-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TMY+XBVeTnfLXj9MKblr1gGRLctTYM3j0Su6QuNRd16932mCnOWlwd2rEfBvT95x tcEOBLfiUiJVqHzuDgVxhw== 0000890566-97-000650.txt : 19970401 0000890566-97-000650.hdr.sgml : 19970401 ACCESSION NUMBER: 0000890566-97-000650 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNELL CORRECTIONS INC CENTRAL INDEX KEY: 0001016152 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 760433642 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14472 FILM NUMBER: 97569622 BUSINESS ADDRESS: STREET 1: 4801 WOODWAY STREET 2: STE 400W CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7136230790 MAIL ADDRESS: STREET 1: 4801 WOODWAY STREET 2: STE 400W CITY: HOUSTON STATE: TX ZIP: 77056 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-14472 CORNELL CORRECTIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0433642 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 4801 WOODWAY, SUITE #100E, HOUSTON, TEXAS 77056 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 623-0790 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.001 par value per Share (Title of Class) Indicate by 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 ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will be not contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ). At February 28, 1997, Registrant had outstanding 6,765,398 shares of its common stock. The aggregate market value of the Registrant's voting stock held by non-affiliates at this date was approximately $45,796,000 based on the closing price of $10.625 per share as reported on the American Stock Exchange. For purposes of the foregoing calculation, all directors and officers of the Registrant have been deemed to be affiliates, but the Registrant disclaims that any of such directors or officers is an affiliate. Documents Incorporated by Reference Portions of the Proxy Statement for 1996 Annual Meeting of Stockholders.Part III PART I ITEM 1. BUSINESS Cornell Corrections, Inc. (the "Company") is one of the leading providers of privatized correctional, detention and pre-release services in the United States. The Company is the successor to entities that began developing institutional correctional and detention facilities in Massachusetts and Rhode Island in 1991, and pre-release facilities in California in 1977. The Company has rapidly expanded its operations through acquisitions and internal growth and is currently developing or operating facilities in the following 7 states: California, Texas, Rhode Island, Utah, North Carolina, Georgia and New Mexico. As of December 31, 1996, the Company had 24 contracts to operate 21 private correctional, detention and pre-release facilities with an aggregate design capacity of 3,577 beds. Of these facilities, 18 were in operation (3,142 beds) and 3 were under development (435 beds). The 3 facilities under development commenced operations during the first quarter of 1997. As of March 25, 1997, the Company had expanded its operations to include 31 contracts to operate 26 facilities with an aggregate design capacity of 5,303 beds. The increase from December 31, 1996 included completing the acquisition of Interventions, Co. (300 pre-release beds and 150 juvenile beds), two newly awarded contracts in Santa Fe, New Mexico (504 secure institutional beds and 156 juvenile beds), and the beginning of a 516 bed expansion of the Company's Big Spring, Texas operations, with the balance from internal expansion. Construction on the Santa Fe, New Mexico and Big Spring, Texas expansion projects are expected to be completed during 1998. The Company provides to governmental agencies the integrated development, design, construction and operation of facilities within three areas of operational focus: (i) secure institutional correctional and detention services, (ii) pre-release correctional services and (iii) juvenile correctional and detention services. Institutional correctional and detention services primarily consist of the operation of secure adult incarceration facilities. Pre-release correctional services primarily consist of providing pre-release and halfway house programs for adult inmates serving the last three to six months of their sentences and preparing for re-entry into society at large. At the facilities it operates, the Company generally provides maximum and medium security incarceration and minimum security residential services, institutional food services, certain transportation services, general education programs (such as high school equivalency and English as a second language programs), health care (including medical, dental and psychiatric services), work and recreational programs and chemical dependency and substance abuse programs. Additional services provided in the Company's pre-release facilities typically include life skills and employment training and job placement assistance. Juvenile services provided by the Company will include medical, educational and counseling programs tailored to meet the special needs of juveniles. ACQUISITIONS HISTORY In March 1994, the Company acquired Eclectic Communications, Inc. ("Eclectic"), the operator of 11 privatized institutional and pre-release facilities in California with an aggregate design capacity of 979 beds. Consideration for this acquisition was $10.3 million, consisting of $6.0 million in cash, $3.3 million of subordinated indebtedness, approximately $700,000 of other long-term obligations, and $300,000 of direct acquisition costs. In May 1996, the Company acquired the Reid Center, a 310 bed pre-release facility located in Houston, Texas, for approximately $2.0 million. Included in the acquisition were the Reid Center facility property and buildings, the equipment, inventory and supplies used in the operation of the Reid Center facility and the assignment of the Reid Center's contract with the Texas Department of Criminal Justice ("TDCJ"). Following the consummation of this acquisition, approximately 100 employees of the Reid Center became - 2 - employees of the Company. The Company believes that the Reid Center is the largest single facility pre-release center in Texas and that its acquisition enhances the Company's position as one of the leaders in providing pre-release services. In July 1996, the Company completed the acquisition of substantially all the assets of MidTex Detentions, Inc. ("MidTex"), an operator of secure institutional facilities in Big Spring, Texas ("Big Spring Facility"), for an aggregate purchase price of approximately $23.7 million. The City of Big Spring has an Intergovernmental Agreement ("IGA") with the Federal Bureau of Prisons ("FBOP") to house up to 1,333 inmates at the Big Spring Facility, and, as part of the acquisition, MidTex assigned to the Company its rights under an operating agreement with the City of Big Spring ("Big Spring Operating Agreement") to manage the Big Spring Facility. The Big Spring Operating Agreement has a base term of 20 years from the closing of the acquisition and three five-year renewal options at the discretion of the Company. The IGA has an indefinite term, although it may be terminated or modified by the FBOP upon 90 days' written notice. Following consummation of the this acquisition, approximately 250 employees of the City of Big Spring and MidTex became employees of the Company. In January 1997, the Company acquired substantially all of the assets and liabilities of Interventions, Co. ("Interventions") for $6.0 million which included the assumption of $2.3 million of pre-acquisition debt and $230,000 of transaction costs. Included as part of the acquisition is the operation of a 300 bed residential pre-release facility in Dallas, Texas and a 150 bed capacity residential Transitional Living Center for juveniles in San Antonio, Texas. In addition to the residential program operated at the Dallas facility, Interventions provides various non-residential aftercare treatment programs for probationers in Dallas, Texas. Following consummation of this acquisition, approximately 150 employees of Interventions became employees of the Company. INDUSTRY AND MARKET There is a growing trend in the United States toward privatization of governmental correctional and detention services and functions. Generally, this trend results from continuing pressures faced by governments to control costs and improve service efficiency as a result of the rapidly growing inmate population in the United States. Further, as a result of the number of crimes committed each year and the corresponding number of arrests, incarceration costs generally grow faster than other parts of government budgets. In an attempt to address these pressures, governmental agencies are increasingly privatizing new facilities. According to reports issued by the Bureau of Justice Statistics ("BJS"), the number of adult inmates in United States federal and state prison facilities increased from 503,601 at December 31, 1985 to 1,104,074 at June 30, 1995, an increase of more than 119%. According to the Private Adult Correctional Facility Census, prepared by the Private Corrections Project Center for Studies in Criminology & Law, University of Florida, ("Private Correctional Facility Census"), the design capacity of privately managed adult correctional and detention facilities in the United States increased from 26 facilities with a design capacity of 10,973 beds at December 31, 1989 to 92 facilities with a design capacity of 57,609 beds at December 31, 1995. By year-end 1995, according to the Private Correctional Facility Census, numerous counties, various agencies of the federal government and 20 states had awarded management contracts to private companies. According to the Private Correctional Facility Census, privatized facilities include (i) correctional facilities operated for the FBOP and detention facilities operated for the Immigration and Naturalization Service ("INS") and U.S. Marshals Service, (ii) state prisons, pre-release correctional facilities, intermediate sanction facilities, work program facilities and state jail facilities operated for state agencies and (iii) city jail and transfer facilities operated for local agencies. Even after such growth, according to the Private Correctional Facility Census, less than five percent of adult inmates in United States correctional and detention facilities - 3 - were housed in privately-managed facilities. There are also many privatized juvenile offender facilities. The Company believes that the market for juvenile services is also growing rapidly because of an increasing population of teenagers and an escalation of crime rates and incidents of mental health problems among that population. In addition, the Company believes that there is a growing trend toward privatization of juvenile services by governmental agencies. AREAS OF OPERATIONAL FOCUS INSTITUTIONAL. At December 31, 1996, the Company operated 6 facilities, with an aggregate design capacity of 2,193 beds, that provide secure institutional correctional and detention services for incarcerated adults. These facilities consist of: the Big Spring Facility, medium and minimum security facilities operated primarily for the FBOP; the Donald W. Wyatt Federal Detention Facility ("Wyatt Facility"), a medium and maximum security unit operated primarily for the U.S. Marshals Service in Central Falls, Rhode Island; and two minimum security facilities in California operated for the California Department of Corrections ("CDC"). The Company operates the Big Spring Facility pursuant to the Big Spring Operating Agreement between the Company and the City of Big Spring. The City of Big Spring in turn is a party to the IGA with the FBOP for an indefinite term with respect to the facilities. The INS and the U.S. Marshals Service also use the facilities. Inmates include detainees held by the INS, adjudicated inmates held by the INS who will be deported after serving their sentences and adjudicated inmates held for the FBOP. These facilities are equipped with an interactive satellite link to INS courtroom facilities and judges that should allow processing of a high volume of INS detainees, while reducing the time, effort and expense incurred in transporting inmates to offsite courtrooms. The Wyatt Facility in Central Falls opened in 1993 and primarily houses federal inmates awaiting adjudication under federal criminal charges. In addition, the Wyatt Facility houses certain other inmates under a contract with the Suffolk County, Massachusetts, Sheriff's Department. The Company's California facilities house primarily inmates sentenced by the State of California, most of whom are non-violent offenders with sentences of up to two years. Under its contracts, the Company provides a variety of programs and services at its institutional adult incarceration facilities, including secure incarceration services, institutional food services, certain transportation services, general education programs (such as high school equivalency and English as a second language programs), work and recreational programs and chemical dependency and substance abuse programs. PRE-RELEASE. At December 31, 1996 the Company operated or had contracts to operate 13 facilities, with an aggregate design capacity of 1,024 beds, that provide pre-release correctional services. Of these facilities, 6 are operated primarily for the FBOP, 5 are operated primarily for the CDC, 1 is operated for the TDCJ and 1 began operations for the North Carolina Department of Corrections ("NCDC") during the first quarter of 1997. Most residents of these facilities are or will be serving the last three to six months of their sentences and preparing for re-entry into society at large. At its pre-release facilities, the Company typically provides minimum security residential services, institutional food services, general education programs, life skills and employment training, job placement assistance and chemical dependency and substance abuse counseling. About 20% of the inmates at the FBOP pre-release facilities in California, Utah and Texas are on home confinement; monitoring is primarily done by required check-ins and by unscheduled visits to places of residence and employment. - 4 - JUVENILE SERVICES. At December 31, 1996, the Company had contracts to operate 2 facilities, with an aggregate design capacity of 360 beds, that provide juvenile services. During the first quarter of 1997, the Company completed the construction, and began the operation of a 160 bed short-term juvenile detention facility for the State of Utah in Salt Lake City. The facility primarily houses pre-adjudicated juvenile detainees and juveniles awaiting placement in long-term correctional facilities. The Salt Lake City Juvenile Detention Facility includes an interactive satellite link to juvenile courtroom facilities and judges that should allow processing of a high volume of juvenile detainees, while reducing the time, effort and expense incurred in transporting detainees to offsite courtrooms. During the first quarter of 1997, the Company began the operation of a 200 bed capacity juvenile correctional facility for the State of Georgia located in Pelham, Georgia ("Pelham Facility"). The current contract is for 120 beds. Services at the Pelham Facility include intake and evaluation, mental health care, counseling, and an education program. The Company intends to pursue additional contract awards to provide juvenile detention and correctional services, including contracts for specialized rehabilitation programs and services for juveniles such as military style boot camps, wilderness programs and secure education and training centers. - 5 - FACILITIES The following table summarizes certain additional information with respect to contracts and facilities under operation by the Company as of December 31, 1996 (note: This table does not reflect new facilities from contracts awarded or acquired after December 31, 1996):
PRINCIPAL DESIGN CONTRACTING CAPACITY INITIAL COMMENCEMENT GOVERNMENT (NO. OF CONTRACT OF CURRENT TERM RENEWAL FACILITY NAME AND LOCATION AGENCY BEDS)(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4) - ------------------------------------------------------------------------------ ------- -------- ---------- --------- SECURE INSTITUTIONAL CORRECTIONAL AND DETENTION FACILITIES: Baker Correctional Facility CDC 288 1987 7/92 5 None Baker, California (5) Big Spring Correctional Facility FBOP (6) 1,333 (6) (6) (6) (6) Big Spring, Texas Donald W. Wyatt Federal Detention Facility U.S. 302 1992 11/93 5 One Central Falls, Rhode Island (5) Marshals Five-Year Service (7) Leo Chesney Correctional Facility CDC 270 1988 4/93 5 None Live Oak, California (5) PRE-RELEASE FACILITIES: Durham Center NCDC 75 1996 6/96 5 One Durham, North Carolina Five Year El Monte Center FBOP 52 1993 4/93 (8) (8) El Monte, California (5) Indiana Street Center CDC 96 1990 7/94 3 None San Francisco, California (5) Inglewood Men's Center CDC 53 1982 7/94 3 None Inglewood, California (5) Inglewood Women's Center CDC 27 1984 7/92 4 1/2 None Inglewood, California (5) Leidel Community Correctional Center FBOP 94 1996 1/96 1 1/2 Three Houston, Texas One-Year Marvin Gardens Center CDC 42 1981 7/94 3 None Los Angeles, California (5) Oakland Center FBOP (9) 61 1981 9/93 (10) (10) Oakland, California (5) Reid Community Correctional Center TDCJ 310 1996 1/96 1 1/2 One Houston, Texas Unspecified Term Salt Lake City Center FBOP (9) 58 1995 12/95 2 Three Salt Lake City, Utah One-Year San Diego Center FBOP 50 1984 11/95 2 Three San Diego, California (5) One-Year Santa Barbara Center CDC (11) 25 1977 7/94 3 None Santa Barbara, California (5) Taylor Street Center FBOP (12) 81 1984 2/96 2 Three San Francisco, California (5) One Year JUVENILE FACILITIES: Pelham Juvenile Correctional Facility State of 200 1996 1/97 10 None Pelham, Georgia Georgia (13) Salt Lake City Juvenile Detention Facility State of 160 1996 6/96 3 None Salt Lake City, Utah Utah (14)
- ---------- (1) Design capacity is based on the physical space available presently, or with minimal additional expenditure, for inmate or residential beds in compliance with relevant regulations and contract requirements. In certain cases, the management contract for a facility provides for a different number of beds. (2) Date from which the Company, or its predecessor, has had a contract with the contracting governmental agency on an uninterrupted basis. (3) Substantially all contracts are terminable by the contracting government agency for any reason upon the required notice to the Company. (FOOTNOTES CONTINUED ON FOLLOWING PAGE) - 6 - (4) Except as otherwise noted, the renewal option, if any, is at the discretion of the contracting government agency. (5) Facility is accredited by the American Correctional Association. (6) The City of Big Spring, Texas entered into the IGA with the FBOP for an indefinite term (until modified or terminated) with respect to the Big Spring Facility, which began operations during 1989 and expanded through 1995. The Big Spring Operating Agreement has a term of 20 years with three five-year renewal options at the Company's discretion, pursuant to which the Company will manage the Big Spring Facility for the City of Big Spring. (7) The U.S. Marshals Service entered into an intergovernmental agreement with the Central Falls Detention Facility Corporation ("DFC") in August 1991 for an indefinite term (until modified or terminated) with respect to the Wyatt Facility. The DFC, in turn, entered into a Professional Management Agreement with the Company for the Company to operate this facility effective November 1993 for a term of five years, with one five-year renewal option. In addition, pursuant to a contract between the DFC and the Suffolk County, Massachusetts Sheriff's Department, entered into in March 1996, Massachusetts state inmates are housed under the Company's management at this facility. (8) The current contract term was less than one year, with an original termination date of September 1993; the FBOP has exercised three of its four one-year renewal options. (9) In addition to its contract with the FBOP with respect to these facilities, the Company has contracts with the Administrative Office of the United States Courts, Pretrial Services ("Pretrial Services") to provide beds at these facilities. (10) The current contract term was two years, with an original termination date of August 1995; the FBOP has exercised the first of its three one-year renewal options. (11) In addition to its contract with the CDC with respect to this facility, in March 1996 the Company entered into a contract with the FBOP, with a term of two years and three one-year renewal options, to provide beds at this facility. (12) In addition to its contract with the FBOP with respect to this facility, the Company has contracts with Pretrial Services and with the City of San Francisco to provide beds at this facility. (13) State of Georgia, Department of Children and Youth Services. (14) Utah Department of Human Services, Division of Youth Corrections. FACILITY MANAGEMENT CONTRACTS Generally, the Company is compensated on the basis of the number of inmates held or supervised under each of its facilities' management contracts. The Company's existing facility management contracts generally provide that the Company will be compensated at an occupant per diem rate. Such compensation is invoiced in accordance with applicable law and is paid on a monthly basis. Under a per diem rate structure, a decrease in occupancy rates would cause a decrease in revenues and profitability. The Company is, therefore, dependent upon governmental agencies to supply the Company's facilities with a sufficient number of inmates to meet the facilities' design capacities, and in most cases such governmental agencies are under no obligation to do so. Moreover, because many of the Company's facilities have inmates serving relatively short sentences or only the last three to six months of their sentences, the high turnover rate of inmates requires a constant influx of new inmates from the relevant governmental agencies to provide sufficient occupancies to achieve profitability. Occupancy rates during the start-up phase when facilities are first opened typically result in capacity underutilization for 30 to 90 days. After a management contract has been awarded, the Company incurs facility start-up costs consisting principally of initial employee training, travel and other direct expenses incurred in connection with the contract. These costs vary by contract and can range between $30,000 and $1.0 million. All the Company's contracts are subject to legislative appropriations. A failure by a governmental agency to receive appropriations could result in termination of the contract by such agency or a reduction of the management fee payable to the Company. The Company's contracts generally require the Company to operate each facility in accordance with all applicable laws and regulations. The Company is required by its contracts to maintain certain levels of insurance coverage for general liability, workers' compensation, vehicle liability and property loss or damage. The Company is also required to indemnify the contracting agency for claims and costs arising out of the Company's operations, and in certain cases, to maintain performance bonds. - 7 - The Company's facility management contracts typically have terms ranging from one to five years, and many have one or more renewal options for terms ranging from one to five years. Only the contracting governmental agency may exercise a renewal option. To date, all renewal options under the Company's management contracts have been exercised. However, in connection with the exercise of the renewal option, the contracting governmental agency or the Company typically has requested changes or adjustments to the contract terms. Additionally, the Company's facility management contracts typically allow a contracting governmental agency to terminate a contract without cause by giving the Company written notice ranging from 30 to 180 days. MARKETING The Company's principal customers are the federal, state, and county governmental agencies responsible for correctional, detention and pre-release services. These governmental agencies often procure these services from the private sector by issuing a Request for Proposal ("RFP") to which a number of companies may respond. Most of the Company's activities in the area of securing new business are expected to be in the form of responding to RFPs. As part of the Company's process of responding to RFPs, management of the Company meets with appropriate personnel from the requesting agency to best determine the agency's distinct needs. If the Company believes that the project complies with its business strategy, the Company will submit a written response to the RFP. When responding to RFPs, the Company incurs costs, typically ranging from $10,000 to $75,000 per proposal, to determine the prospective client's distinct needs and prepare a detailed response to the RFP. The preparation of a response to an RFP typically takes from five to 10 weeks. In addition, the Company may incur substantial costs to (i) acquire options to lease or purchase land for a proposed facility and (ii) engage outside consulting and legal expertise related to a particular RFP. A typical RFP requires bidders to provide detailed information, including, but not limited to, descriptions of the following: the services to be provided by the bidder, the bidder's experience and qualifications, and the price at which the bidder is willing to provide the services requested by the agency (which services may include the renovation, improvement or expansion of an existing facility or the planning, design and construction of a new facility). Based on proposals received in response to an RFP, the governmental agency will award a contract; however, the governmental agency does not necessarily award a contract to the lowest bidder. In addition to costs, governmental agencies also consider experience and qualifications of bidders in awarding contracts. The marketing process for obtaining facility management contracts consists of several critical events. These include issuance of an RFP by a governmental agency, submission of a response to the RFP by the Company, the award of the contract by a governmental agency and the commencement of construction or operation of the facility. The Company's experience has been that a substantial period of time may elapse from the initial inquiry to receipt of a new contract, although, as the concept of privatization has gained wider acceptance, the length of time from inquiry to the award of contract has shortened. The length of time required to award a contract is also affected, in some cases, by the need to introduce enabling legislation. The bidding and award process for an RFP typically takes from three to nine months. Generally, if the facility for which an award has been made must be constructed, the Company's experience has been that management of a newly constructed facility typically commences between 12 and 24 months after the governmental agency's award. The Company also at times receives inquiries from or on behalf of governmental agencies that are considering privatization of certain facilities or that have already decided to contract with private providers. When such an inquiry is received, the Company determines whether there is a need for the Company's services and whether the legal and political climate in which the governmental agency operates is conducive to serious consideration of privatization. The Company then conducts an initial cost analysis to further determine project feasibility. - 8 - When a contract requires construction of a new facility, the Company's success depends, in part, upon its ability to acquire real property for its facilities on desirable terms and at satisfactory locations. Management of the Company expects that many such locations will be in or near populous areas and therefore anticipates legal action and other forms of opposition from residents in areas surrounding each proposed site. The Company may incur significant expenses in responding to such opposition and there can be no assurance of success. In addition, the Company may choose not to bid in response to an RFP or may determine to withdraw a bid if legal action or other forms of opposition are anticipated. OPERATIONS Pursuant to the terms of its management contracts, the Company is responsible for the overall operation of its facilities, including staff recruitment, general administration of the facilities, security and supervision of the offenders and facility maintenance. The Company also provides a variety of rehabilitative and educational programs at many of its facilities. Inmates at most facilities managed by the Company may receive basic education through academic programs designed to improve inmate literacy levels (including English as a second language programs) and the opportunity to acquire General Education Development certificates. At many facilities, the Company also offers vocational training to inmates who lack marketable job skills. In addition, the Company offers life skills, transition planning programs that provide inmates job search training and employment skills, health education, financial responsibility training and other skills associated with becoming productive citizens. At several of its facilities, the Company also offers counseling, education and/or treatment to inmates with chemical dependency or substance abuse problems. The Company operates each facility in accordance with Company-wide policies and procedures generally based on the standards and guidelines established by the American Correctional Association ("ACA") Commission on Accreditation. The ACA is an independent organization comprised of professionals in the corrections industry which establishes guidelines and standards by which a correctional institution may gain accreditation. The ACA standards, which are the industry's most widely accepted correctional standards, describe specific objectives to be accomplished and cover such areas as administration, personnel and staff training, security, medical and health care, food service, inmate supervision and physical plant requirements. At December 31, 1996, 12 of the Company's facilities are accredited by the ACA and the Company intends to seek ACA accreditation for certain of its other facilities. Internal quality control, conducted by senior facility staff and executive officers of the Company, takes the form of periodic operational, programmatic and fiscal audits; facility inspections; regular review of logs, reports and files; and strict maintenance of personnel standards, including an active training program. The requirements for training at the Company meet and often exceed ACA standards. Each of the Company's facilities develops its own training plan that is reviewed, evaluated and updated annually. Dedicated space and equipment for training is provided and outside resources such as community colleges are utilized in the training process. All correctional officers undergo an initial 40-hour orientation upon their hiring and receive academy-level training amounting to 120 hours and on-the-job training of up to 80 hours. Each correctional officer also receives up to 40 hours of training and education annually. FACILITY DESIGN, CONSTRUCTION AND FINANCE In addition to operating correctional facilities, the Company also provides services to governmental agencies with respect to the development, design and construction of new correctional and detention facilities and the redesign and renovation of older facilities. The Company has developed and/or managed: (i) the development, design and construction of the 302 bed Wyatt Facility in Central Falls, Rhode Island; (ii) the development, design and construction of a 1,140 bed multi-purpose, multi-jurisdictional detention center in Plymouth, Massachusetts; (iii) the development of the 288 bed facility in Baker California; (iv) the - 9 - development of the 270 bed facility in Live Oak, California; (v) the development, design and construction of the 58 bed FBOP facility in Salt Lake City, Utah; (vi) the development, design and construction of the 94 bed Leidel Center in Houston, Texas; (vii) the development, design and remodeling of a 75 bed pre-release center in Durham, North Carolina, (viii) the development, design, and construction of the 160 bed Salt Lake City Juvenile Detention Facility in Salt Lake City, Utah; and (ix) the development, design and remodeling of the 200 bed capacity Pelham, Georgia Juvenile Facility. Currently, the Company operates all of the facilities it has developed, designed and constructed with the exception of the detention center in Plymouth, Massachusetts, which is operated by the Sheriff's Department of the County of Plymouth, Massachusetts. The Company utilizes an experienced team of outside professional architectural consultants as part of the group that participates from conceptual design through final construction of a project. When designing a facility, the Company's outside architects utilize, with appropriate modifications, prototype designs the Company has previously used in developing projects. Management of the Company believes that the use of such proven designs allows the Company to reduce cost overruns and avoid construction delays. Additionally, the Company designs its facilities with the intention to improve security and minimize the number of guards or correctional officers needed to properly staff the facility by enabling enhanced visual and electronic surveillance of the facility. The Company may propose various construction financing structures to the contracting governmental agencies. The governmental agency may finance, or the Company may arrange for the financing of, the construction of such facilities through various methods including, but not limited to, the following: (i) a one-time general revenue appropriation by the governmental agency for the cost of the new facility, (ii) general obligation bonds that are secured by either a limited or unlimited tax levy by the issuing governmental entity or (iii) lease revenue bonds or certificates of participation secured by an annual lease payment that is subject to annual or bi-annual legislative appropriations. If the project is financed using project-specific tax-exempt bonds or other obligations, the construction contract is generally subject to the sale of such bonds or obligations. Substantial expenditures for construction will not be made on such a project until the tax-exempt bonds or other obligations are sold. If such bonds or obligations are not sold, construction and management of the facility will be delayed until alternate financing is procured or development of the project will be entirely suspended. When the Company is awarded a facility management contract, appropriations for the first annual or bi-annual period of the contract's term have generally already been approved, and the contract is subject to governmental appropriations for subsequent annual or bi-annual periods. Of the 21 facilities the Company operates or has contracted to operate as of December 31, 1996, 2 were funded using one of the above-described financing methods, 2 are owned by the Company and 17 are leased. Of the 17 leased facilities, 3 at the Big Spring Facility are operated under long-term leases ranging from 34 to 38 years including renewal options at the discretion of the Company. As part of the purchase price for the MidTex acquisition, the Company prepaid a majority of the facility costs related to the Big Spring Facility through at least the year 2030. The Company has in the past worked with governmental agencies and placement agents to obtain and structure financing for construction of facilities. In some cases, an unrelated special purpose corporation is established to incur borrowings to finance construction and, in other cases, the Company directly incurs borrowings for construction financing. A growing trend in the privatization industry is the requirement by governmental agencies that private operators make capital investments in new facilities and enter into direct financing arrangements in connection with the development of such facilities. - 10 - COMPETITION The Company competes with a number of companies, including, but not limited to, Corrections Corporation of America ("CCA"), Wackenhut Corrections Corporation ("WHC") and U.S. Corrections Corporation ("USCC"). At December 31, 1995, CCA and WHC accounted for more than 70% of the privatized secure adult beds under contract in the United States, according to the Private Correctional Facility Census. Therefore, certain competitors of the Company are larger and may have greater resources than the Company. The Company also competes in some markets with small local companies that may have better knowledge of local conditions and may be better able to gain political and public acceptance. In addition, the Company may compete in some markets with governmental agencies that operate correctional and detention facilities. EMPLOYEES At December 31, 1996, the Company had 715 full-time employees and 39 part-time employees. Of such full-time employees, approximately 30 were employed at the Company's corporate and administrative offices in Houston, Texas and Ventura, California. The remainder of the employees work at the Company's facilities. The Company employs management, administrative and clerical, security, educational and counseling services, health services and general maintenance personnel. The Company believes its relations with its employees are good. From time to time, collective bargaining efforts have begun at certain of the Company's facilities, although to date none of the efforts has been successful. The Company expects such collective bargaining efforts to continue. REGULATIONS The industry in which the Company operates is subject to federal, state and local regulations administered by a variety of regulatory authorities. Generally, prospective providers of correctional, detention and pre-release services must comply with a variety of applicable state and local regulations, including education, healthcare and safety regulations. The Company's contracts frequently include extensive reporting requirements and require supervision with on-site monitoring by representatives of contracting governmental agencies. In addition to regulations requiring certain contracting governmental agencies to enter into a competitive bidding procedure before awarding contracts, the laws of certain jurisdictions may also require the Company to award subcontracts on a competitive basis or to subcontract with businesses owned by women or members of minority groups. INSURANCE The Company maintains a $10 million general liability insurance policy for all its operations. The Company also maintains insurance in amounts it deems adequate to cover property and casualty risks, workers' compensation and directors' and officers' liability. The Company's contracts and the statutes of certain states in which the Company operates typically require the maintenance of insurance by the Company. The Company's contracts provide that, in the event that the Company does not maintain such insurance, the contracting agency may terminate its agreement with the Company. The Company believes that it is in compliance in all material respects with respect to these requirements. - 11 - ITEM 2. PROPERTIES The Company leases corporate headquarters office space in Houston, Texas and an administrative office in Ventura, California. The Company also leases space for 20 of the facilities it is currently operating or developing. In connection with the acquisition of MidTex, and as part of the purchase price, the Company prepaid a majority of the facility costs related to the Big Spring Facility through at least the year 2030. At December 31, 1996, the Company owned two facilities, the Leidel Center and the Reid Center, both located in Houston, Texas. The Company is not required to lease space at the Wyatt Facility, which is owned by the DFC, or the Salt Lake City Juvenile Detention Facility, which is owned by the County of Salt Lake and leased to the State of Utah. ITEM 3. LEGAL PROCEEDINGS The Company currently and from time to time is subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries or for wrongful restriction of, or interference with, inmate privileges, and employment matters. In the opinion of management of the Company, the outcome of the proceedings to which the Company is currently a party will not have a material adverse effect upon the Company's operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's security holders during the fourth quarter of 1996. ITEM 5. MARKET FOR CORNELL CORRECTIONS, INC. COMMON STOCK AND RELATED STOCKHOLDER MATTERS The common stock of the Company is currently listed on the American Stock Exchange ("AMEX") under the symbol CRN. As of February 28, 1997, there were approximately 37 record holders of common stock. The high and low sales prices for the common stock on the AMEX since the common stock began trading on October 3, 1996 are shown below: 1996 Period HIGH LOW 1st Quarter..................... N/A N/A 2nd Quarter..................... N/A N/A 3rd Quarter..................... N/A N/A 4th Quarter..................... 12 3/4 8 7/8 The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain excess cash flow, if any, for use in the operation and expansion of its business and does not anticipate paying cash dividends on the common stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will be dependent upon, among other factors, the Company's results of operations, financial condition, capital requirements, restrictions, if any, imposed by financing commitments and legal requirements. The Company's current credit facility prohibits payment of dividends. - 12 - ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1992 1993 1994 (1) 1995 1996 (2) ------- ------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Occupancy fees ................................... $ -- $ 107 $ 15,389 $ 20,594 $ 31,877 Other income ..................................... 2,540 3,091 300 98 450 ------- ------- -------- -------- -------- Total revenues ................................ 2,540 3,198 15,689 20,692 32,327 Operating expenses .................................. -- 2,827 12,315 16,351 26,038 Depreciation and amortization ....................... 3 16 758 820 1,390 General and administrative expenses ................. 1,627 1,315 2,959 3,531 4,560 ------- ------- -------- -------- -------- Income (loss) from operations ....................... 910 (960) (343) (10) 339 Interest expense .................................... -- -- 294 1,115 2,810 Interest income ..................................... (30) (45) (138) (136) (167) ------- ------- -------- -------- -------- Income (loss) before income taxes ................... 940 (915) (499) (989) (2,304) Provision for income taxes .......................... -- -- 101 -- 75 ------- ------- -------- -------- -------- Net income (loss) ................................... $ 940 $ (915) $ (600) $ (989) $ (2,379) ======= ======= ======== ======== ======== Earnings (loss) per share ........................... $ .38 $ (.34) $ (.16) $ (.25) $ (.53) ======= ======= ======== ======== ======== Number of shares used in per share computation (3) .................................. 2,491 2,695 3,811 3,983 4,466 Supplemental earnings per share (4) ................. $ .03 $ .04 ======== ======== OPERATING DATA: Beds under contract (end of period) ................. -- 282 1,155 1,478 3,254 Contracted beds in operation (end of period) ........ -- 282 1,155 1,135 2,899 Average occupancy based on contracted beds in operation (5) ............................ -- -- 92.1% 98.9% 97.0% BALANCE SHEET DATA: Working capital ..................................... $ 812 $ 810 $ 2,015 $ 1,525 $ 7,747 Total assets ........................................ 1,300 2,048 13,095 14,184 46,824 Long-term debt ...................................... -- -- 3,447 7,649 745 Stockholders' equity ................................ 896 1,085 6,631 3,053 41,051
- ---------- (1) Includes the operations of Eclectic purchased by the Company on March 31, 1994. (2) Includes the operations of the Big Spring Facility and the Reid Center acquired in July 1996 and May 1996, respectively. (3) Prior to March 31, 1994, the Company was organized as a partnership. For purposes of computing average shares outstanding for the period prior to March 31, 1994, the partnership units were converted to common shares using a one-to-one unit-to-share conversion ratio. (4) Supplemental per share data is presented to show what the earnings would have been if the repayment of debt with proceeds from the initial public offering had taken place at the beginning of the respective periods. (5) For any applicable facilities, includes reduced occupancy during the start-up phase. For the year ended December 31, 1993, occupancy did not commence until December 1993. - 13 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company provides to governmental agencies the integrated development, design, construction and operation of correctional and detention facilities. The following table sets forth the number of facilities under contract or award at the end of the periods shown.
DECEMBER 31, ------------------------------------------- 1994 1995 1996 ---------- ---------- ------- Contracts (1) ................................................................... 16 19 24 Facilities in operation ......................................................... 13 12 18 Design capacity of facilities in operation ...................................... 1,281 1,347 3,142 Beds under contract (end of period) ............................................. 1,155 1,478 3,254 Contract beds in operation (end of period) ...................................... 1,155 1,135 2,899 Average occupancy based on contracted beds in operation (2) ..................... 92.1% 98.9% 97.0%
- ---------- (1) Consists of facilities in operation, facilities under development and facilities for which awards have been obtained. (2) For any applicable facilities, includes reduced occupancy during the start-up phase. During 1996, the Company added the management of 2,230 beds through opening or contracting to open five new facilities (587 beds) and the acquisitions of MidTex and the Reid Center (1,643 beds). As of December 31, 1996, the Company had 24 contracts to operate 21 private correctional, detention and pre-release facilities with an aggregate design capacity of 3,577 beds. Of these facilities, 18 were in operation (3,142 beds) and 3 were under development (435 beds). The 3 facilities under development commenced operations during the first quarter of 1997. The Company derives substantially all its revenues from operating correctional, detention and pre-release facilities for federal and state governmental agencies in the United States. Revenues for operation of correctional, detention and pre-release facilities are generally recognized on a per diem rate based upon the number of occupant days for the period. The Company's operating expenses consist primarily of facility personnel costs, lease expense, insurance, utilities, food, medical services, supplies and clothing. Depreciation and amortization includes amortization of prepaid facility use costs pertaining to the Big Spring Facility, amortization of intangible assets including goodwill, and depreciation of buildings and other property and equipment. General and administrative expenses consists primarily of salaries and related overhead of the Company's corporate and administrative personnel who provide senior management, accounting, finance, personnel and other services, and costs of developing new contracts. RESULTS OF OPERATIONS The Company's historical operating results reflect that the Company has expanded its business significantly since 1994. Material fluctuations in the Company's results of operations are principally the result of the timing and effect of acquisitions, the level of development activity conducted by the Company, and occupancy rates at Company-operated facilities. The Company's acquisitions to date have been accounted for using the purchase method of accounting, whereby the operating results of the acquired businesses have been reported in the Company's operating results since the date of acquisition. - 14 - The Company's operations grew significantly with the March 1994 acquisition of Eclectic. The operations of Eclectic were included in the Company's results of operations for nine months in 1994 and a full twelve months in the years thereafter. The Company's acquisition of the Reid Center in May 1996 and MidTex in July 1996 significantly increased 1996 revenues over 1995 and will have a greater impact in 1997 once such operations are included in the Company's reported results of operations for a full year. In connection with the Company's July 1996 credit facility ("1996 Credit Facility"), the Company incurred expenses, issued certain options and warrants, and sold shares of common stock, for which the Company recognized total deferred financing costs of $1.3 million, of which $726,000 was noncash, to be amortized over the life of the 1996 Credit Facility. Since the use of proceeds from the initial public offering were used to retire the outstanding indebtedness under the 1996 Credit Facility, the total deferred financing costs were charged to interest expense during the third quarter of 1996 in connection with the early retirement of the borrowings under the 1996 Credit Facility. In addition, the Company recognized noncash compensation expense of $870,000 during the third quarter of 1996 in connection with the issuance of certain options granted in July 1996 to purchase shares of common stock. The following table sets forth for the periods indicated the percentages of total revenue represented by certain items in the Company's historical consolidated statements of operations. YEAR ENDED DECEMBER 31, 1994 1995 1996 --------------------------- Total revenues..................................... 100.0% 100.0% 100.0% Operating expenses................................. 78.5 79.0 80.5 Depreciation and amortization...................... 4.8 4.0 4.3 General and administrative expenses................ 18.9 17.0 14.1 ------ ------ ------ Income (loss) from operations...................... (2.2) 0.0 1.1 Interest expense (income).......................... 1.0 4.8 8.2 ------ ------ ------ Income (loss) before income taxes.................. (3.2) (4.8) (7.1) Provision for income taxes......................... 0.6 0.0 0.2 ------ ------ ------ Net income (loss).................................. (3.8) (4.8) (7.3) ====== ====== ====== YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 TOTAL REVENUES. Total revenues increased by 56.2% to $32.3 million for the year ended December 31, 1996 from $20.7 million for the year ended December 31, 1995. The increase in occupancy fees of $11.3 million, or 54.8%, was due principally to the acquisition of MidTex as of July 1, 1996, the opening of two new pre-release facilities during the first quarter of 1996, and the acquisition of the Reid Center as of May 1, 1996. The increase in other income for the year ended December 31, 1996 to $450,000 from $98,000 for the year ended December 31, 1995 was due principally to the recognition of revenue related to a previously reserved note receivable of $206,000 pertaining to 1994 operations of the Wyatt Facility, the realization of which improved from prior periods due to payments received on the note and due to the additional operating experience with the facility. Additional other income related to commissary operations and commissions earned at the Big Spring Facility. OPERATING EXPENSES. Operating expenses increased by 59.2% to $26.0 million for the year ended December 31, 1996 from $16.4 million for the year ended December 31, 1995. This increase was principally attributable to the acquisition of MidTex as of July 1, 1996, the opening of two new pre-release facilities during the first quarter of 1996, and the acquisition of the Reid Center as of May 1, 1996. As a percentage of revenues, operating expenses increased to 80.5% from 79.0% due primarily to the relative increase in secure institutional operations. - 15 - DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 69.5% to $1.4 million for the year ended December 31, 1996 from $820,000 for the year ended December 31, 1995. The increase was principally due to the amortization of prepaid facility use costs of the Big Spring Facility, the opening of two new pre-release facilities in January 1996, and to the acquisition of the Reid Center in May 1996. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by 29.1% to $4.6 million for the year ended December 31, 1996 from $3.5 million for the year ended December 31, 1995. Included in general and administrative expenses for the year ended December 31, 1996 was a non-recurring, non-cash charge of $870,000 in connection with the July 1996 grant of certain options to purchase shares of the Company's common stock. As a percentage of revenues, excluding the non-recurring charge, general and administrative expenses decreased to 11.4% from 17.0% due principally to spreading fixed costs over a larger revenue base. INTEREST. Interest expense, net of interest income, increased to $2.6 million for the year ended December 31, 1996 from $979,000 for the year ended December 31, 1995. The increase in net interest expense was principally due to the $1.3 million non-recurring charge ($726,000 of which was non-cash) to expense deferred financing costs associated with the early retirement of significant portions of the 1996 Credit Facility, borrowings under the Company's 1995 and 1996 Credit Facilities related to the acquisition of MidTex in July 1996, the Company's financing of the purchase of certain outstanding stock in November 1995, the construction and development of the two new pre-release facilities which opened during the first quarter of 1996, and the acquisition of the Reid Center in May 1996. INCOME TAXES. The Company did not recognize any provision for federal income taxes due to a taxable loss in both years. The Company recognized a provision for state income taxes of $75,000 for the year ended December 31, 1996. As of December 31, 1996, the Company had recognized a deferred tax asset of $608,000. Management of the Company believes that this deferred tax asset is realizable. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 TOTAL REVENUES. Total revenues increased 31.9% to $20.7 million for the year ended December 31, 1995 from $15.7 million for the year ended December 31, 1994. The revenue increase was due principally to the recognition of occupancy fees for a full 12 months in 1995 related to the Eclectic acquisition versus the recognition of nine months in 1994. Additionally, an increase in occupancy fees of approximately $1.1 million was attributable to the Wyatt Facility principally as a result of a higher occupancy and per diem rate in 1995 compared to 1994. OPERATING EXPENSES. Operating expenses increased 32.8% to $16.4 million for the year ended December 31, 1995 from $12.3 million for the year ended December 31, 1994. The increase in operating expenses was due principally to the recognition of operating expenses of Eclectic for a full 12 months in 1995. As a percentage of revenues, operating expenses increased to 79.0% from 78.5% principally for the same reason. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by 8.2% to $820,000 for the year ended December 31, 1995 from $758,000 for the year ended December 31, 1994. The increase was due principally to recognizing 12 months of contract value and goodwill amortization in 1995 as compared to nine months of amortization in 1994 resulting from the acquisition of Eclectic, offset in part by an accounting adjustment in the first quarter of 1995 to adjust depreciation expense in prior periods. - 16 - GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 19.3% to $3.5 million for the year ended December 31, 1995 from $3.0 million for the year ended December 31, 1994. The increase in general and administrative expenses was principally due to the addition of the operations of Eclectic and an increase in RFP and development costs. Development costs increased by $457,000 for the year ended December 31, 1995 compared to the year ended December 31, 1994. As a percentage of revenues, general and administrative expenses decreased to 17.0% from 18.9% due principally to spreading fixed costs over a larger revenue base. INTEREST. Interest expense, net of interest income, increased to $979,000 for the year ended December 31, 1995 from $156,000 for the year ended December 31, 1994. The increase resulted from the expensing of debt issuance costs and commitment fees of $472,000 associated with the 1995 Credit Facility, the incurrence of $4.0 million of debt and other long-term obligations in connection with the acquisition of Eclectic and increased borrowings under the 1995 Credit Facility to purchase treasury stock. INCOME TAXES. There was no provision for income taxes for the year ended December 31, 1995 due to a taxable loss. The Company recognized a provision for income taxes of $101,000 for the year ended December 31, 1994, even though the Company incurred a loss for financial reporting purposes in 1994, principally because certain goodwill amortization contributing to the loss for financial reporting purposes was not deductible for income tax purposes. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 REVENUES. Revenues increased 390.6% to $15.7 million for the year ended December 31, 1994 from $3.2 million for the year ended December 31, 1993. The revenue increase was principally due to the recognition of occupancy fees for nine months of operations in 1994 for the facilities added as part of the Eclectic acquisition in March 1994. Additionally, because the Wyatt Facility did not begin operations until December 1993, Wyatt Facility occupancy fees for 1994 increased by approximately $3.5 million as compared to 1993. For the year ended December 31, 1993, there were $3.0 million of procurement and preopening revenues included in development fees and other income related to the procurement and preopening activities of the Wyatt Facility. OPERATING EXPENSES. Operating expenses increased 335.6% to $12.3 million for the year ended December 31, 1994 from $2.8 million for the year ended December 31, 1993. The increase in operating expenses was principally due to the addition of the operations of Eclectic and to a full year of operating costs of the Wyatt Facility. As a percentage of revenues, operating expenses decreased to 78.5% from 88.4% due principally to spreading fixed costs over a larger revenue base. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $758,000 for 1994 from $16,000 in 1993. The increase was due to recognizing nine months of amortization and depreciation in 1994 resulting from the Eclectic acquisition. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 125.0% to $3.0 million for the year ended December 31, 1994 from $1.3 million for the year ended December 31, 1993. The increase was principally due to the addition of the operations of Eclectic. As a percentage of revenues, general and administrative expenses decreased to 18.9% from 41.1% due principally to spreading fixed costs over a larger revenue base. - 17 - INTEREST. Interest expense was $294,000 for the year ended December 31, 1994 compared to no interest expense for the year ended December 31, 1993 due to the incurrence of indebtedness related to the Eclectic acquisition. Interest income increased to $138,000 for the year ended December 31, 1994 from $45,000 for the year ended December 31, 1993 due to the assumption of certain interest-bearing receivables from the California Department of Corrections in connection with the Eclectic acquisition. INCOME TAXES. As described above, the Company recognized a provision for income taxes of $101,000 for the year ended December 31, 1994. There was no provision for income taxes for the year ended December 31, 1993 because the Company was organized as a partnership prior to March 31, 1994. LIQUIDITY AND CAPITAL RESOURCES INITIAL PUBLIC OFFERING. On October 8, 1996, the Company completed an initial public offering ("IPO") of its common stock. Net proceeds to the Company from the sale of the 3,523,103 shares of newly issued common stock were approximately $37.4 million. On October 8, 1996, the Company repaid a total of $33.9 million of indebtedness, $27.9 million of which was borrowed under the 1996 Credit Facility and $6.0 million of which was borrowed under a short term convertible note ("Convertible Bridge Note"). GENERAL. The Company's primary capital requirements are for working capital, start-up costs related to new operating contracts, furniture, fixtures and equipment, supply purchases, new facility renovations and acquisitions. Working capital requirements generally increase immediately prior to the Company commencing management of a new facility as the Company incurs start-up costs and purchases necessary equipment and supplies before facility management revenue (through occupancy fees) is realized. Some of the Company's management contracts have required the Company to make substantial initial expenditures of cash in connection with the opening or renovating of a facility. Substantially all these start-up expenditures are fully or partially recoverable as pass-through costs or are reimbursable from the contracting governmental agency over the term of the contract. CHANGES IN FINANCIAL POSITION. As of December 31, 1996, total assets had increased $32.6 million to $46.8 million since December 31, 1995. The increase related principally to the acquisitions of MidTex and the Reid Center for which total consideration was $25.7 million, and excess cash proceeds from the IPO. Total stockholders' equity increased $38.0 million to $41.1 million as of December 31, 1996 largely as a result of the IPO and certain other equity transactions. The Company utilized the net proceeds from the IPO in early October 1996 to retire all of the outstanding borrowings under the 1996 Credit Facility and the Convertible Bridge Note. Therefore, immediately following the consummation of the IPO, the Company had no material debt. The Company used borrowings under the 1996 Credit Facility to refinance outstanding borrowings under the 1995 Credit Facility, to finance a portion of the MidTex acquisition and for working capital. As of December 31, 1996, the Company had no outstanding borrowings under the 1996 Credit Facility. WORKING CAPITAL. The Company's working capital increased to $7.7 million at December 31, 1996 from $1.5 million at December 31, 1995. This increase was principally due to excess cash proceeds from the IPO after repayment of indebtedness, and an increase in receivables resulting from the acquisition of MidTex in July 1996 and the Reid Center in May 1996. EXISTING CREDIT FACILITIES. Under the 1996 Credit Facility, as amended, the Company has a $15.0 million credit facility comprised of a $5.0 million revolving credit facility for working capital purposes and a $10.0 million multiple-advance term loan facility available for new and expanded facilities costs. - 18 - In January 1997, the Company acquired the assets of Interventions. The Company financed the $6.0 million purchase price, which included the retirement of $2.3 million of pre-acquisition bank debt, with $2.0 million of borrowings from the multiple-advance term loan facility under the 1996 Credit Facility, and the remainder with cash. See Note 7 to the consolidated financial statements. CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31, 1996 were $1.3 million and related to construction in progress for a new pre-release facility which opened during the first quarter of 1997, completion of construction and purchase of furniture and equipment for the two pre-release facilities which opened during the first quarter of 1996, and for normal replacement of furniture and equipment at various facilities. CASH USED IN OPERATING ACTIVITIES. The Company had net cash used in operating activities of $540,000 for the year ended December 31, 1996. For the three months ended December 31, 1996, the Company had net cash provided by operating activities of $858,000. Significant uses of operating cash during 1996 include start-up costs for facilities under development, and increased prepaid insurance and other items related to the additional acquired facilities. Management of the Company believes that the cash flows anticipated to be generated from operations, together with the credit available under the 1996 Credit Facility, will provide sufficient liquidity to meet the Company's working capital requirements for the near term. It is not anticipated that the 1996 Credit Facility will provide sufficient financing to finance construction costs related to future institutional contract awards or significant future acquisitions. The Company anticipates obtaining separate sources of financing to finance such activities. INFLATION Management of the Company believes that inflation has not had a material effect on the Company's results of operations during the past three years. However, most of the Company's facility management contracts provide for payments to the Company of either fixed per diem fees or per diem fees that increase by only small amounts during the terms of the contracts. Inflation could substantially increase the Company's personnel costs (the largest component of facility management expense) or other operating expenses at rates faster than any increases in occupancy fees. - 19 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Cornell Corrections, Inc.: We have audited the accompanying consolidated balance sheets of Cornell Corrections, Inc. (formerly Cornell Cox, Inc., a Delaware corporation and successor to the Cornell Cox Group, L.P., a Delaware limited partnership), and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cornell Corrections, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 7, 1997 - 20 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA CORNELL CORRECTIONS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, 1995 1996 ------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents ........................... $ 390 $ 4,874 Accounts receivable, net ............................ 3,436 4,976 Current portion of notes receivable ................. 216 211 Deferred tax asset .................................. 27 120 Prepaids and other .................................. 187 1,128 Restricted assets ................................... 284 1,124 ------- ------- Total current assets ............................. 4,540 12,433 PROPERTY AND EQUIPMENT, net ............................ 1,909 26,074 OTHER ASSETS: Notes receivable, noncurrent ........................ 519 620 Goodwill, net ....................................... 6,204 5,864 Contract value, net ................................. 206 -- Deferred tax asset, noncurrent ...................... 409 488 Deferred costs and other ............................ 397 1,345 ------- ------- Total assets ..................................... $14,184 $46,824 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities ............ $ 2,991 $ 4,403 Current portion of long-term debt ................... 24 283 ------- ------- Total current liabilities ........................ 3,015 4,686 LONG-TERM DEBT, net of current portion ................. 7,625 462 OTHER LONG-TERM LIABILITIES ............................ 491 625 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 and $.001 par value, respectively, 1,000,000 and 10,000,000 shares authorized, respectively, none outstanding................................... -- -- Common stock, $.01 and $.001 par value, respectively, 9,000,000 and 30,000,000 shares authorized, respectively, 3,189,385 and 7,320,398 shares issued and outstanding, respectively....................................... 32 7 Additional paid-in capital........................... 6,955 47,562 Stock option loans................................... -- (455) Retained deficit..................................... (1,331) (3,710) Treasury stock (555,000 shares of common stock, at cost) (2,603) (2,353) ------- ------- Total stockholders' equity........................... 3,053 41,051 ------- ------- Total liabilities and stockholders' equity........... $14,184 $46,824 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. - 21 - CORNELL CORRECTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1994 1995 1996 -------- -------- -------- REVENUES: Occupancy fees ............................. $ 15,389 $ 20,594 $ 31,877 Other income ............................... 300 98 450 -------- -------- -------- 15,689 20,692 32,327 OPERATING EXPENSES ........................... 12,315 16,351 26,038 DEPRECIATION AND AMORTIZATION ................ 758 820 1,390 GENERAL AND ADMINISTRATIVE EXPENSES .......... 2,959 3,531 4,560 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS ................ (343) (10) 339 INTEREST EXPENSE ............................. 294 1,115 2,810 INTEREST INCOME .............................. (138) (136) (167) -------- -------- -------- LOSS BEFORE PROVISION FOR INCOME TAXES ....... (499) (989) (2,304) PROVISION FOR INCOME TAXES ................... 101 -- 75 -------- -------- -------- NET LOSS ..................................... $ (600) $ (989) $ (2,379) ======== ======== ======== LOSS PER SHARE ............................... $ (.16) $ (.25) $ (.53) ======== ======== ======== NUMBER OF SHARES USED IN PER SHARE CALCULATION 3,811 3,983 4,466 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. - 22 - CORNELL CORRECTIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
TOTAL PARTNERSHIP COMMON STOCK ADDITIONAL STOCK RETAINED CAPITAL ------------------ PAID-IN OPTION EARNINGS TREASURY BALANCE SHARES AMOUNT CAPITAL LOANS (DEFICIT) STOCK ------- --------- ---- -------- ----- ------- ------- BALANCES AT DECEMBER 31, 1993 .............. $ 1,085 -- $-- $ -- $-- $ -- $ -- ALLOCATION OF JANUARY 1, 1994, TO MARCH 31, 1994 (i.e., PRE- INCORPORATION), LOSS TO RESPECTIVE PARTNERS' ACCOUNTS ........... (258) -- -- -- -- 258 -- CONVERSION OF PARTNERSHIP INTO CORNELL CORRECTIONS, INC., A C CORPORATION ............................. (827) 2,100,376 21 806 -- -- -- ISSUANCE OF COMMON STOCK ................... -- 1,088,009 11 6,490 -- -- -- DIRECT COSTS RELATED TO ISSUANCE OF COMMON STOCK ......................... -- -- -- (355) -- -- -- NET LOSS ................................... -- -- -- -- -- (600) -- ------- --------- ---- -------- ----- ------- ------- BALANCES AT DECEMBER 31, 1994 .............. -- 3,188,385 32 6,941 -- (342) -- EXERCISE OF STOCK OPTIONS .................. -- 1,000 -- 3 -- -- -- PURCHASE OF TREASURY STOCK (555,000 shares, at cost) ............... -- -- -- -- -- -- (2,603) ISSUANCE OF WARRANTS ....................... -- -- -- 11 -- -- -- NET LOSS ................................... -- -- -- -- -- (989) -- ------- --------- ---- -------- ----- ------- ------- BALANCES AT DECEMBER 31, 1995 .............. -- 3,189,385 32 6,955 -- (1,331) (2,603) CONVERSION OF PAR VALUE FROM $.01 to $.001 ...................... -- -- (29) 29 -- -- -- ISSUANCES OF COMMON STOCK .................. -- 3,618,091 3 37,670 -- -- -- EXERCISE OF STOCK OPTIONS AND WARRANTS ............................ -- 512,922 1 1,140 (455) -- -- INCOME TAX BENEFITS FROM STOCK OPTIONS EXERCISED ....................... -- -- -- 172 -- -- -- STOCK-BASED COMPENSATION ................... -- -- -- 1,596 -- -- -- REVERSAL OF PUT RIGHT COST ................. -- -- -- -- -- -- 250 NET LOSS ................................... -- -- -- -- -- (2,379) -- ------- --------- ---- -------- ----- ------- ------- BALANCES AT DECEMBER 31, 1996 .............. $ -- 7,320,398 $ 7 $ 47,562 $(455) $(3,710) $(2,353) ======= ========= ==== ======== ===== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. - 23 - CORNELL CORRECTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994 1995 1996 ------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ......................................................................... $ (600) $ (989) $ (2,379) Adjustments to reconcile net loss to net cash used in operating activities -- Depreciation .................................................................. 271 166 498 Amortization .................................................................. 487 654 892 Deferred income taxes ......................................................... 101 -- (172) Non-cash stock-based compensation and financing charges ....................... -- -- 1,596 Change in assets and liabilities, net of effects from acquisition of businesses -- Accounts receivable ..................................................... (1,161) (1,086) 1,090 Restricted assets ....................................................... (71) (5) (233) Other assets ............................................................ 779 166 (1,765) Accounts payable and accrued liabilities ................................ 92 (137) (67) ------- -------- -------- Net cash used in operating activities ......................................... (102) (1,231) (540) ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ............................................................. (167) (1,159) (1,256) Acquisition of businesses, less cash acquired .................................... (5,921) -- (25,174) Redemption of commercial paper and U.S. Treasury notes ........................... 585 -- -- ------- -------- -------- Net cash used in investing activities ......................................... (5,503) (1,159) (26,430) ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt ..................................................... 50 11,360 40,841 Payments on long-term debt ....................................................... (284) (7,158) (47,745) Proceeds from issuance of common stock ........................................... 6,146 3 37,673 Proceeds from exercise of stock options and warrants ............................. -- -- 685 Purchase of treasury stock ....................................................... -- (2,353) -- ------- -------- -------- Net cash provided by financing activities ..................................... 5,912 1,852 31,454 ------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 307 (538) 4,484 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................... 621 928 390 ------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................................... $ 928 $ 390 $ 4,874 ======= ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid .................................................................... $ 293 $ 520 $ 1,454 ======= ======== ======== Income taxes paid ................................................................ $ -- $ -- $ 75 ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. - 24 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cornell Corrections, Inc. (collectively with its subsidiaries, the "Company"), a Delaware corporation, provides to governmental agencies the integrated development, design, construction and management of facilities within three areas of operational focus: (i) secure institutional correctional and detention services, (ii) pre-release correctional services and (iii) juvenile correctional and detention services. CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. RESTRICTED ASSETS For certain facilities, the Company maintains bank accounts for restricted cash belonging to inmates and commissary operations, for an equipment replacement fund for the replacement of equipment used in state programs, and for a restoration fund for any necessary restorations of the related facilities. These bank accounts and commissary inventories are collectively referred to as "restricted assets" in the accompanying financial statements. DEFERRED COSTS Facility start-up costs, which consist of costs of initial employee training, travel and other direct expenses incurred in connection with the opening of new facilities, are capitalized and amortized on a straight-line basis over the lesser of the initial term of the contract plus renewals or five years. Direct incremental development costs paid to unrelated third parties incurred in securing new facilities, including certain costs of responding to requests for proposal ("RFPs"), are capitalized as deferred costs and amortized as part of start-up costs. Internal payroll and other costs incurred in securing new facilities are expensed to general and administrative expenses. Deferred development costs are charged to general and administrative expenses when the success of obtaining a new facility project is considered doubtful. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Ordinary maintenance and repair costs are expensed while renewal and betterment costs are capitalized. Prepaid facility use cost, which resulted from the July 1996 acquisition of MidTex, is being amortized over 35 years using the straight-line method. Buildings and improvements are depreciated over their estimated useful lives of 20 to 40 years using the straight-line method. Furniture and equipment are depreciated over their estimated useful lives of 3 to 10 years using the straight-line method. Amortization of leasehold improvements is computed on the straight-line method based upon the shorter of the life of the asset or the term of the respective lease. - 25 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property and equipment at December 31, 1995 and 1996, are as follows (in thousands): 1995 1996 -------- -------- Land ................................................. $ -- $ 561 Prepaid facility use ................................. -- 21,637 Buildings and improvements ........................... -- 2,651 Leasehold improvements ............................... 598 1,100 Furniture and equipment .............................. 407 938 Construction in progress ............................. 1,334 439 -------- -------- 2,339 27,326 Accumulated depreciation and amortization (430) (1,252) -------- -------- $ 1,909 $ 26,074 ======== ======== Construction in progress at December 31, 1996 represents construction and development costs attributable to a new pre-release facility which opened during the first quarter of 1997. CONTRACT VALUE Contract value represents the estimated fair value of the contracts acquired with the acquisition of Eclectic Communications, Inc. ("Eclectic") which were amortized over the remaining term of the contracts. Accumulated amortization was $542,000 as of December 31, 1995 and contract value was fully amortized as of December 31, 1996. GOODWILL Goodwill represents the total consideration the Company paid to acquire Eclectic in excess of the fair market value of the net tangible and identifiable intangible assets acquired. Goodwill is being amortized on a straight-line basis over 20 years, which represents management's estimation of the related benefit to be derived from the acquired business. Under Accounting Principles Board ("APB") Opinion No. 17, the Company periodically evaluates whether events and circumstances after the acquisition date indicate that the remaining balance of goodwill may not be recoverable. If factors indicate that goodwill should be evaluated for possible impairment, the Company would compare estimated undiscounted future cash flow from the related operations to the carrying amount of goodwill. If the carrying amount of goodwill were greater than undiscounted future cash flow, an impairment loss would be recognized. Any impairment loss would be computed as the excess of the carrying amount of goodwill over the estimated fair value of the goodwill (calculated based on discounting estimated future cash flows). Accumulated amortization of goodwill was $599,000 and $939,000 as of December 31, 1995 and 1996, respectively. REALIZATION OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets be probable of future recovery in their respective carrying amounts as of each balance sheet date. The Company adopted SFAS No. 121 effective January 1, 1996. Management believes its long-lived assets are realizable and that no impairment allowance is necessary pursuant to the provision of SFAS No. 121. - 26 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION Substantially all occupancy fees are derived from contracts with federal and state government agencies, which pay per diem rates based upon the number of occupant days for the period. Such revenues are recognized as services are provided. Revenues related to other income include development fees and miscellaneous other income. The development fees relate to the development, design and supervision of facility construction activities. Revenues are recognized as services are provided. INCOME TAXES The Company utilizes the liability method of accounting for income taxes as required by SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases based on enacted tax rates. USE OF ESTIMATES The Company's financial statements are prepared in accordance with generally accepted accounting principles ("GAAP"). Financial statements prepared in accordance with GAAP require the use of management estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Additionally, management estimates affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. BUSINESS CONCENTRATION Contracts with federal and state governmental agencies account for nearly all of the Company's revenues. FINANCIAL INSTRUMENTS The Company considers the fair value of all financial instruments not to be materially different from their carrying values at the end of each fiscal year based on management's estimate of the Company's ability to borrow funds under terms and conditions similar to those of the Company's existing debt. ACCOUNTING FOR STOCK-BASED COMPENSATION In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for the Company's 1996 fiscal year. SFAS No. 123 allows the Company to adopt either of two methods for accounting for stock options. The Company intends to continue to account for its stock-based compensation plans under Accounting Principles Board, Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"). In accordance with SFAS No. 123, certain pro forma disclosures are provided in Note 6. PER SHARE DATA Per share data is based on the weighted average number of common shares and common share equivalents outstanding for the period. Common shares equivalents have been included in the calculation of the shares used in computing net loss per common share using the treasury stock method. - 27 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INITIAL PUBLIC OFFERING On October 3, 1996, the Company completed an initial public offering ("IPO") of its common stock. Net proceeds to the Company from the sale of the 3,523,103 shares of newly issued common stock were approximately $37.4 million. Proceeds of the IPO were used to repay indebtedness and for general working capital purposes. NON-RECURRING CHARGES In connection with the Company's July 1996 credit facility ("1996 Credit Facility"), the Company incurred expenses, issued certain options and warrants, and sold shares of common stock, for which the Company recognized total deferred financing costs of $1.3 million, of which $726,000 was noncash, to be amortized over the life of the 1996 Credit Facility. Since the use of proceeds from the IPO were used to retire significant portions of the 1996 Credit Facility, the total deferred financing costs were charged to interest expense as of September 30, 1996. In addition, the Company recognized noncash compensation expense of $870,000 during the third quarter of 1996 in connection with options to purchase shares of common stock granted in July 1996 to certain officers of the Company based upon the estimated valuation of the shares of common stock compared to the exercise price on the date of grant. 2. ACQUISITIONS In July 1996, the Company completed the acquisition of substantially all the assets of MidTex Detentions, Inc. ("MidTex"), a private correctional center operator for the Federal Bureau of Prisons ("FBOP"), operating secure institutional facilities in Big Spring, Texas with a capacity of 1,305 beds at the date of acquisition ("Big Spring Facility"). In May 1996, the Company acquired a 310-bed facility located in Houston, Texas ("Reid Center"), previously operated by Texas Alcoholism Foundation, Inc., and The Texas House Foundation, Inc. (collectively, "Texas House"). Total consideration for these acquisitions was approximately $25.7 million. The acquisitions were financed primarily through borrowings under the 1996 Credit Facility and a short term convertible note ("Convertible Bridge Note"). In connection with the MidTex acquisition, the Company entered into various agreements for the use of the facilities and the annual payment of $216,000 (in lieu of property taxes) per year for approximately the next 35 years. The acquisition costs and the estimated fair market value of the assets acquired and liabilities assumed associated with the above-mentioned acquisitions are as follows (in thousands): MIDTEX REID CENTER Cash paid.................................. $23,200 $1,986 Transaction costs.......................... 470 90 ------- ------ Total purchase price.................... $23,670 $2,076 ======= ====== Net assets acquired -- Cash..................................... $ 486 $ -- Receivables, net......................... 2,726 -- Other current assets..................... 755 -- Property and equipment, net: Prepaid facility use.................... 21,710 -- Other................................... 10 2,090 Other assets............................. 5 -- Accounts payable and accrued liabilities. (2,022) (14) ------ ------ $23,670 $2,076 ======= - 28 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The carrying value of the prepaid facility use relates to the Company's right to use the three detention facilities retained by the City of Big Spring for 19, 20, and 23 years, respectively, plus three five-year extensions. Extensions of the lease agreement are at the option of the Company. The costs will be amortized over the respective periods, including the option periods. The Company currently intends to exercise these extensions. Both the Reid Center and MidTex acquisitions have been accounted for as purchases; therefore, the accompanying statements of operations reflect the results of operations since their respective acquisition dates. The unaudited consolidated results of operations on a pro forma basis as though the Reid Center and MidTex had been acquired as of the beginning of the Company's fiscal years 1995 and 1996 are as follows (amounts in thousands, except per share data): YEAR ENDED DECEMBER 31, 1995 1996 Total revenues........................... $38,716 $42,061 Net loss................................. (8) (2,030) Loss per share........................... (.00) (.45) The unaudited consolidated results of operations on a pro forma basis (i) assuming the Reid Center and MidTex had been acquired as of the beginning of the Company's fiscal year 1996, (ii) assuming the IPO had occurred at the beginning of the Company's fiscal year 1996, and (iii) excluding the $2.1 million of non-recurring charges described above, are as follows (amounts in thousands, except per share data): YEAR ENDED DECEMBER 31, 1996 Total revenues............................... $42,061 Net income................................... 1,772 Earnings per share........................... .25 Effective March 31, 1994, the Company purchased all outstanding stock of Eclectic, a California-based operator of residential care and secure correctional facilities. Consideration for the Eclectic acquisition was $10.3 million, consisting of $6 million in cash, $3.3 million in seller subordinated debt, approximately $700,000 of other long-term obligations, and $300,000 of transaction costs. The Eclectic acquisition was accounted for as a purchase, and the accompanying statement of operations reflects the operating results of Eclectic since the acquisition date. - 29 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The consideration paid and total net book value of the assets acquired and liabilities assumed associated with the Eclectic acquisition were as follows (in thousands): Cash paid (including transaction costs) ............ $ 6,334 Debt issued and other obligations incurred ......... 4,000 -------- Total purchase price ............................. $ 10,334 ======== Net assets acquired -- Current assets ................................... $ 2,532 Property and equipment ........................... 586 Contract value ................................... 748 Goodwill ......................................... 6,799 Other assets ..................................... 1,717 Current liabilities .............................. (1,577) Other liabilities ................................ (471) -------- $ 10,334 ======== 3. INCOME TAXES The following is an analysis of the Company's deferred tax assets (in thousands): DECEMBER 31, --------------------- 1995 1996 ------- ------- Deferred tax assets relating to -- Net operating loss carryforwards ....... $ 380 $ 609 Accelerated depreciation and amortization of property and equipment for financial reporting purposes .................... 114 290 Accrued expenses recorded for financial reporting purposes and deferred for tax purposes .............................. 217 282 Deferred compensation .................. -- 331 ------- ------- 711 1,512 Deferred tax liabilities ................. -- -- Net deferred tax asset before valuation allowance .............................. 711 1,512 Valuation allowance ...................... (275) (904) ------- ------- Net deferred tax asset ................. $ 436 $ 608 ======= ======= The components of the Company's income tax provision were as follows (in thousands): YEAR ENDED DECEMBER 31, 1994 1995 1996 ------------------------- Current provision................. $ -- $ -- $ 247 Deferred provision (benefit)...... 101 -- (172) ------ ------ ------ Tax provision................... $ 101 $ -- $ 75 ====== ====== ====== - 30 - YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 1996 ----- ----- ----- Computed taxes at statutory rate of 34 percent ...... $(170) $(336) $(783) Amortization of non-deductible intangibles .......... 166 162 186 1994 first quarter loss reported in partnership tax return ........................... 88 -- -- State income taxes, net of federal benefit .......... 35 -- (39) Changes in valuation allowance ...................... -- 190 629 Other ............................................... (18) (16) 82 ----- ----- ----- $ 101 $-- $ 75 ===== ===== ===== As of December 31, 1996, the Company has a net operating loss ("NOL") carryforward for income tax purposes of approximately $1,600,000 available to offset future taxable income. This carryforward will expire beginning 2008. 4. LONG-TERM DEBT The Company's long-term debt consisted of the following (in thousands): DECEMBER 31, 1995 1996 ------ ---- 1995 Credit Facility (all repaid in 1996): Revolving credit .................................... $ 740 $-- Term loan ........................................... 4,000 -- Multiple-advance term loan .......................... 500 -- Stock repurchase loan ............................... 2,350 -- ------ ---- Total ............................................ 7,590 -- Other notes payable, interest at 2.9% to 9.9% .......... 59 745 ------ ---- 7,649 745 Less -- current maturities ............................. 24 283 ------ ---- $7,625 $462 ====== ==== In conjunction with the acquisition of MidTex, the 1995 Credit Facility was replaced with the1996 Credit Facility. The 1996 Credit Facility provided up to $35,000,000 in loans pursuant to four separate facilities consisting of a $2,500,000 revolving credit facility, a $23,200,000 term loan facility that was used to finance a portion of the Mid-Tex acquisition costs, a $6,950,000 multiple-advance term loan facility for new and expanded facilities costs and a $2,350,000 facility that was used to refinance the stock repurchase loan. In addition, in July 1996, the Company borrowed $6.0 million under the Convertible Bridge Note. On October 8, 1996, the Company repaid a total of $33.9 million of borrowings under the 1996 Credit Facility and the Convertible Bridge Note using proceeds from the IPO. As a result of the repayments of the term loan facility and the stock repurchase loan facility, such facilities were canceled. - 31 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1996, the 1996 Credit Facility was amended to increase the revolving credit facility to $5.0 million and the multiple-advance term loan facility to $10.0 million. Loans under the 1996 Credit Facility bear interest at a designated prime rate plus the following margins: revolving credit, 1%; multiple-advance term loan, 1.75%. Commitment fees equal to 0.5% per annum are payable on the unused portions of the revolving credit and multiple-advance term loan facilities. The revolving credit facility and the multiple-advance term loan facility will mature and all amounts, if any, outstanding thereunder will be due on December 31, 1997. The 1996 Credit Facility is secured by all of the Company's assets, including the stock of all the Company's subsidiaries, does not permit the payment of cash dividends and requires the Company to comply with certain earnings, net worth and debt service covenants. At December 31, 1996, there were no borrowings outstanding under the 1996 Credit Facility. Other notes payable pertain to financed insurance premiums and various vehicle notes. Scheduled maturities of long-term debt are as follows (in thousands): DECEMBER 31, 1996 1997..................................... $ 283 1998..................................... 316 1999..................................... 119 2000..................................... 27 ------ Total.................................. $ 745 ====== In connection with the 1996 Credit Facility, the Company issued warrants to the lender enabling the lender to purchase 264,000 shares of Class B Common Stock at a per share exercise price of $2.82. The warrants are fully vested and expire in 2003. As a condition to funding, the 1996 Credit Facility required certain existing stockholders to purchase at least $200,000 of Class B Common Stock. On July 9, 1996, the existing stockholders purchased an aggregate of 90,331 shares of Class B Common Stock for $254,733 (or $2.82 per share). As a condition to the Convertible Bridge Note, the lender and certain existing stockholders entered into a put agreement dated as of July 3, 1996 ("Put Agreement"). The Company issued options to an existing stockholder to purchase 60,221 shares of Class B Common Stock at $2.82 per share in consideration for entering into the Put Agreement (see Note 6 - "Treasury Stock" regarding the expiration of this Put Agreement in 1996). Total financing costs of $1,261,000 (which includes (i) transaction costs of $535,000, (ii) the $568,000 difference between the exercise price of the warrants granted to the lender and an existing stockholder and the estimated valuation of the shares of common stock underlying such options and (iii) the $158,000 difference between the purchase price and the estimated valuation of the 90,331 shares of common stock purchased by an existing stockholder) were capitalized as deferred financing costs. - 32 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office space and certain facilities under long-term operating leases. Rent expense for all operating leases for the years ended December 31, 1994, 1995 and 1996, was approximately $1,667,000, $2,244,000, and $2,358,000, respectively. As of December 31, 1996, the Company had the following rental commitments under noncancelable operating leases (in thousands): For the year ending December 31 -- 1997................................... $2,209 1998................................... 1,378 1999................................... 874 2000................................... 447 2001................................... 175 Thereafter............................. 1,257 ------ $6,340 401(K) PLAN The Company has a defined contribution 401(k) plan. The Company's matching contribution represents 50 percent of a participant's contribution, up to the first six percent of the participant's salary. The Company can also make additional discretionary contributions. For the years ended December 31, 1994, 1995 and 1996, the Company recorded $100,000, $139,000, and $210,000, respectively, of contribution expense. OTHER The Company is subject to certain claims and disputes arising in the normal course of the Company's business. In the opinion of the Company's management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations. 6. STOCKHOLDERS' EQUITY CAPITALIZATION Upon the completion of the IPO, the Company's authorized stock was as follows: CLASS AUTHORIZED PAR VALUE Common stock.................. 30,000,000 $ .001 Preferred stock............... 10,000,000 .001 Preferred stock may be issued from time to time by the Board of Directors of the Company, which is responsible for determining the voting, dividend, redemption, conversion and liquidation features of any preferred stock. The Company effected a reclassification of its equity in 1996 in connection with the IPO which resulted in the reclassification of each share of Class A Common Stock and Class B Common Stock of the Company into one share of Common stock, par value $.001 per share, of the Company. - 33 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OPTIONS AND WARRANTS In May 1996, the Company adopted the 1996 Stock Option Plan ("1996 Plan"). Pursuant to the 1996 Plan, the Company may grant non-qualified and incentive stock options. The Compensation Committee of the Board of Directors is responsible for determining the exercise price and vesting terms for the options. Additionally, prior to the IPO, the Company made various grants of options and warrants to purchase the Company's common stock. The Company may grant options for up to 880,000 shares under the 1996 Plan. The Company has granted options on 673,358 shares through December 31, 1996. The 1996 Plan option exercise price can be no less than the stock's market price on the date of grant. The 1996 Plan options vest up to four years, and expire after seven to ten years. On July 8, 1996, the chairman of the board and the chief financial officer of the Company exercised options to purchase 137,110 and 82,750 shares of Class A Common Stock and Class B Common Stock at an aggregate price of $274,220 and $180,638, respectively. In connection with the exercise, each officer entered into a promissory note with the Company for the respective aggregate exercise amounts. The promissory notes bear interest at the applicable short-term federal rate as prescribed by Internal Revenue Service regulations, mature in four years, are full recourse and are collateralized by shares of common stock exercised. A summary of the status of the Company's stock option plan and other options and warrants at December 31, 1995 and 1996 and changes during the years then ended is presented in the table and narrative below:
1995 1996 ------------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE -------- --------- --------- --------- Outstanding at beginning of year................. 83,062 $ 5.11 814,562 $ 2.12 Granted.......................................... 732,500 1.78 776,469 5.24 Exercised........................................ (1,000) 2.50 (512,922) 2.22 Forfeited........................................ -- -- -- -- Expired.......................................... -- -- -- -- -------- --------- Outstanding at end of year....................... 814,562 2.12 1,078,109 4.32 ======== ========= Exercisable at end of year....................... 793,562 2.11 930,609 3.46 Weighted average fair value of options granted... $.55 $4.10
Of the 1,078,109 options outstanding at December 31, 1996, 948,109 options have exercise prices between $2.00 and $5.64, with a weighted average exercise price of $3.26 and a weighted average remaining contractual life of 7.3 years. The remaining 130,000 options have exercise prices of $12.00 and a weighted average remaining contractual life of 9.8 years. - 34 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had compensation cost for the stock option grants under the 1996 Plan and other stock options and warrants been determined under SFAS No. 123, the Company's net loss and loss per share would have been the following pro forma amounts (in thousands, except per share amounts): YEAR ENDED DECEMBER 31, 1995 1996 Net Loss: As reported $ (989) $(2,379) Pro Forma (1,391) (3,503) Loss per share: As reported (.25) (.53) Pro Forma (.35) (.80) Because SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Under SFAS No. 123, the fair value of each option grant was estimated on the date of grant using the minimum value calculation prior to the IPO, and the Black-Scholes option pricing model subsequent to the IPO. The following weighted average assumptions were used for grants in 1995 and 1996, respectively: risk-free interest rates of 6.1% and 6.8%; dividend rates of $0 and $0; expected lives of 7.0 and 7.5 years; expected volatility of 32.5% since the Company's stock began trading in October 1996. The Black-Scholes option valuation model and other existing models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of and are highly sensitive to subjective assumptions including the expected stock price volatility. The Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. TREASURY STOCK Effective November 1, 1995, the Company repurchased 555,000 shares of Class A Common Stock from a former officer of the Company ("Stock Repurchase"). The Stock Repurchase and related expenses were financed with borrowings under the 1995 Credit Facility. In connection with the Stock Repurchase, the Company issued options to purchase 555,000 shares of Class B Common Stock, each with an exercise price of $2.00 per share, to certain existing stockholders and to the lender under the 1995 Credit Facility. Also, in connection with the Stock Repurchase, the Company granted the lender under the 1995 Credit Facility the Put Agreement to require the Company to repurchase options to purchase 31,250 shares of Class B Common Stock for an aggregate price of $250,000 (i.e., $8.00 per share) upon the first to occur of (a) the closing of an initial public offering of shares of common equity of the Company, (b) the repayment by the Company of the Stock Repurchase Loan or (c) December 31, 1996. The Put Agreement, which was accrued in 1995, expired and was reversed in 1996. - 35 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. SUBSEQUENT EVENTS On January 31, 1997, the Company acquired the assets of Interventions, Co. ("Interventions"). The Company paid an aggregate purchase price of $6,003,000 comprised of $3,523,000 in cash, $2,250,000 for the repayment of Interventions' outstanding notes payable, and $230,000 of transaction costs. The Company financed the purchase with $2,000,000 of borrowings from the multiple-advance term loan facility under its 1996 Credit Facility and the remainder with cash. The acquisition is being treated as a purchase for accounting purposes. The operations acquired from Interventions include (i) a 300 bed residential pre-release correctional center in Dallas County, Texas, (ii) various non-residential aftercare treatment programs for an additional 170 probationers in Dallas, Texas, and (iii) a 44 bed juvenile residential transitional living center program in San Antonio, Texas. In addition, the Company acquired from Interventions the 72,000 square foot, 150 bed capacity facility in San Antonio in which the juvenile transitional living center is operated. - 36 - ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Items 10, 11, 12 and 13 of Part III have been omitted from this report because the Company will file with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement. The information required by Items 10, 11, 12 and 13 of this report, which will appear in the definitive proxy statement, is incorporated by reference into Part III of this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS 1. Financial statements and reports of Arthur Andersen LLP Reports of Independent Auditors Consolidated Balance Sheets - December 31, 1995 and 1996 Consolidated Statements of Operations for the years ended December 31, 1994, 1995, and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995, and 1996 Notes to Consolidated Financial Statements 2. Financial statement schedules All schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes thereto. 3. Exhibits
EXHIBIT INCORPORATED NO. DESCRIPTION BY REFERENCE - -------------------------------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. 4.1 Certificate representing Common Stock. (1) 4.2 Registration Rights Agreement dated as of March 31, 1994, as amended, (1) among the Company and the stockholders listed on the signature pages thereto. 9.1 Stock Transfer and Voting Agreement dated November 23, 1994 between (1) David M. Cornell and Jane B. Cornell. 10.1 Cornell Corrections, Inc. 1996 Stock Option Plan. (1) 10.2 Employment Agreement dated as of March 31, 1994 between the Company (1) and Marvin H. Wiebe. 10.3 Form of Indemnification Agreement between the Company and each of its (1) directors and executive officers. - 37 - EXHIBIT INCORPORATED NO. DESCRIPTION BY REFERENCE - -------------------------------------------------------------------------------------------- 10.4 Stockholders Agreement among certain stockholders named therein. 10.5 Contract between CCCI and the CDC (No. 92.401) for the Baker, California (1) Facility dated June 25, 1992, as amended. 10.6 Professional Management Agreement between the Company and Central Falls (1) Detention Facility Corporation dated July 15, 1992. 10.7 Operating Agreement by and between each of MidTex Detentions, Inc., the (1) City of Big Spring, Texas ("Big Spring") and Cornell Corrections of Texas, Inc. ("CCTI") dated as of July 1, 1996 and related Assignment and Assumption of Operating Agreement. 10.8 Contract between CCCI and the CDC (No. R92.132) for the Live Oak, (1) California Facility dated March 1, 1993, as amended. 10.9 Asset Purchase Agreement dated as of January 31, 1997 by and between (2) Cornell Corrections of Texas, Inc. and Interventions, Co. 10.10 [Intentionally Omitted] 10.11 [Intentionally Omitted] 10.12 Contract between Texas Alcoholism Foundation, Inc. and the Texas (1) Department of Criminal Justice, Parole Division for the Reid Facility dated January 31, 1996, as amended. 10.13 [Intentionally Omitted] 10.14 Form of Contract between CCCI and the Utah State Department of Human (1) Services, Division of Youth Corrections for the Salt Lake City, Utah Juvenile Facility. 10.15 Asset Purchase Agreement among CCTI, Texas Alcoholism Foundation, Inc. (1) and the Texas House Foundation, Inc. dated May 14, 1996. 10.16 Asset Purchase Agreement among CCTI, the Company, Ed Davenport, Johnny (1) Rutherford and MidTex Detentions, Inc. dated May 22, 1996. 10.17 Lease Agreement between CCCI and Baker Housing Company dated August 1, (1) 1987 for the Baker, California facility. 10.18 Lease Agreement between CCCI and Sun Belt Properties dated as of May 23, (1) 1988, as amended for the Live Oak, California facility. 10.19 Lease Agreement between Big Spring and Ed Davenport dated as of July 1, (1) 1996 for the Interstate Unit and related Assignment and Assumption of Leases. 10.20 Secondary Sublease Agreement between Big Spring and Ed Davenport dated (1) as of July 1, 1996 for the Airpark Unit and related Assignment and Assumption of Leases. 10.21 Secondary Sublease Agreement between Big Spring and Ed Davenport dated (1) as of July 1, 1996 for the Flightline Unit and related Assignment and Assumption of Leases. 10.22 [Intentionally Omitted] 10.23 Amended and Restated Credit Agreement among the Company, subsidiaries of (1) the Company, the lenders listed therein ("Lenders"), and ING, as agent to the Lenders, dated as of July 3, 1996. 10.24 Convertible Subordinated Promissory Note from the Company to ING dated (1) as of July 3, 1996. 10.25 Put Agreement among the Company, Concord II, CEP II, and ING dated as of (1) July 3, 1996. 10.26 Subordination Agreement among the Company and ING dated July 3, 1996. (1) 10.27 Extension Agreement among the Company, Concord II, and CEP II dated as (1) of July 3, 1996. - 38 - EXHIBIT INCORPORATED NO. DESCRIPTION BY REFERENCE - -------------------------------------------------------------------------------------------- 10.28 Warrant Issuance Agreement between the Company and ING dated July 3, (1) 1996. 10.29 Stock Option Agreement between the Company and CEP II dated July 9, (1) 1996. 10.30 Warrant Issuance Agreement between the Company and ING dated March 14, (1) 1995. 10.31 Investors Agreement among the Company, ING and certain stockholders of (1) the Company listed therein dated as of November 1, 1995. 10.32 Option Agreement between the Company and ING dated as of November 1, (1) 1995. 10.33 Form of Option Agreement between the Company and the Optionholder listed (1) therein dated as of November 1, 1995. 11.1 Computation of Per Share Earnings. 21.1 Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney. 27.1 Financial Data Schedule.
(1) Registration Statement on Form S-1 of the Company (Registration No. 333-08243). (2) Current Report on Form 8-K of the Company dated January 31, 1997 (File No. 1-14472). (b) REPORTS ON FORM 8-K None. - 39 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. CORNELL CORRECTIONS, INC. Dated: March 28, 1997 By: /S/ DAVID M. CORNELL David M. Cornell Chairman of the Board, President and Chief Executive Officer SIGNATURE TITLE DATE /S/ DAVID M. CORNELL Chairman of the Board, President March 28, 1997 David M. Cornell and Chief Executive Officer (Principal Executive Officer) /S/ STEVEN W. LOGAN Chief Financial Officer, Treasurer March 28, 1997 Steven W. Logan and Secretary (Principal Financial Officer and Principal Accounting Officer) /S/ RICHARD T. HENSHAW III* Director March 28, 1997 Richard T. Henshaw III /S/ PETER A. LEIDEL* Director March 28, 1997 Peter A. Leidel /S/ CAMPBELL A. GRIFFIN, JR.* Director March 28, 1997 Campbell A. Griffin, Jr. /S/ TUCKER TAYLOR* Director March 28, 1997 Tucker Taylor * By: DAVID M. CORNELL David M. Cornell Attorney-in-Fact - 40 -
EX-3.1 2 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF CORNELL CORRECTIONS, INC. UNDER SECTIONS 242 AND 245 OF THE DELAWARE GENERAL CORPORATION LAW CORNELL CORRECTIONS, INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, hereby adopts this Restated Certificate of Incorporation, which accurately restates and integrates the provisions of the existing Certificate of Incorporation of the Corporation and all amendments thereto that are in effect on the date hereof (the "Certificate of Incorporation") and further amends the provisions of the Certificate of Incorporation, and hereby further certifies that: 1. The current name of the Corporation is Cornell Corrections, Inc. The name under which the Corporation was originally incorporated was Cornell Cox, Inc. The original Certificate of Incorporation of the Corporation (as amended, the "Certificate of Incorporation") was filed with the Secretary of State of the State of Delaware on March 31, 1994. 2. The restatement of and amendments to the Certificate of Incorporation contained herein have been duly adopted by a resolution of the Board of Directors of the Corporation (the "Board of Directors") proposing and declaring advisable this Restated Certificate of Incorporation, and a majority of the outstanding shares of the Corporation's capital stock has duly approved and adopted this Restated Certificate of Incorporation, all in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. 3. This Restated Certificate of Incorporation restates and further amends the Certificate of Incorporation of the Corporation. The amendments to the Certificate of Incorporation effected by this Restated Certificate of Incorporation include, but are not limited to, amendments (i) to reclassify each share of Class A Common Stock, par value $.001 per share, of the Corporation and each share of Class B Common Stock, par value $.001 per share, of the Corporation into one share of Common Stock, par value $.001 per share, of the Corporation, (ii) to authorize the issuance of up to 10,000,000 shares of Preferred Stock, par value $.001 per share, of the Corporation from time to time in one or more series as may be determined by the Board of Directors, (iii) to add provisions relating to dividends, liquidation and voting with respect to Common Stock of the Corporation, (iv) to add provisions regarding the denial of preemptive rights and cumulative voting, (v) to provide for not less than 3 and no more than 13 Directors of the Corporation, (vi) to provide the procedure for filling vacancies on the Board of Directors, (vii) to restrict the taking of action by the stockholders of the Corporation by less than unanimous written consent without a stockholders' meeting, and (viii) to provide for the amendment of the Bylaws of the Corporation by the Board of Directors and by the stockholders of the Corporation and to establish the required vote for any such amendment. 1 4. The capital of the Corporation shall not be reduced under or by reason of the foregoing amendments to the Certificate of Incorporation. 5. The Certificate of Incorporation shall be superseded by this Restated Certificate of Incorporation, which Restated Certificate of Incorporation shall become effective at 8:00 a.m., New York time, on the closing date of an initial public offering of shares of Common Stock of the Corporation pursuant to a registration statement that shall have become effective under the Securities Act of 1933, as amended, so long as such date occurs within 90 days after the date of filing hereof, and this Restated Certificate of Incorporation shall thereafter be the Certificate of Incorporation of the Corporation. 6. The text of the Certificate of Incorporation is hereby restated and amended to read in its entirety as follows (hereinafter, this Restated Certificate of Incorporation, as it may be further amended or restated from time to time, is referred to the "Restated Certificate of Incorporation"). RESTATED CERTIFICATE OF INCORPORATION FIRST:The name of the Corporation is Cornell Corrections, Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful business, act or activity for which corporations may be organized under the provisions of the General Corporation Law of the State of Delaware or any successor statute (the "DGCL"). FOURTH: The aggregate number of shares of capital stock that the Corporation shall have authority to issue is 40,000,000, divided into classes as follows: (1) 30,000,000 shares of common stock, par value $.001 per share ("Common Stock"), and (2) 10,000,000 shares of preferred stock, par value $.001 per share ("Preferred Stock"). 2 Shares of any class or series of capital stock of the Corporation may be issued for such consideration and for such corporate purposes as the Board of Directors may from time to time determine. Upon the effectiveness of the Restated Certificate of Incorporation under the DGCL, each outstanding share of Class A Common Stock, par value $.001 per share, of the Corporation and each outstanding share of Class B Common Stock, par value $.001 per share, of the Corporation shall be automatically reclassified as one share of Common Stock. The following is a statement of the powers, preferences and rights, and the qualifications, limitations or restrictions, of the Preferred Stock and Common Stock. SECTION I. PREFERRED STOCK Shares of Preferred Stock shall be issuable from time to time in one or more series as may be determined by the Board of Directors. Each series shall be distinctly designated. The Board of Directors is hereby expressly granted the authority to fix, by resolution or resolutions (a) adopted prior to such issuance, (b) providing for the issuance of any shares of each particular series of Preferred Stock and (c) incorporated in a certificate of designation filed with the Secretary of State of the State of Delaware, the designation, powers (including voting powers and voting rights, full or limited, or no voting powers) and preferences, and the relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, if any, of such series, including, without limiting the generality of the foregoing, the following: (1) the designation of, and the number of shares of Preferred Stock which shall constitute, the series, which number may be increased (except as otherwise fixed by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (2) the rate and times at which (or the method of determination thereof), and the terms and conditions upon which, dividends, if any, on shares of the series shall be paid, the nature of any preferences or the relative rights of priority of such dividends to the dividends payable, and the qualifications, limitations or restrictions, if any, with respect to such dividends payable, on any other shares of any class or classes of capital stock of the Corporation or on any shares of other series of Preferred Stock, and a statement whether or in what circumstances such dividends shall be cumulative; 3 (3) whether shares of the series shall be convertible into or exchangeable for shares of any class or series of capital stock or other securities or property of the Corporation or of any other corporation or entity, and, if so, the terms and conditions of such conversion or exchange, including any provisions for the adjustment of the conversion or exchange rate in such events as the Board of Directors shall determine; (4) whether shares of the series shall be redeemable, and, if so, the terms and conditions of such redemption (including whether redemption shall be optional or mandatory), including the date or dates or event or events upon or after the occurrence of which they shall be redeemable, and the amount and type of consideration payable in case of redemption, which amount per share may vary under different conditions and at different redemption dates; (5) the rights, if any, of holders of shares of the series upon the voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding-up of the Corporation, and the relative rights of priority, if any, of payment of shares of the series; (6) whether shares of the series shall have a sinking fund or purchase account for the redemption or purchase of shares of the series, and, if so, the terms, conditions and amount of such sinking fund or purchase account; (7) whether shares of the series shall have voting rights in addition to the voting rights as shall be provided by law and, if so, the terms of such voting rights, which may, without limiting the generality of the foregoing, include (a) the right to more or less than one vote per share on any or all matters voted upon by the stockholders of the Corporation and (b) the right to vote, as a series by itself or together with other series of Preferred Stock or together with all series of Preferred Stock as a class and/or with the Common Stock as a class, upon such matters, under such circumstances and upon such conditions as the Board of Directors shall determine, including, without limitation, the right, voting as a series by itself or together with other series of Preferred Stock or together with all series of Preferred Stock as a class and/or with the Common Stock as a class, to elect one or more Directors of the Corporation under such circumstances and upon such conditions as the Board of Directors shall determine; and (8) any other powers, preferences and relative, participating, optional or other rights, and qualifications, limitations or restrictions, of shares of that series. The relative powers, preferences and rights of each series of Preferred Stock in relation to the powers, preferences and rights of each other series of Preferred Stock shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to the 4 authority granted herein, and the consent, by class or series vote or otherwise, of holders of Preferred Stock of such of the series of Preferred Stock as are from time to time outstanding shall not be required for the issuance by the Board of Directors of any other series of Preferred Stock, whether or not the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, the powers, preferences and rights of such outstanding series, or any of them; PROVIDED, HOWEVER, that the Board of Directors may provide in such resolution or resolutions adopted with respect to any series of Preferred Stock that the consent of holders of at least a majority (or such greater proportion as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of shares of any or all other series of Preferred Stock. SECTION II. COMMON STOCK (1) DIVIDENDS. Subject to any requirements with respect to preferential or participating dividends as shall be provided by the express terms of any outstanding series of Preferred Stock, holders of the Common Stock shall be entitled to receive such dividends thereon, if any, as may be declared from time to time by the Board of Directors. (2) LIQUIDATION. In the event of liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, holders of the Common Stock shall be entitled to receive such assets and properties of the Corporation, tangible and intangible, as are available for distribution to stockholders of the Corporation, after there shall have been paid or set apart for payment the full amounts necessary to satisfy any preferential or participating rights to which holders of each outstanding series of Preferred Stock are entitled by the express terms of such series. (3) VOTING. Each share of Common Stock shall entitle the holder thereof to one vote on each matter submitted to a vote of holders of shares of Common Stock. Holders of shares of Common Stock shall be entitled to vote on each matter submitted to a vote of stockholders of the Corporation, except (a) as shall otherwise be provided with respect to the election of one or more Directors of the Corporation by holders of shares of one or more outstanding series of Preferred Stock under circumstances as shall be provided by the Restated Certificate of Incorporation or by any provisions established pursuant thereto and (b) to the extent holders of shares of one or more outstanding series of Preferred Stock are entitled to vote separately as a class by law or under circumstances as shall be provided by the Restated Certificate of Incorporation or by any provisions established pursuant thereto. SECTION III. CAPITAL STOCK (1) REGARDING PREEMPTIVE RIGHTS. No stockholder of the Corporation shall by reason of his holding shares of any class or series of capital stock of the Corporation have any 5 preemptive or preferential right to purchase, acquire, subscribe for or otherwise receive any additional, unissued or treasury shares (whether now or hereafter acquired) of any class or series of capital stock of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying any right, option or warrant to purchase, acquire, subscribe for or otherwise receive shares of any class or series of capital stock of the Corporation now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividends or voting or other rights of such stockholder, and the Board of Directors may issue or authorize the issuance of shares of any class or series of capital stock of the Corporation, or any notes, debentures, bonds or other securities convertible into or carrying rights, options or warrants to purchase, acquire, subscribe for or otherwise receive shares of any class or series of capital stock of the Corporation, without offering any such shares of any such class, either in whole or in part, to the existing stockholders of any such class. (2) CUMULATIVE VOTING. Cumulative voting of shares of any class or series of capital stock of the Corporation having voting rights is prohibited. FIFTH:(1) DIRECTORS. The powers of the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed by or under the direction of, the Board of Directors. The Board of Directors is hereby authorized and empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject to the provisions of the DGCL, the Restated Certificate of Incorporation and any Bylaw of the Corporation adopted by the stockholders of the Corporation; PROVIDED, HOWEVER, that no Bylaw of the Corporation hereafter adopted by the stockholders of the Corporation, nor any amendment thereto, shall invalidate any prior act of the Board of Directors that would have been valid if such Bylaw or amendment thereto had not been adopted. (2) NUMBER AND ELECTION OF DIRECTORS. Subject to such rights of holders of shares of one or more outstanding series of Preferred Stock to elect one or more Directors of the Corporation under circumstances as shall be provided by or established pursuant to the Restated Certificate of Incorporation, the number of Directors of the Corporation that shall constitute the Board of Directors shall not be less than three (3) nor more than thirteen (13) and shall be specified from time to time in the Bylaws of the Corporation. Election of Directors of the Corporation need not be by written ballot unless the Bylaws of the Corporation shall so provide. (3) VACANCIES. Unless otherwise provided by the Restated Certificate of Incorporation or by any provisions established pursuant thereto with respect to the rights of holders of shares of one or more outstanding series of Preferred Stock, newly created directorships resulting from any increase in the authorized number of Directors of the Corporation and any vacancies on the Board of Directors resulting from death, resignation or removal of a Director of the Corporation shall be filled by (a) the affirmative vote of at least a majority of the remaining Directors of the 6 Corporation then in office, even if such remaining Directors constitute less than a quorum of the Board of Directors, or (b) the affirmative vote of holders of at least a majority of the then outstanding Voting Stock (as defined below), voting together as a single class. The term "Voting Stock" shall mean all outstanding shares of all classes and series of capital stock of the Corporation entitled to vote generally in the election of Directors of the Corporation, considered as one class; and, if the Corporation shall have shares of Voting Stock entitled to more or less than one vote for any such share, each reference in the Restated Certificate of Incorporation to a proportion or percentage in voting power of Voting Stock shall be calculated by reference to the portion or percentage of votes entitled to be cast by holders of such shares generally in the election of Directors of the Corporation. SIXTH:From and after the first date as of which the Corporation has a class or series of capital stock registered under the Securities Exchange Act of 1934, as amended, no action required to be taken or that may be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, and the power of the stockholders of the Corporation to consent in writing to the taking of any action by written consent without a meeting is specifically denied, except for action by unanimous written consent, which is expressly allowed. Unless otherwise provided by the DGCL, by the Restated Certificate of Incorporation or by any provisions established pursuant thereto with respect to the rights of holders of one or more outstanding series of Preferred Stock, special meetings of the stockholders of the Corporation may be called at any time by the Chairman of the Board of Directors or by any two or more Directors of the Corporation. SEVENTH: No Director of the Corporation shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a Director of the Corporation involving any act or omission of any such Director; PROVIDED, HOWEVER, that this Article SEVENTH shall not eliminate or limit the liability of such Director (1) for any breach of such Director's duty of loyalty to the Corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the DGCL, as the same exists or as such provision may hereafter be amended, supplemented or replaced, or (4) for any transactions from which such Director derived an improper personal benefit. If the DGCL is amended after the filing of the Restated Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of a Director of the Corporation, then the liability of a Director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by such law, as so amended. Any repeal or modification of this Article SEVENTH by the stockholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the personal liability of a Director of the Corporation existing at the time of such repeal or modification. EIGHTH: In furtherance of, and not in limitation of, the powers conferred by statute, the Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the Corporation, or adopt new Bylaws, without any action on the part of the stockholders of the 7 Corporation. Any adoption, amendment or repeal of the Bylaws of the Corporation by the Board of Directors shall require, in addition to any other affirmative vote that may be required by law, the Restated Certificate of Incorporation or the Bylaws of the Corporation, the affirmative vote of at least a majority of the Whole Board. The term "Whole Board" shall mean the total number of Directors of the Corporation as so fixed, whether or not there exist any vacancies in previously authorized directorships. The stockholders of the Corporation shall also have the power to adopt, amend or repeal the Bylaws of the Corporation, or adopt new Bylaws, at any annual or special meeting by the affirmative vote of holders of at least a majority of the then outstanding Voting Stock, voting together as a single class, in addition to any other affirmative vote that may be required by law, the Restated Certificate of Incorporation or the Bylaws of the Corporation. 8 IN WITNESS WHEREOF, the Corporation has caused the Restated Certificate of Incorporation to be signed and attested by its duly authorized officer, this 30th day of September, 1996. CORNELL CORRECTIONS, INC. By: DAVID M. CORNELL David M. Cornell Chief Executive Officer 9 EX-3.2 3 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF CORNELL CORRECTIONS, INC. OCTOBER 1, 1996 AMENDED AND RESTATED BYLAWS OF CORNELL CORRECTIONS, INC. Table of Contents Page ARTICLE I OFFICES..........................................................1 1.1 Registered Office.................................................1 1.2 Other Offices.....................................................1 ARTICLE II MEETINGS OF STOCKHOLDERS.........................................1 2.1 Place of Meetings.................................................1 2.2 Annual Meetings...................................................1 2.3 Special Meetings..................................................1 2.4 Registered Holders of Shares; Closing of Share Transfer Records; and Record Date..................................................2 2.5 Quorum............................................................2 2.6 Voting by Stockholders............................................3 2.7 Proxies...........................................................3 2.8 No Shareholder Action Without Meeting.............................4 ARTICLE III DIRECTORS........................................................4 3.1 Number and Election of Directors..................................4 3.2. Vacancies........................................................4 3.3. Duties and Powers................................................4 3.4. Meetings.........................................................5 3.5. Quorum...........................................................5 3.6. Actions Without a Meeting........................................5 3.7. Telephonic Meetings..............................................5 3.8. Committees.......................................................5 3.9. Reimbursement of Expenses........................................6 3.10. Protection for Reliance.........................................6 ARTICLE IV OFFICERS.........................................................6 4.1. General..........................................................6 4.2. Election.........................................................6 4.3. Duties...........................................................7 4.4. Chairman.........................................................7 4.5. President........................................................7 4.6. Vice Presidents..................................................7 4.7. Secretary and Assistant Secretaries..............................7 -i- 4.8. Treasurer and Assistant Treasurers...............................8 4.9. Removal..........................................................8 4.10. Voting Securities Owned by the Corporation......................8 ARTICLE V STOCK............................................................8 5.1. Form of Certificates.............................................8 5.2. Signatures.......................................................9 5.3. Lost Certificates................................................9 5.4. Transfers........................................................9 5.5. Beneficial Ownership.............................................9 5.6. Dividends........................................................9 ARTICLE VI INDEMNIFICATION.................................................10 6.1 General..........................................................10 6.2 Expenses.........................................................10 6.3 Advances.........................................................10 6.4 Request for Indemnification......................................11 6.5 Nonexclusivity of Rights.........................................11 6.6 Insurance and Subrogation........................................11 6.7 Severability.....................................................11 6.8 Certain Persons Not Entitled to Indemnification..................11 6.9 Definitions......................................................12 ARTICLE VII NOTICES........................................................12 7.1. Notices.........................................................12 7.2. Waiver of Notice................................................13 ARTICLE VIII MISCELLANEOUS.................................................13 8.1. Fiscal Year.....................................................13 8.2. Amendments......................................................13 -ii- AMENDED AND RESTATED BYLAWS OF CORNELL CORRECTIONS, INC. ARTICLE I OFFICES 1.1 REGISTERED OFFICE. The registered office of Cornell Corrections, Inc., a Delaware corporation (the "Corporation"), is The Corporation Trust Company, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware, 19801. 1.2 OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors of the Corporation (the "Board of Directors") may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Annual or special meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. If not so designated or stated, such meeting shall be held at the registered office of the Corporation. 2.2 ANNUAL MEETINGS. The annual meeting of stockholders shall be held on such date and at such time as may be designated from time to time by the Board of Directors and stated in the notice of such meeting. At the annual meeting, the stockholders shall elect by a plurality vote a Board of Directors and transact such other business as may properly be brought before the meeting. Written notice of the annual meeting of stockholders of the Corporation stating the place, date and hour of the meeting shall be sent to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. Failure to hold the annual meeting shall not work a forfeiture or dissolution of the Corporation or affect otherwise valid corporate acts. 2.3 SPECIAL MEETINGS. Unless otherwise prescribed by the Delaware General Corporation Law ("DGCL") or by the Certificate of Incorporation of the Corporation (as amended or restated from time to time, the "Certificate of Incorporation"), special meetings of stockholders of the Corporation for any purpose or purposes may be called at any time by the Chairman of the Board of Directors or by any two or more directors of the Corporation. Written notice of the special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the -1- meeting is called shall be given not less 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. 2.4 REGISTERED HOLDERS OF SHARES; CLOSING OF SHARE TRANSFER RECORDS; AND RECORD DATE. (a) REGISTERED HOLDERS AS OWNERS. Unless otherwise provided under Delaware law, the Corporation may regard the person in whose name any shares issued by the Corporation are registered in the stock transfer records of the Corporation at any particular time (including, without limitation, as of a record date fixed pursuant to paragraph (b) of this Section 2.4) as the owner of those shares at that time for purposes of voting those shares, receiving distributions thereon or notices in respect thereof, transferring those shares, exercising rights of dissent with respect to those shares, entering into agreements with respect to those shares, or giving proxies with respect to those shares; and neither the Corporation nor any of its officers, directors, employees or agents shall be liable for regarding that person as the owner of those shares at that time for those purposes, regardless of whether that person possesses a certificate for those shares. (b) RECORD DATE. For the purpose of determining stockholders of the Corporation entitled to notice of or to vote at any meeting of stockholders of the Corporation or any adjournment thereof, or entitled to receive a distribution by the Corporation (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, or in order to make a determination of stockholders of the Corporation for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders of the Corporation, such date in any case to be not more than 60 days and, in the case of a meeting of stockholders, not less than 10 days, prior to the date on which the particular action requiring such determination of stockholders of the Corporation is to be taken. The Board of Directors shall not close the books of the Corporation against transfers of shares during the whole or any part of such period. If the Board of Directors does not fix a record date for any meeting of the stockholders of the Corporation, the record date for determining stockholders of the Corporation entitled to notice of or to vote at such meeting shall be at the close of business on the day next preceding the day on which notice is given, or, if in accordance with Section 7.2 of these Bylaws notice is waived, at the close of business on the day next preceding the day on which the meeting is held. 2.5 QUORUM. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders of the Corporation for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders of the Corporation, the stockholders of the Corporation entitled to vote at such meeting, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement -2- at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. 2.6 VOTING BY STOCKHOLDERS. (a) VOTING ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS. With respect to any matters as to which no other voting requirement is specified by the DGCL, the Certificate of Incorporation or these Amended and Restated Bylaws (these "Bylaws"), the affirmative vote required for stockholder action shall be that of a majority of the shares present in person or represented by proxy at the meeting (as counted for purposes of determining the existence of a quorum at the meeting). In the case of a matter submitted for a vote of the stockholders of the Corporation as to which a stockholder approval requirement is applicable under the stockholder approval policy of any stock exchange or quotation system on which the capital stock of the Corporation is traded or quoted, the requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any provision of the Internal Revenue Code, in each case for which no higher voting requirement is specified by the DGCL, the Restated Certificate of Incorporation or these Bylaws, the vote required for approval shall be the requisite vote specified in such stockholder approval policy, the Exchange Act or Internal Revenue Code provision, as the case may be (or the highest such requirement if more than one is applicable). For the approval of the appointment of independent public accountants (if submitted for a vote of the stockholders of the Corporation), the vote required for approval shall be a majority of the votes cast on the matter. (b) VOTING IN THE ELECTION OF DIRECTORS. Unless otherwise provided in the Certificate of Incorporation or these Bylaws in accordance with the DGCL, directors shall be elected by a plurality of the votes cast by the holders of outstanding shares of capital stock of the Corporation entitled to vote in the election of directors at a meeting of stockholders at which a quorum is present. (c) OTHER. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders of the Corporation, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. 2.7 PROXIES. Each stockholder of the Corporation entitled to vote at a meeting of stockholders of the Corporation may authorize another person or persons to act for him by proxy. Proxies for use at any meeting of stockholders of the Corporation shall be filed with the Secretary, or such other officer as the Board of Directors may from time to time determine by resolution, before or at the time of the meeting. All proxies shall be received and taken charge of and all ballots shall be received and canvassed by the secretary of the meeting who shall decide all questions relating to -3- the qualification of voters, the validity of the proxies and the acceptance or rejection of votes, unless an inspector or inspectors shall have been appointed by the chairman of the meeting, in which event such inspector or inspectors shall decide all such questions. 2.8 NO SHAREHOLDER ACTION WITHOUT MEETING. From and after the first date as of which the Corporation has a class or series of capital stock registered under the Exchange Act, no action required to be taken or that may be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, and the power of the stockholders of the Corporation of the Corporation to consent in writing to the taking of any action by written consent without a meeting is specifically denied, except for action by unanimous written consent, which is expressly allowed. ARTICLE III DIRECTORS 3.1 NUMBER AND ELECTION OF DIRECTORS. The number of directors of the Corporation shall be five, and thereafter such number of directors may be increased or decreased from time to time (but not to a number greater than or less than permitted by the Certificate of Incorporation) by an amendment to these Bylaws. Any director of the Corporation may resign at any time upon written notice to the Corporation. To be effective, such notice of resignation need not be formally accepted by the Board of Directors. A director of the Corporation need not be a stockholder of the Corporation or a resident of the State of Delaware. 3.2. VACANCIES. Newly created directorships resulting from any increase in the authorized number of directors of the Corporation and any vacancies on the Board of Directors resulting from the death, resignation or removal of a director of the Corporation shall be filled by (i) the affirmative vote of at least a majority of the remaining directors then in office, even if such remaining directors of the Corporation constitute less than a quorum or (ii) the affirmative vote of holders of at least a majority of the then outstanding Voting Stock (as defined below), voting together as a single class. The term "Voting Stock" shall mean all outstanding shares of all classes and series of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation, considered as one class; and, if the Corporation shall have shares of Voting Stock entitled to more or less than one vote for any such share, each reference in these Bylaws to a proportion or percentage in voting power of Voting Stock shall be calculated by reference to the portion or percentage of votes entitled to be cast by holders of such shares generally in the election of directors of the Corporation. 3.3. DUTIES AND POWERS. The business, affairs and property of the Corporation shall be managed by or under the directorship of the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these Bylaws authorized or required to be exercised or done by the stockholders of the Corporation. -4- 3.4. MEETINGS. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there be one, or by the President or by any two or more directors of the Corporation. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than 48 hours before the date of the meeting, by telephone, telegram or facsimile on 24 hours' notice or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Unless otherwise required by law, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 3.5. QUORUM. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 3.6. ACTIONS WITHOUT A MEETING. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. 3.7. TELEPHONIC MEETINGS. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 3.7 shall constitute presence in person at such meeting. 3.8. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors of the Corporation as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting -5- in place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. 3.9. REIMBURSEMENT OF EXPENSES. The directors of the Corporation shall be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary or other consideration as director. No such reimbursement shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees shall be allowed like reimbursement for attending committee meetings. 3.10. PROTECTION FOR RELIANCE. Any member of the Board of Directors, or any member of any committee designated by the Board of Directors, shall, in the performance of his duties, be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. ARTICLE IV OFFICERS 4.1. GENERAL. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President and a Secretary. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors, a Chief Financial Officer, a Treasurer and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. 4.2. ELECTION. The Board of Directors shall elect or appoint the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are elected and qualified, or until the earlier of their resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors. -6- 4.3. DUTIES. The officers of the Corporation shall have such powers and duties as generally pertain to their offices, except as modified herein or by the Board of Directors, as well as such powers and duties as from time to time may be conferred by the Board of Directors. 4.4. CHAIRMAN. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation and, subject to the control of the Board of Directors, shall have general supervision and control of the business, affairs and properties of the Corporation and its general officers. The Chairman shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. The Chairman shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by the Board of Directors. 4.5. PRESIDENT. The President shall, subject to the control of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. If there is no Chairman of the Board, the President shall be the Chief Executive Officer of the Corporation; otherwise, he shall be the Chief Operating Officer of the Corporation and shall execute all bonds, mortgages, contracts and other instruments of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these Bylaws, the Board of Directors, the Chairman of the Board or the President. The President shall preside at all meetings of the stockholders of the Corporation and the Board of Directors, unless the Board of Directors has appointed a Chairman of the Board, who would preside at all such meetings. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these Bylaws or by the Board of Directors. 4.6. VICE PRESIDENTS. At the request of the President or in his absence or in the event of his inability or refusal to act, any Vice President may perform the duties of the President and, when so acting, such officer shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. If there is no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President and, when so acting, such officer shall have all the powers of and be subject to all the restrictions upon the President. 4.7. SECRETARY AND ASSISTANT SECRETARIES. The Secretary or an Assistant Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders of the Corporation and record all the proceedings at such meetings in a book or books to be kept for that purpose, and the Secretary or an Assistant Secretary shall also perform similar duties for the standing committees when required. The Secretary or an Assistant Secretary shall give, or cause to be given, notice of all meetings of the stockholders of the Corporation and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, the President or any Vice President. If a Secretary or Assistant Secretary -7- shall be unable or shall refuse to cause to be given notice of any meeting of the stockholders of the Corporation or any special meeting of the Board of Directors, then either the Board of Directors, the Chairman of the Board, the President or any Vice President may choose another officer to cause such notice to be given. The Secretary or an Assistant Secretary shall see that all corporate books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. 4.8. TREASURER AND ASSISTANT TREASURERS. The Treasurer or an Assistant Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors, the Chairman of the Board, the President or any Vice President. The Treasurer or an Assistant Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board, the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer or Assistant Treasurer and of the financial condition of the Corporation. 4.9. REMOVAL. Any officer may be removed, with or without cause, by the Board of Directors. Any such removal shall be without prejudice to any rights such officer may have pursuant to any employment contract he may have with the Corporation. Any vacancy in an office may be filled by the Board of Directors. 4.10. VOTING SECURITIES OWNED BY THE CORPORATION. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name and on behalf of the Corporation by the Chairman of the Board, the President or any Vice President, and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time, confer like powers upon any other person or persons. ARTICLE V STOCK 5.1. FORM OF CERTIFICATES. The shares of stock of the Corporation shall be represented by certificates of stock, signed in the name of the Corporation (i) by the Chairman of the Board, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares of stock in the Corporation owned by the holder named in the certificate. -8- 5.2. SIGNATURES. Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 5.3. LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the delivery to the Secretary of the Corporation of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 5.4. TRANSFERS. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be cancelled before a new certificate shall be issued. 5.5. BENEFICIAL OWNERSHIP. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 5.6. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting thereof, and may be paid in cash, in property or in shares of capital stock of the Corporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. -9- ARTICLE VI INDEMNIFICATION 6.1 GENERAL. The Corporation shall indemnify and hold harmless an Indemnitee (as this and all other capitalized words used in this Article VI not previously defined in these Bylaws are defined in Section 6.6 hereof) from and against any and all judgments, penalties, fines (including excise taxes), amounts paid in settlement and, subject to Section 6.2, Expenses (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties, amounts paid in settlement or Expenses) arising out of any event or occurrence related to the fact that Indemnitee is or was a director or officer of the Corporation. The Corporation may, but shall not be required to, indemnify and hold harmless an Indemnitee from and against any and all judgments, penalties, fines (including excise taxes), amounts paid in settlement and, subject to Section 6.2, Expenses (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties, amounts paid in settlement or Expenses) arising out of any event or occurrence related to the fact that Indemnitee is or was an employee or agent of the Corporation or is or was serving in another Corporate Status. 6.2 EXPENSES. If Indemnitee is, by reason of his serving as a director, officer, employee or agent of the Corporation, a party to and is successful, on the merits or otherwise, in any Proceeding, the Corporation shall indemnify him against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to such Matter. The termination of any Matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Matter. If Indemnitee is, by reason of any Corporate Status other than his serving as a director, officer, employee or agent of the Corporation, a party to and is successful, on the merits or otherwise, in any Proceeding, the Corporation may, but shall not be required to, indemnify him against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. To the extent that the Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding, the Corporation may, but shall not be required to, indemnify him against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 6.3 ADVANCES. In the event of any threatened or pending Proceeding in which Indemnitee is a party or is involved and that may give rise to a right of indemnification under this Article VI, following written request to the Corporation by Indemnitee, the Corporation may, but shall not be required to, pay to Indemnitee amounts to cover Expenses reasonably incurred by Indemnitee in such Proceeding in advance of its final disposition upon the receipt by the Corporation of (i) a written undertaking executed by or on behalf of Indemnitee providing that Indemnitee will repay the advance if it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Corporation as provided in these Bylaws and (ii) satisfactory evidence as to the amount of such Expenses. -10- 6.4 REQUEST FOR INDEMNIFICATION. To request indemnification, Indemnitee shall submit to the Secretary of the Corporation a written claim or request. Such written claim or request shall contain sufficient information to reasonably inform the Corporation about the nature and extent of the indemnification or advance sought by Indemnitee. The Secretary of the Corporation shall promptly advise the Board of Directors of such request. 6.5 NONEXCLUSIVITY OF RIGHTS. This Article VI shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled to under applicable law, the Restated Certificate of Incorporation, these Bylaws, any agreement, a vote of stockholders or a resolution of directors of the Corporation, or otherwise. No amendment, alteration or repeal of this Article VI or any provision hereof shall be effective as to any Indemnitee for acts, events and circumstances that occurred, in whole or in part, before such amendment, alteration or repeal. The provisions of this Article VI shall continue as to an Indemnitee whose Corporate Status has ceased for any reason and shall inure to the benefit of his heirs, executors and administrators. Neither the provisions of this Article VI nor those of any agreement to which the Corporation is a party shall be deemed to preclude the indemnification of any person who is not specified in this Article VI as having the potential to receive indemnification or is not a party to any such agreement, but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL. 6.6 INSURANCE AND SUBROGATION. To the extent the Corporation maintains an insurance policy or policies providing liability insurance for directors or officers of the Corporation, an Indemnitee who is a director or officer of the Corporation shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of coverage available for any such director or officer under such policy or policies. In the event of any payment hereunder, the Corporation shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. The Corporation shall not be liable under this Article VI to make any payment of amounts otherwise indemnifiable hereunder if, and to the extent that, Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 6.7 SEVERABILITY. If any provision or provisions of this Article VI shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article VI shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 6.8 CERTAIN PERSONS NOT ENTITLED TO INDEMNIFICATION. Notwithstanding any other provision of this Article VI, no person shall be entitled to indemnification or advancement of Expenses under this Article VI with respect to any Proceeding, or any Matter therein, brought or made by such person against the Corporation. -11- 6.9 DEFINITIONS. For purposes of this Article VI: (a) "CORPORATE STATUS" describes the status of a person who is or was a director, officer, employee or agent of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the written request of the Corporation. For purposes of this Agreement, "serving at the written request of the Corporation" includes any service by Indemnitee which imposes duties on, or involves services by, Indemnitee with respect to any employee benefit plan or its participants or beneficiaries. (b) "EXPENSES" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding. (c) "INDEMNITEE" includes any person who is, or is threatened to be made, a witness in or a party to any Proceeding as described in Section 6.1 or 6.2 hereof by reason of his Corporate Status. (d) "MATTER" is a claim, a material issue or a substantial request for relief. (e) "PROCEEDING" includes any action, suit, alternate dispute resolution mechanism, hearing or any other proceeding, whether civil, criminal, administrative, arbitrative, investigative or mediative, any appeal in any such action, suit, alternate dispute resolution mechanism, hearing or other proceeding and any inquiry or investigation that could lead to any such action, suit, alternate dispute resolution mechanism, hearing or other proceeding, except one initiated by an Indemnitee to enforce his rights under this Article VI. ARTICLE VII NOTICES 7.1. NOTICES. Whenever written notice is required by law, the Certificate of Incorporation or these Bylaws to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex, facsimile or cable. -12- 7.2. WAIVER OF NOTICE. Whenever any notice is required by law, the Certificate of Incorporation or these Bylaws to be given to any director, member of a committee or stockholder of the Corporation, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VIII MISCELLANEOUS 8.1. FISCAL YEAR. The fiscal year of the Corporation shall end on December 31 of each year. 8.2. AMENDMENTS. These Bylaws may be altered, amended or repealed, in whole or in part, or new Bylaws may be adopted, by the stockholders of the Corporation or by the Board of Directors as provided in the Certificate of Incorporation. -13- EX-10.4 4 EXHIBIT 10.4 STOCKHOLDERS AGREEMENT BY AND AMONG CERTAIN STOCKHOLDERS OF CORNELL CORRECTIONS, INC. OCTOBER 8, 1996 STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT, dated as of October 8, 1996, by and among(a) David M. Cornell (including his guardian, the executor of his estate or other personal representative, "Cornell"), (b) Charterhouse Equity Partners II, L.P. and Chef Nominees Limited (collectively, "Charterhouse Group"), and (c) Concord Partners; Concord Partners II, L.P.; Concord Partners Japan Limited; Dillon, Read & Co., as Agent; Lexington Partners III, L.P. and Lexington Partners IV, L.P. (collectively, "Dillon Read Group"). Cornell, Charterhouse Group, and Dillon Read Group are also collectively referred to herein as the "Holders." W I T N E S S E T H: In consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree, effective as of the Effective Date (as defined in Section 3 below), as follows: Section 1. DEFINITIONS. The following shall have (unless otherwise provided elsewhere in this Agreement) the following respective meanings (such meanings being equally applicable to both the singular and plural form of the terms defined). "AGREEMENT" means this Stockholders Agreement, including all amendments and modifications hereof, supplements hereto, and any exhibits or schedules to any of the foregoing, and shall refer to this Stockholders Agreement as the same may be in effect at the time such reference becomes operative. "COMMON STOCK" means the Common Stock, par value $.001 per share, of the Company. Section 2. CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS. (a) The Company has previously furnished to the Holders copies of the Restated Certificate of Incorporation dated September 30, 1996 of the Company and the Amended and Restated Bylaws dated October 1, 1996 of the Company (collectively, the "Charter Documents"). From and after the date hereof, each Holder shall vote all shares of Common Stock beneficially held by him or it and which he or it has the power to vote (including any shares of Common Stock hereafter acquired or owned by such Holder), at any regular or special meeting of stockholders of the Company and shall otherwise take all actions necessary to ensure that the Charter Documents do not, at any time, conflict with the provisions of this Agreement. 1 (b) From and after the date hereof, each Holder shall vote all shares of Common Stock beneficially held by him or it and which he or it has the power to vote (including any shares of Common Stock hereafter acquired or owned by such Holder), at any regular or special meeting of stockholders of the Company called for the purpose of filling positions on the Board of Directors of the Company and shall use its best efforts to otherwise take all actions necessary to ensure that the following members are elected to the Board of Directors of the Company: (i) one individual (who may be Cornell) designated by Cornell (the "Cornell Nominee"), (ii) one individual designated by Charterhouse Group (the "Charterhouse Nominee"), and (iii) one individual designated by Dillon Read Group (the "Dillon Read Nominee"). (c) If, prior to his or her election to the Board of Directors of the Company pursuant to Section 2(b) hereof, any Cornell Nominee, Charterhouse Nominee or Dillon Read Nominee shall be unable or unwilling to serve as a director of the Company, the entity designating such nominee shall be entitled to nominate a replacement who shall then be the Cornell Nominee, Charterhouse Nominee or Dillon Read Nominee, as the case may be, for the purposes of this Section 2. If, following election to the Board of Directors of the Company pursuant to Section 2(b) hereof, any Cornell Nominee, Charterhouse Nominee, or Dillon Read Nominee shall resign or be removed or be unable to serve for any reason prior to the expiration of his or her term as a director of the Company, then the person or entity designating such nominee may, at any time thereafter, notify the other Holders in writing of a replacement, and the remaining Cornell Nominee, Charterhouse Nominee and Dillon Read Nominee, as applicable, and Cornell, Charterhouse Group and Dillon Read Group, shall use its best efforts to take all actions necessary to ensure the election to the Board of Directors of the Company of such replacement nominee to fill the unexpired term of the prior nominee. (d) Each Holder hereby agrees to use such Holder's best efforts to call, or cause the appropriate officers and directors of the Company to call, a special or annual meeting of stockholders of the Company and to vote all of the shares of Common Stock owned or controlled by such Holder for the removal (with or without cause) of any nominee designated and elected pursuant to Section 2(b) hereof if the person or entity designating such nominee shall have given written notice to each of the other Holders of its desire to have such nominee removed. (e) Each Holder hereby agrees that, except as provided in Section 2(d) hereof, he or it shall not vote to remove any director who is a Cornell Nominee, Charterhouse Nominee or Dillon Read Nominee without Cause (as such term is hereinafter defined). For the purposes of this Section 2(e) only, "Cause" shall mean (i) the commission by a director of an act of fraud or embezzlement against the Company or any of its subsidiaries or (ii) a conviction for a felony (or a plea of NOLO CONTENDERE thereto) or guilty plea of such director with respect to a felony. (f) In order to effectuate the provisions of this Section 2, the Holders hereby agree that when any action or vote is required to be taken by such Holders pursuant to this Agreement, such Holders shall use their respective best efforts to call, or cause the appropriate 2 officers and directors of the Company to call, a special or annual meeting of stockholders of the Company, as the case may be, to effectuate such stockholder action. Section 3. EFFECTIVE TIME. This Agreement shall become effective only upon the closing date (the "Effective Date") of an initial public offering of shares of Common Stock by the Company pursuant to a registration statement that shall have become effective under the Securities Act of 1933, as amended. If the Effective Date has not occurred prior to December 31, 1996, this Agreement shall become null and void and be of no force or effect. Section 4. TERMINATION. (a) This Agreement will terminate upon the first to occur of (i) four years from the Effective Date or (ii) the Holders collectively owning less than 25% of the outstanding shares of Common Stock of the Company. (b) This Agreement will terminate as to any Holder upon such Holder owning less than 5% of the outstanding shares of Common Stock of the Company. Section 5. SPECIFIC PERFORMANCE. Each of the Holders acknowledges and agrees that in the event of any breach of this Agreement, the non-breaching party or parties would be irreparably harmed and could not be made whole by monetary damages. It is accordingly agreed that the Holders shall waive the defense in any action for specific performance that a remedy at law would be adequate and that the Holders, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to compel specific performance of this Agreement. Section 6. MISCELLANEOUS. (a) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not control or affect the meaning or construction of any provisions hereof. (b) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein, and there are no restrictions, promises, representations, warranties, covenants, or undertakings with respect to the subject matter hereof, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties hereto with respect to the subject matter hereof except to the extent expressly set forth herein. (c) NOTICES. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Agreement shall be sufficiently given or made if in writing and (i) delivered in person with receipt acknowledged, (ii) sent by registered or certified mail, return receipt requested, postage prepaid, (iii) sent by overnight courier with guaranteed next day delivery or (iv) sent by telex or telecopier to the party to whom directed at the following address: 3 (i) If to Cornell, to him at: David M. Cornell Cornell Corrections, Inc. 4801 Woodway Suite 400W Houston, Texas 77056 Fax: (713) 623-2853 (ii) If to any Charterhouse Group entity, to it at: Charterhouse Equity Partners II, L.P. c/o Charter Group International, Inc. 535 Madison Avenue New York, NY 10022-4299 Attention: Richard T. Henshaw Fax: (212) 750-9704 (iii) If to any Dillon Read Group entity, to it at: Dillon, Read & Co. Inc. 535 Madison Avenue New York, New York 10022 Attention: Peter Leidel Fax: (212) 308-5107 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, three (3) business days after the same shall have been deposited in the United States mail, one business day after sent by overnight courier or on the day telexed or telecopied. (d) APPLICABLE LAW. The laws of the State of Delaware shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under applicable principles of conflicts of laws. (e) SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality or enforceability of this Agreement, 4 including any provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. (f) SUCCESSOR, ASSIGNS, TRANSFEREES. The provisions of this Agreement shall be binding upon and accrue to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. (g) AMENDMENTS; WAIVERS. This Agreement may not be amended, modified or supplemented and no waivers of or consent to departures from the provisions hereof may be given unless consented to in writing by the Charterhouse Group, Dillon Read Group and Cornell. (h) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same Agreement. 5 IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement as of the date first above written. DAVID M. CORNELL /S/ DAVID M. CORNELL CHARTERHOUSE EQUITY PARTNERS II, L.P. By: Chusa Equity Investors II, L.P., general partner By: Charterhouse Equity II, Inc., general partner By: /S/ RICHARD T. HENSHAW III Title: CHEF NOMINEES LIMITED By: Charterhouse Group International Inc., Attorney-in-fact By: /S/ RICHARD T. HENSHAW III Title: CONCORD PARTNERS By: /S/ PETER A. LEIDEL Title: CONCORD PARTNERS II, L.P. By: /S/ PETER A. LEIDEL Title: 6 CONCORD PARTNERS JAPAN LIMITED By: /S/ PETER A. LEIDEL Title: DILLON, READ & CO., INC., as Agent By: /S/ DAVID W. NIEMIEC Title: LEXINGTON PARTNERS III, L.P. By: /S/ DAVID W. NIEMIEC Title: LEXINGTON PARTNERS IV, L.P. By: /S/ DAVID W. NIEMIEC Title: 7 EX-11.1 5 EXHIBIT 11.1 Cornell Corrections, Inc. Statement Re: Computation of Per Share Earnings (in thousands except per share amounts)
Year Ended December 31, 1994 1995 1996 ------- ------- ------- Net loss ........................................................................ $ (600) $ (989) $(2,379) ======= ======= ======= Shares used in computing loss per share: Weighted average common shares and common share equivalents .................. 2,923 3,188 4,228 Less treasury shares ......................................................... -- (93) (555) Effect of shares issuable under stock options and warrants based on the treasury stock method ............................ 888 888 793 ------- ------- ------- 3,811 3,983 4,466 ------- ------- ------- Loss per share ................................................................. $ (0.16) $ (0.25) $ (0.53) ======= ======= =======
EX-21.1 6 EXHIBIT 21.1 SUBSIDIARIES OF CORNELL CORRECTIONS, INC. (AS OF DECEMBER 31, 1996)
PERCENTAGE OF VOTING PERCENTAGE OF SECURITIES OWNED BY VOTING SECURITIES A SUBSIDIARY OWNED BY CORNELL OF CORNELL CORRECTIONS, INC. CORRECTIONS, INC. ----------------- ------------------- Cornell Corrections of North America...... 100% The Cornell Cox Group, L.P................ 99% 1% Cornell Corrections Management, Inc....... 100% Cornell Corrections Consulting, Inc.... 100% International Self Help Services, Inc.. 100% Cornell Corrections of Texas, Inc...... 100% Cornell Corrections of California, Inc. 100% Cornell Corrections of Rhode Island, Inc. 100%
EX-23.1 7 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 7, 1997, included herein in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 No. 333-19127 and 333-19145 filed on December 31, 1996. ARTHUR ANDERSEN LLP Houston, Texas March 28, 1997 EX-24.1 8 EXHIBIT 24.1 POWER OF ATTORNEY WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation ("Company"), intends to file with the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("Act"), an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents relating to the said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint DAVID M. CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of the said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1997. /s/RICHARD T. HENSHAW III RICHARD T. HENSHAW III POWER OF ATTORNEY WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation ("Company"), intends to file with the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("Act"), an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents relating to the said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint DAVID M. CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of the said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1997. /s/CAMPBELL A. GRIFFIN, JR. CAMPBELL A. GRIFFIN, JR. POWER OF ATTORNEY WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation ("Company"), intends to file with the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("Act"), an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents relating to the said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint DAVID M. CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of the said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1997. /s/TUCKER TAYLOR TUCKER TAYLOR POWER OF ATTORNEY WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation ("Company"), intends to file with the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("Act"), an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents relating to the said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint DAVID M. CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of the said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1997. /s/PETER A. LEIDEL PETER A. LEIDEL POWER OF ATTORNEY WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation ("Company"), intends to file with the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("Act"), an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents relating to the said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint DAVID M. CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of the said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1997. /S/ RICHARD T. HENSHAW III RICHARD T. HENSHAW III POWER OF ATTORNEY WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation ("Company"), intends to file with the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("Act"), an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents relating to the said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint DAVID M. CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of the said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1997. /S/ CAMPBELL A. GRIFFIN, JR. CAMPBELL A. GRIFFIN, JR. POWER OF ATTORNEY WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation ("Company"), intends to file with the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("Act"), an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents relating to the said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint DAVID M. CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of the said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1997. /S/ TUCKER TAYLOR TUCKER TAYLOR POWER OF ATTORNEY WHEREAS, CORNELL CORRECTIONS, INC., a Delaware corporation ("Company"), intends to file with the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("Act"), an Annual Report on Form 10-K for the fiscal year ended December 31, 1996, as prescribed by the Commission pursuant to the Act and the rules and regulations of the Commission promulgated thereunder, with any and all exhibits and other documents relating to the said Annual Report; NOW, THEREFORE, the undersigned in his capacity as a director or officer, or both, as the case may be, of the Company, does hereby appoint DAVID M. CORNELL and STEVEN W. LOGAN and each of them severally, his true and lawful attorney or attorneys with power to act with or without the others, and with full power of substitution and resubstitution, to execute in his name, place and stead in his capacity as a director or officer, or both, as the case may be, of the Company, said Annual Report, any and all amendments to said Annual Report and all instruments as said attorneys or any of them shall deem necessary or incidental in connection therewith and to file the same with the Commission. Each of the said attorneys shall have full power and authority to do and perform in the name and on behalf of the undersigned in any and all capacities every act whatsoever necessary or desirable as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this instrument on this 25th day of March, 1997. /S/ PETER A. LEIDEL PETER A. LEIDEL EX-27.1 9
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 4,874 0 4,976 0 0 12,433 27,326 (1,252) 46,824 4,686 462 0 0 7 41,044 46,824 31,877 32,327 0 31,988 0 0 2,810 (2,304) 75 (2,379) 0 0 0 (2,379) (0.53) 0
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