
currently in process and bring them on line.
We also plan to remain focused on our operating margins, on increasing
utilization (particularly in the Abraxas division) and improving customer mix
as we believe those initiatives are key elements of our financial performance.
30
Management
Overview
Demand
.
Our business is driven generally by
demand for incarceration or treatment services, and specifically by demand for
private incarceration or treatment services, within our three primary business
segments: Adult Secure Services; Abraxas Youth and Family Services; and Adult
Community-Based Services. The demand for adult and juvenile corrections and
treatment services has generally increased at a steady rate over the past ten
years, largely as a result of increasing sentence terms and/or mandatory
sentences for criminals and as well a greater range of criminal acts,
increasing demand for incarceration of illegal aliens and a public recognition
of the need to provide services to juveniles that will improve the possibility
that they will lead productive lives. Moreover, demand for our services is also
affected by the amount of available capacity in the government systems to
enable governments to provide the services themselves, as well as desire and
ability of these systems to add additional capacity. In addition, the balance
between community-based corrections treatment of adults as an alternative to
traditional incarceration continues to be analyzed by many political and
societal parties. Among other things, we
monitor federal, state and industry communications and statistics relative to
trends in prison populations, juvenile justice statistics and initiatives, and
developments in alternatives to traditional incarceration or detention of
adults for opportunities to expand our scope or delivery of services.
The federal government
contracts with private providers for the incarceration of adults, whether they
are serving prison sentences, detained as illegal aliens, detained in
anticipation of pending judicial administration or transitioning from prison to
society. Chief among the federal
agencies which use private providers are the Federal Bureau of Prisons (BOP),
U.S. Immigration and Customs Enforcement (ICE) and United States Marshalls
Service (USMS). We provide adult secure and adult community-based services to
the federal government. Most of the federal involvement in juvenile
administration in the federal system is handled via Medicare and Medicaid
assistance to state governments. Although there are circumstances in which we
may contract with a federal agency on a sole source basis, the primary means by
which we secure a contract with a federal agency is via the RFP bidding
process. From time to time, we contract
to provide management services to a local governmental unit who then bids on a
federal contract.
States and smaller
governmental units remain divided on the issue of private prisons and private
provision of juvenile and community-based programs, although a majority of
states permit private provision for our services. We anticipate that increasing budget pressure
on states and smaller governmental units may cause more states and smaller
governmental units to consider utilizing private providers such as us to
provide these services on a more economical basis. We believe capital budget
constraints among prison agencies may encourage them to continue to explore
outsourcing to private operators as an alternative to deploying their own
capital for prison construction or major refurbishment. Although it varies from
governmental unit to governmental unit, the primary political forces who
typically oppose privatization of prisons are organized labor and religious
groups.
Private juvenile and
community-based programs are utilized by states and local governmental units
and are organized on a profit and not-for-profit basis. We monitor opportunities in these segments
via our corporate and business division development officers. Many opportunities are not published in any
manner and, accordingly, we believe that taking the initiative at the state and
local levels is key in developing sole source opportunities.
Performance
.
We track a number of factors as we monitor financial performance. Chief among them are:
·
capacity (the
number of beds within each business segments facilities),
·
occupancy
(utilization),
·
per diem
reimbursement rates,
·
revenues,
·
operating
margins, and
·
operating
expenses.
Capacity.
Capacity, commonly expressed
in terms of number of beds, is primarily impacted by the number and size of the
facilities we own or lease and the facilities we operate on behalf of a third
party owner or lessee. We view capacity
as one of the measures of our development efforts, through which we may increase
capacity by adding new projects or by expanding existing projects (as we have
done in 2007 through 2009 at several of our facilities including Great Plains
Correctional Facility and D. Ray James Prison).
As part of the evaluation of our development efforts, we will assess (a) whether
a given development project was brought into service in accordance with our
expectation as to time and expense; and (b) the number of projects in
development or under consideration at the relevant point in time. In addition to the focus on new projects,
capacity will reflect our success in renewing and maintaining existing
contracts and facilities. It will also
reflect any closure of programs or facilities due to underutilization or failure
to earn an adequate risk-adjusted rate of return. We must also be cognizant of the possibility
that state or local budgetary limitations may cause the contractual commitment
31
Table of Contents
to a given facility to be
reduced or even eliminated, which would require us to either secure an
alternate customer or close the operation.
Occupancy.
Occupancy is typically
expressed in terms of percentage of contract capacity utilized. We look at occupancy to assess the efficacy
of both our efforts to market our facilities and our efforts to retain existing
customers or contracts. Because revenue
varies directly with occupancy, occupancy is a principal driver of our revenues.
Our industry experiences significant economies of scale, whereby as occupancy
rises, operating costs per resident decline. Some of our contracts are take-or-pay,
meaning that the agency making use of the facility is obligated to pay for beds
even though they are not used.
Historically, occupancy percentages in many of our facilities have been
high and we are mindful of the need to maintain such occupancy levels. As new development projects are brought into
service, occupancy percentages may decline until the projects reach full
utilization (as, for example, with the activation of the 1,100 bed expansion at
Great Plains Correctional Facility during the fourth quarter of 2008 and the
700 bed expansion at D. Ray James Prison during the second quarter of 2009).
Where we have commitments for utilization before the commencement of
operations, occupancy percentages reflect the speed at which a facility
achieves full service/implementation. However, we may decide to undertake
development projects without written commitments to make full use of a
facility. In these instances, we have performed our own assessment of the
existing or anticipated demand, based on discussions with local government or
other potential customer representatives and our analysis of other factors, of
the demand for services at the facility.
There is no assurance that we would recover our initial investment in
these projects. We will monitor
occupancy as a measure of the accuracy of our estimation of the demand for the
services of a development facility and will incorporate this information in
future assessments of potential projects.
Per Diem Reimbursement Rates.
Per diem
reimbursement rates are another key element of our gross revenue and operating
margin since per diem contracts represent a majority of our revenues
(approximately 62.0% and 61.8% for the three and six months ended June 30,
2009, respectively). Per diem rates are
a function of negotiation between management and a governmental unit at the
inception of a contract or through the bidding process. Actual per diem rates vary dramatically
across our business segments, as well as within each business segment,
depending upon the particular service or program provided. The initial per diem
rates often change during the term of a contract in accordance with a
schedule. The amount of the change can
be a fixed amount set forth within the contract, an amount determined by
formulas set forth within the contract or an amount determined by negotiations
between management and the governmental unit (often these negotiations are
along the same lines as the original per diem negotiation a review of
expenses and approval of an amount to recompense for expenses and assure the
potential of an operating profit). In
recent years, as budgetary pressures on governmental units have increased, some
of our customers have negotiated relief from formulaic increase provisions
within their agreements or have declined to include in their appropriation
legislation amounts that would increase the per diem rates payable under the
contract. Based on the economic turmoil which began in the second half of 2008,
we are expecting such pressures to continue in 2009 for many of our customers.
In similar prior situations we have attempted to mitigate the impact of these
developments by negotiating services provided, obtaining commitments for
increased volume and other measures. We
may also choose to consider terminating an existing relationship at a given
facility and replacing it with a new customer (as was done with our Great
Plains Correctional Facility in 2007).
Revenues.
We derive
substantially all of our revenues from providing adult corrections and
treatment and juvenile justice, educational and treatment services outsourced
by federal, state and local government agencies in the United States. Revenues
for our services are generally recognized on a per diem rate based upon the
number of occupant days or hours served for the period, on a guaranteed
take-or-pay basis or on a cost-plus reimbursement basis. For the three months
ended June 30, 2009, our revenue base consisted of 62.0% for services
provided under per diem contracts, 32.5% for services provided under
take-or-pay and management contracts, 3.6% for services provided under
cost-plus reimbursement contracts, 1.8% for services provided under
fee-for-service contracts and 0.1% from other miscellaneous sources. For the three months ended June 30,
2008, our revenue base consisted of 53.0% for services provided under per diem
contracts, 40.9% for services provided under take-or-pay and management
contracts, 3.7% for services provided under cost-plus reimbursement contracts,
2.1% for services provided under fee-for-service contracts and 0.3% from other
miscellaneous sources. For the six months ended June 30, 2009 our revenue
base consisted of 61.8% for services provided under per diem contracts, 32.8%
for services provided under take-or-pay and management contracts, 3.5% for
services provided under cost-plus reimbursement contracts, 1.8% for services
provided under fee-for-service contracts and 0.1% from other miscellaneous
sources. For the six months ended June 30,
2008 our revenue base consisted of 52.2% for services provided under per diem
contracts, 41.5% for services provided under take-or-pay and management
contracts, 3.9% for services provided under cost-plus reimbursement contracts,
2.1% for services provided under fee-for-service contracts and 0.3% from other
miscellaneous sources. The increase in
revenues in the respective 2009 periods provided under per diem contracts (and
the corresponding decrease in revenues provided under take-or-pay and
management contracts) primarily reflects the transition of our contract with
the Arizona Department of Corrections from a take-or-pay contract to a per diem
contract upon the activation (and subsequent ramp in the fourth quarter of
2008) of its 1,100 bed expansion. In addition, we also terminated several
management contracts in 2008
32
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(including
Salt Lake Valley Detention Center and Lincoln County Detention Center in September 2008
and February 2008, respectively).
Revenues can fluctuate from year to year due
to changes in government funding policies, changes in the number or types of
clients referred to our facilities by governmental agencies, changes in the
types of services delivered to our customers, the opening of new facilities or
the expansion of existing facilities and the termination of contracts for a
facility or the closure of a facility.
Factors considered in determining billing rates to
charge include: (1) the programs specified by the contract and the related
staffing levels; (2) wage levels customary in the respective geographic
areas; (3) whether the proposed facility is to be leased or purchased; and
(4) the anticipated average occupancy levels that could reasonably be
expected to be maintained and the duration of time required to reach such
occupancy levels.
Revenues-Adult Secure
Services.
Revenues for
our Adult Secure Services division are primarily generated from per diem,
take-or-pay and management contracts.
For the three months ended June 30, 2009 and 2008, we realized
average per diem rates on our adult secure facilities of approximately $55.28
and $53.41, respectively.
For the six months ended June 30,
2009 and 2008, we realized average per diem rates of approximately $54.52 and
$54.46, respectively.
The average
per diem rate for the six months ended June 30, 2008 benefited from a
contract-based revenue adjustment for the contract year ended March 2008
in the amount of approximately $1.5 million at the RCC. We periodically have
experienced pressure from contracting governmental agencies to limit or even
reduce per diem rates. Many of these governmental entities are under severe
budget pressures and we anticipate that governmental agencies may periodically
approach us in 2009 about per diem rate concessions (or decline to provide
funding for contractual rate increases).
Decreases in, or the lack of anticipated increases in, per diem rates
could adversely impact our operating margin.
Revenues-Abraxas Youth and Family Services.
Revenues for our Abraxas Youth and Family Services
division are primarily generated from per diem, fee-for-service and cost-plus
reimbursement contracts. For the three
months ended June 30, 2009 and 2008, we realized average per diem rates on
our residential youth and family services facilities of approximately $194.53
and $190.46, respectively. For the six
months ended June 30, 2009 and 2008, we realized average per diem rates of
approximately $195.96 and $188.66, respectively. The increase in the average per diem rate for
2009 reflects the continued ramp-up of the Abraxas Academy (reactivated in the
fourth quarter of 2006), the reactivation of the Hector Garza Residential
Treatment Center in August 2007 as well as changes in the mix of services
provided and customers served at our other facilities. For the three months ended June 30, 2009
and 2008, we realized average fee-for-service rates for our non-residential
community-based Abraxas Youth and Family Services facilities and programs,
including rates that are limited by Medicaid and other private insurance
providers, of approximately $45.17 and $49.33, respectively. For the six months
ended June 30, 2009 and 2008, we realized average fee for service rates of
approximately $45.12 and $49.80, respectively.
The fluctuation in the average fee-for-service rates for 2009 and 2008
is due to changes in the mix of services provided at our non-residential
facilities. The majority of our Abraxas Youth and Family Services contracts
renew annually.
Revenues-Adult Community-Based Services.
Revenues for our Adult Community-Based Services
division are primarily generated from per diem and fee-for-service contracts.
For the three months ended June 30, 2009 and 2008, we realized average per
diem rates on our residential adult community-based facilities of approximately
$66.85 and $65.80, respectively. For the six months ended June 30, 2009
and 2008, we realized average per diem rates on our residential Adult
Community-Based Services facilities of approximately $67.05 and $65.88,
respectively. For the three months ended
June 30, 2009 and 2008, we realized average fee-for-service rates on our
non-residential Adult Community-Based Services facilities and programs of
approximately $10.35 and $12.62, respectively.
For the six months ended June 30, 2009 and 2008, we realized
average fee-for-service rates on our non-residential Adult Community-Based
Services facilities and programs of approximately $9.64 and $12.86,
respectively. Our average
fee-for-service rates fluctuate from year to year principally due to changes in
the mix of services provided by our various Adult Community-Based Services
programs and facilities.
Operating Margins.
We have
historically experienced higher operating margins in our Adult Secure Services
and Adult Community-Based Services divisions as compared to our Abraxas Youth
and Family Services division. Our operating margin, in a given period, will be
impacted by those facilities which may either be underutilized, dormant or have
been reactivated during the period. As previously discussed, we have
reactivated several facilities, including the Abraxas Academy and the Hector
Garza Residential Treatment Center in 2006 and 2007, respectively. We have also
expanded several of our Adult Secure facilities during 2008 and 2009 (D. Ray
James Prison, Great Plains Correctional Facility and Walnut Grove Youth
Correctional Facility, for example), which provides the opportunity to leverage
existing infrastructure. Additionally, our operating margins within a division
can vary from facility to facility based on whether a facility is owned or
leased, the level of competition for the contract award, the proposed length of
the contract, the mix of services provided, the occupancy levels for a
facility, the level of capital commitment required with respect to a facility,
the anticipated changes in operating
33
Table of Contents
costs over the term of the contract and our ability to
increase a facilitys contract revenue. Under take-or-pay contracts, such as
the contract at the Moshannon Valley Correctional Center, operating margins are
typically higher during the early stages of the contract as the facilitys
population ramps up (as revenues are received at contract percentages
regardless of actual occupancy). As the variable costs (primarily
resident-related and certain facility costs) increase with the growth in
population, operating margins will generally decline to a stabilized level.
Following its activation in April 2006, we experienced such operating
margin impact pertaining to the Moshannon Valley Correctional Center in the
third and fourth quarters of 2006. A decline in occupancy at our Abraxas Youth
and Family Services facilities can have a more significant negative impact on
operating margins than a decline in occupancy in our Adult Secure Services
division due to the longer periods typically required to ramp resident
population at a youth facility.
We have experienced and expect to continue to
experience interim period operating margin fluctuations due to factors such as
the number of calendar days in the period, higher payroll taxes (generally in
the first half of the year) and salary and wage increases and insurance cost
increases that are incurred prior to certain contract rate increases.
Periodically, many of the governmental agencies with whom we contract may
experience budgetary pressures and may approach us to limit or reduce per diem
rates (including contractual price increases as well). We have seen indications
of such customer behavior in 2009 and believe it will continue into 2010.
Decreases in, or the lack of anticipated increases in, per diem rates could
adversely impact our operating margin. Additionally, a decrease in per diem
rates without a corresponding decrease in operating expenses could also
adversely impact our operating margin.
Operating Expenses.
We track
several different areas of our operating expenses. Foremost among these expenses are employee
compensation and benefits and expenses, risk related areas such as general
liability, medical and workers compensation, client/inmate costs such as food,
clothing, medical and programming costs, financing costs and administrative
overhead expenses. Increases or decreases in one or more of these expenses,
such as our experience with rising insurance costs, can have a material effect
on our financial performance. Operating
expenses are also impacted by decisions to close or terminate a particular
program or facility. Such decisions are
based on our assessments of operating results, operating efficiency and
risk-adjusted returns and are an ongoing part of our portfolio management. In addition, decisions to restructure
employee positions will typically increase period costs initially (at the time of
such actions), but generally reduce post-restructuring expense levels.
We are responsible for all facility operating costs, except for certain
debt service and interest or lease payments for facilities where we have a
management contract only. At these facilities, the facility owner is
responsible for all debt service and interest or lease payments related to the
facility. We are responsible for all other operating expenses at these
facilities. We operated 14 and 16 facilities under management contracts at June 30,
2009 and 2008, respectively. Included in the facilities under management
contracts at June 30, 2009 were the Walnut Grove Youth Correctional
Facility and the eight Los Angeles County Jails, which represented 1,714 beds
of service capacity, or approximately 82.5%, of the residential service
capacity represented by management contracts.
A majority of our facility operating costs consists of
fixed costs. These fixed costs include lease and rental expense, insurance,
utilities and depreciation. As a result,
when we commence operation of new or expanded facilities, fixed operating costs
may increase. The amount of our variable operating costs, including food,
medical services, supplies and clothing, depend on occupancy levels at the
facilities. Our largest single operating cost, facility payroll expense and
related employment taxes and expenses, has both a fixed and a variable
component. We can adjust a facilitys staffing levels and the related payroll
expense to a certain extent based on occupancy at a facility; however a minimum
fixed number of employees is required to operate and maintain any facility
regardless of occupancy levels. Personnel costs are subject to increases in
tightening labor markets based on local economic environments and other
conditions.
We incur pre-opening and start-up expenses including
payroll, benefits, training and other operating costs prior to opening a new or
expanded facility and during the period of operation while occupancy is ramping
up. These costs vary by contract (and the pace/scale of the activation and
related population ramp). Since pre-opening and start-up costs are generally
factored into the revenue per diem rate that is charged to the contracting
agency, we typically expect to recover these upfront costs over the life of the
contract. Because occupancy rates during a facilitys start-up phase typically
result in capacity under-utilization for at least 90 to 180 days, we may incur
additional post-opening start-up costs.
The ramp phase for our youth facilities is typically longer than that
experienced in adult facilities. We do not anticipate post-opening start-up
costs at any adult secure facilities operated under any future contracts with
the BOP which are take-or-pay contracts, meaning that the BOP will pay at least
80.0% of the contractual monthly revenue once the facility opens, regardless of
actual occupancy.
Newly opened facilities are staffed according to
applicable regulatory or contractual requirements when we begin receiving
offenders or clients. Offenders or clients are typically assigned to a newly
opened facility on a phased-in basis over a one- to six-month period. Our
start-up period for new juvenile operations is 12 months from the date we begin
recognizing
34
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revenue unless break-even occupancy levels are
achieved before then. The actual time required to ramp a juvenile facility
(with an approximate capacity, for example, of 100 to 200 beds) may be a period
of one to three years. Our start-up period for new adult operations is nine
months from the date we begin recognizing revenue unless break-even occupancy
levels are achieved before then. The
approximate time to ramp an adult facility of approximately 1,000 beds may be a
period of three to six months, depending upon the customer requirements. Although we typically recover these upfront
costs over the life of the contract, quarterly results can be substantially
affected by the timing of the commencement of operations as well as the
development and construction of new facilities.
Working capital requirements
generally increase immediately prior to commencing management of a new or
expanded facility as we incur start-up costs and purchase necessary equipment
and supplies before facility management revenue is realized.
General
and administrative expenses consist primarily of costs for corporate and
administrative personnel who provide senior management, legal, finance,
accounting, human resources, investor relations, payroll and information
systems, costs of business development and outside professional and consulting
fees.
Recent
Developments
D. Ray James Prison
In August 2007, we
announced that we were initiating a second expansion of the D. Ray James
Prison. This expansion project increased the facilitys service capacity by an
additional 700 beds for a total service capacity of approximately 2,800 beds.
This expansion project began in the first quarter of 2008 and was completed in
the second quarter of 2009. We are
currently marketing this additional expansion to multiple customers, but we can
make no assurances as to who the customer will be (or what the possible timing
might be).
Hudson, Colorado
In
August 2008, we entered into an agreement pursuant to which we will lease
a new 1,250 male bed adult secure facility in Hudson, Colorado. The facility is
owned by a third party and is being built on land we sold to the third party.
We retained approximately 270 acres out of the original 320 acres we acquired
in 2007. We anticipate the construction, which began in the third quarter of
2008, to be completed in late 2009. We have signed an implementation agreement
with the Colorado Department of Corrections (Colorado DOC), which governs the
construction of the facility and contemplates a service agreement which can be
entered into upon completion of the implementation agreement. We would
expect to begin receiving inmates upon the activation of the facility, which is
currently anticipated to be during the first quarter of 2010. We expect
to enter into a service agreement for the facility with the Colorado DOC but
can make no assurances that we will do so (or what the possible timing might
be).
Liquidity and Capital
Resources
General
.
Our
primary capital requirements are for (1) purchases, construction or
renovation of new facilities, (2) expansions of existing facilities, (3) working
capital, (4) pre-opening and start-up costs related to new operating
contracts, (5) acquisitions, (6) information systems hardware and
software, and (7) furniture, fixtures and equipment. Working capital requirements generally
increase immediately prior to commencing management of a new or expanded facility
as we incur start-up costs and purchase necessary equipment and supplies before
facility management revenue is realized.
Cash
Flows From Operating Activities.
Cash provided by operations was
approximately $18.3 million for the six months ended June 30, 2009
compared to $26.5 million for the six months ended June 30, 2008. The decrease from the prior period was
principally due to the timing and amount of vendor payments.
Cash
Flows From Investing Activities
.
Cash used in investing activities was
approximately $14.6 for the six months ended June 30, 2009 due to capital
expenditures of $9.5 million related to the facility expansion projects at the
D. Ray James Prison and Great Plains Correctional Facility, as well as certain
infrastructure work at our Hudson, Colorado facility offset by insurance
proceeds of $1.7 million (related to damages sustained at the Reid Community
Residential Facility during Hurricane Ike in September 2008) and net payments
to the restricted debt payment account of $6.8 million.
Cash used in
investing activities was approximately $46.2 million for the six months ended June 30,
2008 due to capital expenditures of $39.0 million related primarily to the
expansion projects at the D. Ray James Prison and the Great Plains Correctional
Facility and net payments to the restricted debt payment account of $7.4
million. Additionally, we had sales of
investment securities of $0.3 million.
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Table of Contents
Cash
Flows From Financing Activities
.
Cash used in financing activities was
approximately $1.7 million for the six months ended June 30, 2009 due
primarily to borrowings of $2.0 million on our Amended Credit Facility offset
by payments on the Amended Credit Facility of $4.0 million and proceeds from
the exercise of stock options of $0.3 million.
Cash provided by financing
activities was approximately $17.7 million for the six months ended June 30,
2008 due primarily to borrowings on our Amended Credit Facility of $17.5
million and proceeds from the exercise of stock options of $0.2 million.
Treasury
Stock Repurchases.
We did not purchase any of our common stock in
the six months ended June 30, 2009 and 2008.
Long-Term Credit Facilities.
Our Amended
Credit
Facility provides for borrowings up to $100.0 million (including letters of
credit) and matures in December 2011. At our election, outstanding
borrowings bear interest, at either the LIBOR rate plus a margin ranging from
1.50% to 2.25% or a rate which ranges from 0.00% to 0.75% above the applicable
prime rate. The applicable margins are
subject to adjustments based on our total leverage ratio.
The available
commitment under our Amended Credit Facility was approximately $11.6 million at
June 30, 2009. We had outstanding
borrowings under our Amended Credit Facility of $73.0 million and we had
outstanding letters of credit of approximately $15.4 million at June 30,
2009. Subject to certain requirements,
we have the right to increase the commitments under our Amended Credit Facility
up to $150.0 million,
although the indenture for our Senior Notes limits
our ability, subject to certain conditions, to expand the Amended Credit
Facility beyond $100.0 million. We can
provide no assurance that all of the banks that have made commitments to us
under our Amended Credit Facility would be willing to participate in an
expansion to the Amended Credit Facility should we desire to do so.
The Amended
Credit Facility
is
collateralized by substantially all of our assets, including the assets and
stock of all of our subsidiaries. The Amended Credit Facility is not secured by
the assets of MCF, a special purpose entity.
Our
Amended Credit Facility contains financial and other restrictive covenants that
limit our ability to engage in certain activities. Our ability to borrow under the Amended
Credit Facility is subject to compliance with certain financial covenants,
including bank leverage, total leverage and fixed charge coverage ratios. At June 30,
2009, we were in compliance with all such covenants. Our Amended Credit
Facility includes other restrictions that, among other things, limit our
ability to incur indebtedness; grant liens; engage in mergers, consolidations
and liquidations; make investments, restricted payment and asset dispositions;
enter into transactions with affiliates; and engage in sale/leaseback
transactions.
MCF is obligated for the outstanding
balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47%
per annum and are payable in semi-annual installments of interest and annual
installments of principal. All unpaid
principal and accrued interest on the bonds is due on the earlier of August 1,
2016 (maturity) or as noted under the bond documents.
The bonds are limited, nonrecourse
obligations of MCF and secured by the property and equipment, bond reserves,
assignment of subleases and substantially all assets related to the facilities
included in the 2001 Sale and Leaseback Transaction (in which we sold eleven
facilities to MCF). The bonds are not
guaranteed by Cornell.
In June 2004, we issued $112.0
million in principal of 10.75% Senior Notes the (Senior Notes) due July 1,
2012. The Senior Notes are unsecured
senior indebtedness and are guaranteed by all of our existing and future
subsidiaries (collectively, the Guarantors).
The Senior Notes are not guaranteed by MCF (the Non-Guarantor). Interest on the Senior Notes is payable
semi-annually on January 1 and July 1 of each year, commencing January 1,
2005. On or after July 1, 2008, we
may redeem all or a portion of the Senior Notes at the redemption prices
(expressed as a percentage of the principal amount) listed below, plus accrued
and unpaid interest, if any, on the Senior Notes redeemed, to the applicable
date of redemption, if redeemed during the 12-month period commencing on July 1
of each of the years indicated below:
Year
|
|
Percentages
|
|
|
|
|
|
2008
|
|
105.375
|
%
|
2009
|
|
102.688
|
%
|
2010 and
thereafter
|
|
100.000
|
%
|
Upon
the occurrence of specified change of control events, unless we have exercised
our option to redeem all the Senior Notes as described above, each holder will
have the right to require us to repurchase all or a portion of such holders
Senior Notes at a purchase price in cash equal to 101% of the aggregate
principal amount of the notes repurchased plus accrued and unpaid interest, if
any, on the Senior Notes repurchased, to the applicable date of purchase. The Senior Notes were issued under an
indenture which limits our ability and the ability of our Guarantors to, among
other things, incur additional indebtedness, pay dividends or make other
distributions, make other restricted payments and investments, create liens,
incur
36
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Contents
restrictions
on the ability of the Guarantors to pay dividends or other payments to us,
enter into transactions with affiliates, and engage in mergers, consolidations
and certain sales of assets.
In conjunction with the
issuance of the Senior Notes, we entered into an interest rate swap transaction
with a financial institution to hedge our exposure to changes in the fair value
on $84.0 million of our Senior Notes.
The purpose of this transaction was to convert future interest due on
$84.0 million of the Senior Notes to a variable rate. The terms of the interest rate swap contract
and the underlying debt instrument were identical. The swap agreement was designated as a fair
value hedge. The swap had a notional
amount of $84.0 million and matured in July 2012 to mirror the maturity of
the Senior Notes. Under the agreement,
we paid, on a semi-annual basis (each January 1 and July 1), a
floating rate based on a six-month U.S. dollar LIBOR rate, plus a spread, and
received a fixed-rate interest of 10.75%.
The swap agreement was
marked to market each quarter with a corresponding mark-to-market adjustment
reflected as either a discount or premium on the Senior Notes. The carrying value of the Senior Notes as of
this date was adjusted accordingly by the same amount. Because the swap
agreement was an effective fair-value hedge, there was no effect on our results
of operations from the mark-to-market adjustment as long as the swap was in
effect. In October 2007, we terminated the swap agreement. We received
approximately $0.2 million in conjunction with the termination, which is being
amortized over the remaining term of the Senior Notes.
Future Liquidity
Our shelf registration
statement under Form S-3 for potential offerings from time to time of up
to $75.0 million in gross proceeds of debt securities, common stock, preferred
stock, warrants or certain other securities was declared effective by the
Securities and Exchange Commission in September 2008.
We expect to use existing
cash balances, internally generated cash flows and borrowings from our Amended
Credit Facility to fulfill anticipated obligations such as capital
expenditures, working-capital needs and scheduled debt maturities over at least
the next twelve months. As of June 30, 2009, we had approximately
$11.6 million of available capacity under our Amended Credit Facility. We
will continue to analyze our capital structure, including a potential
refinancing of our Senior Notes and financing for our expected future capital
expenditures, including any potential acquisitions. We will consider
potential acquisitions from time to time. Our principal focus for
acquisitions is anticipated to be in our Adult Secure and Adult Community-Based
divisions, although we would also pursue attractively priced acquisitions in
our Abraxas Youth and Family Services division. We may decide to use internally
generated funds, bank financing, equity issuances, debt issuances or a
combination of any of the foregoing to finance our future capital needs. We may
also seek, from time to time, to retire
or purchase some of our common stock and/or outstanding debt through cash
purchases in open market purchases, privately negotiated transactions or
otherwise. Such repurchases, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions and other
factors. At June 30, 2009, we believe we have sufficient liquidity
necessary to complete those projects for which we have outstanding commitments.
Our internally generated
cash flow is directly related to our business. Should the private corrections
and juvenile businesses deteriorate, or should we experience poor results in
our operations, cash flow from operations may be reduced. We have, however,
continued to generate positive cash flow from operating activities over recent
years and expect that cash flow will continue to be positive over the next
year. Our access to debt and equity markets may be reduced or closed to us due
to a variety of events, including, among others, industry conditions, general
economic conditions, market conditions, credit rating agency downgrades of our
debt and/or market perceptions of us and our industry. The volatility
seen in the financial markets beginning in the third quarter of 2008 has
continued into the third quarter of 2009 and is expected to be present for the
near term. Such volatility could result in decreased availability of
capital at economical terms and could also put additional financial and
budgetary pressure on our customers. Such conditions could potentially
result in our inability to pursue additional future growth opportunities (such
as facility expansions or new facility construction) and, if coupled with
unexpected client, operational or other issues affecting our cash flow, in a
need to seek additional financing at terms we would otherwise not accept.
In addition, our accounts
receivable are with federal, state, county and local government agencies, which
we believe generally reduces our credit risk. However, it is possible
that situations such as continuing budget resolutions, delayed passage of
budgets or budget pressures may increase the length of repayment of certain of
these receivables. Recently, the State of California has notified vendors
providing services to the state that it will temporarily issue IOUs, which
will be repaid October 2, 2009. While we will closely monitor this
situation, we do not currently expect this to have a permanent impact on the repayment
of our receivables related to our facilities in California.
37
Table of Contents
Results of
Operations
The following table sets forth for the
periods indicated the percentages of revenue represented by certain items in our
historical consolidated statements of operations.
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Operating
expenses
|
|
70.9
|
|
72.1
|
|
72.0
|
|
72.9
|
|
Depreciation
and amortization
|
|
4.5
|
|
4.5
|
|
4.7
|
|
4.4
|
|
General and
administrative expenses
|
|
6.0
|
|
7.6
|
|
6.1
|
|
7.2
|
|
Income from
operations
|
|
18.6
|
|
15.8
|
|
17.2
|
|
15.5
|
|
Interest
expense, net
|
|
6.2
|
|
5.9
|
|
6.1
|
|
6.3
|
|
Income from
operations before provision for income taxes
|
|
12.4
|
|
9.9
|
|
11.1
|
|
9.2
|
|
Provision for
income taxes
|
|
5.1
|
|
4.3
|
|
4.6
|
|
3.9
|
|
Net income
|
|
7.3
|
|
5.6
|
|
6.5
|
|
5.3
|
|
Non-controlling
interest
|
|
0.4
|
|
|
|
0.4
|
|
|
|
Income
available to stockholders
|
|
6.9
|
%
|
5.6
|
%
|
6.1
|
%
|
5.3
|
%
|
Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008
Revenues
.
Revenues increased approximately $10.7
million, or 11.3%, to $105.3 million for the three months ended June 30,
2009 from $94.6 million for the three months ended June 30, 2008.
Adult Secure Services.
Adult Secure Services revenues increased approximately $9.0
million, or 17.9%, to $59.3 million for the three months ended June 30,
2008 from $50.3 million for the three months ended June 30, 2007 due primarily
to
(1) revenues of $5.1 million at the Great Plains Correctional
Facility due to increased occupancy as a result of a facility expansion
completed in September 2008, (2) an increase in revenues of $2.0
million at the RCC due to improved occupancy, (3) an increase in revenues
of $0.8 million at the Walnut Grove Youth Correctional Facility (Walnut Grove)
due to a facility expansion completed in the third quarter of 2008 and (4) an
increase in revenues of $0.7 million at the Big Spring Correctional Center due
to increased occupancy. The remaining
net increase in revenues of $0.4 million was due to various immaterial fluctuations
in revenues at our other Adult Secure Services facilities.
At
June 30, 2009, we operated ten Adult Secure Services facilities with an
aggregate service capacity of 13,541.
Average contract occupancy was 87.3% for the three months ended June 30,
2009 compared to 92.4% for the three months ended June 30, 2008. The
decrease in the average contract occupancy is primarily due to (1) the
additional capacity brought into operations in September 2008 at Walnut
Grove, which we began ramping during the fourth quarter of 2008, (2) under-utilization
at certain California facilities and (3) the activation of the second
expansion at the D. Ray James Prison in April 2009. The average per diem
rate for our Adult Secure Services facilities was approximately $55.28 and
$53.41 for the three months ended June 30, 2009 and 2008, respectively.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services revenues increased
approximately $0.8 million, or 3.0%, to $27.7 million for the three months
ended June 30, 2009 from $26.9 million for the three months ended June 30,
2008 due primarily to (1)
an increase in revenues of
$0.9 million at the Cornell Abraxas 1 facility (A-1) due to improved
occupancy, (2) an increase in revenues of $0.7 million at the Texas
Adolescent Treatment Center (TATC) due to improved occupancy, (3) an
increase in revenues of $0.5 million at the Abraxas Academy due to increased
occupancy and (4) an increase in revenues of $0.4 million at the Hector
Garza Residential Treatment Center due to improved occupancy. The increase in revenues due to the above was
offset by (1) a decrease in revenues of $1.0 million due to the
termination of our management contract for the Salt Lake Valley Detention
Center as of September 2008 and (2) a decrease in revenues of $0.6
million due to the termination of our management contract for the Reading
Alternative Education School Program in June 2008. The remaining net decrease in revenues of
$0.1 million was due to various immaterial fluctuations in revenues at our
other Abraxas Youth and Family Services facilities and programs.
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At
June 30, 2009, we operated 17 residential
Abraxas
Youth and Family Services
facilities and 11 non-residential
Abraxas Youth and Family Services
community-based programs
with an aggregate service capacity of 3,321. Additionally, we had one facility
that was vacant at June 30, 2009 with a service capacity of 70 beds. Average contract occupancy for the three
months ended June 30, 2009 was 89.4% compared to 81.9% for the three
months ended June 30, 2008. The
increase in the average contract occupancy in 2009 was due to increased
occupancy/higher utilization at such facilities as the Abraxas Academy, A-1 and
the Hector Garza Residential Treatment Center.
The
average per diem rate for our residential
Abraxas
Youth and Family Services
facilities was approximately $194.53 for the
three months ended June 30, 2009 compared to $190.46 for the three months
ended June 30, 2008. Our average
fee-for-service rate for our non-residential
Abraxas
Youth and Family Services
community-based facilities and programs was
approximately $45.17 for the three months ended June 30, 2009 compared to
$49.33 for the three months ended June 30, 2008. Our average
fee-for-service rate can fluctuate from period-to-period depending on the mix
of services provided at our various
Abraxas
Youth and Family Services
facilities and programs.
Adult Community-Based Services.
Adult
Community-Based Services revenues increased approximately $0.9 million, or
5.1%, to $18.4 million for the three months ended June 30, 2009 from $17.5
million for the three months ended June 30, 2008 due to various immaterial
fluctuations in revenues spread across our Adult Community-Based Services
facilities and programs.
At June 30, 2009, we operated 28
residential Adult Community-Based Services facilities and three non-residential
Adult Community-Based Services programs with an aggregate service capacity of
3,960. Average contract occupancy was 111.3%
for the three months ended June 30, 2009 compared to 101.0% for the three
months ended June 30, 2008. The
average per di
em rate for our residential Adult Community-Based
Services facilities was approximately $66.85 for the three months ended June 30,
2009 compared to $65.80 for the three months ended June 30, 2008. The average fee-for-service rate for our
non-residential Adult Community-Based Services programs was approximately
$10.35 for the three months ended June 30, 2009 compared to $12.62 for the
three months ended June 30, 2008. Our average fee-for-service rates
fluctuate as a result of changes in the mix of services provided by our various
Adult Community-Based Services programs and facilities.
Operating Expenses
.
Operating
expenses increased approximately $6.4 million, or 9.4%, to $74.7 million for
the three months ended June 30, 2009 from $68.3 million for the three
months ended June 30, 2008.
Adult Secure Services.
Adult Secure Services operating expenses increased approximately
$6.7 million, or 20.8%, to $38.9 million for the three months ended June 30,
2009 from $32.2 million for the three months ended June 30, 2008 due primarily
to (1)
an increase in operating expenses of $2.3 million at
the Great Plains Correctional Facility due to increased occupancy as a result
of a facility expansion completed in September 2008, (2) an increase
in operating expenses of $1.1 million at the D. Ray James Prison due to increased
occupancy, (3) an increase in operating expenses of $0.9 million at RCC
due to increased occupancy, (4) an increase in operating expenses of $0.9
million at the Big Spring Correctional Center due to improved occupancy and (5) an
increase in operating expenses of $0.5 million at Walnut Grove due to increased
occupancy following the completion of a facility expansion in the third quarter
of 2008. The remaining net increase in operating expenses of approximately $1.0
million was due to various immaterial fluctuations in operating expenses at our
other Adult Secure Services facilities as well as an increase in divisional
operating expenses in the 2009 period.
As
a percentage of segment revenues, Adult Secure Services operating expenses were
65.6% for the three months ended June 30, 2009 compared to 64.1% for the
three months ended June 30, 2008.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services division operating expenses increased
approximately $0.3 million, or 1.3%, to $23.9 million for the three months
ended June 30, 2009 from $23.6 million for the three months ended June 30,
2008 due primarily to (1) an increase in operating expenses of $0.5
million at the Abraxas Academy due to increased occupancy, (2) an increase
in operating expenses of $0.6 million at the Hector Garza Residential Treatment
Center due to improved occupancy and (3) an increase in operating expenses
of $0.6 million at TATC due to increased occupancy, The increase in operating expenses due to
the above was offset, in part, by (1) a decrease in operating expenses of
$0.9 million due to the termination of our management contract for the Salt
Lake Valley Detention Center as of September 2008 and (2) a decrease
in operating expenses of $0.4 million due to the termination of our management
contract for the Reading Alternative Education School Program in June 2008.
The remaining net decrease in operating expenses of approximately $0.1
million was due to various immaterial fluctuations in operating expenses at our
other Abraxas Youth and Family Services facilities and programs.
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As a percentage of segment revenues, Abraxas
Youth and Family Services operating expenses were 85.8% for the three months
ended June 30, 2009 compared to 87.9% for the three months ended June 30,
2008. The reduction in the operating
expense ratio in 2009 was principally due to the increased utilization at those
facilities noted.
Adult Community-Based Services.
Adult Community-Based Services operating expenses were
approximately $12.1 million and $12.4 for the three months ended June 30,
2009 and 2008, respectively.
The decrease
was primarily due to an estimated gain of $0.4 million in June 2009
related to the insurance recoveries in excess of property carrying values at
the Reid Community Residential Facility damaged in Hurricane Ike in September 2008. This gain is reflected in operating expenses
for the three months ended June 30, 2009.
There were no significant
fluctuations in operating expenses at our various Adult Community-Based
Services facilities and programs between the two periods.
As a percentage of segment revenues,
Adult Community-Based Services operating expenses were 65.7% for the three
months ended June 30, 2009 compared to 71.0% for the three months ended June 30,
2008. The improvement in the operating margin was primarily due to the
increased utilization across the various facilities and programs during the
period.
Depreciation
and Amortization
.
Depreciation and amortization expense was approximately $4.7
million and $4.2 million for the three months ended June 30, 2009 and
2008, respectively. Depreciation expense
increased primarily due to the facility expansions at the Great Plains
Correctional Facility and the D. Ray James Prison. Amortization of intangibles was approximately
$0.4 million and $0.5 million for the three months ended June 30, 2009 and
2008, respectively.
General
and Administrative Expenses.
General and administrative expenses decreased approximately $0.9 million, or
12.5%, to $6.3 million for the three months ended June 30, 2009 compared
to $7.2 million for the three months ended June 30, 2008. The decrease was due primarily to higher
legal and other professional expenses incurred in the 2008 period.
Interest.
Interest expense, net of interest income, increased to approximately
$6.6 million for the three months ended June 30, 2009 from $5.6 million
for the three months ended June 30, 2008. The increase in net interest
expense was partially due to higher average outstanding borrowings during 2009.
Capitalized interest for the three months ended June 30, 2008 was
approximately $0.8 million and related to the facility expansion projects at
the Great Plains Correctional Facility and the D. Ray James Prison. There was
no interest capitalized during the three months ended June 30, 2009.
Income
Taxes.
For the three
months ended June 30, 2009, we recognized a provision for income taxes at
an estimated effective rate of 41.4%. For
the three months ended June 30, 2008, we recognized a provision for income
taxes at an estimated effective rate of 42.8%.
The change in our estimated effective tax rate in 2009 was related to an
increase in operating income across certain of our business segments and the
decreased impact of certain non-deductible expenses.
Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Revenues
.
Revenues increased approximately $15.0 million, or 7.9%, to $205.0 million for
the six months ended June 30, 2009 from $190.0 million for the six months
ended June 30, 2008.
Adult Secure Services.
Adult Secure Services revenues increased approximately $15.9
million, or 15.9%, to $116.1 million for the six months ended June 30, 2009
from $100.2 million for the six months ended June 30, 2008 due primarily
to (1)
an increase in revenues of approximately $10.2
million at the Great Plains Correctional Facility due to increased occupancy as
a result of a facility expansion completed in September 2008, (2) an
increase in revenues of $2.4 million at RCC due to improved occupancy, (3) an
increase in revenues of $1.5 million at Walnut Grove due to a facility
expansion completed in the third quarter of 2008, (4) an increase in
revenues of $1.0 million at the Big Spring Correctional Center due to increased
occupancy and (5) an increase in revenues of $0.7 million at the D. Ray
James Prison due to increased occupancy resulting from the facility expansion
completed in February 2008. The
remaining net increase in revenues of $0.1 million was due to various
immaterial fluctuations in revenues at our other Adult Secure Services
facilities.
Average
contract occupancy for the six months ended June 30, 2009 was 89.6%
compared to 94.0% for the six months ended June 30, 2008. The average per diem rate for our Adult
Secure Services facilities was approximately $54.52 and $54.46 for the six
months ended June 30, 2009 and 2008, respectively.
The decrease in
the average contract occupancy is primarily due to (1) the additional
capacity brought into operations in September 2008 at Walnut Grove, which
we began ramping during the fourth quarter of 2008, (2) under-utilization
at certain California facilities and (3) the activation of the second
expansion at D. Ray James Prison in April 2009.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services revenues decreased
approximately $1.3 million, or 2.4%, to $53.4 million for the six months ended June 30,
2009 from $54.7 million for the six months ended June 30, 2008 due to
(1) a
decrease in revenues of $1.9 million due to the termination of our management
contract for the Salt Lake Valley Detention Center as of September 2008
and (2) a decrease in revenues of $1.2 million due to the termination of
our management contract for the Reading Alternative Education School Program as
of June 2008. The decrease in
40
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revenues
due to the above was offset, in part, by (1) an increase in revenues of
$1.2 million at the Abraxas Academy due to increased occupancy, (2) an
increase in revenues of $1.0 million at TATC due to improved occupancy and (3) an
increase in revenues of $0.4 million at the Hector Garza Residential Treatment
Center due to increased occupancy. The
remaining net decrease in revenues of $0.8 million was due to various
immaterial fluctuations in revenues at our other Abraxas Youth and Family
Services facilities and programs.
Average
contract occupancy was 86.8% and 83.8% for the six months ended June 30,
2009 and 2008, respectively. The increase in the 2009 average contract
occupancy was primarily a result of higher utilization of the Hector Garza
Residential Treatment Center, the Abraxas Academy and TATC facilities. The average per diem rate for our residential
Abraxas Youth and Family Services facilities was approximately $195.96 and
$188.66 for the six months ended June 30, 2009 and 2008, respectively. The
increase in the 2009 average per diem rate reflects the continued ramp-up of
the Abraxas Academy, increased utilization at A-1 and our San Antonio
facilities, as well as changes in the mix of services provided at other facilities.
The average fee-for-service rate for our non-residential Abraxas Youth and
Family Services community-based facilities and programs was approximately
$45.12 and $49.80 for the six months ended June 30, 2009 and 2008,
respectively. The decrease in the average fee-for-service rate for 2009 was due
to changes in the mix of services provided by our various non-residential
Abraxas Youth and Family Services facilities and programs.
Adult Community-Based Services.
Adult Community-Based Services revenues increased approximately
$0.3 million, or 0.9%, to $35.5 million for the six months ended June 30,
2009 from $35.2 million for the six months ended June 30, 2008. Revenues decreased approximately $0.6 million
due to the termination of our management contract for the Lincoln County
Detention Center in May 2008. This
decrease was offset by a net increase in revenues of $0.9 million due to
immaterial fluctuations in revenues among our various Adult Community-Based
Services facilities and programs.
Average
contract occupancy was 107.4% and 100.9% for the six months ended June 30,
2009 and 2008. The average per diem rate
for our residential Adult Community-Based Services facilities was $67.05 and
$65.88 for the six months ended June 30, 2009 and 2008, respectively. The average fee-for-service rate for our
non-residential Adult Community-Based Services programs was $9.64 and $12.86
for the six months ended June 30, 2009 and 2008, respectively. The
decrease in the average fee-for-service rate for 2009 was due to changes in the
mix of services provided by our various non-residential Adult Community-Based
Services facilities and programs.
Operating
Expenses.
Operating
expenses increased approximately $9.1 million, or 6.6%, to $147.6 million for
the six months ended June 30, 2009 from $138.5 million for the six months
ended June 30, 2008.
Adult Secure Services.
Adult Secure Services operating expenses increased approximately
$11.1 million, or 17.2%, to $75.6 million for the six months ended June 30,
2009 from $64.5 million for the six months ended June 30, 2008 due to (1) an
increase in operating expenses of $4.5 million at the Great Plains Correctional
Facility due to increased occupancy as a result of a facility expansion
completed in September 2008 (2) an increase in operating expenses of
$1.6 million at the D. Ray James Prison due to increased occupancy as a result
of facility expansions completed in February 2008 and April 2009, (3) an
increase in operating expenses of $1.4 million at the Big Spring Correctional
Center due to improved occupancy, (4) an increase in operating expenses of
$1.1 million at Walnut Grove due to increased occupancy as a result of a
facility expansion completed in third quarter of 2008 and (5) an increase
in operating expenses of $0.8 million at RCC due to improved occupancy.
The remaining
net increase in operating expenses of $1.7 million was due to various
immaterial fluctuations in operating expenses at our other Adult Secure
Services facilities as well as an increase in divisional operating expenses of
$1.5 million in the 2009 period.
As a percentage of segment revenues, Adult
Secure Services operating expenses were 65.1% for the six months ended June 30,
2009 compared to 64.3% for the six months ended June 30, 2008. The 2008
operating margin was favorably impacted by a $1.5 million contract-based
revenue adjustment at the RCC for the contract year ended March 2008
(which we recognized in March 2008).
Abraxas Youth and Family Services.
Abraxas Youth and Family Services operating expenses decreased
approximately $1.1 million, or 2.2%, to $48.0 million for the six months ended June 30,
2009 from $49.1 million for the six months ended June 30, 2008 due
primarily to (1) a decrease in operating expenses of $1.9 million due to
the termination of our management contract for the Salt Lake Valley Detention
Center as of September 2008 and (2) a decrease in operating expenses
of $0.9 million due to the termination of our management contract for the
Reading Alternative Education School Program as of June 2008. The decrease
in operating expenses due to the above was offset, in part, by (1) an
increase in operating expenses of $1.2 million at the Abraxas Academy due to
improved occupancy, (2) an increase in operating expenses of $1.1 million
at the Hector Garza Residential Treatment Center due to improved occupancy and (3) an
increase in operating expenses of $0.8 million at TATC due to improved
occupancy. T
he remaining net decrease in
operating expenses of approximately $1.4
41
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million
was due to various immaterial fluctuations in operating expenses at our other
Abraxas Youth and Family Services facilities and programs.
As a percentage of segment revenues, Abraxas
Youth and Family Services operating expenses were 89.9% and 89.8% for the six
months ended June 30, 2009 and 2008, respectively.
Adult Community-Based Services.
Adult Community-Based Services operating expenses decreased
approximately $0.9 million, or 3.6%, to $24.0 million for the six months ended June 30,
2009 from $24.9 million for the six months ended June 30, 2008 due
primarily to a
decrease in operating expenses of $0.6 million due to the termination of our
management contract for the Lincoln County Detention Center in May 2008. Additionally, in June 2009, we recorded
an estimated gain of $0.4 million related to the insurance recoveries in excess
of property carrying values at the Reid Community Residential Facility damaged
in Hurricane Ike in September 2008.
This gain is reflected in operating expenses for the six months ended June 30,
2009. The remaining net increase in
operating expenses of $0.1 million was due to immaterial fluctuations in operating
expenses at our other Adult Community-Based Services facilities and programs.
As a percentage
of segment revenues, Adult Community-Based Services operating expenses were
67.7% for the six months ended June 30, 2009 compared to 70.8% for the six
months ended June 30, 2008.
Depreciation
and Amortization
.
Depreciation and amortization expense was
approximately $9.6 million and $8.4 million for the six months ended June 30,
2009 and 2008, respectively.
Depreciation of property and equipment increased approximately $1.3
million due primarily to depreciation expense related to the facility
expansions at the Great Plains Correctional Facility and the D. Ray James
Prison. Amortization of intangibles was
approximately $0.9 million and $1.0 million for the six months ended June 30,
2009 and 2008, respectively.
General
and Administrative Expenses.
General and administrative expenses decreased approximately $1.4 million, or
10.1%, to approximately $12.4 million for the six months ended June 30,
2009 from $13.8 million for the six months ended June 30, 2008
due primarily
to lower legal and other professional expenses in the 2009 period.
Interest.
Interest expense, net of interest income, increased to
approximately $12.5 million for the six months ended June 30, 2009 from $11.9
million for the six months ended June 30, 2008. The increase in net
interest expense was partially due to higher levels of borrowings outstanding
during 2009. For the six months ended June 30, 2009, we capitalized
interest of $0.7 million related to the 700 bed facility expansion project at
the D. Ray James Prison. For the six
months ended June 30, 2008, we capitalized interest of approximately $1.3
million related to the expansion projects at the D. Ray James Prison and the
Great Plains Correctional Facility.
Income
Taxes.
For the six
months ended June 30, 2009, we recognized a provision for income taxes at
an estimated effective rate of 41.5%. For
the six months ended June 30, 2008, we recognized a provision for income
taxes at an estimated effective rate of 43.1%.
The change in our estimated effective tax rate in 2009 was related to an
increase in operating income across certain of our business segments and the
decreased impact of certain non-deductible expenses.
Contractual Uncertainties Related to
Certain Facilities
Regional Correctional Center.
The Office of Federal Detention Trustee (OFDT)
holds the contract for the use of the RCC on behalf of ICE, USMS and the BOP
with Bernalillo County (the County) through an intergovernmental services
agreement, and we have an operating and management agreement with the
County. In July 2007, we were
notified by ICE that it was removing all ICE detainees from the RCC and the
removal was completed in early August 2007. The facility is still being
utilized by the USMS, and since May 2008 by the BOP, but not at its full
capacity. In February 2008, ICE
informed us that it would not resume use of the facility. In February 2008, OFDT attempted to
unilaterally amend its agreement with the County to reduce the number of
minimum annual guaranteed mandays under the agreement from 182,500 to
66,300. Neither we nor the County believe OFDT has the right to
unilaterally amend the contract in this manner, and OFDT has been informed of
our position. Although either party to the intergovernmental services agreement
has the right to terminate upon 180 days notice, neither party has exercised
such right as of June 30, 2009.
There
is a pending lawsuit against the County concerning the County jail system,
known as the McClendon case. In 1994,
plaintiffs sued the County in federal district court in the District of
New Mexico over conditions at the county jail, which was then located at what
is now the Regional Correctional Center and run by the County. The County
subsequently built their new Metropolitan Detention Center to house the County
inmates and also negotiated two stipulated agreements in 2004 designed to end
the McClendon lawsuit. These
stipulated settlements covered the Metropolitan Detention Facility and were
approved by the Court in 2005 (the 2005 settlement agreements).
In
March 2009, the Federal Judge presiding over the case issued an Order
based on motions filed by Plaintiffs class counsel asking the Judge to reform
the 2005 settlement agreements to allow for access to the RCC. In those motions, the Plaintiffs also
requested alternative relief in the form of withdrawal of the Courts approval
of the 2005 settlement agreements. Based
on our interpretation of the Order, the Judge denied Plaintiffs request for
access to the RCC, granted the alternative relief requested, withdrew her
approval of the 2005 settlement agreements and granted the option to Plaintiffs
to
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Table of
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rescind
their 2005 settlement agreements. The
Plaintiffs chose to rescind the 2005 settlement agreements. In the Order, the Judge concluded that the
RCC, at least to the extent it is used to house detainees by Bernalillo County
pursuant to the intergovernmental services agreement, is part of the county
jail system. The County has informed us
that it does not believe McClendon should apply to the RCC and the County has
filed an appeal of the Order to the U.S. Court of Appeals for the Tenth
Circuit. We are not a party to this lawsuit and the ramifications of the
Courts Order to our operation of the RCC are unclear.
The
2005 settlement agreements imposed various conditions on the Metropolitan
Detention Center that resulted in material increases to its operating
costs. The effect of the rescission of
the 2005 settlement agreements is unclear since those settlement agreements
replaced prior settlement agreements approved in 1996. We do not believe we are contractually
obligated to bear any incremental costs of complying with any settlement
agreements in the McClendon case although the County has expressed to us
that it may want us to absorb a portion of any costs that would be incurred. We currently plan to continue to operate the
facility and also continue with our marketing plans for the RCC.
Revenues
for this facility were approximately $6.4 million and $4.0 million (including a
$1.5 million contract-based revenue adjustment for the contract year ended March 31,
2008, for which the related receivable is carried in accounts receivable-trade
at June 30, 2009) for the six months ended June 30, 2009 and 2008,
respectively. The net carrying value of the leasehold improvements for this
facility was approximately $1.1 million at June 30, 2009 and December 31,
2008. Our lease for this facility requires monthly rent payments of
approximately $0.13 million for the remaining term of the lease (which was
extended through June 2010). To date, although we have several federal
agencies using the RCC, the facility still has available capacity. Our
inability to expand the existing population with current or new customers or
any disruption of our operations due to activity in the McClendon case could
have an adverse effect on our financial condition, results of operations and
cash flows. We believe that pursuant to the provisions of SFAS No. 144,
no impairment to the carrying value of the leasehold improvements for this
facility has occurred.
Hector Garza Residential
Treatment Center.
In October 2005, we initiated the
temporary closure of this MCF leased facility in San Antonio, Texas. We
reactivated the facility during the third quarter of 2007. The net carrying
value for this facility was approximately $4.0 million at June 30, 2009
and December 31, 2008. We believe
that, pursuant to the provisions of SFAS No. 144, no impairment to the
carrying value of this facility has occurred due to existing (and increasing)
demand from current customers (including the Texas Youth Commission) and
anticipated incremental demand from additional multiple customers to whom the
facility is being marketed (including several current and anticipated requests
for proposal).
Realization of long-lived assets
We review our long-lived assets (including our
facilities at a facility-by-facility level) for impairment at least annually or
when changes in circumstances or a triggering event indicates that the carrying
amount of the asset may not be recoverable in accordance with the provisions of
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 requires that long-lived assets to be held and used recognize an
impairment loss only if the carrying amount of the long-lived asset is not
recoverable from its estimated future undiscounted cash flows and to measure an
impairment loss as the difference between the carrying value and the fair value
of the asset. Assets to be disposed of by sale are recorded at the lower of
their carrying amount or fair value less estimated selling costs. We estimate
projections of undiscounted cash flows, and also fair value, based upon the
best information available, which may include expected future discounted cash
flows to be produced by the asset and/or available market prices. Factors that
significantly influence estimated future cash flows include the periods and
levels of occupancy for the facility, expected per diem or reimbursement rates,
assumptions regarding the levels of staffing, services and future operating and
capital expenditures necessary to generate forecasted revenues, related costs
for these activities and future rate of increases or decreases associated with
these factors. Information typically utilized will also include relevant terms
of existing contracts (for similar services and customers), market knowledge of
customer demand (both present and anticipated) and related pricing, market
competitors, and our historical experience (as to areas including customer
requirements, contract terms, operating requirements/costs, occupancy trends,
etc.). We may also consider the results of any appraisals if a fair value is
necessary. Estimates for factors such as per diem or reimbursement rates may be
highly subjective, particularly in circumstances where there is no current
operating contract in place and changes in the assumptions and estimates could
result in the recognition of impairment charges.
The most subjective estimates made in our impairment
analysis for 2008 related to Cornell Abraxas 1 and the Hector Garza Residential
Treatment Center, particularly with respect to estimated occupancy. The
approximate carrying values at December 31, 2008 for Cornell Abraxas 1 and the
Hector Garza Residential Treatment Center were $10.4 million and $4.0 million,
respectively. The estimated undiscounted future cash flow values exceeded the
carrying values noted for the facilities, and all facilities had operating
contracts in place. During 2009, there were no significant events that caused
us to believe that an impairment of these facilities during the current period
had occurred.
We may be required to record an impairment charge in
the future if we are unable to successfully negotiate a replacement contract on
any of our facilities for which we currently have an operating contract.
Contractual
Obligations and Commercial Commitments
.
We have
assumed various financial obligations and commitments in the ordinary course of
conducting our business. We have contractual obligations requiring future cash
payments under our existing contractual arrangements, such as management,
consultative and non-competition agreements.
We maintain operating leases in the
ordinary course of our business activities.
These leases include those for operating facilities, office space and
office and operating equipment, and the terms of these agreements range from
2008 until 2075. As of June 30,
2009, our total commitment under these operating leases was approximately
$118.5 million.
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The following table details our known
future cash payments (on an undiscounted basis) related to various contractual
obligations as of June 30, 2009 (in thousands):
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
2010 -
|
|
2012 -
|
|
|
|
|
|
Total
|
|
2009
|
|
2011
|
|
2013
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt principal
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell Companies, Inc.
|
|
$
|
112,000
|
|
$
|
|
|
$
|
|
|
$
|
112,000
|
|
$
|
|
|
·
Special Purpose Entity
|
|
134,100
|
|
12,400
|
|
28,000
|
|
33,000
|
|
60,700
|
|
Long-term debt interest
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell Companies, Inc.
|
|
36,120
|
|
6,020
|
|
24,080
|
|
6,020
|
|
|
|
·
Special Purpose Entity
|
|
50,257
|
|
5,679
|
|
19,482
|
|
14,534
|
|
10,562
|
|
Revolving line of credit-principal
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell Companies, Inc.
|
|
73,000
|
|
|
|
73,000
|
|
|
|
|
|
Revolving line of credit-interest
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell Companies, Inc.
|
|
696
|
|
486
|
|
210
|
|
|
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell Companies, Inc.
|
|
21
|
|
7
|
|
14
|
|
|
|
|
|
Construction commitments
|
|
4,619
|
|
4,619
|
|
|
|
|
|
|
|
Operating leases
|
|
118,462
|
|
3,851
|
|
25,580
|
|
21,876
|
|
67,155
|
|
Consultative and non-competeagreements
|
|
110
|
|
110
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
529,385
|
|
$
|
33,172
|
|
$
|
170,366
|
|
$
|
187,430
|
|
$
|
138,417
|
|
Approximately
$2.7 million of unrecognized tax benefits have been recorded as liabilities in
accordance with FIN 48 as of June 30, 2009 but are not included in the
contractual obligations table above because we are uncertain as to if or when
such amounts may be settled. Related to
the unrecognized tax benefits not included in the table above, we have also
recorded a liability for potential penalties of approximately $0.1 million and
for interest of approximately $0.1 million as of June 30, 2009.
We
enter into letters of credit in the ordinary course of operating and financing
activities. As of June 30, 2009, we
had outstanding letters of credit of approximately $15.4 million primarily for
certain workers compensation insurance and other operating obligations. The following table details our letters of
credit commitments as of June 30, 2009 (in thousands):
|
|
Total
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Amounts
|
|
Less than
|
|
|
|
|
|
More Than
|
|
|
|
Committed
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
15,449
|
|
$
|
14,699
|
|
$
|
750
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3. Quantitative and
Qualitative Disclosures about Market Risk
In
the normal course of business, we are exposed to market risk, primarily from
changes in interest rates. We
continually monitor exposure to market risk and develop appropriate strategies
to manage this risk. We are not exposed
to any other significant market risks, including commodity price risk or,
foreign currency exchange risk or interest rate risks from the use of
derivative financial instruments. In
conjunction with the issuance of the Senior Notes, we entered into an interest
rate swap of $84.0 million related to the interest obligations under the Senior
Notes in effect converting them to a floating rate based on six-month LIBOR. We
terminated the interest rate swap in October 2007.
Credit Risk
Due
to the short duration of our investments, changes in market interest rates
would not have a significant impact on their fair value. In addition, our accounts receivables are
with federal, state, county and local government agencies, which we believe
reduces our credit risk. However, it is possible that such situations as continuing
budget resolutions, delayed passage of budgets or budget pressures may increase
the length of repayment of certain receivables. Recently, the State of
California has notified vendors providing services to the state that it will
temporarily issue IOUs, which will be repaid October 2, 2009. While we
will closely monitor this situation, we do not currently expect this to have a
permanent impact on the repayment of our receivables related to our facilities
in California.
44
Table of
Contents
Interest Rate Exposure
Our exposure to changes in interest rates
primarily results from our Amended Credit Facility, as these borrowings have
floating interest rates. The debt on our
consolidated financial statements at June 30, 2009 with fixed interest
rates consist of the 8.47% Bonds issued by MCF, a special purpose entity, in August 2001
in connection with the 2001 Sale and Leaseback Transaction and $112.0 million
of Senior Notes. The detrimental effect
of a hypothetical 100 basis point increase in interest rates on our current
borrowings under our Amended Credit Facility would be to reduce income before
provision for income taxes by approximately $0.4 million for the six months ended
June 30, 2009. At June 30, 2009,
the fair value of our consolidated fixed rate debt was approximately $323.5
million based upon quoted market prices or discounted future cash flows using the
same or similar securities.
Inflation
Other than personnel,
offender medical costs at certain facilities, and employee medical and workers
compensation insurance costs, we believe that inflation has not had a material
effect on our results of operations during the past two years. We have experienced significant increases in
offender medical costs and employee medical and workers compensation insurance
costs, and we have also experienced higher personnel costs during the past two
years. Most of our facility management contracts provide for payments of either
fixed per diem fees or per diem fees that increase by only small amounts during
the term of the contracts. Inflation could substantially increase our personnel
costs (the largest component of our operating expenses), medical and insurance
costs or other operating expenses at rates faster than any increases in
contract revenues. Food costs (part of
our resident/inmate care costs) have also been subject to rising prices in 2008
and 2009. We believe we have limited our exposure through long-term contracts
with fixed term pricing.
ITEM 4. Controls and Procedures
Evaluation of
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information disclosed in our annual and periodic reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. In addition,
we designed these disclosure controls and procedures to ensure that this
information is accumulated and communicated to management, including the chief
executive officer (CEO) and chief financial officer (CFO), to allow timely
decisions regarding required disclosures. SEC rules require that we
disclose the conclusions of our CEO and CFO about the effectiveness of our
disclosure controls and procedures.
We do not expect that our
disclosure controls and procedures will prevent all errors or fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. In
addition, the design of disclosure controls and procedures must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitation in a
cost-effective control system, misstatements due to error or fraud could occur
and not be detected.
Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, and as required by
paragraph (b) of Rules 13a-15 and 15d-15 of the Exchange Act, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act) as of the end of the period required by this report. Based on
that evaluation, our principal executive officer and principal financial
officer have concluded that these controls and procedures are effective as of
that date.
Changes in Internal Control over Financial Reporting
In connection with the evaluation as required
by paragraph (d) of Rules 13a-15 and 15d-15 of the Exchange Act, we
have not identified any change in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under
Exchange Act) during our fiscal quarter ended June 30, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
45
Table of Contents
PART II
OTHER INFORMATION
ITEM 1.
Legal
Proceedings.
See Part I, Item 1.
Note 9 to the Consolidated Financial Statements, which is incorporated herein
by reference.
ITEM 1A.
Risk
Factors.
The risk factors as
previously disclosed in our Form 10-K for the fiscal year ended December 31,
2008 are incorporated herein by this reference. There are no material changes
to such risk factors.
ITEM 2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
ITEM 3.
Defaults
Upon Senior Securities.
None.
ITEM 4.
Submission of Matters to a
Vote of Security Holders.
On June 18, 2009, the Company held
its 2009 Annual Meeting of Shareholders.
The matters voted on at the meeting and the results thereof are as
follows:
1.
Shareholders elected the persons listed below as directors whose
terms expire at the 2010 Annual Meeting of Shareholders or until their
successors are elected and qualified.
Results by nominee were:
|
|
|
|
Authority
|
|
|
|
Voted For
|
|
Withheld
|
|
|
|
|
|
|
|
Max Batzer
|
|
14,095,978
|
|
361,321
|
|
Anthony R.
Chase
|
|
14,098,081
|
|
359,218
|
|
Richard Crane
|
|
13,804,844
|
|
652,455
|
|
Zachary R.
George
|
|
14,359,370
|
|
97,929
|
|
Todd Goodwin
|
|
14,007,311
|
|
449,988
|
|
James E.
Hyman
|
|
14,022,681
|
|
434,618
|
|
Andrew R.
Jones
|
|
14,068,623
|
|
388,676
|
|
Alfred Jay
Moran, Jr.
|
|
14,006,898
|
|
450,401
|
|
D. Stephen
Slack
|
|
14,015,661
|
|
441,638
|
|
2.
Shareholders ratified the selection of PricewaterhouseCoopers LLP
as the Companys independent registered public accounting firm for the fiscal
year ending December 31, 2009.
Results were as follows:
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Vote
|
|
14,404,262
|
|
50,611
|
|
2,426
|
|
0
|
|
3.
Shareholders approved amendments to the Companys 2006 Equity
Incentive Plan and reapproval of performance goals that may apply to awards
under the plan. Results were as follows:
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Vote
|
|
12,627,017
|
|
1,371,848
|
|
5,720
|
|
452,714
|
|
4.
Shareholders approved amendments to the Companys 2000 Director
Stock Plan. Results were as follows:
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Vote
|
|
13,366,765
|
|
627,930
|
|
9,890
|
|
452,714
|
|
46
Table of Contents
5.
Shareholders rejected a
shareholders proposal that the Company provide semi-annual reports to
shareholders regarding the Companys political contributions and trade
association dues. Results were as
follows:
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Vote
|
|
3,958,000
|
|
9,338,683
|
|
707,902
|
|
452,714
|
|
ITEM 5.
Other Information.
None.
ITEM 6.
Exhibits.
10.1
|
|
Form of
Cornell Companies, Inc. Restricted Stock Award Agreement
(Profitability & Time-Based) (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on
April 7, 2009)
|
10.2
|
|
Form of
Cornell Companies, Inc. Restricted Stock Award Agreement (Performance
Based) (incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed on April 7, 2009)
|
10.3
|
|
Cornell
Companies, Inc. 2006 Incentive Plan, as amended and restated
(incorporated by reference to the Companys Proxy Statement on Schedule 14A
filed April 28, 2009)
|
10.4
|
|
Cornell
Companies, Inc. Amended and Restated 2000 Director Stock Plan
(incorporated
by reference to the Companys Proxy Statement on Schedule 14A filed
April 28, 2009
)
|
10.5*
|
|
Cornell
Companies, Inc. First Amendment to the Amended and Restated 1996 Stock
Option Plan
|
31.1*
|
|
Section 302
Certification of Chief Executive Officer
|
31.2*
|
|
Section 302
Certification of Chief Financial Officer
|
32.1**
|
|
Section 906
Certification of Chief Executive Officer
|
32.2**
|
|
Section 906
Certification of Chief Financial Officer
|
*
|
|
Filed
herewith.
|
**
|
|
Furnished
herewith.
|
47
Table of
Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
|
CORNELL COMPANIES, INC.
|
|
|
|
|
|
|
Date: August 7,
2009
|
By:
|
/s/
James E. Hyman
|
|
|
JAMES
E. HYMAN
|
|
|
Chief
Executive Officer, President and Chairman
of the Board (Principal Executive Officer)
|
|
|
|
|
|
|
Date: August 7,
2009
|
By:
|
/s/
John R. Nieser
|
|
|
JOHN
R. NIESER
|
|
|
Senior
Vice President, Chief Financial Officer
and Treasurer (Principal Financial Officer and
Principal Accounting Officer)
|
48
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