<Page>
PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(3)
(To Prospectus Dated November 24, 1999) Registration Statement
File No. 333-91211
3,000,000 SHARES
[LOGO]
COMMON STOCK
- ----------------------------------------------------------------------
We are offering 3,000,000 shares of common stock. Our common stock is listed on
the New York Stock Exchange under the symbol "CRN." The last reported sale price
of our common stock on November 26, 2001 was $15.00 per share.
INVESTING IN THE SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 5 OF THE ACCOMPANYING
PROSPECTUS.
<Table>
<Caption>
PER
SHARE TOTAL
-------- -----------
Public Offering Price....................................... $14.00 $42,000,000
Underwriting Discounts and Commissions...................... $ 0.98 $ 2,940,000
Proceeds to Cornell (before expenses)....................... $13.02 $39,060,000
</Table>
We have granted the underwriters a 30-day option to purchase up to 450,000
additional shares of the common stock on the same terms and conditions as set
forth above to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about November 30, 2001.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
JEFFERIES & COMPANY, INC.
FIRST ANALYSIS SECURITIES CORPORATION
November 27, 2001
INSIDE FRONT COVER
We are a leading provider of privatized correctional, treatment and education
services outsourced by federal, state adn local government agencies. We
provide a diversified portfolio of services for adults and juveniles,
including:
o incarceration and detention:
o transition from incarceration;
o drug and alcohol treatment programs;
o behavioral rehabilitation and treatment; and
o K-12 education.
[COLLAGE OF PHOTOS OF SERVICES AND FACILITIES]
<Page>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<Table>
<Caption>
PAGE
--------
About this Prospectus Supplement...... S-2
Prospectus Supplement Summary......... S-3
Risk Factors.......................... S-10
Note on Forward-Looking Statements.... S-16
Use of Proceeds....................... S-17
Dividend Policy....................... S-17
Price Range of Common Stock........... S-17
Capitalization........................ S-18
Selected Consolidated Financial
Data................................ S-19
</Table>
<Table>
<Caption>
PAGE
--------
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-21
Business.............................. S-34
Management............................ S-46
Principal Stockholders................ S-49
Underwriting.......................... S-51
Legal Matters......................... S-53
Experts............................... S-54
Where You Can Find More Information... S-54
</Table>
PROSPECTUS
<Table>
<Caption>
PAGE
--------
About this Prospectus................. 2
Where You Can Find More Information... 3
Cornell Corrections................... 4
Consolidated Ratios of Earnings to
Fixed Charges....................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 11
</Table>
<Table>
<Caption>
PAGE
--------
Description of Debt Securities........ 12
Description of Common Stock........... 19
Description of Preferred Stock........ 23
Plan of Distribution.................. 24
Legal Matters......................... 25
Experts............................... 25
</Table>
------------------------
This prospectus supplement and the accompanying prospectus incorporate
important business and financial information about us and our subsidiaries that
is not included in or delivered with these documents. This information is
available without charge to security holders upon written or oral request.
You should rely only on the information contained in this document or to
which we have referred you. We and the underwriters have not authorized anyone
to provide you with information that is different. This document may only be
used where it is legal to sell these securities. The information in this
document may only be accurate on the date of this document, regardless of the
time of delivery of this document or any sale of common stock. In this
prospectus supplement, "Cornell Companies," "Cornell," "we," "us" and "our"
refer to Cornell Companies, Inc. and its subsidiaries, predecessors and acquired
businesses unless the context requires otherwise.
S-1
<Page>
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement is a supplement to the accompanying prospectus
that is also a part of this document. This prospectus supplement and the
accompanying prospectus are part of a registration statement that we filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under the shelf registration process, we may sell any combination of the
securities described in the accompanying prospectus up to a total dollar amount
of $350,000,000, of which this offering is a part. In this prospectus
supplement, we provide you with specific information about the terms of this
offering. Both this prospectus supplement and the accompanying prospectus
include important information about us, our common stock and other information
you should know before investing in our common stock. This prospectus supplement
also adds, updates and changes information contained in the accompanying
prospectus. To the extent that any statement that we make in this prospectus
supplement is inconsistent with the statements made in the accompanying
prospectus, the statements made in the accompanying prospectus are deemed
modified or superseded by the statements made in this prospectus supplement. For
example, we changed the name of our company on May 25, 2000 from Cornell
Corrections, Inc. to Cornell Companies, Inc. The accompanying prospectus, which
is dated November 24, 1999, reflects our prior name. You should read both this
prospectus supplement and the accompanying prospectus as well as the additional
information described under the heading "Where You Can Find More Information"
beginning on page S-54 of this prospectus supplement before investing in our
common stock.
In addition, we have provided certain information about the industry in
which we operate in this prospectus supplement under the captions "Prospectus
Supplement Summary" and "Business." Unless otherwise indicated, the data and
statistics contained in those sections are based on internal or industry sources
that we believe are reliable.
S-2
<Page>
PROSPECTUS SUPPLEMENT SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING US AND THE SHARES OF COMMON STOCK BEING SOLD IN THIS
OFFERING AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS
APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS. YOU SHOULD ALSO READ CAREFULLY THE OTHER
INFORMATION ABOUT US THAT IS INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
OUR COMPANY
We are a leading provider of privatized correctional, treatment and
educational services outsourced by federal, state and local government agencies.
We provide a diversified portfolio of services for adults and juveniles,
including:
- incarceration and detention;
- transition from incarceration;
- drug and alcohol treatment programs;
- behavioral rehabilitation and treatment; and
- K-12 education.
We provide these essential services across the United States through our 69
facilities, in operation or under development, with a total service capacity of
15,241. We believe that our innovative programs and services have put us at the
forefront of our industry by measuring and demonstrating superior results in
meeting the public policy goals of community safety and recidivism reduction.
Our services address a total market size that we believe exceeds
$50 billion, of which less than 10% is currently privatized. The total market is
expected to demonstrate consistent growth over the next decade primarily driven
by overcrowded and aging government facilities, increasing emphasis on
treatment, rehabilitation and education and the growing demographic of the 14 to
24 year-old at-risk population, driven by the "Baby Boom Echo." We also expect
the size of the private market to grow as a result of governments' demonstrated
need to rapidly activate new programs and facilities, reduce costs, increase
accountability and improve overall quality of service.
Our financial performance is characterized by consistent growth, stable and
recurring revenue streams and a general resistance to economic weakness. From
1998 to 2000, our revenues grew at a compound annual growth rate of
approximately 36%. We expect continued revenue growth in the future driven by
new contract awards, existing facility expansions and accretive fill-in
acquisitions. The size of our target markets and diversity of our service
offering help to ensure a high degree of revenue stability in a range of
operating environments. Typically, our operating contracts are renewed and are
often expanded. Additionally, our business is less vulnerable to changing
economic cycles and typically outperforms other industries in periods of
economic weakness based on higher incarceration rates, a more plentiful labor
pool and the essential nature of the services we provide.
COMPETITIVE STRENGTHS
We believe we are well-positioned to capitalize on the favorable trends in
our industry and attribute our strong market position to the following
competitive strengths:
PROVEN TRACK RECORD AND ESTABLISHED INDUSTRY REPUTATION. With operations
dating back to 1973, we have been able to demonstrate, through diligent tracking
and measurement, our history of delivering superior results. This long track
record of proven performance distinguishes us and provides a significant
competitive edge as quality of services, safety and reliability have become key
determinants for new contract awards. Our strong industry reputation is based on
the ability of our innovative programs to meet the goals of community safety and
recidivism reduction by emphasizing education and rehabilitation. To solidify
our integral role in shaping our industry and to stay at the forefront of
S-3
<Page>
business trends, we led the formation of the principal industry trade body and
continue to spearhead major industry initiatives.
FULL-SERVICE SOLUTIONS PROVIDER. Our portfolio of services targets both
adults and juveniles and encompasses incarceration and detention, transition
from incarceration, drug and alcohol treatment programs, behavioral
rehabilitation and treatment, and K-12 education. This multifaceted portfolio
increases the total addressable market opportunity available to us, estimated at
more than $50 billion, and diversifies our revenue stream. Additionally, by
bundling our services into a more complete solution we are able to provide a
differentiated, higher value-added service offering to contracting government
agencies. Furthermore, the breadth of our services allows us to improve the
utilization of our facilities and increase our operating leverage.
FINANCIAL FLEXIBILITY. Immediately following this offering, we expect to
have approximately $48 million of cash, borrowing availability of up to
$45 million on an undrawn credit facility and a virtually debt-free balance
sheet. We believe this financial strength significantly enhances our competitive
position for new contract awards and enables us to further capitalize on the
substantial growth opportunities in our industry. Our ability to fund continued
growth is augmented by our sale and leaseback transaction completed in August
2001. This landmark transaction allowed us to reduce leverage while retaining
long-term control of our assets at attractive, non-escalating rental rates and
provides the flexibility to use the same vehicle for new facilities and
contracts.
LONG-TERM CONTROL OF OPERATING ASSETS. We control, through outright
ownership or long-term leases, operating facilities representing a large
majority of our revenues. We believe that such control increases the likelihood
of contract renewal, allows us to expand existing facilities and capture higher
margins, and enhances our ability to win new contracts. In addition, long-term
control of our operating facilities allows us to better control our operating
margins and reduce cost escalation pressures.
BUSINESS STRATEGY
We believe that our long-standing reputation for superior performance, broad
portfolio of services and strong financial profile provide a solid foundation
for increased growth and profitability. Furthermore, we have achieved superior
results from our commitment to humane rehabilitation and educational opportunity
for the individuals in our residential and non-residential community-based
programs--the "Cornell Difference." To capitalize on the opportunities in our
industry, our business strategy focuses on the following areas:
WIN NEW CONTRACTS. We aggressively pursue new contracts that leverage our
existing infrastructure and capabilities and meet our stringent profitability
criteria. We focus on "take-or-pay" contracts, which provide a fixed minimum
revenue stream regardless of occupancy and thereby add increased stability and
predictability to our revenue stream. Since the beginning of 1999, we have won
11 contracts that are expected to contribute more than $60 million in annualized
recurring revenues when all facilities commence operations. Approximately 96% of
these new contract revenues will be from take-or-pay contracts. As of
October 15, 2001, we had submitted proposals to the Federal Bureau of Prisons,
or FBOP, for four contracts with an aggregate capacity of 6,000 beds. All of
these FBOP proposals are for take-or-pay contracts. We believe that our improved
financial flexibility with the completion of the 2001 Sale and Leaseback
Transaction described below and this offering will enhance our ability to win
and service new contracts.
EXPAND EXISTING FACILITIES AND IMPROVE UTILIZATION. Adding capacity to
existing facilities to meet increased demand enables us to generate incremental
revenues at significantly higher margins and with less capital than new
construction. Since 1998, we have completed six facility expansions that are
expected to contribute more than $45 million in annualized recurring revenues.
The breadth of our complementary service portfolio has been instrumental in
allowing us to keep our capacity utilization high (approximately 96% at the end
of the third quarter of 2001), which creates opportunities to
S-4
<Page>
expand existing facilities. We will continue to evaluate expansion opportunities
at our facilities to maximize profitability and return on invested capital.
MAKE ACCRETIVE FILL-IN ACQUISITIONS AND DIVERSIFY OUR SERVICE
PORTFOLIO. Acquisitions provide us with the opportunity to diversify our
current service offering and add new service lines. We augmented our strong
foundation in treatment and rehabilitation with our 1994 acquisition of one of
the largest pre-release operators in the country. We expanded our adult
incarceration services through our acquisition in 1996 of one of the nation's
leading private operators. To capitalize on the rapidly growing juvenile market,
we acquired one of the nation's premier juvenile treatment and education
companies in 1997. Anticipating today's movement toward treatment and
rehabilitation, we acquired one of the leading drug and alcohol and behavioral
health operators in 1999. We will continue to selectively evaluate accretive
acquisition opportunities and add complementary services to our offering mix to
increase our growth opportunities and diversify our revenue stream.
AGGRESSIVELY UTILIZE OUR RESEARCH CAPABILITIES. Research gives us the
ability to measure and benchmark our operating performance and allows us to
demonstrate our accomplishments when preparing a proposal in response to a
government request. We believe that we have the most comprehensive system for
measuring programs and operating performance in our industry. Our dedicated
research and evaluation department applies behavioral sciences and utilizes
technology to evaluate programs, identify trends and recommend solutions. We
will continue to augment our research capabilities and refine our reporting
processes to win additional contracts and manage existing contracts more
effectively.
RECENT DEVELOPMENTS
THIRD QUARTER EARNINGS
Our earnings per share for the third quarter of 2001 reflect a 36% increase
in comparable earnings per share for the third quarter of 2000, demonstrating
the benefits we are realizing from new contract awards and per diem rate
increases. Excluding non-recurring extraordinary and special charges that
related primarily to our early retirement of debt after the 2001 Sale and
Leaseback Transaction, moving our development efforts in Alaska to another site
and net start-up costs in the third quarter of 2000, our earnings per share for
the third quarter of 2001 would have been $0.30, reflecting a 36% increase over
the comparable $0.22 earnings per share for the third quarter of 2000. A
reconciliation between our diluted earnings per share for the third quarter
before these non-recurring extraordinary and special charges and on an as
reported basis in 2000 and 2001 is as follows:
<Table>
<Caption>
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------------
2000 2001
-------- --------
Diluted earnings per share
As reported............................................... $0.20 $0.15
Extraordinary and special charges......................... -- 0.15(1)
Start-up costs, net....................................... 0.02 --
----- -----
$0.22 $0.30
===== =====
</Table>
- ------------------------
(1) Includes net-of-tax charges of $479,000 due to the early retirement of
debt, $483,000 due to the write-off of deferred debt issuance costs and
$545,000 due to the write-off of deferred acquisition costs and facility
closing costs.
S-5
<Page>
2001 SALE AND LEASEBACK TRANSACTION
On August 14, 2001, we completed a sale and leaseback transaction, or the
2001 Sale and Leaseback Transaction, involving 11 of our facilities. We sold the
facilities to Municipal Corrections Finance, L.P., and are leasing them back for
an initial period of 20 years, with renewal options for up to approximately 25
additional years. Municipal Corrections Finance, L.P. is a third-party special-
purpose entity with no prior relationship to us.
We received approximately $173.0 million of proceeds from the sale of the
facilities. We used $120.0 million of the proceeds to repay our long-term senior
debt and invested the remaining proceeds of $53.0 million in short-term
securities. As a result, we now have an undrawn $45 million revolving line of
credit. The gain on sale of the facilities of approximately $7.5 million was
deferred and is being amortized over the initial lease term as a reduction to
rental expense.
Our lease payment obligations are fixed for the initial 20-year lease
period. The cash rental payments due under the initial lease term are largely
due in the first 15 years of the lease term, therefore we are capitalizing a
portion of the rental payments as prepaid rent during the first 15 years of the
lease term and amortizing the aggregate lease payments over the 20-year lease
term on a straight-line basis.
CONTACT INFORMATION
Our headquarters are located at 1700 West Loop South, Suite 1500, Houston,
Texas 77027, and our telephone number is (713) 623-0790. Our web address is
www.cornellcompanies.com. Information on our website should not be considered to
be part of this prospectus supplement or the accompanying prospectus.
S-6
<Page>
THE OFFERING
<Table>
Common stock offered by us................... 3,000,000 shares
Common stock to be outstanding after this
offering................................... 12,430,790 shares
Use of proceeds.............................. We plan to use the proceeds received by us in
this offering and existing cash to pay
approximately $40.2 million to retire our
subordinated notes.
New York Stock Exchange symbol............... CRN
</Table>
Except as otherwise indicated, all information in this prospectus supplement
assumes no exercise of the underwriters' over-allotment option.
Except as otherwise indicated, the total number of shares of common stock
outstanding after the offering excludes:
- 1,196,124 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $8.04 per share;
- 200,370 shares of common stock issuable upon exercise of outstanding
warrants at an exercise price of $6.70 per share; and
- 341,812 shares of common stock reserved for issuance under our stock
option plans.
S-7
<Page>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data as of
and for the two years ended December 31, 2000, the three months and the nine
months ended September 30, 2000 and 2001 and as of September 30, 2001. The data
for the two years ended December 31, 2000 is derived from our consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The data for the three months and nine months
ended September 30, 2000 and 2001 is derived from our unaudited consolidated
financial statements. You should read the summary consolidated financial data in
connection with our consolidated financial statements and related notes
incorporated by reference. The following table also sets forth our summary
unaudited pro forma statements of operations data for the year ended
December 31, 2000 and for the nine months ended September 30, 2001, which
reflects our consolidated results of operations as though the 2001 Sale and
Leaseback Transaction and the retirement of our subordinated notes with the net
proceeds from this offering and existing cash had occurred on January 1, 2000.
These pro forma statements are based on certain assumptions and estimates and do
not purport to be indicative of consolidated results that might have been
obtained had this offering, the retirement of our subordinated notes and the
2001 Sale and Leaseback Transaction actually occurred on such dates or of our
future results. The balance sheet data as of September 30, 2001 as adjusted
refects our consolidated financial position as though this offering and the
retirement of our subordinated notes with the net proceeds from this offering
and existing cash had occurred on September 30, 2001.
<Table>
<Caption>
THREE MONTHS
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, ENDED
----------------------------------------- ----------------------------------- SEPTEMBER 30,
PRO FORMA PRO FORMA -------------------
1999(1) 2000 2000 2000 2001 2001 2000 2001
----------- ------------ ------------ -------- -------- ------------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $176,967 $226,050 $226,050 $165,622 $195,106 $195,106 $56,747 $68,733
Operating expenses...... 135,850 175,391 193,037 128,585 156,052 167,062 43,809 56,480
Pre-opening and start-up
expenses.............. 2,929 2,298 2,298 838 3,858 3,858 295 --
Depreciation and
amortization.......... 6,007 7,276 3,973 5,312 5,748 3,298 1,853 1,515
General and
administrative
expenses.............. 9,932 12,024 12,024 9,004 11,390 11,390 3,274 4,312
-------- -------- -------- -------- -------- -------- ------- -------
Income from
operations............ 22,249 29,061 14,718 21,883 18,058(4) 9,498 7,516 6,426(4)
Interest expense,
net(2)................ 8,405 15,554 (10) 11,553 11,102 (219) 4,243 3,170
Net income.............. 5,352(3) 7,969 8,690 6,096 4,395(4) 6,503 1,932 1,442(4)
Earnings per share:
Basic................. $ .57 $ .85 $ .70 $ .65 $ .48(4) $ .53 $ .21 $ .16(4)
Diluted............... $ .55 $ .84 $ .70 $ .64 $ .45(4) $ .51 $ .20 $ .15(4)
Number of shares used to
compute earnings per
share (in thousands):
Basic................. 9,432 9,383 12,383 9,435 9,236 12,236 9,391 9,242
Diluted............... 9,660 9,495 12,495 9,570 9,661 12,661 9,525 9,880
OTHER FINANCIAL DATA:
EBITDAR(5).............. $ 33,614 $ 46,037 $ 46,037 $ 34,070 $ 35,250 $ 35,250 $11,711 $12,849
Net income, as
adjusted(6)........... 8,611 8,005 8,726 6,564 5,766 6,912 2,106 2,949
Diluted earnings per
share, as
adjusted(7)........... $ .89 $ .84 $ .70 $ .69 $ .60 $ .55 $ .22 $ .30
OPERATING DATA:
Total service capacity
(end of period)(8).... 14,845 14,364(9) 14,364(9) 14,364 15,909 15,909 14,364 15,909
Average occupancy
excluding start-up
operations(10)........ 97.0% 96.0% 96.0% 95.5% 96.1% 96.1% 95.4% 95.6%
</Table>
(FOOTNOTES ON FOLLOWING PAGE)
S-8
<Page>
<Table>
<Caption>
SEPTEMBER 30, 2001
---------------------------------------
DECEMBER 31, 2000 ACTUAL AS ADJUSTED
----------------- ------------------ ------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 620 $ 50,402 $ 48,515
Working capital...................................... 29,703 96,885 96,771
Total assets......................................... 291,439 185,693 181,256
Long-term debt....................................... 146,926 38,424 2
Stockholders' equity................................. 104,320 109,221 144,979
</Table>
- ------------------------------
(1) Includes the operations of Interventions-Illinois, acquired in
November 1999.
(2) Interest expense, net is our interest expense, net of interest income.
(3) In January 1999, we recorded a net-of-tax charge of $3.0 million for the
cumulative effect of a change in accounting principle related to start-up
costs.
(4) In the third quarter of 2001, we recognized $0.15 per share in
extraordinary and special charges consisting of a net-of-tax extraordinary
charge of $479,000 due to the early retirement of debt, a pre-tax charge to
interest expense of $818,000 to write-off a portion of deferred debt
issuance costs related to the reduced commitment of our senior credit
facility, a pre-tax charge to general and administrative expense of
$660,000 to write-off deferred acquisition costs associated with the Fort
Greeley, Alaska project and pre-tax charges to depreciation and
amortization and operating expenses of $263,000 to recognize closing costs
at the Durham Treatment Center due to its contract termination. In
January 2001, we recorded a net-of-tax benefit of $770,000 for the
cumulative effect of a change in accounting principle related to changing
our method of accounting for supplies.
(5) EBITDAR is defined as income from operations plus depreciation and
amortization expense and rental expenses. Although EBITDAR is not a measure
of performance calculated in accordance with generally accepted accounting
principles (GAAP), we believe that EBITDAR is accepted as a generally
recognized measure of performance in our industry. Nevertheless, this
measure should not be considered in isolation or as a substitute for
operating income, net income, net cash provided by operating activities or
any other measure for determining our operating performance or liquidity
that is calculated in accordance with GAAP.
(6) The following table summarizes various expenses or income items included in
net income which have been added back to arrive at net income, as adjusted.
All amounts are net of tax.
<Table>
<Caption>
NINE MONTHS ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, SEPTEMBER 30, ENDED
-------------------------------- -------------------------------- SEPTEMBER 30,
PRO FORMA PRO FORMA -------------------
1999 2000 2000 2000 2001 2001 2000 2001
-------- -------- ---------- -------- -------- ---------- -------- --------
(IN THOUSANDS)
Net income............................ $5,352 $7,969 $8,690 $6,096 $4,395 $6,503 $1,932 $1,442
====== ====== ====== ====== ====== ====== ====== ======
Expense (income) items included in net
income:
Pre-opening and start-up costs, net
of associated revenues............ $ 905 $ 597 $ 597 $ 468 $ 634 $ 634 $ 174 $ --
Cumulative effect of change in
accounting principle.............. 2,954 -- -- -- (770) (770) -- --
Extraordinary charge due to early
retirement of
debt.............................. -- -- -- -- 479 -- -- 479
Non-recurring interest charge....... -- -- -- -- 483 -- -- 483
Write-off of deferred acquisition
costs and facility closing
costs............................. -- -- -- -- 545 545 -- 545
Cost sharing payments............... (600) -- -- -- -- -- -- --
Sale of facility license............ -- (561) (561) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total expense (income) items included
in net income....................... $3,259 $ 36 $ 36 $ 468 $1,371 $ 409 $ 174 $1,507
====== ====== ====== ====== ====== ====== ====== ======
</Table>
Net income, as adjusted, is not a measure of performance calculated in
accordance with GAAP and should not be considered as a substitute for net
income.
(7) Diluted earnings per share, as adjusted, is computed based upon diluted
earnings as reported plus the adjustments described in footnote (6) above.
Diluted earnings per share, as adjusted, is not a measure of performance
calculated in accordance with GAAP and should not be considered as a
substitute for diluted earnings per share.
(8) Our service capacity is comprised of the number of beds available for
service upon completion of construction of residential facilities and the
average program capacity of non-residential community-based programs.
(9) The Utah Department of Corrections, or Utah DOC, selected our bid in
June 1999 for the 490 bed Timpie Valley Correctional Facility subject to
final contract negotiations. In 2000, the Utah DOC declined to pursue this
project, therefore our service capacity was reduced accordingly.
(10) Average occupancy is based on monthly contracted service capacity data of
residential facilities in operation. Since certain facilities have service
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
S-9
<Page>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. YOU SHOULD
CAREFULLY CONSIDER THESE RISK FACTORS AND THE RISK FACTORS IN THE ACCOMPANYING
PROSPECTUS AS WELL AS ALL OF THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS BEFORE
YOU DECIDE TO INVEST IN OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
PUBLIC RESISTANCE TO PRIVATIZATION OF CORRECTIONAL AND DETENTION FACILITIES
COULD RESULT IN OUR INABILITY TO OBTAIN NEW CONTRACTS OR THE LOSS OF EXISTING
CONTRACTS.
Management of correctional and detention facilities by private entities has
not achieved complete acceptance by either the government or the public. The
movement toward privatization of correctional and detention facilities has also
encountered resistance from certain groups, such as labor unions, local
sheriff's departments, and groups believing that correctional and detention
facility operations should only be conducted by government agencies. Changes in
the dominant political party in any market in which correctional facilities are
located could have an adverse impact on privatization. Further, some government
agencies are not legally permitted to delegate their traditional management
responsibilities for correctional and detention facilities to private companies.
Any of these resistances may make it more difficult for us to renew or
maintain existing contracts, to obtain new contracts or sites on which to
operate new facilities or to develop or purchase facilities and lease them to
government or private entities, any or all of which could have a material
adverse effect on our business.
WE ARE SUBJECT TO THE SHORT-TERM NATURE OF GOVERNMENT CONTRACTS.
Many governmental agencies are legally limited in their ability to enter
into long-term contracts that would bind elected officials responsible for
future budgets. Therefore, many contracts with government agencies typically
either have a very short term or are subject to termination on short notice
without cause. In addition, our contracts with government agencies may contain
one or more renewal options that may be exercised only by the contracting
government agency. No assurance can be given that any agency will exercise a
renewal option in the future. The non-renewal or termination of any of our
significant contracts with governmental agencies could materially adversely
affect our financial condition, results of operation and liquidity, including
our ability to secure new facility management contracts from others.
WE ARE DEPENDENT ON GOVERNMENT APPROPRIATIONS. IF GOVERNMENT APPROPRIATION
LEVELS ARE REDUCED, OUR BUSINESS MAY BE HARMED.
Our cash flow is subject to the receipt of sufficient funding of and timely
payment by contracting governmental entities. If the appropriate governmental
agency does not receive sufficient appropriations to cover its contractual
obligations, a contract may be terminated or the amounts payable to us may be
deferred or reduced. Any delays in payment, or the termination of a significant
contract, could have an adverse effect on our cash flow and financial condition.
Moreover, as a result of the slowing economy and the events of September 11,
2001, federal, state and local governments may encounter unusual budgetary
constraints and there is a risk that spending on outsourced services provided by
us may be curtailed.
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OUR ABILITY TO WIN NEW CONTRACTS TO DEVELOP AND MANAGE CORRECTIONAL,
DETENTION AND TREATMENT FACILITIES DEPENDS ON MANY FACTORS OUTSIDE OUR CONTROL.
Our growth is generally dependent upon our ability to win new contracts to
develop and manage new correctional, detention and treatment facilities. This
depends on a number of factors we cannot control, including crime rates and
sentencing patterns in various jurisdictions. Accordingly, the demand for our
facilities could be adversely affected by the relaxation of enforcement efforts,
leniency in conviction and sentencing practices or through the legal
decriminalization of certain activities that are currently proscribed by our
criminal laws. For instance, any changes with respect to drugs and controlled
substances or illegal immigration could affect the number of persons arrested,
convicted and sentenced, thereby potentially reducing demand for correctional
facilities to house them. Similarly, reductions in crime rates could lead to
reductions in arrests, convictions and sentences requiring correctional
facilities. The Bureau of Justice Statistics reports that the level of violent
crime in the United States has declined steadily since 1994 and the level of
property crime is at the lowest level since 1974. However, the number of
detained offenders has grown steadily during that period.
While we believe that governments will continue to privatize correctional,
detention and treatment facilities, we believe the rate of growth experienced in
the state private corrections industry during the late 1980's and early 1990's
is moderating. Certain jurisdictions recently have required successful bidders
to make a significant capital investment in connection with the financing of a
particular project, a trend that could require us to have sufficient capital
resources to compete effectively. We may not be able to obtain these capital
resources when needed. Additionally, our success in obtaining new awards and
contracts may depend, in part, upon our ability to locate land that can be
leased or acquired under favorable terms. Otherwise desirable locations may be
in or near populated areas and, therefore, may generate legal action or other
forms of opposition from residents in areas surrounding a proposed site.
OUR PROFITABILITY MAY SUFFER IF THE NUMBER OF OFFENDERS OCCUPYING OUR
CORRECTIONAL, DETENTION AND TREATMENT FACILITIES DECREASES.
Our correctional, detention and treatment facilities are dependent upon
government agencies supplying offenders. A substantial portion of our revenues
is generated under contracts that specify a net rate per day per resident, or a
per diem rate, sometimes with no minimum guaranteed occupancy levels, even
though most correctional facility cost structures are relatively fixed. Under
such a per diem rate structure, a decrease in occupancy levels at a particular
facility could have a material adverse effect on the financial condition and
results of operations at such facility.
A FAILURE TO COMPLY WITH EXISTING REGULATIONS COULD RESULT IN MATERIAL
PENALTIES OR NON-RENEWAL OR TERMINATION OF OUR CONTRACTS TO MANAGE CORRECTIONAL,
DETENTION AND TREATMENT FACILITIES.
Our industry is subject to a variety of federal, state and local
regulations, including education, health care and safety regulations, which are
administered by various regulatory authorities. We may not always successfully
comply with these regulations, and failure to comply could result in material
penalties or non-renewal or termination of facility management contracts. The
contracts typically include extensive reporting requirements and supervision and
on-site monitoring by representatives of contracting government agencies.
Corrections officers are customarily required to meet certain training
standards, and in some instances facility personnel are required to be licensed
and subject to background investigation. Certain jurisdictions also require the
subcontracts to be awarded on a competitive basis or to subcontract with
businesses owned by members of minority groups. Our facilities are also subject
to operational and financial audits by the governmental agencies with which we
have contracts. The failure to comply with any applicable laws, rules or
regulations and the loss of any required license could adversely affect the
financial condition and results of operations at our affected facilities.
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GOVERNMENT AGENCIES MAY INVESTIGATE AND AUDIT OUR CONTRACTS AND, IF ANY
IMPROPRIETIES ARE FOUND, WE MAY BE REQUIRED TO REFUND REVENUES WE HAVE RECEIVED,
TO FOREGO ANTICIPATED REVENUES AND MAY BE SUBJECT TO PENALTIES AND SANCTIONS,
INCLUDING PROHIBITIONS ON OUR BIDDING IN RESPONSE TO REQUESTS FOR PROPOSALS, OR
RFPS.
Certain of the government agencies we contract with have the authority to
audit and investigate our contracts with them. As part of that process, the
government agency reviews our performance on the contract, our pricing
practices, our cost structure and our compliance with applicable laws,
regulations and standards. If the agency determines that we have improperly
allocated costs to a specific contract, we may not be reimbursed for those costs
and we could be required to refund the amount of any such costs that have been
reimbursed. If a government audit uncovers improper or illegal activities by us
or we otherwise determine that these activities have occurred, we may be subject
to civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeitures of profits, suspension of payments, fines
and suspension or disqualification from doing business with the government. Any
adverse determination could adversely impact our ability to bid in response to
RFPs in one or more jurisdictions.
IF WE FAIL TO SATISFY OUR CONTRACTUAL OBLIGATIONS, OUR ABILITY TO COMPETE
FOR FUTURE CONTRACTS AND OUR FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
Our failure to comply with contract requirements or to meet our client's
performance expectations when performing a contract could materially and
adversely affect our financial performance and our reputation, which, in turn,
would impact our ability to compete for new contracts. Our failure to meet
contractual obligations could also result in substantial actual and
consequential damages. In addition, our contracts often require us to indemnify
clients for our failure to meet performance standards. Some of our contracts
contain liquidated damages provisions and financial penalties related to
performance failures. Although we have liability insurance, the policy limits
may not be adequate to provide protection against all potential liabilities.
NEW COMPETITORS IN OUR INDUSTRY MAY ADVERSELY AFFECT THE PROFITABILITY OF
OUR BUSINESS.
We must compete on the basis of cost, quality and range of services offered,
experience in managing facilities, reputation of personnel and ability to
design, finance and construct new facilities on a cost effective competitive
basis. While there are barriers for companies seeking to enter into the
management and operation of correctional, detention and treatment facilities,
there can be no assurance that these barriers will be sufficient to limit
additional competition.
A DISTURBANCE IN ONE OF OUR FACILITIES COULD RESULT IN CLOSURE OF A FACILITY
OR HARM TO OUR BUSINESS.
An escape, riot or other disturbance at one of our facilities could
adversely effect the financial condition, results of operations and liquidity of
our operations. Among other things, the adverse publicity generated as a result
of an event could adversely affect our ability to retain an existing contract or
obtain future ones. In addition, if such an event were to occur, there is a
possibility that the facility where the event occurred may be shut down by the
relevant governmental agency. A closure of certain of our facilities could
adversely affect the financial condition, results of operations and liquidity of
our operations.
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND
WASHINGTON, D.C. ON SEPTEMBER 11, 2001, AND OTHER ACTS OF VIOLENCE OR WAR MAY
AFFECT THE MARKETS IN WHICH OUR COMMON STOCK TRADES, THE MARKETS IN WHICH WE
OPERATE AND OUR PROFITABILITY.
Terrorist attacks may negatively affect our operations and your investment.
There can be no assurance that there will not be further terrorist attacks
against the United States or United States businesses. As a result of terrorism,
the United States may enter into a protracted armed conflict,
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which could have a further impact on our business. In addition, terrorists
attacks in the United States may increase demand for trained security personnel,
which could increase our operating costs. Political and economic instability in
some regions of the world may also result and could negatively impact our
business. In addition, any of these events may affect the markets in which our
common stock trades. The consequences of any of these armed conflicts are
unpredictable and we may not be able to foresee events that could have an
adverse effect on our business or your investment.
INACCURATE, MISLEADING OR NEGATIVE MEDIA COVERAGE COULD ADVERSELY AFFECT OUR
REPUTATION AND OUR ABILITY TO BID FOR GOVERNMENT CONTRACTS.
The media frequently focuses its attention on private operators' contracts
with government agencies. If the media coverage is negative, it could influence
government officials to slow the pace of outsourcing government services, which
could reduce the number of RFPs. The media may also focus its attention on the
activities of political consultants engaged by us, even when their activities
are unrelated to our business, and we may be tainted by adverse media coverage
about their activities. Moreover, inaccurate, misleading or negative media
coverage about us could harm our reputation and, accordingly, our ability to bid
for and win government contracts.
WE MAY INCUR SIGNIFICANT COSTS BEFORE RECEIVING RELATED REVENUES, WHICH
COULD RESULT IN CASH SHORTFALLS.
When we are awarded a contract to manage a government program, we may incur
significant expenses before we receive contract payments. These expenses include
leasing office space, purchasing office equipment and hiring and training
personnel. As a result, in certain large contracts where the government does not
fund program pre-opening and start-up costs, we may be required to invest
significant sums of money before receiving related contract payments. In
addition, payments due to us from government agencies may be delayed due to
billing cycles or as a result of failures to approve governmental budgets and
finalize contracts in a timely manner.
WE MAY BE UNABLE TO ATTRACT AND RETAIN SUFFICIENT QUALIFIED PERSONNEL
NECESSARY TO SUSTAIN OUR BUSINESS.
Our delivery of services is labor-intensive. When we are awarded a
government contract, we must hire operating management, security, case
management and other personnel. The success of our business requires that we
attract, develop, motivate and retain these personnel. Our inability to hire
sufficient personnel on a timely basis or the loss of significant numbers of
personnel could adversely affect our business.
IF WE ARE UNABLE TO MANAGE OUR GROWTH, OUR PROFITABILITY WILL BE ADVERSELY
AFFECTED.
Sustaining our growth has placed significant demands on our management as
well as on our administrative, operational and financial resources. For us to
continue to manage our growth, we must continue to improve our operational,
financial and management information systems and expand, motivate and manage our
workforce. If our growth comes at the expense of providing quality service and
generating reasonable profits, our ability to successfully bid for contracts and
our profitability will be adversely affected.
UNSUCCESSFUL FINANCING OR ACQUISITION PROJECTS MAY RESULT IN CHARGES TO
EXPENSE FOR DEFERRED COSTS.
If we determine that one or more financing or acquisition projects is
unlikely to be successfully concluded, we could incur significant charges to
expense for deferred costs associated with such projects.
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IF WE DO NOT SUCCESSFULLY INTEGRATE THE BUSINESSES THAT WE ACQUIRE, OUR
RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
We may be unable to manage businesses that we may acquire profitably or
integrate them successfully without incurring substantial expenses, delays or
other problems that could negatively impact our results of operations.
Moreover, business combinations involve additional risks, including:
- diversion of management's attention;
- loss of key personnel;
- assumption of unanticipated legal or financial liabilities;
- our becoming significantly leveraged as a result of the incurrence of debt
to finance an acquisition;
- unanticipated operating, accounting or management difficulties in
connection with the acquired entities;
- amortization or charges of acquired intangible assets, including goodwill;
and
- dilution to our earnings per share.
Also, client dissatisfaction or performance problems with an acquired
business could materially and adversely affect our reputation as a whole.
Further, the acquired businesses may not achieve the revenues and earnings we
anticipated.
BECAUSE FEDERAL ENVIRONMENTAL LAWS IMPOSE STRICT AS WELL AS JOINT AND
SEVERAL LIABILITY FOR CLEAN UP COSTS, UNFORESEEN ENVIRONMENTAL RISKS COULD PROVE
TO BE COSTLY.
Our facilities may be subject to unforeseen environmental risks. The federal
Comprehensive Environmental Response, Compensation, and Liability Act, as
amended, or CERCLA, imposes strict, as well as joint and several, liability for
certain environmental cleanup costs on several classes of potentially
responsible parties, including current owners and operators of the property and,
in some cases, lenders who did not cause or contribute to the contamination.
Furthermore, liability under CERCLA is not limited to the original or
unamortized principal balance of a loan or to the value of the property securing
a loan. Other federal and state laws in certain circumstances may impose
liability for environmental remediation, which costs may be substantial.
Moreover, certain federal statutes and certain states by statute impose a lien
for any cleanup costs incurred by such state on the property that is the subject
of such cleanup costs. All subsequent liens on such property generally are
subordinated to such an environmental lien and, in some states, even prior
recorded liens are subordinated to environmental liens.
WE MIGHT BECOME INVOLVED IN LITIGATION, INCLUDING THIRD-PARTY AND PERSONAL
INJURY CLAIMS, WHICH COULD BE COSTLY AND TIME CONSUMING.
The operation of our facilities exposes us to potential third-party claims
or litigation by offenders or other persons for personal injury or other damages
including damages arising from an offender's escape or from a disturbance or
riot at a facility. In addition, our management contracts generally require us
to indemnify the government agency against any damages to which the government
agency may be subject in connection with such claims or litigation. We are
generally obligated to maintain an insurance program that provides coverage for
certain liability risks, including personal injury, bodily injury, death or
property damage to a third party where we are found to be negligent. There can
be no assurance, however, that such insurance will be adequate to cover
potential third-party claims.
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RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE IS VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE PRICE YOU PAID FOR THEM.
The market price of our common stock has fluctuated in the past and could
continue to fluctuate substantially due to a variety of factors, including:
- quarterly fluctuations in results of operations;
- the termination by a government client of a material contract;
- political and legislative developments adverse to the privatization of
government services;
- changes in or failure to meet earnings estimates by securities analysts;
- sales of our common stock by existing shareholders or the perception that
these sales may occur;
- adverse judgments or settlements obligating us to pay damages;
- negative publicity;
- loss of key personnel; and
- the failure to be awarded a significant contract on which we have bid.
In addition, overall volatility has often significantly affected the market
prices of securities for reasons unrelated to a company's operating performance.
In the past, securities class action litigation has often been commenced against
companies that have experienced periods of volatility in the price of their
stock. Securities litigation initiated against us could cause us to incur
substantial costs and could lead to the diversion of management's attention and
resources.
OUR RIGHTS PLAN AND DELAWARE LAW MAY DISCOURAGE ACQUISITION BIDS.
Our board of directors has adopted a stockholders' rights plan. Under this
plan, we have issued preferred stock purchase rights as a dividend on our
outstanding common stock and on any other common stock issued after adoption of
the plan. The rights become exercisable if someone acquires or offers to acquire
specific amounts of common stock.
Moreover, a provision of Delaware law that is applicable to us could delay
or make difficult a merger, tender offer or proxy contest involving us. This
provision becomes applicable if someone acquires or offers to acquire a
specified amount of our common stock.
The rights and the provisions of Delaware law have certain anti-takeover
effects. The rights will cause substantial dilution to a person or group that
attempts to acquire us without the approval of our board of directors. The
rights and the provisions of Delaware law may deter a potential unfriendly offer
or other effort to gain control of our company that is not approved by our board
of directors. This may deprive our stockholders of opportunities to sell shares
of our common stock at prices higher than those prevailing in the market.
Neither the rights nor this provision of Delaware law should, however, interfere
with any merger or other business combination that is approved by our board of
directors.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS INCLUDE PROVISIONS THAT MAY HAVE
ANTI-TAKEOVER EFFECTS.
Our certificate of incorporation and bylaws include provisions that may
delay, deter or prevent a takeover attempt that stockholders might consider
desirable. For example, our certificate of incorporation provides that our
stockholders may not take any action in writing without a meeting, except by
unanimous written consent. This prohibition could impede or discourage an
attempt to obtain control of us by requiring that any actions required to be
taken by stockholders be taken at properly called stockholder meetings or by
unanimous written consent.
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THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK AFTER THIS
OFFERING COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
Upon completion of this offering, we will have 12,430,790 shares of common
stock outstanding and 1,738,306 shares of common stock issuable pursuant to the
exercise of outstanding options and warrants and reserved for issuance under our
stock option plans. Sales of substantial amounts of our common stock by our
existing stockholders in the public market following the offering, or the
perception that such sales will occur, could cause the market price of our
common stock to drop.
NOTE ON FORWARD-LOOKING STATEMENTS
We have made "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 in this prospectus supplement and the accompanying prospectus, and in the
documents that are incorporated by reference. These forward-looking statements
are subject to various risks and uncertainties. The words "anticipate,"
"believe," "estimate," "expect," "plan," "intend" and similar words are intended
to identify forward-looking statements, but are not the only means of
identifying them. In general, any statement other than a statement of historical
fact is a forward-looking statement. If any of the risks above or in the
accompanying prospectus actually occur, our business, financial condition or
operating results could be adversely affected and could differ materially from
those anticipated in any forward-looking statements.
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USE OF PROCEEDS
We expect to receive proceeds of approximately $38.3 million from the sale
of 3,000,000 shares of common stock ($44.2 million if the underwriters'
over-allotment option is exercised in full) at an offering price of $14.00 per
share after deducting the underwriting discounts and our estimated offering
expenses. We plan to use the proceeds from the offering and existing cash to pay
approximately $40.2 million to retire our subordinated notes. Pending their
uses, we will invest net proceeds of this offering in short-term,
interest-bearing securities.
Our subordinated notes have a seven-year term maturing in July 2007, are
interest-only payable quarterly at a fixed annual rate of 12.875%, and contain
certain financial covenants. Our senior credit facility requires that a majority
of the lenders under that facility approve the prepayment of our subordinated
notes. The retirement of our subordinated notes will result in greater
availability under our senior credit facility.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain excess cash flow, if any, for use in the operation
and expansion of our business and do not anticipate paying cash dividends on our
common stock in the foreseeable future. The payment of dividends is within the
discretion of the Board of Directors and is dependent upon, among other factors,
our results of operations, financial condition, capital requirements,
restrictions, if any, imposed by financing commitments and legal requirements.
Our senior credit facility and our 12.875% subordinated notes currently prohibit
the payment of cash dividends.
PRICE RANGE OF COMMON STOCK
Our common stock is currently listed on the New York Stock Exchange under
the symbol "CRN." As of September 30, 2001, there were approximately 44 record
holders of common stock. The quarterly high and low closing sales prices for the
common stock from January 1, 1999 through November 26, 2001 are shown below:
<Table>
<Caption>
HIGH LOW
-------------- --------------
1999:
First Quarter............................................ $ 19.63 $ 13.25
Second Quarter........................................... 22.63 15.50
Third Quarter............................................ 17.13 13.94
Fourth Quarter........................................... 16.38 8.06
2000:
First Quarter............................................ $ 11.00 $ 7.56
Second Quarter........................................... 11.00 6.56
Third Quarter............................................ 9.00 6.13
Fourth Quarter........................................... 8.19 3.50
2001:
First Quarter............................................ $ 8.25 $ 5.25
Second Quarter........................................... 15.00 7.90
Third Quarter............................................ 18.11 13.40
Fourth Quarter (through November 26)..................... 17.90 14.10
</Table>
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CAPITALIZATION
The following table sets forth our consolidated capitalization as of
September 30, 2001:
- on an actual basis; and
- as adjusted to give effect to the issuance of 3,000,000 shares of our
common stock in this offering at an offering price of $14.00 per share and
the application of the net proceeds, after deducting underwriting
discounts and commissions and estimated offering expenses, and taking into
consideration our use of existing cash to repay our subordinated notes.
The retirement of our subordinated notes includes a prepayment penalty of
approximately $0.8 million together with the write-offs of approximately
$2.6 million of deferred financing costs and $1.0 million of debt
discount, all of which are reflected as a reduction of retained earnings,
net of tax, in the following table.
See "Use of Proceeds." You should read this table in conjunction with our
consolidated financial statements and the related notes incorporated by
reference in this prospectus supplement and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<Table>
<Caption>
SEPTEMBER 30, 2001
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 50,402 $ 48,515
======== ========
Long-term debt, net of current portion:
Subordinated notes........................................ $ 38,422 $ --
Other..................................................... 2 2
-------- --------
Total long-term debt, net of current portion............ 38,424 2
-------- --------
Stockholders' equity:
Preferred stock, par value $.001 per share, 10,000,000
shares authorized, no shares issued and outstanding..... -- --
Common stock, par value $.001 per share, 30,000,000 shares
authorized, 10,453,857 shares issued actual and
13,453,857 shares issued as adjusted(1)................. 10 13
Additional paid-in capital.................................. 93,231 131,538
Stock option loans.......................................... (640) (640)
Retained earnings........................................... 23,622 21,070
Treasury stock (1,046,400 shares of common stock, at
cost)..................................................... (7,002) (7,002)
-------- --------
Total stockholders' equity................................ 109,221 144,979
-------- --------
Total capitalization...................................... $147,645 $144,981
======== ========
</Table>
- ------------------------
(1) Excludes:
- 1,196,124 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $8.04 per share;
- 200,370 shares of common stock issuable upon exercise of outstanding
warrants at an exercise price of $6.70 per share; and
- 341,812 shares of common stock reserved for issuance under our stock
option plans.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data for
the five years ended December 31, 2000 and the nine months ended September 30,
2000 and 2001. The data for the five years ended December 31, 2000 is derived
from our consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants. The data for the nine months ended
September 30, 2000 and 2001 is derived from our unaudited consolidated financial
statements. You should read the selected consolidated financial data in
connection with our consolidated financial statements and related notes
incorporated by reference.
<Table>
<Caption>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1996(1) 1997(2) 1998(3) 1999(4) 2000 2000 2001
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $32,327 $70,302 $123,119 $176,967 $226,050 $165,622 $195,106
Operating expenses....................... 26,038 57,047 98,721 135,850 175,391 128,585 156,052
Pre-opening and start-up expenses........ -- -- -- 2,929 2,298 838 3,858
Depreciation and amortization............ 1,390 2,231 4,228 6,007 7,276 5,312 5,748
General and administrative expenses...... 4,560 5,394 7,581 9,932 12,024 9,004 11,390
------- ------- -------- -------- -------- -------- --------
Income from operations................... 339 5,630 12,589 22,249 29,061 21,883 18,058(7)
Interest expense, net(5)................. 2,643 77 2,485 8,405 15,554 11,553 11,102
Net income (loss)........................ (2,379) 3,554 6,062 5,352(6) 7,969 6,096 4,395(7)
Earnings (loss) per share:
Basic.................................. $ (.65) $ .48 $ .64 $ .57 $ .85 $ .65 $ .48(7)
Diluted................................ $ (.65) $ .46 $ .62 $ .55 $ .84 $ .64 $ .45(7)
Number of shares used to compute earnings
per share (in thousands):
Basic.................................. 3,673 7,350 9,442 9,432 9,383 9,435 9,236
Diluted................................ 3,673 7,740 9,772 9,660 9,495 9,570 9,661
OPERATING DATA:
Total service capacity (end of
period)(8)............................. 3,577 7,072 10,525 14,845 14,364(9) 14,364 15,909
Average occupancy excluding start-up
operations(10)......................... 97.0% 97.6% 98.3% 97.0% 96.0% 95.5% 96.1%
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 4,874 $18,968 $ 2,519 $ 1,763 $ 620 $ 229 $ 50,402
Working capital (deficit)................ 7,747 26,220 16,828 (12,636) 29,703 35,683 96,885
Total assets............................. 46,824 104,109 212,695 273,991 291,439 284,120 185,693
Long-term debt........................... 745 432 98,480 101,500 146,926 150,848 38,424
Stockholders' equity..................... 41,051 86,730 91,500 97,208 104,320 103,094 109,221
</Table>
- ------------------------------
(1) Includes the operations of the Reid Community Correctional Center and the
Big Spring Complex acquired in May 1996 and July 1996, respectively.
(2) Includes the operations of Interventions-Texas and Abraxas acquired in
January 1997 and September 1997, respectively.
(3) Includes the operations of the Great Plains Correctional Facility acquired
in January 1998 and the Alaska facilities purchased from Allvest in
August 1998.
(4) Includes the operations of Interventions-Illinois, acquired in
November 1999.
(5) Interest expense, net is our interest expense, net of interest income.
(6) In January 1999, we recorded a net-of-tax charge of $3.0 million for the
cumulative effect of a change in accounting principle related to start-up
costs.
(7) In January 2001, we recorded a net-of-tax benefit of $770,000 for the
cumulative effect of a change in accounting principle related to changing
our method of accounting for supplies. In the third quarter of 2001, we
recognized $0.15 per share in extraordinary and special charges consisting
of a net-of-tax extraordinary charge of $479,000 due to the early
retirement of debt, a pre-tax charge to interest expense of $818,000 to
write-off a portion of deferred debt issuance costs related to the
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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reduced commitment of our senior credit facility, a pre-tax charge to
general and administrative expense of $660,000 to write-off deferred
acquisition costs associated with the Fort Greeley, Alaska project and a
pre-tax charge to depreciation and amortization and operating expenses of
$263,000 to recognize closing costs at the Durham Treatment Center due to
its contract termination.
(8) Our service capacity is comprised of the number of beds available for
service upon completion of construction of residential facilities and the
average program capacity of non-residential community-based programs.
(9) The Utah Department of Corrections, or Utah DOC, selected our bid in
June 1999 for the 490 bed Timpie Valley Correctional Facility subject to
final contract negotiations. In 2000, the Utah DOC declined to pursue this
project, therefore our service capacity was reduced accordingly.
(10) Average occupancy is based on monthly contracted service capacity data of
residential facilities in operation. Since certain facilities have service
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the "Selected
Consolidated Financial Data" and the historical financial statements and related
notes contained in our 2000 Annual Report on Form 10-K and our Quarterly Reports
on Form 10-Q for the first three quarters of 2001, as amended, which are
incorporated by reference in this prospectus supplement and the accompanying
prospectus.
GENERAL
We are a leading provider of privatized correctional, treatment and
educational services outsourced by federal, state and local government agencies.
We provide a diversified portfolio of services for adults and juveniles through
our three operating divisions: (1) adult secure institutional services;
(2) juvenile treatment, educational and detention services and (3) pre-release
correctional and treatment services. As of October 15, 2001, we had contracts to
operate 69 facilities, in operation or under development, with a total service
capacity of 15,241. Our facilities are located in 13 states and the District of
Columbia.
From 1994 to 1999 we completed eight acquisitions. Our acquisitions have
generally targeted companies that assist us in penetrating new markets,
diversifying our revenues and establishing a nationally recognized presence. To
fulfill this strategy, we have acquired companies that have a reputation for
high quality in the corrections and treatment industry.
We derive substantially all our revenues from providing corrections,
treatment and educational services outsourced by federal, state and local
government agencies in the United States. Revenues for our services are
generally recognized on a per diem rate based upon the number of occupant days
or hours served for the period, on a take-or-pay basis or on a cost-plus
reimbursement basis.
Although we have experienced higher operating margins in our adult secure
institutional and pre-release divisions as compared to the juvenile division,
our operating margins generally vary from facility to facility based on whether
the facility is owned or leased, the level of competition for the contract
award, the proposed length of the contract, the occupancy levels for a facility,
the level of capital commitment required with respect to a facility, the
anticipated changes in operating costs over the term of the contract, and our
ability to increase contract revenues. We have and expect to experience interim
period operating margin differences due to the number of calendar days in the
period, higher payroll taxes in the first half of the year, and salary and wage
increases that are incurred prior to certain contract revenue increases.
We are responsible for all facility operating expenses, except for certain
debt service and lease payments with respect to facilities for which we have
only a management contract (11 facilities in operation at October 15, 2001).
A majority of our facility operating expenses consist of fixed costs. These
fixed costs include lease and rental expense, insurance, utilities and
depreciation. As a result, when we commence operation of new or expanded
facilities, fixed operating expenses increase. The amount of our variable
operating expenses, including food, medical services, supplies and clothing,
depend on occupancy levels at the facilities operated by us. Our largest single
operating expense, facility payroll expense and related employment taxes and
costs, has both a fixed and a variable component. We can adjust the staffing
levels and the related payroll expense to a certain extent based on occupancy at
a facility, but a minimum fixed number of employees is required to operate and
maintain any facility regardless of occupancy levels. Personnel costs are
subject to increase in tightening labor markets based on local economic and
other conditions.
As a result of the 2001 Sale and Leaseback Transaction on August 14, 2001,
our operating expenses will increase due to the associated facility rental
expense to be recognized of approximately
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$17.6 million annually. This additional rental expense will be largely offset by
a reduction to interest expense due to the repayment of long-term debt, and a
reduction to depreciation and amortization expense due to the sale of the 11
facilities.
Following a contract award, we incur pre-opening and start-up expenses
including payroll, benefits, training and other operating costs prior to opening
a new or expanded facility and during the period of operation while occupancy is
ramping up. These costs vary by contract. Since pre-opening and start-up costs
are factored into the revenue per diem rate that is charged to the contracting
agency, we typically expect to recover these upfront costs over the life of the
contract. Because occupancy rates during a facility's start-up phase typically
result in capacity under-utilization for at least 90 to 180 days, we may incur
additional post-opening start-up costs. We do not anticipate post-opening
start-up costs at facilities operating under any future contracts with the
Federal Bureau of Prisons, or FBOP, because these contracts are currently
take-or-pay, meaning that the FBOP will pay us at least 95% of the contractual
monthly revenue regardless of actual occupancy.
Newly opened facilities are staffed according to contract requirements when
we begin receiving offenders or clients. Offenders or clients are typically
assigned to a newly opened facility on a phased-in basis over a one- to
three-month period, although certain programs require a longer time period to
reach break-even occupancy levels. We incur start-up operating losses at new
facilities until break-even occupancy levels are reached. Although we typically
recover these upfront costs over the life of the contract, quarterly results can
be substantially affected by the timing of the commencement of operations as
well as development and construction of new facilities.
General and administrative expenses consist primarily of salaries of our
corporate and administrative personnel who provide senior management, finance,
accounting, human resources, payroll, information systems and other services and
costs of business development.
We continually review the performance of our portfolio of contracts and, if
we determine that a contract will not be able to meet the required level of
financial performance, we will seek to remove that contract from our portfolio.
For the nine months ended September 30, 2001 and for the years ended
December 31, 2000, 1999 and 1998, 18.7%, 18.5%, 19.8% and 20.1%, respectively,
of our consolidated revenues were derived from multiple contracts with the FBOP.
RESULTS OF OPERATIONS
Our historical operating results reflect a significant expansion of our
business. Material fluctuations in our results of operations are principally the
result of the timing and effect of acquisitions, the level of new contract
development activity conducted by us, occupancy rates at company-operated
facilities and extraordinary and non-recurring charges. We have accounted for
our acquisitions using the purchase method of accounting, whereby we have
reported the operating results of the acquired businesses in our operating
results since the date of acquisition.
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The following table sets forth for the periods indicated the percentage of
revenues represented by certain items in our historical consolidated statements
of operations:
<Table>
<Caption>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ----------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
Revenues............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses.................................. 80.2 76.8 77.6 77.6 80.0
Pre-opening and start-up expenses................... -- 1.7 1.0 0.5 2.0
Depreciation and amortization....................... 3.4 3.3 3.2 3.2 2.9
General and administrative expenses................. 6.2 5.6 5.3 5.4 5.8
----- ----- ----- ----- -----
Income from operations.............................. 10.2 12.6 12.9 13.3 9.3
Interest expense, net............................... 2.0 4.8 6.9 7.0 5.7
----- ----- ----- ----- -----
Income before income taxes, extraordinary charge and
cumulative effect of change in accounting
principle......................................... 8.2 7.8 6.0 6.3 3.6
----- ----- ----- ----- -----
Provision for income taxes.......................... 3.3 3.1 2.5 2.6 1.5
----- ----- ----- ----- -----
Income before extraordinary charge and cumulative
effect of change in accounting principle.......... 4.9% 4.7% 3.5% 3.7% 2.1%
===== ===== ===== ===== =====
</Table>
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUES. Revenues increased 17.8% to $195.1 million for the nine months
ended September 30, 2001 from $165.6 million for the nine months ended
September 30, 2000.
Adult secure institutional division revenues increased 13.4% to
$74.8 million for the nine months ended September 30, 2001 from $65.9 million
for the nine months ended September 30, 2000 due principally to (1) the final
550 bed expansion of the D. Ray James Prison which began housing inmates late in
the first quarter of 2000 and reached a full occupancy level late in the second
quarter of 2000, (2) per diem rate increases realized in 2001, (3) the
commencement of a management contract at the Valencia County Detention Center in
the fourth quarter of 2000 and (4) increased occupancy at the Great Plains
Correctional Facility as compared to the nine months ended September 30, 2000.
The increase in revenue was offset, in part, by a reduction in occupancy at the
Santa Fe County Detention Center. Our contract to manage the Santa Fe County
Detention Center expired effective September 30, 2001. There were no revenues
attributable to start-up operations for the nine months ended September 30,
2001. Revenues attributable to start-up operations for the nine months ended
September 30, 2000 were $44,000 and related to the expansion of the D. Ray James
Prison. Average occupancy, excluding start-up operations in 2000, was 96.7% for
the nine months ended September 30, 2001 compared to 97.3% for the nine months
ended September 30, 2000.
Juvenile division revenues increased 32.1% to $83.6 million for the nine
months ended September 30, 2001 from $63.3 million for the nine months ended
September 30, 2000 principally due to (1) the opening of the New Morgan Academy
in the fourth quarter of 2000, (2) the commencement of a management contract at
the Alexander Youth Center in the third quarter of 2001, (3) the opening of the
William Penn Harrisburg Alternative School in the third quarter of 2001,
(4) increased occupancy at the Cornell Abraxas Center for Adolescent Females, or
ACAF, due to a facility expansion and (5) increased occupancy at various
facilities including the Griffin Juvenile facility. Revenues attributable to
start-up operations were $2.8 million for the nine months ended September 30,
2001 and related to the operations of the New Morgan Academy and the expansion
of ACAF. There were no revenues attributable to start-up operations for the nine
months ended September 30, 2000. Average occupancy, excluding start-up
operations in 2001, was 91.5% for the nine months ended September 30, 2001
compared to 90.6% for the nine months ended September 30, 2000.
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Pre-release division revenues increased 0.9% to $36.7 million for the nine
months ended September 30, 2001 from $36.4 million for the nine months ended
September 30, 2000 due to increased average occupancy at various facilities
offset by a reduction in revenue due to the terminations of the Durham Treatment
Center and San Diego Center contracts as of June 30, 2001 and January 31, 2001,
respectively. Average occupancy was 97.6% for the nine months ended
September 30, 2001 compared to 93.8% for the nine months ended September 30,
2000.
OPERATING EXPENSES. Operating expenses increased 21.4% to $156.1 million
for the nine months ended September 30, 2001 from $128.6 million for the nine
months ended September 30, 2000.
Adult secure institutional division operating expenses increased 21.3% to
$58.0 million for the nine months ended September 30, 2001 from $47.9 million
for the nine months ended September 30, 2000 due principally to (1) the final
550 bed expansion of the D. Ray James Prison which began housing inmates late in
the first quarter of 2000 and reached a full occupancy level late in the second
quarter of 2000, (2) increased personnel costs due to contractual wage increases
at the Big Spring Complex associated with receiving an increase in our revenue
per diem, (3) the commencement of a management contract at the Valencia County
Detention Center in the fourth quarter of 2000, (4) increased operating expenses
at the Great Plains Correctional Facility due to increased occupancy as compared
to the nine months ended September 30, 2000 and (5) increased facility rent
expense as a result of the 2001 Sale and Leaseback Transaction. As a percentage
of revenues, excluding start-up operations in 2000, adult secure institutional
division operating expenses were 77.6% for the nine months ended September 30,
2001 compared to 72.6% for the nine months ended September 30, 2000. The decline
in the 2001 operating margin was due to (1) increased personnel and employee
retention costs, inmate medical and utility costs, (2) increased facility rent
expense as a result of the 2001 Sale and Leaseback Transaction and (3) the
reduction in occupancy at the Santa Fe County Detention Center.
Juvenile division operating expenses increased 30.0% to $68.6 million for
the nine months ended September 30, 2001 from $53.7 million for the nine months
ended September 30, 2000. The increase in operating expenses was principally due
to (1) the opening of the New Morgan Academy in the fourth quarter of 2000,
(2) the commencement of a management contract at the Alexander Youth Center in
the third quarter of 2001, (3) the opening of the William Penn Harrisburg
Alternative School in the third quarter of 2001, (4) increased facility rent
expense as a result of the 2001 Sale and Leaseback Transaction, (5) increased
operating expenses at ACAF due to a facility expansion and (6) increased average
occupancy at various facilities including the Griffin Juvenile Facility. As a
percentage of revenues, excluding start-up operations, juvenile division
operating expenses were 81.4% for the nine months ended September 30, 2001
compared to 85.0% for the nine months ended September 30, 2000. The 2001
operating margin was impacted favorably due to the results of the New Morgan
Academy, the Alexander Youth Center and the William Penn Harrisburg Alternative
School, offset by increased personnel and employee retention costs, utility
costs and facility rent expense as a result of the 2001 Sale and Leaseback
Transaction.
Pre-release division operating expenses increased 8.2% to $29.3 million for
the nine months ended September 30, 2001 from $27.0 million for the nine months
ended September 30, 2000 due to increased facility rent expense as a result of
the 2001 Sale and Leaseback Transaction offset, in part, by a reduction to
operating expenses due to our terminations of the Durham Treatment Center and
San Diego Center contracts. As a percentage of revenue, pre-release division
operating expenses were 79.7% for the nine months ended September 30, 2001
compared to 74.4% for the nine months ended September 30, 2000. The decline in
the 2001 operating margin was principally due to increased personnel and
employee retention costs, utility costs and increased facility rent expense as a
result of the 2001 Sale and Leaseback Transaction and due to our termination of
the San Diego Center contract in January 2001.
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PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$3.9 million for the nine months ended September 30, 2001 and were attributable
to the start-up activities of the New Morgan Academy and the expansion of ACAF.
Pre-opening and start-up expenses were $838,000 for the nine months ended
September 30, 2000 and were attributable to the start-up activities of the final
550 bed expansion at the D. Ray James Prison in the first quarter of 2000, the
New Morgan Academy and the Moshannon Valley Detention Center.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 8.2%
to $5.7 million for the nine months ended September 30, 2001 from $5.3 million
for the nine months ended September 30, 2000 due to (1) the completion of a 150
bed expansion at the Big Spring Complex completed in the first quarter of 2001,
(2) the purchase and renovation of a building for the expansion of ACAF,
(3) depreciation of furniture and equipment purchased for the New Morgan
Academy, (4) the write-off of leasehold improvements for the Durham Treatment
Center due to its contract termination and (5) various facility improvements and
furniture and equipment purchases. Depreciation expense was reduced as a result
of the sale of 11 of our facilities in the 2001 Sale and Leaseback Transaction.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $11.4 million for the nine months ended September 30, 2001 from
$9.0 million for the nine months ended September 30, 2000. Included in general
and administrative expense for the nine months ended September 30, 2001 was a
non-recurring charge of $660,000 related to the write-off of deferred
acquisition costs associated with the Fort Greeley, Alaska project. The
remaining increase in general and administrative expenses resulted primarily
from retention and incentive bonus costs, costs for additional personnel
providing public affairs and business development services, certain consulting
and legal costs and other administrative infrastructure costs. Excluding the
$660,000 charge in the 2001 period, general and administrative expenses were
5.5% and 5.4% of revenues for the nine months ended September 30, 2001 and 2000,
respectively.
INTEREST. Interest expense, net of interest income, decreased to
$11.1 million for the nine months ended September 30, 2001 from $11.6 million
for the nine months ended September 30, 2000 due principally to the August 14,
2001 repayment of $120.0 million of senior debt with a portion of the proceeds
from the 2001 Sale and Leaseback Transaction. For the nine months ended
September 30, 2001, interest expense included a non-recurring charge of $818,000
to write-off a portion of unamortized deferred debt issuance costs related to
the senior credit facility as a result of the repayment of all outstanding
borrowings and the associated reduction of the credit commitment. For the nine
months ended September 30, 2001, we capitalized interest of approximately
$69,000 related to facility expansions. There was no interest capitalized for
the nine months ended September 30, 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Revenues increased 27.7% to $226.1 million for the year ended
December 31, 2000 from $177.0 million for the year ended December 31, 1999.
Adult secure institutional division revenues increased 19.9% to
$91.2 million for the year ended December 31, 2000 from $76.0 million for the
year ended December 31, 1999 due principally to (1) the final 550 bed expansion
of the D. Ray James Prison which began housing inmates late in the first quarter
of 2000 and reached a full occupancy level late in the second quarter of 2000,
(2) the opening of the additional 450 bed second phase of the D. Ray James
Prison in the first quarter of 1999, (3) expansions at the Big Spring Complex
completed in the fourth quarter of 1999 and the first quarter of 2000 and
(4) the opening of the Valencia County Detention Center in the fourth quarter of
2000. These revenue increases were offset, in part, by reductions in occupancy
at certain facilities including a temporary reduction at the Great Plains
Correctional Facility. As of December 31, 2000, occupancy at these facilities
had returned to normal occupancy levels. Additionally, during the fourth quarter
of 2000, we entered into a license agreement with our construction contractor
that conveyed certain rights
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<Page>
to the design of an adult secure institution. A non-recurring license agreement
payment of $950,000 was recognized as revenue by us. We have not licensed such
designs in prior years and do not expect to generate significant revenues from
such activity in future periods. Revenues attributable to start-up operations
were approximately $44,000 and $866,000 for the years ended December 31, 2000
and 1999, respectively, and related primarily to the D. Ray James Prison
expansions.
Juvenile division revenues increased 28.2% to $86.0 million for the year
ended December 31, 2000 from $67.1 million for the year ended December 31, 1999
due to (1) the operations of the juvenile facilities and programs acquired from
Interventions--Illinois in November 1999, (2) increased occupancy at the Cornell
Abraxas I facility due to a facility expansion completed in the fourth quarter
of 1999, (3) the opening of the Cornell Abraxas Youth Center late in the first
quarter of 1999, (4) increased occupancy at certain facilities including the
Santa Fe County Juvenile Detention Facility and the Griffin Juvenile Facility,
(5) the opening of the New Morgan Academy in the fourth quarter of 2000, and
(6) the addition of various new programs during 1999 including two new
non-residential mental health programs and one new residential mental health
program in Pennsylvania. Revenues attributable to start-up operations were
$1.2 million and $432,000, for the years ended December 31, 2000 and 1999,
respectively. For the year ended December 31, 2000, revenues attributable to
start-up operations related primarily to the New Morgan Academy. For the year
ended December 31, 1999 revenues attributable to start-up operations related to
the opening of two new residential facilities and three new non-residential
programs.
Pre-release division revenues increased 44.4% to $48.9 million for the year
ended December 31, 2000 from $33.8 million for the year ended December 31, 1999
due principally to (1) the operations of the pre-release facilities and programs
acquired from Interventions--Illinois in November 1999, (2) the opening of a new
facility in Nome, Alaska late in the third quarter of 1999, and (3) increased
occupancy at various facilities including the Leidel Comprehensive Sanctions
Center, the Reid Community Correctional Center and the Dallas County Judicial
Treatment Center. Revenues attributable to start-up operations were $0 and
$122,000 for the years ended December 31, 2000 and 1999, respectively. Revenues
attributable to start-up operations for the year ended December 31, 1999 related
to the new facility in Nome, Alaska.
OPERATING EXPENSES. Operating expenses increased 29.1% to $175.4 million
for the year ended December 31, 2000 from $135.9 million for the year ended
December 31, 1999. For the years ended December 31, 2000 and 1999, operating
expenses included approximately $3.9 million and $308,000, respectively, of rent
expense resulting from the sale and leaseback of certain owned furniture and
equipment during the fourth quarter of 1999. This operating rent expense was
largely offset by a reduction of depreciation and interest expense.
Adult secure institutional division operating expenses increased 23.8% to
$68.2 million for the year ended December 31, 2000 from $55.1 million for the
year ended December 31, 1999 due principally to (1) the final 550 bed expansion
of the D. Ray James Prison, which began housing inmates late in the first
quarter of 2000 and reached a full occupancy level late in the second quarter of
2000, (2) the opening of the additional 450 bed second phase of the D. Ray James
Prison in the first quarter of 1999, (3) increased occupancy at the Big Spring
Complex due to expansions completed in the fourth quarter of 1999 and the first
quarter of 2000, and (4) the opening of the Valencia County Detention Center in
the fourth quarter of 2000. As a percentage of adult secure institutional
division revenues, excluding start-up operations and the $950,000 license
agreement revenue, adult secure institutional division operating expenses were
75.0% for the year ended December 31, 2000 compared to 70.1% for the year ended
December 31, 1999. The 2000 operating margin was impacted unfavorably due to
(1) the sale and leaseback of certain owned furniture and equipment during the
fourth quarter of 1999, (2) a reduction in occupancy at the Great Plains
Correctional Facility offset, in part, by the expansion of the D. Ray James
Prison, (3) a $1.2 million bad debt provision related to a Santa Fe County Adult
Detention Facility contract dispute and (4) a reduction to operating expenses
during the year ended
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<Page>
December 31, 1999 of $1.0 million at the Santa Fe County Adult Detention
Facility resulting from a cost sharing agreement with our construction
contractor.
Juvenile division operating expenses increased 28.2% to $73.9 million for
the year ended December 31, 2000 from $57.6 million for the year ended
December 31, 1999. The increase in operating expenses was due to (1) the
juvenile facilities and programs acquired from Interventions--Illinois in
November 1999, (2) increased occupancy at the Cornell Abraxas I facility due to
a facility expansion completed in the fourth quarter of 1999, (3) the opening of
the Cornell Abraxas Youth Center late in the first quarter of 1999,
(4) increased occupancy at certain facilities including the Santa Fe County
Juvenile Detention Facility and the Griffin Juvenile Facility, (5) the opening
of the New Morgan Academy in the fourth quarter of 2000, and (6) the addition of
various programs including two new non-residential mental health programs and
one residential mental health facility in Pennsylvania. As a percentage of
juvenile division revenues, excluding start-up operations, juvenile division
operating expenses were 85.1% for the year ended December 31, 2000 compared to
85.3% for the year ended December 31, 1999. The improved operating margin for
the year ended December 31, 2000 compared to the year ended December 31, 1999
was due principally to the higher occupancy levels and revenue of certain
facilities including Cornell Abraxas I, the Cornell Abraxas Youth Center, the
Griffin Juvenile Facility and the Santa Fe County Juvenile Detention Facility.
These operating margin improvements were offset, in part, by a margin reduction
due to the sale and leaseback of certain owned furniture and equipment during
the fourth quarter of 1999.
Pre-release division operating expenses increased 39.0% to $36.0 million for
the year ended December 31, 2000 from $25.9 million for the year ended
December 31, 1999 due principally to (1) the pre-release facilities and programs
acquired from Interventions--Illinois in November 1999, (2) the opening of a new
facility in Nome, Alaska late in the third quarter of 1999 and (3) increased
occupancy at various facilities including the Leidel Comprehensive Sanctions
Center, the Reid Community Correctional Center and the Dallas County Judicial
Treatment Center. As a percentage of pre-release division revenues, excluding
start-up operations, pre-release division operating expenses were 73.6% for the
year ended December 31, 2000 compared to 75.4% for the year ended December 31,
1999. The improved operating margin for the year ended December 31, 2000
compared to the year ended December 31, 1999 was due principally to higher
occupancy and revenues at certain facilities. These operating margin
improvements were offset, in part, by margin reductions due to the sale and
leaseback of certain owned furniture and equipment during the fourth quarter of
1999.
PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$2.3 million for the year ended December 31, 2000 and were primarily
attributable to the pre-opening and start-up activities of the New Morgan
Academy which opened in the fourth quarter of 2000 and the final 550 bed
expansion at the D. Ray James Prison in the first quarter of 2000. Pre-opening
and start-up expenses were $2.9 million for the year ended December 31, 1999 and
were attributable to the pre-opening and start-up activities of the additional
450 beds in the D. Ray James Prison, the Cornell Abraxas Youth Center during the
first quarter of 1999 and other new juvenile programs in Pennsylvania and a new
pre-release facility in Alaska. Revenues associated with start-up operations
were $1.3 million and $1.5 million for the years ended December 31, 2000 and
1999, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
21.1% to $7.3 million for the year ended December 31, 2000 from $6.0 million for
the year ended December 31, 1999 due to (1) depreciation of buildings, furniture
and equipment and amortization of non-compete agreements related to the
acquisition of Interventions--Illinois in November 1999, (2) the completion of
the expansions at the Big Spring Complex, (3) the completion of the additional
450 bed expansion in the first quarter of 1999 and the final 550 bed expansion
in the first quarter of 2000 at the D. Ray James Prison and (4) various facility
expansions. These increases were partially offset due to the sale and leaseback
of certain owned furniture and equipment during the fourth quarter of 1999 and
due to our change in the estimated useful lives of certain adult secure
institutions effective July 1, 1999.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 21.1% to $12.0 million for the year ended December 31, 2000 from
$9.9 million for the year ended December 31, 1999. The increase in general and
administrative expenses resulted principally from the centralization of certain
administrative functions and increases in public relations efforts and
information technology infrastructure. Additionally, for the years ended
December 31, 2000 and 1999, general and administrative expenses included
approximately $820,000 and $93,000, respectively, of rent expense resulting from
the sale and leaseback of certain owned furniture and equipment during the
fourth quarter of 1999. This rent expense was largely offset by a reduction of
depreciation and interest expense. Excluding the rent expense resulting from the
1999 sale and leaseback of certain furniture and equipment, general and
administrative expenses for the year ended December 31, 2000 increased 13.9%
compared to the year ended December 31, 1999.
INTEREST. Interest expense, net of interest income, increased to
$15.6 million for the year ended December 31, 2000 from $8.4 million for the
year ended December 31, 1999 due principally to (1) increased borrowings to fund
the acquisition of Interventions--Illinois in November 1999, various facility
expansions and the associated increases in working capital and (2) increases in
base interest rates and our interest rate margin on our senior credit facility.
Capitalized interest for the year ended December 31, 2000 was $40,000 and
related to an expansion at the Big Spring Complex. During the year ended
December 31, 1999, we capitalized interest totaling $1.2 million related
principally to costs for construction of the D. Ray James Prison.
INCOME TAXES. For the year ended December 31, 2000 and 1999, we recognized
a provision for income taxes at an estimated effective rate of 41% and 40%,
respectively. The increase in the estimated effective tax rate for the year
ended December 31, 2000 as compared to the year ended December 31, 1999 was due
primarily to increased taxable income in certain higher taxing states.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased 43.7% to $177.0 million for the year ended
December 31, 1999 from $123.1 million for the year ended December 31, 1998.
Adult secure institutional division revenues increased 44.4% to
$76.0 million for the year ended December 31, 1999 from $52.6 million for the
year ended December 31, 1998 due principally to (1) the opening of the 560 bed
expansion unit at the Big Spring Complex in the fourth quarter of 1998 and
additional Big Spring Complex expansions during the fourth quarter of 1999,
(2) the opening of the 550 initial beds in the D. Ray James Prison in the fourth
quarter of 1998 and an additional 450 beds in the first quarter of 1999 and
(3) the opening of the 661 bed Santa Fe County Adult Detention Facility in the
third quarter of 1998. Revenues attributable to start-up operations for the Big
Spring Complex and D. Ray James Prison expansions were approximately $866,000
for the year ended December 31, 1999.
Juvenile division revenues increased 42.7% to $67.1 million for the year
ended December 31, 1999 from $47.0 million for the year ended December 31, 1998
due to (1) the opening of the Santa Fe County Juvenile Detention Facility in the
third quarter of 1998, (2) increased occupancy at the Cornell Abraxas I and
Cornell Abraxas of Ohio facilities due to facility expansions completed in the
third quarter of 1998, (3) the opening of the Danville Center for Adolescent
Females in the second quarter of 1998 and the Cornell Abraxas Youth Center late
in the first quarter of 1999, (4) the acquisition of Interventions-Illinois
during the fourth quarter of 1999, (5) increased occupancy at the Campbell
Griffin Facility in San Antonio, Texas and (6) the addition of various new
programs including two new non-residential mental health programs in
Pennsylvania. Revenues attributable to start-up operations were approximately
$432,000 for the year ended December 31, 1999.
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Pre-release division revenues increased 44.2% to $33.8 million for the year
ended December 31, 1999 from $23.5 million for the year ended December 31, 1998
due principally to a full year of operations of five pre-release centers in
Alaska acquired in August 1998 and the acquisition of Interventions-Illinois
during the fourth quarter of 1999. Revenues attributable to start-up operations
were approximately $122,000 for the year ended December 31, 1999 and related to
a new facility in Alaska.
OPERATING EXPENSES. Operating expenses increased 37.6% to $135.9 million
for the year ended December 31, 1999 from $98.7 million for the year ended
December 31, 1998.
Adult secure institutional division operating expenses increased 45.8% to
$55.1 million for the year ended December 31, 1999 from $37.8 million for the
year ended December 31, 1998 due principally to (1) the opening of the 560 bed
expansion unit at the Big Spring Complex in the fourth quarter of 1998 and
additional Big Spring Complex expansions during the fourth quarter of 1999,
(2) the opening of the 550 initial beds at the D. Ray James Prison in the fourth
quarter of 1998 and an additional 450 beds in the first quarter of 1999 and
(3) the opening of the 661 bed Santa Fe County Adult Detention Facility in the
third quarter of 1998. As a percentage of adult secure institutional division
revenues, excluding start-up operations, adult secure institutional division
operating expenses were 70.1% for the year ended December 31, 1999 compared to
71.9% for the year ended December 31, 1998. The improved operating margin was
due principally to a greater mix of owned versus leased facilities and a
reduction to operating expenses of $1.0 million at the Santa Fe County Adult
Detention Facility resulting from a cost-sharing agreement with our construction
contractor.
Juvenile division operating expenses increased 39.8% to $57.6 million for
the year ended December 31, 1999 from $41.2 million for the year ended
December 31, 1998. The increase in operating expenses was due to (1) the Santa
Fe County Juvenile Detention Facility which began operations late in the third
quarter of 1998, (2) increased occupancy at the Cornell Abraxas I and Cornell
Abraxas of Ohio facilities due to facility expansions completed in the third
quarter of 1998, (3) the Cornell Abraxas Youth Center which began operations
late in the first quarter of 1999 and the Danville Center for Adolescent Females
which began operations in the second quarter of 1998, (4) the acquisition of
Interventions-Illinois during the fourth quarter of 1999, (5) increased
occupancy at the Campbell Griffin Facility in San Antonio, Texas and (6) the
addition of new programs including two new non-residential mental health
programs in Pennsylvania. As a percentage of juvenile division revenues,
excluding start-up operations, operating expenses were 85.3% for the year ended
December 31, 1999 compared to 87.7% for the year ended December 31, 1998. The
improved operating margin was due principally to improved results from certain
expanded residential facilities.
Pre-release division operating expenses increased 38.5% to $25.9 million for
the year ended December 31, 1999 from $18.7 million for the year ended
December 31, 1998 due principally to the acquisition of five pre-release centers
in Alaska in August 1998 and the acquisition of Interventions-Illinois during
the fourth quarter of 1999. As a percentage of pre-release division revenues,
excluding start up operations, operating expenses were 75.4% for the year ended
December 31, 1999 compared to 79.8% for the year ended December 31, 1998. The
improved operating margin was due principally to a greater mix of owned versus
leased facilities, including four owned facilities in Alaska.
PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$2.9 million for the year ended December 31, 1999 and were primarily
attributable to the pre-opening and start-up activities of the additional 450
beds during the first and second quarters of 1999 at the D. Ray James Prison,
the Cornell Abraxas Youth Center during the first quarter of 1999 and other new
juvenile programs in Pennsylvania and a new pre-release facility in Alaska.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
42.1% to $6.0 million for the year ended December 31, 1999 from $4.2 million for
the year ended December 31, 1998 due to
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(1) depreciation of buildings and equipment acquired in Alaska in August 1998,
(2) the opening of the 560 bed expansion unit at the Big Spring Complex in the
fourth quarter of 1998 and additional Big Spring Complex expansions during 1999,
(3) the phase-in of 1,550 beds in the D. Ray James Prison from the fourth
quarter of 1998 through the fourth quarter of 1999 and (4) various facility
expansions and related equipment. Effective July 1, 1999, the lease term for the
three original Big Spring Complex units was extended from an average of
35 years to 50 years. At this date, management revised its estimated useful
lives of the Big Spring Complex and two other adult secure institutions to
50 years. The effect of this change reduced building depreciation and prepaid
facility use amortization by approximately $300,000 for the year ended
December 31, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 31.0% to $9.9 million for the year ended December 31, 1999 from
$7.6 million for the year ended December 31, 1998. The increase in general and
administrative expenses resulted principally from additional corporate
executive, business development and administrative personnel, overhead and
travel to manage our increased business and for the development of new
contracts.
INTEREST. Interest expense, net of interest income, increased to
$8.4 million for the year ended December 31, 1999 from $2.5 million for the year
ended December 31, 1998 due principally to increased borrowings to finance
(1) the acquisition of the Alaskan assets in August 1998, (2) construction costs
of new facilities and expansions including the 560 bed Big Spring Complex
expansion unit in 1998, additional Big Spring Complex expansions in 1999 and the
1,550 bed D. Ray James Prison and (3) the acquisition of Interventions-Illinois
in the fourth quarter of 1999. For the year ended December 31, 1999, we
capitalized interest totaling $1.2 million related principally to costs for
construction of the D. Ray James Prison expansions and other facility
expansions.
INCOME TAXES. For the years ended December 31, 1999 and 1998, we recognized
a provision for income taxes at an estimated effective rate of 40%.
ACCOUNTING CHANGE. In January 1999, we adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," or SOP 98-5, and recorded a
net-of-tax charge of approximately $3.0 million for the cumulative effect of a
change in accounting principle. As a result of our adoption of SOP 98-5, we
began to expense pre-opening and start-up costs as incurred.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Our primary capital requirements are for (1) construction of new facilities,
(2) expansions of existing facilities, (3) working capital, (4) pre-opening and
start-up costs related to new operating contracts, (5) acquisitions,
(6) information systems hardware and software and (7) furniture, fixtures and
equipment. Working capital requirements generally increase immediately prior to
us commencing management of a new facility as we incur pre-opening and start-up
costs and purchase necessary equipment and supplies before contractual facility
management revenue is realized.
OUTSTANDING PROPOSALS AND BIDS
As of October 15, 2001, we were involved in numerous proposal processes
across of all our service lines, the most significant proposals of which were
submitted to the FBOP for contracts for four awards with an aggregate capacity
of 6,000 beds. In addition, the FBOP has published a notice for a fifth contract
for 1,500 beds, but has not yet solicited proposals for this contract. Each of
these proposals is for a take-or-pay contract, providing a minimum level of
guaranteed revenues. The nature of the written proposal process is dynamic and,
at any given date, the number of new projects and the aggregate offender
capacity for which written proposals have been submitted can increase or
decrease
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significantly based upon when written proposals are submitted and when responses
to these proposals are received.
2001 SALE AND LEASEBACK TRANSACTION
On August 14, 2001, we completed the 2001 Sale and Leaseback Transaction. We
sold the facilities to MCF, and are leasing them back for an initial period of
20 years, with approximately 25 years of additional renewal period options. MCF
is a special-purpose entity.
We received $173.0 million of proceeds from the sale of the facilities. We
used $120.0 million of the proceeds to repay our long-term senior debt and
invested the remaining proceeds of $53.0 million in short-term securities. As a
result, we now have an undrawn $45.0 million revolving line of credit. The gain
on sale of the facilities of approximately $7.5 million was deferred and is
being amortized over the initial lease term as a reduction to facility rental
expense.
Our lease payment obligations are fixed for the initial 20-year lease
period. The cash rental payments due under the initial lease term are largely
due in the first 15 years of the lease term, therefore we will be capitalizing a
portion of the rental payments as prepaid rent during the first 15 years of the
lease term and amortizing the aggregate lease payments over the 20-year lease
term on a straight-line basis.
The straight-line rental expense for the 2001 Sale and Leaseback Transaction
will be approximately $17.6 million annually. The future minimum lease cash
payments are as follows (in thousands):
<Table>
Three months ended December 31, 2001........................ $ 6,134
Year ended December 31:
2002...................................................... 24,862
2003...................................................... 25,116
2004...................................................... 25,138
2005...................................................... 25,101
Thereafter (2006 through 2021).............................. 249,725
--------
Total....................................................... $356,076
========
</Table>
LONG-TERM CREDIT FACILITIES
On August 14, 2001, we repaid $70.0 million outstanding under our revolving
line of credit with a portion of the proceeds from the 2001 Sale and Leaseback
Transaction. In connection with the repayment, we amended our senior credit
facility, which now provides for borrowings of up to $45.0 million under a
revolving line of credit. The commitment amount is reduced by $1.6 million
quarterly beginning in July 2002. The senior credit facility matures in
July 2005 and bears interest, at our election, at either the prime rate plus a
margin of 2.0%, or a rate which is 3.0% above the applicable LIBOR rate. The
senior credit facility is secured by substantially all of the our assets,
including the stock of all of our subsidiaries; does not permit the payment of
cash dividends; and requires us to comply with certain leverage, net worth and
debt service coverage covenants.
Additionally, the senior credit facility provides us with the ability to
enter into operating lease agreements for the acquisition or development of
operating facilities. This lease financing arrangement provides for funding to
the lessor under the operating leases of up to $100.0 million, of which
approximately $49.4 million had been utilized as of September 30, 2001. We
expect to utilize the remaining capacity under this lease financing arrangement
to complete construction of the Moshannon Valley Correctional Center. The leases
under this arrangement have a term of five years, include purchase and renewal
options, and provide for residual value guarantees for each lease which average
81.4% of the total cost and would be due by us upon termination of the leases.
Upon termination of a
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lease, we could either exercise a purchase option or the facilities could be
sold to a third party. We believe the fair value of the leased facilities will
equal or exceed the residual guaranteed amounts. Lease payments under the lease
financing arrangement are variable and are adjusted for changes in interest
rates.
On August 14, 2001, we repaid the $50.0 million of outstanding 7.74% senior
secured notes with a portion of the proceeds from the 2001 Sale and Leaseback
Transaction.
We have outstanding $38.4 million, net of discount, of our 12.875%
subordinated notes issued in July 2000. Our subordinated notes have a seven-year
term maturing in July 2007, are interest-only payable quarterly at a fixed
annual rate of 12.875%, and contain certain financial covenants. We intend to
use the proceeds received by us in this offering and existing cash to repay the
outstanding $39.4 million of these subordinated notes and a prepayment fee of
approximately $800,000. Our senior credit facility requires that a majority of
the lenders under that facility approve the prepayment of the subordinated
notes.
NEW FACILITIES AND PROJECTS UNDER CONSTRUCTION
The New Morgan Academy was completed and became operational in two phases
during the fourth quarter of 2000 and the first quarter of 2001.
In April 1999, we were awarded a contract to design, build and operate a
1,095 bed prison for the FBOP in Moshannon Valley, Pennsylvania. Construction
and activation activities commenced immediately. In June 1999, the FBOP issued a
Stop-Work Order pending a re-evaluation of their environmental documentation
supporting the decision to award the contract. The environmental study was
completed with a finding of no significant impact. The Stop-Work Order was
lifted by the FBOP on August 9, 2001. We anticipate that construction will be
resumed in the near-term pending a re-negotiation of the originally awarded
contract.
At September 30, 2001, accounts receivable include costs totaling
$1.4 million for direct costs incurred by us since June 1999 for payroll and
other operating costs related to the Moshannon Valley Correctional Center since
the issuance of the Stop-Work Order. These costs were incurred at the direction
of the FBOP with the understanding that such costs would be reimbursed. Although
no formal written agreement exists, we believe that these costs will be
reimbursed by the FBOP in the near term. In the event any portion of these costs
are not reimbursed, such costs will be expensed.
Development and construction costs for the New Morgan Academy and the
Moshannon Valley Correctional Center have been financed with our lease financing
arrangement discussed under "--Long-Term Credit Facilities."
CAPITAL EXPENDITURES
Capital expenditures for the nine months ended September 30, 2001 were
$7.7 million and related primarily to (1) a 150 bed expansion at the Big Spring
Complex, (2) the purchase and renovation of a building and related furniture and
equipment purchases for an expansion of ACAF, (3) purchases of furniture and
equipment for the New Morgan Academy and (4) various facility improvements and
furniture and equipment purchases.
We believe that the remaining net proceeds from this offering, the excess
cash proceeds from the 2001 Sale and Leaseback Transaction and cash flows
generated from operations, together with the credit available under the senior
credit facility and the operating lease capacity thereunder, will provide
sufficient liquidity to meet our committed capital and working capital
requirements for currently awarded and certain potential future contracts. To
the extent our cash and current financing arrangements do not provide sufficient
financing to fund construction costs related to future adult secure
institutional contract awards or significant expansions, we anticipate obtaining
additional sources
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of financing to fund such activities. However, we cannot assure you that such
financing will be available, or will be available on terms favorable to us.
INFLATION
Other than personnel and inmate medical costs at certain facilities during
2000 and early 2001, we believe that inflation has not had a material effect on
our results of operations during the past three years. Most of our facility
management contracts provide for payments to us of either fixed per diem rates
or per diem rates that increase by only small amounts during the terms of the
contracts. Inflation could substantially increase our personnel costs (the
largest component of operating expenses) or other operating expenses at rates
faster than any increases in contract revenues.
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BUSINESS
COMPANY OVERVIEW
As the successor to entities that began developing adult secure
institutional facilities in 1984, pre-release correctional and treatment
facilities in 1974 and juvenile facilities in 1973, we provide a diversified
portfolio of services for adults and juveniles through our three operating
divisions: (1) adult secure institutional services; (2) juvenile treatment,
educational and detention services and (3) pre-release correctional and
treatment services. These services include incarceration and detention,
transition from incarceration, drug and alcohol treatment programs, behavioral
rehabilitation and treatment, and K-12 education. We provide these essential
services through our 69 facilities, in operation or under development, in 13
states and the District of Columbia. As of October 15, 2001, our contracts for
these facilities provided for a total service capacity of 15,241. We believe
that our innovative programs and services have put us at the forefront of our
industry by measuring and demonstrating superior results in meeting the public
policy goals of community safety and recidivism reduction.
Our services address a total market size that we believe exceeds
$50 billion, of which less than 10% is currently privatized. The total market is
expected to demonstrate consistent growth over the next decade primarily driven
by overcrowded and aging government facilities, increasing emphasis on
treatment, rehabilitation and education and the growing demographic of the 14 to
24 year-old at-risk population, driven by the "Baby Boom Echo." We also expect
the size of the private market to grow as a result of the governments'
demonstrated need to rapidly activate new programs and facilities, reduce costs,
increase accountability and improve overall quality of service.
Our financial performance is characterized by consistent growth, stable and
recurring revenue streams and a general resistance to economic weakness. From
1998 to 2000, our revenues grew at a compound annual growth rate of
approximately 36%. We expect continued revenue growth in the future driven by
new contract awards, existing facility expansions and accretive fill-in
acquisitions.
The size of our target markets and diversity of our service offering help to
ensure a high degree of revenue stability in a range of operating environments.
Typically, our operating contracts are renewed and are often expanded.
Additionally, our business is less vulnerable to changing economic cycles and
typically outperforms other industries in periods of economic weakness based on
higher incarceration rates, a more plentiful labor pool and the essential nature
of the services we provide.
INDUSTRY BACKGROUND
PRIVATIZATION
Correctional and detention services are an essential government function. In
the United States, as prison populations increase and federal, state and local
governments face continuing pressure to control costs and improve the service
quality, there is a growing trend toward outsourcing and privatization of
government services and functions, including correctional and detention
services. Outsourcing and privatization has historically faced opposition in the
U.S.; however, public and government acceptance has increased as standards of
service improve and cost-savings are provided to the government.
While juvenile and pre-release services have been privatized for decades,
the adult private prison industry in the U.S. began in 1984 as public
authorities began to respond to overcrowding pressures and budgetary
constraints, and to explore more efficient means of incarceration. Prison
management companies offer a range of services that governments have
historically provided to house and care for the needs of offenders. These
services include facility design, construction management, health-care, food
service, security, transportation, education and rehabilitation. Governments
engaging private companies seek to receive these services at a lower cost than a
public authority could provide.
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THE PRISON POPULATION AND OVERCROWDING
The FBOP believes that private prison facilities complement FBOP operations
and utilize private operators as a way to help handle a projected growth of
federal inmates in the coming years. From 2000 to 2006, the federal prison
population is projected to grow by 50%.
Males between 14 and 24 years of age have demonstrated the highest
propensity for criminal behavior. This at-risk population in the United States
is projected to increase in the coming years. The U.S. Bureau of the Census
estimates this population segment leveled out in 1995 at 20.4 million, but will
increase to 23.2 million by 2005.
These demographics, along with population growth and political trends, have
led to the continuing growth of inmate populations and associated spending by
governments at all jurisdictional levels. Economic downturn is likely to further
this growth. We believe there is a correlation between a weakened economic
environment and increased unemployment and higher crime rates. As a result, in
an economic recession, the number of incarcerations may increase, further
fueling the need for additional services within the corrections industry.
Prison overcrowding is difficult to measure because there are no uniform
means to determine capacity. The FBOP estimated that by year end 2000, the
federal prison system was operating at 131% of capacity and that state prisons
were at 101% to 115% of capacity depending on the capacity measure. We believe
that new construction provides approximately 1,000 new beds per week while the
demand for new prison construction could call for approximately 8,000 new beds
per week.
CALIFORNIA'S PROPOSITION 36
Proposition 36 became law in California in June 2001. Generally, this new
initiative substitutes treatment for prison sentences for certain crimes, such
as first time drug offenses. Management believes this new initiative in
California is part of a trend in the U.S. to provide treatment to first time
offenders rather than incarceration. As a long-time leading provider in
treatment and educational services, we believe that we are well positioned to
benefit from this trend without significant capital investment. For example,
during the third quarter of 2001, we were awarded our first contract consistent
with this initiative.
OPERATIONS
Pursuant to the terms of our management contracts, we are responsible for
the overall operation of our facilities, including staff recruitment, general
facility administration, security and supervision of the offenders or clients
and facility maintenance. We also provide a variety of rehabilitative and
educational programs at many of our facilities.
We provide this diversified portfolio of essential services for adults and
juveniles through our three operating divisions: (1) adult secure institutional
services; (2) juvenile treatment, educational and detention services and
(3) pre-release correctional and treatment services. Our innovative programs
have put us at the forefront of our industry by measuring and demonstrating
superior results in meeting the goals of community safety, rehabilitation and
education.
ADULT SECURE INSTITUTIONAL SERVICES DIVISION
Our adult secure institutional division provides maximum, medium, and
low-security incarceration. This division is committed to ensuring public safety
through the operation of a secure environment and offenders are provided with a
variety of programming and services geared toward a successful return to the
community and a subsequent reduction in recidivism. At October 15, 2001, we
operated or had under development nine facilities with a total service capacity
of 7,313 beds that provide, or will provide, adult secure institutional services
for incarcerated adults.
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The adult secure institutional division provides:
- low to maximum-security incarceration services;
- integrated facility development and operational services;
- state-of-the-art correctional technology including electronic controls and
surveillance equipment;
- basic education such as preparation and testing for the high school
equivalency exam, or GED, English as a second language, or ESL, classes
and Adult Basic Education, or ABE;
- health care including medical, dental, behavioral health and psychiatric
services;
- individual and group counseling;
- substance abuse treatment including detoxification, testing, counseling,
12-step programs and relapse prevention services;
- life skills training including training relating to proper hygiene,
personal finance and parenting skills;
- institutional food services; and
- recreational activities such as exercise programs, hobby and craft and
leisure activities.
According to reports issued by the United States Department of Justice,
Bureau of Justice Statistics, or the BJS, the number of adult offenders housed
in federal and state prison facilities and in local jails increased from 744,208
at December 31, 1985 to 1,933,503 at December 31, 2000. The average annual
increase of offenders in custody from 1990 to 2000 was 5.3%.
According to the Private Adult Correctional Facility Census, the design
capacity of privately managed adult secure institutional facilities in operation
or under construction worldwide increased from 20,687 beds at December 31, 1992
to 145,521 beds at September 4, 2001, a compound annual growth rate of more than
24%. In 1997, the adult prison management industry, encompassing federal and
state prisons and local jails, spent approximately $30 to $40 billion to house
its incarcerated population. At December 31, 2000, private prisons held only
5.8% of all state inmates and 10.7% of federal inmates, but had experienced a
9.1% increase over the six month period ended June 30, 2000.
JUVENILE TREATMENT, EDUCATIONAL AND DETENTION SERVICES DIVISION
Our juvenile division provides residential, community-based, behavioral
health and alternative education programs to juveniles, typically between the
ages of ten and 17. In addition to meaningful treatment options, the programs
also develop continuing care plans which help bridge the juvenile back to the
community. Under the names "Cornell Abraxas" and "Cornell Interventions," we
offer programs to meet the multiple needs of troubled juveniles. At October 15,
2001, we operated or had contracts to operate 20 residential facilities and 17
non-residential community-based programs serving an aggregate capacity of
approximately 4,171 youths.
Juvenile treatment, educational and detention services consist primarily of
programs that are designed to lead to rehabilitation while providing public
safety and holding juveniles accountable for their decisions and behavior. We
operate primarily within a restorative justice model. The basic philosophy is
that merely serving time in an institution does not relieve juvenile offenders
of the obligation to repay their victims and that incarceration alone does not
compensate for the societal impact of crimes. The use of a balanced approach
gives equal emphasis to accountability, competency development and community
protection.
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The juvenile division provides:
- diverse treatment settings including settings that are physically-secure,
staff-secure and community-based;
- specialized treatment for special populations including females, drug
sellers, sex offenders, firesetters and families;
- individualized treatment planning and case management;
- counseling including individual, group and family therapy, cognitive
behavior therapy and stress and anger management;
- substance abuse treatment and relapse prevention and education services;
- life skills training such as training relating to proper hygiene, personal
finance and parenting skills;
- accredited alternative and special educational programs;
- gender-specific programs;
- employment training and assistance;
- medical services; and
- wilderness training programs and accredited ropes course challenges.
The juvenile corrections industry is estimated at $5 to $7 billion annually
and consists of at least 108,000 beds. The juvenile treatment and educational
components of the juvenile corrections industry are estimated to be far larger.
This market segment is fragmented with several thousand providers across the
country, most of which are small and operate in a specific geographic area.
The juvenile corrections industry has expanded rapidly in recent years as
the need for services for at-risk and adjudicated youth has risen. According to
the American Correctional Association's Directory of Adult and Juvenile
Correctional Departments, Institutions, Agencies, and Probation and Parole
Authorities, state spending in the juvenile corrections industry increased at a
compound annual growth rate of 15.7% from 1993 to 1999.
PRE-RELEASE CORRECTIONAL AND TREATMENT SERVICES DIVISION
Our pre-release division provides community-based services including job
placement and treatment and education programs as an alternative to
incarceration as well as to aid in the successful transition from a correctional
facility back into society. At October 15, 2001, we operated or had contracts to
provide pre-release correctional and treatment services within 17 residential
facilities and six non-residential community based programs with an aggregate
service capacity of 3,757. The pre-release area is primarily comprised of
individuals who have been granted parole or sentenced to probation. Probationers
(individuals sentenced for an offense without incarceration) and parolees
(individuals released prior to the completion of their sentence) are typically
placed in pre-release settings. These individuals typically spend three to six
months in halfway houses until they are prepared to re-enter society.
The pre-release division provides:
- minimum-security and staff-secure residential services;
- home confinement and electronic monitoring;
- employability training and assistance such as preparing for, securing and
maintaining employment;
- basic education including preparation and testing for the GED, ABE,
computer courses, college-level courses and extensive libraries;
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- vocational training such as training in the culinary arts and
construction;
- counseling including individual, group and family therapy, cognitive
behavior therapy and stress and anger management;
- substance-abuse treatment including detoxification, testing, counseling,
12-step programs and relapse prevention services; and
- life skills training including training related to proper hygiene,
securing appropriate housing, personal finance and parenting skills.
Expenditures in the pre-release correctional services industry are estimated
at $3.9 billion annually and consist of approximately 50,000 beds. This market
segment is extremely fragmented with several thousand providers across the
country, most of which are small and operate in a specified geographic area.
Similar to the adult secure institutional and the juvenile service segments,
the area of pre-release correctional services has experienced substantial
growth. According to the BJS, the number of parolees increased from 220,438 at
December 31, 1980 to 725,527 at December 31, 2000, a compound annual growth rate
of 6.1%. During the same period, the number of individuals on probation
increased from approximately 1.1 million to 3.8 million, a compound annual
growth rate of 6.4%. The probation and parole populations represent
approximately 67% of the total number of adults under correctional supervision
in the United States.
MARKETING AND BUSINESS DEVELOPMENT
Our principal customers are federal, state and local government agencies
responsible for adult and juvenile corrections, treatment and educational
services. The development process for obtaining facility management contracts
consists of several steps including issuance of a request for proposal, or RFP,
by a contracting agency, submission of a response to the RFP by us, the award of
the contract by a government agency and the commencement of construction or
operation of the facility. These agencies generally procure services from the
private sector by issuing an RFP to which a number of companies may respond. In
addition to costs, government agencies consider numerous other factors including
bidders' experience and qualifications when awarding contracts.
As part of our process of responding to RFPs, our management meets with
appropriate personnel from the requesting agency to best determine the agency's
distinct needs. We may also receive inquiries from or on behalf of government
agencies considering privatization of certain facilities or that have already
decided to contract with private providers. When we receive such an inquiry, we
determine whether there is a need for our services and whether the legal and
political climate in which the government agency operates is conducive to
serious consideration of privatization. We then conduct an initial cost analysis
to further determine project feasibility.
If we believe the project is consistent with our strategic business plan, we
will submit a written response to the RFP. When responding to RFPs, we incur
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.
In addition, we may incur substantial costs to acquire options to lease or
purchase land for a proposed facility and engage outside consulting and legal
expertise related to a particular RFP. The preparation of a response to an RFP
typically takes from five to ten weeks. 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, we will begin operation of the newly
constructed facility between 12 and 24 months after the contract award.
When a contract requires construction of a new facility, our success
depends, in part, upon our ability to acquire real property for our facilities
on desirable terms and at satisfactory locations. We anticipate that a large
majority of new facilities will be constructed in rural areas. To the extent
that these locations are in or near populous areas, management anticipates legal
action and other forms of
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opposition from residents in areas surrounding certain proposed sites. We may
incur significant expenses in responding to such opposition and there can be no
assurance of success. In addition, we 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.
CONTRACTS
Our facility management contracts generally provide that we will be
compensated at an occupant per diem rate, fees for treatment service,
take-or-pay or cost-plus reimbursement. Factors that we consider in determining
the per diem rate to charge include (1) the programs specified by the contract
and the related staffing levels, (2) wage levels customary in the respective
geographic areas, (3) whether the proposed facility is to be leased or purchased
and (4) the anticipated average occupancy levels which we believe could
reasonably be maintained. Compensation is invoiced in accordance with the
applicable contract and is typically paid to us on a monthly basis. Some of our
juvenile education contracts provide for annual payments.
We aggressively pursue new contracts that leverage our existing
infrastructure and capabilities and meet our stringent profitability criteria.
Since the beginning of 1999, we have won 11 contracts that are expected to
contribute more than $60 million in annualized recurring revenues when all
facilities commence operations. We focus on take-or-pay contracts, which provide
a fixed minimum revenue stream regardless of occupancy and thereby add increased
stability and predictability to our revenue stream. Approximately 96% of these
new contract revenues have been from take-or-pay contracts. As of October 15,
2001, we had submitted proposals to the FBOP for four contracts with an
aggregate capacity of 6,000 beds. All of these FBOP proposals are for
take-or-pay contracts.
QUALITY OF OPERATIONS AND REGULATORY OVERSIGHT
Independent accreditation by various oversight and regulatory organizations
is designed to show that a facility meets nationally accepted professional
standards for quality of operation, facility design, management, and
maintenance. Accrediting entities include the American Correctional Association,
or ACA, for the adult secure and pre-release sectors, and the Joint Commission
on Accreditation of Healthcare Organizations, Departments of Public Welfare,
Departments of Protective and Regulatory Services, and Departments of Human
Services and Education for the juvenile sector. ACA standards are the national
benchmark for the effective operation of correctional systems throughout the
United States and address services, programs, and operations essential to good
correctional management including administrative and fiscal controls, staff
training and development, physical plant, safety and emergency procedures,
sanitation, food service, and rules and discipline. ACA accreditation is
important to the courts as an indicator of improved conditions for adult prisons
under court order. It is our policy that all of our facilities' daily operations
be performed in accordance with accreditation standards. Accreditation and the
standards of service required thereby also contributes to the public's increased
acceptance of us and our provision of privatized corrections services.
Internal quality control, conducted by our senior facility staff and
executive officers, takes the form of periodic operational, programming and
fiscal audits, facility inspections, regular review of logs, reports and files
and strict maintenance of personnel standards, including an active training
program. Each of our facilities develops its own training plan that is reviewed,
evaluated and updated annually. All adult correctional officers undergo a
minimum 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 continuing training and
education annually. All juvenile treatment employees undergo a minimum 80-hour
orientation upon their hiring and also receive up to 40 hours of continuing
training and education annually.
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<Page>
The corrections, treatment and education industries are 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. Our contracts frequently
include extensive reporting requirements and require supervision with on-site
monitoring by representatives of contracting government agencies.
In addition to regulations requiring certain contracting government agencies
to enter into a competitive bidding procedure before awarding contracts, the
laws of certain jurisdictions may also require us to award subcontracts on a
competitive basis or to subcontract with businesses owned by women or members of
minority groups.
Our contracts and the statutes of certain states in which we operate
typically require us to maintain insurance. Our contracts provide that, in the
event we do not maintain such insurance, the contracting agency may terminate
its agreement with us. We believe that we are in compliance in all material
respects with these requirements. We maintain a $10 million per occurrence per
facility general liability insurance policy for all our operations. We also
maintain insurance in amounts we deem adequate to cover property and casualty
risks, workers' compensation and directors' and officers' liability.
FACILITIES
As of October 15, 2001, we had contracts to operate 69 facilities, including
the Moshannon Valley Correctional Center, which is under development. In
addition to providing management services, we have been involved in the
development, design and/or construction of many of these facilities.
We control, through outright ownership or long-term leases, operating
facilties representing a large majority of our revenues. We believe that such
control increases the likelihood of contract renewal, allows us to expand
existing facilities and capture higher margins, and enhances our ability to win
new contracts. In addition, long-term control of our operating facilities allows
us to better control our operating margins and reduce cost escalation pressures.
The following table summarizes certain additional information with respect
to facilities under operation or development by us as of October 15, 2001. As
indicated, the majority of the facilities to which we provide services are
either owned or leased by us. Facilities that are leased are generally under
terms ranging from one to 45 years.
<Table>
<Caption>
COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------- ----------- -------- ----------
ADULT SECURE INSTITUTIONAL FACILITIES:
Baker Community Correctional Facility ...................... 262 1987 Leased
Baker, California
Big Spring Complex ......................................... 2,604 (4) Leased(5)
Big Spring, Texas
D. Ray James Prison ........................................ 1,550 1998 Leased(5)
Charlton County, Georgia
Donald D. Wyatt Detention Facility ......................... 302 1992 Managed
Central Falls, Rhode Island
Great Plains Correctional Facility ......................... 730 (6) Leased(5)
Hinton, Oklahoma
</Table>
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<Page>
<Table>
<Caption>
COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------- ----------- -------- ----------
Leo Chesney Community Correctional Facility ................ 200 1988 Leased
Live Oak, California
Moshannon Valley Correctional Center ....................... 1,095 1999 Leased
Philipsburg, Pennsylvania(7)
Valencia County Detention Center ........................... 110 2000 Managed
Los Lunas, New Mexico
Westmoreland County Prison ................................. 460 2001 Managed
Greenburg, Pennsylvania
JUVENILE TREATMENT, EDUCATIONAL AND DETENTION FACILITIES:
RESIDENTIAL FACILITIES:
Alexander Youth Center ..................................... 134 2001 Managed
Alexander, Arkansas
Contact .................................................... 47 (8) Owned
Wauconda, Illinois
Cornell Abraxas I .......................................... 248 1973 Leased(5)
Marienville, Pennsylvania
Cornell Abraxas II ......................................... 23 1974 Owned
Erie, Pennsylvania
Cornell Abraxas III ........................................ 22 1975 Owned
Pittsburgh, Pennsylvania
Cornell Abraxas Center for Adolescent Females .............. 100 1989 Owned
Pittsburgh, Pennsylvania
Cornell Abraxas of Ohio .................................... 108 1993 Leased(5)
Shelby, Ohio
Cornell Abraxas Youth Center ............................... 92 1999 Leased
South Mountain, Pennsylvania
Danville Center for Adolescent Females ..................... 64 1998 Managed
Danville, Pennsylvania
DuPage Adolescent Center ................................... 35 (8) Owned
Hinsdale, Illinois
Erie Residential Behavioral Health Program ................. 16 1999 Leased
Erie, Pennsylvania
Griffin Juvenile Facility .................................. 170 1996 Leased(5)
San Antonio, Texas
Leadership Development Program ............................. 120 1994 Leased
South Mountain, Pennsylvania
New Morgan Academy ......................................... 214 2000 Leased
New Morgan, Pennsylvania
Psychosocial Rehabilitation Unit ........................... 13 1994 Owned
Erie, Pennsylvania
</Table>
S-41
<Page>
<Table>
<Caption>
COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------- ----------- -------- ----------
Residential School ......................................... 30 (8) Owned
Matteson, Illinois
Salt Lake Valley Juvenile Detention Facility ............... 160 1996 Managed
Salt Lake City, Utah
Santa Fe County Juvenile Detention Facility ................ 129 1997 Managed
Santa Fe, New Mexico
Shaffner Youth Center ...................................... 61 2001 Managed
Steelton, Pennsylvania
South Mountain Secure Residential Treatment Unit ........... 52 1997 Managed
South Mountain, Pennsylvania
NON-RESIDENTIAL FACILITIES:
Adams Behaviorial Health Services .......................... 34 1998 Leased
Oxford, Pennsylvania
Cornell Abraxas Parenting Academy .......................... 36 1999 Leased
Harrisburg, Pennsylvania
Cornell Abraxas Student Academy ............................ 110 1996 Leased
Harrisburg, Pennsylvania
Delaware Community Programs ................................ 39 1994 Leased
Milford, Delaware
Erie Behavioral Health Services ............................ 36 1997 Leased
Erie, Pennsylvania
Harrisburg ................................................. 91 1999 Leased
Harrisburg, Pennsylvania
Harrisburg Day Treatment Program ........................... 58 1996 Leased
Harrisburg, Pennsylvania
Juvenile Field Services .................................... 110 (8) Managed
Chicago, Illinois
Kline Plaza ................................................ 251 1996 Leased
Harrisburg, Pennsylvania
Lehigh Valley Community Programs ........................... 53 1992 Leased
Lehigh Valley, Pennsylvania
Lycoming/Clinton County Behavioral Health Services ......... 30 1998 Leased
Williamsport, Pennsylvania
Maple Creek Home ........................................... 8 (8) Owned
Matteson, Illinois
Non-Residential Care--West ................................. 25 1991 Leased
Pittsburgh, Pennsylvania
Philadelphia Community Programs ............................ 222 1992 Owned
Philadelphia, Pennsylvania
Washington D.C. Community Programs ......................... 155 1993 Leased
District of Columbia
</Table>
S-42
<Page>
<Table>
<Caption>
COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------- ----------- -------- ----------
William Penn Harrisburg Alternative School ................. 600 2001 Leased
Harrisburg, Pennsylvania
Workbridge Allegheny ....................................... 475 1994 Leased
Pittsburgh, Pennsylvania
PRE-RELEASE RESIDENTIAL CORRECTIONAL AND TREATMENT
FACILITIES:
Cordova Center ............................................. 192 1985 Leased(5)
Anchorage, Alaska
Dallas County Judicial Center .............................. 300 1991 Leased
Wilmer, Texas
El Monte Center ............................................ 55 1993 Leased
El Monte, California
Inglewood Men's Center ..................................... 47 1982 Leased
Inglewood, California
Leidel Community Correctional Center ....................... 150 1996 Leased(5)
Houston, Texas
Marvin Gardens Center ...................................... 42 1981 Leased
Los Angeles, California
Midtown Center ............................................. 32 1998 Owned
Anchorage, Alaska
Northstar Center ........................................... 135 1990 Leased
Fairbanks, Alaska
Oakland Center ............................................. 61 1981 Leased
Oakland, California
Parkview Center ............................................ 112 1993 Leased(5)
Anchorage, Alaska
Reid Community Correctional Center ......................... 350 1996 Leased(5)
Houston, Texas
Salt Lake City Center ...................................... 58 1995 Leased
Salt Lake City, Utah
Santa Barbara Center ....................................... 25 1996 Leased
Santa Barbara, California
Seaside Center ............................................. 40 1999 Leased
Nome, Alaska
Taylor Street Center ....................................... 177 1984 Leased
San Francisco, California
Tundra Center .............................................. 85 1986 Leased(5)
Bethel, Alaska
Woodridge .................................................. 136 (8) Owned
Woodridge, Illinois
</Table>
S-43
<Page>
<Table>
<Caption>
COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------- ----------- -------- ----------
PRE-RELEASE NON-RESIDENTIAL COMMUNITY-BASED TREATMENT
CENTERS:
East St. Louis ............................................. 80 (8) Leased
East St. Louis, Illinois
Lifeworks--Joliet .......................................... 156 (8) Leased
Joliet, Illinois
Northside Clinic ........................................... 252 (8) Owned
Chicago, Illinois
Santa Fe Electronic Monitoring ............................. 50 1999 Leased
Santa Fe, New Mexico
Southwestern Illinois Correctional Center(9) ............... 671 (8) Managed
East St. Louis, Illinois
Southwood .................................................. 551 (8) Owned
Chicago, Illinois
</Table>
- ------------------------
(1) Total service capacity is comprised of the beds available for service upon
completion of construction of residential facilities and the average program
capacity of the non-residential community-based facilities. In certain
cases, the management contract for a facility provides for a lower number of
beds.
(2) Date from which we, or our predecessor, have had a contract for services on
an uninterrupted basis.
(3) We do not incur any facility use costs for facilities which we only have a
management contract.
(4) The City of Big Spring entered into the Intergovernmental Agreement with the
FBOP for an indefinite term (until modified or terminated) with respect to
the Big Spring Complex, which began operations during 1989. The Big Spring
Operating Agreement, as amended, has a term through 2047 including renewal
options at our discretion, pursuant to which we manage the Big Spring
Complex for the City of Big Spring. The portion of the Big Spring Operating
Agreement relating to the Cedar Hill Unit has a term of 30 years with four
five-year renewal options at our discretion.
(5) Facility sold on August 14, 2001 as part of the 2001 Sale and Leaseback
Transaction.
(6) The prison is operated pursuant to a one-year contract with nine one-year
renewal options between the Oklahoma Department of Corrections and the
Hinton Economic Development Authority, or HEDA. HEDA in turn has
subcontracted the operations to us under a 30-year operating contract with
four five-year renewals.
(7) In April 1999, we were awarded a contract to design, build and operate the
Moshannon Valley Correctional Center and immediately commenced construction
and activation activities. In June 1999, the FBOP issued a Stop-Work Order
pending a re-evaluation of their environmental documentation supporting the
decision to award the contract. The environmental study was completed with a
finding of no significant impact. The Stop-Work Order was lifted by the FBOP
on August 9, 2001. We anticipate that construction will be resumed in the
near-term pending a re-negotiation of the originally awarded contract.
(8) The Cornell Interventions programs/facilities contract with numerous
agencies throughout Illinois. Initial contract dates vary by agency and
range from 1974 to 1997.
(9) We manage a therapeutic community drug and alcohol program within the state
operated Southwestern Illinois Correctional Center.
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<Page>
COMPETITION
Our industry is currently characterized by a few large national operators
focused primarily in the adult secure institutional sector and by a large number
of smaller operators in the juvenile and pre-release sectors. Management
believes its principal competitors are Corrections Corporation of America and
Wackenhut Corrections Corporation and that only Corrections Corporation of
America, Wackenhut Corrections and Cornell have the established industry track
record, access to sources of financing, broad geographic reach and specialized
expertise to compete successfully for large new federal contracts in the adult
secure institutional sector as well as in other areas in which we operate.
This high degree of concentration in the adult secure institutional sector
is in contrast to the juvenile and pre-release sectors, where approximately
10,000 to 15,000 juvenile facilities and 2,000 local and regional pre-release
facilities, approximately 600 of which are privately operated, are in operation
nationwide.
We distinguish ourselves from our competitors through the diversity of our
service offering, by emphasizing rehabilitation, treatment and education, and by
providing solutions-based services to the government agencies with which we
contract.
EMPLOYEES
At October 15, 2001, we had approximately 3,480 full-time employees and 270
part-time employees. We employ management, administrative and clerical,
security, educational and counseling services, health services and general
maintenance personnel. Approximately 380 employees at four of our facilities are
represented by unions. We believe our relations with our employees are good.
LEGAL PROCEEDINGS
We currently are subject to claims and suits arising in the ordinary course
of business, including claims for damages for personal injuries or for wrongful
restriction of, or interference with, offender privileges and employment
matters. In the opinion of management, the outcome of the proceedings to which
we are currently a party will not have a material adverse effect upon our
operations or financial condition.
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<Page>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets certain information concerning each of our
executive officers, directors and key employees as of October 30, 2001:
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- --------------------------------------------------------
Steven W. Logan...................... 40 Director; Chairman of the Board of Directors, President
and Chief Executive Officer
John L. Hendrix...................... 53 Senior Vice President and Chief Financial Officer
Thomas R. Jenkins.................... 54 Senior Vice President and Chief Operating Officer
Patrick N. Perrin.................... 41 Vice President and Chief Administrative Officer
Kevin T. Smyley...................... 51 Managing Director, Business Development
Kevin B. Kelly....................... 38 Treasurer and Corporate Secretary
Luis A. Collazo...................... 35 Corporate Controller and Chief Accounting Officer
Leslie A. Balonick................... 49 Vice President, Mid-West Region
John C. Godlesky..................... 55 Vice President, Eastern Region
Gary L. Henman....................... 62 Vice President, Adult Secure Institutions
Laura J. Shol........................ 46 Vice President, Western Region
Marvin H. Wiebe, Jr.................. 54 Senior Vice President
Arlene R. Lissner.................... 70 Director; Director of Special Projects
Anthony R. Chase..................... 46 Director
James H.S. Cooper.................... 47 Director
David M. Cornell..................... 66 Director
Peter A. Leidel...................... 45 Director
Harry J. Phillips, Jr................ 51 Director
Tucker Taylor........................ 62 Director
Marcus A. Watts...................... 43 Director
</Table>
Steven W. Logan has been a director and the President and Chief Executive
Officer since August 1999 and was named Chairman of the Board of Directors in
July 2001. Prior to August 1999, Mr. Logan served as Executive Vice President
from April 1998 and was Chief Operating Officer from April 1998 through
December 1998. Previously, Mr. Logan served as Senior Vice President from
November 1997 to April 1998, and Chief Financial Officer, Treasurer and
Secretary from 1993 to April 1998. From 1984 to 1993, Mr. Logan served in
various positions with Arthur Andersen LLP, Houston.
John L. Hendrix has been Senior Vice President and Chief Financial Officer
since September 1999. Mr. Hendrix previously served as Senior Vice President and
Chief Financial Officer of GC Services from 1998 to August 1999. From 1996 to
1998, Mr. Hendrix served as Senior Vice President and Chief Financial Officer of
APS Holding Corporation. Mr. Hendrix served as Senior Vice President and Chief
Financial Officer at Kay-Bee Toy Stores in 1996 and held various senior
financial positions at Kay-Bee Toy Stores since 1991. Mr. Hendrix is a Certified
Public Accountant.
Thomas R. Jenkins has been Senior Vice President since May 1999 and Chief
Operating Officer since January 1999. Mr. Jenkins previously served as Vice
President, Juvenile since September 1997. From November 1995 through
September 1997 he served as Vice President--Operations of Abraxas. From 1973
through November 1995, Mr. Jenkins served with the Department of Public Welfare,
Commonwealth of Pennsylvania in various capacities ranging from Director of
various juvenile facilities to Director of the Pennsylvania Child Welfare
Services.
Patrick N. Perrin has been Vice President since June 2001 and Chief
Administrative Officer since November 1998. Prior to November 1998, Mr. Perrin
served as Corporate Director of Risk
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<Page>
Management, Employee Benefits and Retirement Plans for Tracor, Inc. from
November 1991 to October 1998.
Kevin T. Smyley has been Managing Director, Business Development since
January 2001 and was Director of Public Policy since September 1999 and a Vice
President of Cornell Interventions, Inc., one of our subsidiaries, since
June 1999. From 1997 to 1999, Mr. Smyley served as Co-Executive Director and
Project Manager for the Kid's Stuff Foundation. From 1991 to 1997, Mr. Smyley
worked for Lockheed Martin IMS serving as Vice President of Criminal Justice
Services from 1995 to 1997. Mr. Smyley is a member of the National Organization
of Black Law Enforcement Executives, the ACA and the American Probation and
Parole Association.
Kevin B. Kelly has served as Treasurer and Corporate Secretary since
November 1999 and was Corporate Controller and Chief Accounting Officer from
January 1996 to November 1999. Prior to January 1996, Mr. Kelly was Assistant
Controller and Corporate Financial Reporting Manager for American Ecology
Corporation from 1993 to 1995. Mr. Kelly is a Certified Public Accountant.
Luis A. Collazo has been Corporate Controller and Chief Accounting Officer
since November 1999. Prior to November 1999, Mr. Collazo served as Corporate
Controller and Vice President of Accounting and Business Processes for IKON
Document Services, a division of IKON Office Solutions from September 1993 to
November 1999. Mr. Collazo is a Certified Public Accountant.
Leslie A. Balonick has been Vice President, Mid-West Region since we
acquired Interventions in November 1999. She previously served as Acting
Clinical Director for BHS Consulting Corp. from September 1998 to November 1999
and as Director of Planning and Business Development from 1996 to August 1998.
From 1991 to 1996, she served as Regional Manager for Interventions.
Ms. Balonick serves as a member of the Women's Committee of the Illinois
Department of Human Services, Office of Alcoholism and Substance Abuse Advisory
Board and is a Clinically Certified Substance Abuse Counselor.
John C. Godlesky has been Vice President, Eastern Region since
November 1999 and Vice President, Juvenile since January 1999. He previously
served as Director, Division of Residential Programs of Abraxas from June 1993
to December 1998, and was responsible for the overall development, direction and
management of Abraxas' juvenile residential programs.
Gary L. Henman has been Vice President, Adult Secure Institutions since
October 1998 and National Director of Quality Assurance since June 1998. He was
previously an associate professor at Louisiana State University from 1997 to
September 1998. From 1973 to 1997, Mr. Henman was with the FBOP, progressing to
Deputy Regional Director and Warden of five facilities, including the United
States Penitentiaries at Leavenworth, Kansas and Marion, Illinois. Mr. Henman
was Chairman of both the FBOP High Security Facility Task Force and the FBOP
Task Force on Vocational Training.
Laura J. Shol has been Vice President, Western Region since November 1999
and served as Vice President, Pre-Release since November 1997, and was Managing
Director of Pre-Release Centers since May 1997. She previously served as
Director of Community Corrections from June 1996 through May 1997, and was
Senior Regional Administrator of Eclectic from 1986 to June 1996.
Marvin H. Wiebe, Jr. has been Senior Vice President since November 1997 and
Vice President since we acquired Eclectic Communications, Inc. in 1994. He was
previously Vice President--Administration and Finance, Vice President--Secure
Detention and Chief Financial Officer of Eclectic, where he was employed for
11 years. Mr. Wiebe has served as President of the International Community
Corrections Association and as an auditor for the ACA Commission on
Accreditation for Corrections and is a member of the International Community
Corrections Association, the California Probation Parole & Correctional
Association and the ACA.
Arlene R. Lissner has been a director since September 1997 when we acquired
Abraxas, and is Director of Special Projects. Ms. Lissner founded Abraxas in
1973, where she served as President and
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<Page>
Chief Executive Officer until 1977, at which time she left that position to
become Chairperson of the Board of Directors of Abraxas. Ms. Lissner resumed her
role as President and Chief Executive Officer of Abraxas from April 1996 through
September 1997.
Anthony R. Chase has been a director since October 1999. Mr. Chase has
served as Chairman and Chief Executive Officer of ChaseCom Limited Partnership
since December 1998 and as President and Chief Executive Officer of Faith
Broadcasting, L.P. since November 1993. Mr. Chase is also Chairman of the Board
of the Telecom Opportunity Institute, a national, non-profit organization
founded by ChaseCom Limited Partnership to increase career, education and job
training opportunities in the telecommunications industry for people in
historically underserved communities. Mr. Chase is a Professor of Law at the
University of Houston Law Center. Mr. Chase is a director of Leap Wireless
International, Inc., a nationwide provider of wireless phone service, a director
of Northern Trust Bank of Texas, and a Member of the Council on Foreign
Relations.
James H. S. Cooper has been a director since October 1999. Mr. Cooper is the
founder and Chairman of Brentwood Capital Advisors LLC of Brentwood, Tennessee,
where he has been since May 1999. Mr. Cooper was a Managing Director of SunTrust
Equitable Securities Corporation of Nashville, Tennessee (and its predecessor,
Equitable Securities Corp.) from April 1995 to April 1999, and served as
Congressman, 4th District of Tennessee in the United States House of
Representatives from 1983 to 1995. Mr. Cooper has also been an Adjunct Professor
at the Owen School of Management at Vanderbilt University since 1995.
Mr. Cooper serves as a director of several private companies.
David M. Cornell has been a director since our founding and was Chairman of
the Board from our founding until September 2000. Mr. Cornell also served as
President and Chief Executive Officer from our founding until August 1999.
Peter A. Leidel has been a director since May 1991 and was Chairman of the
Board from September 2000 to July 2001. Mr. Leidel is founder and Managing
Director of Yorktown Partners LLC, and a partner of Ticonderoga Capital, both of
which manage private investment funds. In September 1997, Mr. Leidel resigned as
Senior Vice President of Dillon Read & Co, Inc. (a predecessor of UBS
PaineWebber Inc.) where he worked since 1983 managing private investment funds.
Mr. Leidel is a director of Willbros Group, Inc., an oil and gas industry
contractor, Carbon Energy Corporation, an oil and gas exploration company, and
several private companies.
Harry J. Phillips, Jr. has been a director since January 2001. Mr. Phillips
is President of Timberlake Interests, Inc. and Phillips Investments, Inc., and
general partner of ECOL Partners. Mr. Phillips previously served as Chairman and
Chief Executive Officer of American Ecology Corporation from 1992 to 1995.
Mr. Phillips is a director of Conservatek Industries, Inc. and Aeriform, Inc.
Tucker Taylor has been a director since October 1996. Mr. Taylor has been
President of CBCA, Inc., a company that administers health benefits for
self-insured employers, since July 2000. From 1992 to 1999, Mr. Taylor was
Executive Vice President of Medical Care International and, after an
acquisition, a Senior Vice President at Columbia/HCA. Mr. Taylor is also a
director of SuperShuttle, a privately held ground transportation company, and
Alta Healthcare Systems, a privately held hospital company.
Marcus A. Watts has been a director since January 2001. Mr. Watts is a
partner of the law firm of Locke Liddell & Sapp LLP where he has practiced
corporate and securities law since 1984. Mr. Watts is a director of
Aeriform, Inc. and serves on the board of various civic and charitable
organizations.
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<Page>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of October 15, 2001, except as otherwise noted,
and as adjusted to reflect the sale of the 3,000,000 shares of common stock
offered by us pursuant to this prospectus supplement for the following
individuals or groups:
- each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
- each of our named executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o Cornell Companies, Inc., 1700 West Loop South, Suite 1500, Houston, Texas
77027. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, each person identified in the table
possesses sole voting and investment power with respect to all common stock
shown to be held by them. The number of shares of common stock outstanding used
in calculating the percentage for each listed person includes common stock
underlying options held by such person that are exercisable within 60 days of
October 15, 2001, but excludes common stock underlying options held by any other
person. The numbers shown in the table assume no exercise by the underwriters of
their over-allotment option.
<Table>
<Caption>
BENEFICIAL OWNERSHIP
-----------------------------------------------
BEFORE OFFERING AFTER OFFERING
---------------------- ----------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
BENEFICIAL OWNER NAME SHARES(1) OWNERSHIP SHARES(1) OWNERSHIP
- --------------------- --------- ---------- --------- ----------
FMR Corp. ......................................... 1,106,800 11.7% 1,106,800 8.9%
82 Devonshire Street
Boston, Massachusetts 02109
Caxton Associates, L.L.C. ......................... 723,000 7.7% 723,000 5.8%
Princeton Plaza, Building 2
731 Alexander Road
Princeton, New Jersey 08540
Dimensional Fund Advisors Inc.(2) ................. 702,000 7.4% 702,000 5.6%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Royce & Associates, Inc. .......................... 673,100 7.1% 673,100 5.4%
1414 Avenue of the Americas
New York, New York 10019
Wellington Management Company ..................... 659,000 7.0% 659,000 5.3%
75 State Street
Boston, Massachusetts 02109
Anthony R. Chase................................... 19,157 * 19,157 *
James H. S. Cooper................................. 30,229 * 30,229 *
David M. Cornell(3)................................ 442,393 4.6% 442,393 3.5%
John L. Hendrix.................................... 37,200 * 37,200 *
Thomas R. Jenkins.................................. 26,858 * 26,858 *
</Table>
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<Page>
<Table>
<Caption>
BENEFICIAL OWNERSHIP
-----------------------------------------------
BEFORE OFFERING AFTER OFFERING
---------------------- ----------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
BENEFICIAL OWNER NAME SHARES(1) OWNERSHIP SHARES(1) OWNERSHIP
- --------------------- --------- ---------- --------- ----------
Peter A. Leidel.................................... 80,886 * 80,886 *
Arlene R. Lissner.................................. 17,375 * 17,375 *
Steven W. Logan.................................... 328,957 3.4% 328,957 2.6%
Harry J. Phillips, Jr.............................. 53,750 * 53,750 *
Tucker Taylor...................................... 37,812 * 37,812 *
Marcus A. Watts.................................... 7,867 * 7,867 *
Marvin H. Wiebe, Jr................................ 41,230 * 41,230 *
All directors and executive officers as a group
(12 persons)..................................... 1,123,714 11.3% 1,123,714 8.7%
</Table>
- ------------------------
* Less than 1.0%.
(1) Shares of common stock listed include shares subject to stock options
exercisable within 60 days (15,250 for Mr. Chase, 15,250 for Mr. Cooper,
141,334 for Mr. Cornell, 24,000 for Mr. Hendrix, 22,998 for Mr. Jenkins,
12,833 for Mr. Leidel, 14,000 for Ms. Lissner, 197,374 for Mr. Logan, 3,750
for Mr. Phillips, 20,333 for Mr. Taylor, 3,750 for Mr. Watts, 34,223 for
Mr. Wiebe, and 505,095 for all the above as a group).
(2) Based on a filing made with the SEC reflecting ownership of common stock as
of December 31, 2000. The filing indicates sole voting and dispositive power
with respect to the referenced shares of common stock.
(3) Mr. Cornell has sole voting power for 442,393 shares of common stock and
sole dispositive power for 422,428 shares of common stock, of which 141,334
shares are subject to stock options exercisable within 60 days. The total
includes 19,965 shares over which Jane B. Cornell, the former wife of David
M. Cornell, has sole dispositive power and, pursuant to a voting agreement,
over which Mr. Cornell has sole voting power.
S-50
<Page>
UNDERWRITING
Under the underwriting agreement, which will be filed as an exhibit to a
current report on Form 8-K and incorporated by reference to the registration
statement relating to the accompanying prospectus, each of the underwriters for
whom Lehman Brothers Inc., Jefferies & Company, Inc. and First Analysis
Securities Corporation are acting as representatives, has severally agreed to
purchase from us the respective number of shares of common stock shown opposite
its name below:
<Table>
<Caption>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
Lehman Brothers Inc......................................... 1,875,000
Jefferies & Company, Inc.................................... 675,000
First Analysis Securities Corporation....................... 450,000
---------
Total................................................... 3,000,000
=========
</Table>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depends on the satisfaction of the conditions
contained in the underwriting agreement, including:
- the representations and warranties made by us to the underwriters are
true;
- there is no material change in the financial markets; and
- we deliver customary closing documents to the underwriters.
We have granted the underwriters an option to purchase, from time to time
until 30 days after the date of the underwriting agreement, in whole or in part,
up to an aggregate of an additional 450,000 shares at the public offering price
less underwriting discounts and commissions shown on the cover page of this
prospectus supplement. This option may be exercised to cover over-allotments, if
any, made in connection with the offering. To the extent that the option is
exercised, each underwriter will be obligated, so long as the conditions set
forth in the underwriting agreement are satisfied, to purchase its pro rata
portion of these additional shares based on the underwriter's percentage
underwriting commitment in the offering as indicated in the preceding table and
we will be obligated to sell the shares of common stock to the underwriters.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus supplement, and to selected
dealers, at such public offering price less a selling concession not in excess
of $0.59 per share. The underwriters may allow, and the selected dealers may
re-allow, a concession not in excess of $0.10 per share to brokers and dealers.
If all the shares are not sold at the public offering price, the underwriters
may change the offering price and other selling terms.
The following table summarizes the underwriting discounts and commissions we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' over-allotment option to purchase up to
450,000 additional shares.
<Table>
<Caption>
NO EXERCISE FULL EXERCISE
----------- -------------
Per share underwriting discounts and commissions to
be paid by Cornell................................. $ 0.98 $ 0.98
Total................................................ 2,$940,000 3,$381,000
</Table>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $750,000.
S-51
<Page>
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids or purchases for the purpose
of pegging, fixing or maintaining the price of the common stock, in accordance
with Regulation M under the Securities Exchange Act of 1934:
- Over-allotment involves sales by the underwriter of shares in excess of
the number of shares the underwriter is obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriter is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriter may close out any short position by either
exercising its over-allotment option and/or purchasing shares in the open
market.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriter will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriter sells more shares than could be
covered by the over-allotment option, which is called a naked short
position, the position can only be closed out by buying shares in the open
market. A naked short position is more likely to be created if the
underwriter is concerned that there could be downward pressure on the
price of the shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of the
common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on the New York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor the
underwriters make any representation that the representatives will engage in
these stabilizing transactions or that any transaction, once commenced, will not
be discontinued without notice.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Lehman Brothers Inc. for a period
of 90 days after the date of this prospectus, except issuances pursuant to the
exercise of options outstanding on the date hereof, grants of employee stock
options pursuant to the terms of a plan in effect on the date hereof, issuances
pursuant to the exercise of such options, the filing of registration statements
on Form S-8 and amendments thereto in connection with those stock options or our
employee stock purchase plans in existence on the date hereof and the issuance
of
S-52
<Page>
shares or options in acquisitions in which the acquiror of such shares agrees to
the foregoing restrictions.
Members of our board of directors, senior officers and designated holders of
our common stock have agreed under lock-up agreements that without the prior
written consent of Lehman Brothers Inc., they will not offer, sell or otherwise
dispose of any shares of capital stock or any securities which may be converted
into or exchanged for any shares of capital stock for a period ending 90 days
after the date of this prospectus.
We have agreed to indemnify the underwriters against liabilities relating to
the offering, including liabilities under the Securities Act and liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and to contribute to payments that the underwriters may
be required to make for these liabilities.
This prospectus is not, and under no circumstances is to be construed as an
advertisement or a public offering of shares in Canada or any province or
territory thereof. Any offer or sale of shares in Canada will be made only under
an exemption from the requirements to file a prospectus supplement or prospectus
and an exemption from the dealer registration requirement in the relevant
province or territory of Canada in which such offer or sale is made.
Purchasers of the shares of our common stock offered by this prospectus may
be required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of the prospectus.
A prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by the underwriters and/or one
or more of the selling group members participating in this offering, or by their
affiliates. In those cases, prospective investors may view offering terms online
and, depending upon the underwriter or the particular selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the underwriters on the same basis as other allocations.
Other than the prospectus in electronic format, the information on the
underwriters' or any selling group member's web site and any information
contained in any other web site maintained by the underwriter or any selling
group member is not part of the prospectus or the registration statement of
which this prospectus forms a part, has not been approved and/or endorsed by us
or the underwriters or any selling group member in its capacity as underwriter
or selling group member and should not be relied upon by investors.
Lehman Brothers Inc. and its affiliates have performed and expect to
continue to perform financial advisory investment banking services for us for
which they have received and will receive customary compensation.
LEGAL MATTERS
The validity of the notes offered by this prospectus supplement will be
passed upon for Cornell by Locke Liddell & Sapp LLP, Houston, Texas. The
underwriters are being represented by Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Marcus A. Watts, a partner at Locke Liddell & Sapp LLP, is a director and
shareholder of Cornell and beneficially owns 7,867 shares of our common stock,
representing less than 1% of the outstanding shares of our common stock.
S-53
<Page>
EXPERTS
The audited financial statements incorporated by reference in this
prospectus supplement and elsewhere in the registration statement, to the extent
and for the periods indicated in their reports, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, and file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports, proxy
statements and other information we file at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0300 for further information on the public reference room. You may
also access filed documents at the SEC's website at www.sec.gov.
We have filed a registration statement on Form S-3 and related exhibits with
the SEC under the Securities Act of 1933. The registration statement contains
additional information about us and our common stock. You may inspect the
registration statement and exhibits without charge and obtain copies from the
SEC at prescribed rates at the locations above.
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus supplement and the accompanying prospectus,
and information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference in this prospectus
supplement and the accompanying prospectus the following documents we have
filed, or may file, with the SEC:
- Our Annual Report on Form 10-K for the fiscal year ended December 31, 2000
filed with the SEC on March 30, 2001;
- Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001,
June 30, 2001 and September 30, 2001 filed with the SEC on May 15, 2001,
August 14, 2001, and October 30, 2001, respectively, and our amendment to
our Quarterly Report on Form 10-Q/A for the quarter ended September 30,
2001 and filed with the SEC on November 26, 2001;
- Our Current Report on Form 8-K dated August 14, 2001 filed with the SEC on
August 28, 2001;
- Description of our common stock set forth under the caption "Item 1.
Description of Registrant's Securities to be Registered" on Form 8-A filed
July 17, 1996 (as amended by Amendment No. 1 on Form 8-A/A filed
September 11, 1996);
- Description of Rights set forth under the caption "Item 1. Description of
Registrant's Securities to be Registered" on Form 8-A filed May 11, 1998,
as amended by the Form 8-A/A filed May 15, 1998; and
- All documents filed by us with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and before termination of this offering.
A statement contained in a document incorporated by reference in this
prospectus supplement or the accompanying prospectus shall be deemed to be
modified or superseded for purposes of this prospectus supplement and the
accompanying prospectus to the extent that a statement contained herein or in
any other subsequently filed document that is also incorporated herein modifies
or replaces such statement. Any statements so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
document.
S-54
<Page>
You may request a free copy of any of the documents incorporated by
reference in this prospectus supplement or the accompanying prospectus by
writing or telephoning us at the following address:
Cornell Companies, Inc.
1700 West Loop South, Suite 1800
Houston, Texas 77027
(713) 623-0790
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
front of this document.
S-55
<Page>
PROSPECTUS
$350,000,000
CORNELL CORRECTIONS, INC.
DEBT SECURITIES
COMMON STOCK
PREFERRED STOCK
------------------
We will offer from time to time debt securities, common stock or preferred
stock. We will provide the specific terms of these securities in supplements to
this prospectus. You should read this prospectus and any supplement carefully
before you invest. You should also read the documents we have referred you to
the section called "Where You Can Find More Information" in this prospectus for
information about us and for financial statements.
Our common stock is traded on the New York Stock Exchange under the symbol
"CRN." Any common stock sold under a supplement to this prospectus will be
listed on the New York Stock Exchange. If we decide to list any of the debt
securities or the preferred stock on any exchange or market, the related
prospectus supplement will disclose the exchange or market.
------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 5 IN THIS
PROSPECTUS.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
NOVEMBER 24, 1999
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
--------
About This Prospectus....................................... 2
Where You Can Find More Information......................... 3
Cornell Corrections......................................... 4
Consolidated Ratios of Earnings to Fixed Charges............ 4
Risk Factors................................................ 5
Use of Proceeds............................................. 11
Description of Debt Securities.............................. 12
Description of Common Stock................................. 19
Description of Preferred Stock.............................. 23
Plan of Distribution........................................ 24
Legal Matters............................................... 25
Experts..................................................... 25
</Table>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
this shelf process, we may sell any combination of the securities described in
this prospectus in one or more offerings up to a total dollar amount of
$350,000,000.
This prospectus provides you with a general description of the securities we
may offer. Each time we offer our securities, we will provide you with a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. Before you invest in our securities,
you should read both this prospectus and any prospectus supplement together with
all additional information described under the heading "Where You Can Find More
Information."
2
<Page>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy the registration statement on Form S-3, of which this prospectus is a part,
as well as reports, proxy statements and other information filed by us, at the
public reference room maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional public
reference rooms of the Commission: 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can call the Commission at 1-800-SEC-0330 for
information regarding the operations of its public reference rooms. The
Commission also maintains a World Wide Web site at http://www.sec.gov, which
contains reports, proxy and information statements, and other information
regarding registrants, like us, that file electronically.
Our common stock is listed on the New York Stock Exchange. Our reports,
proxy statements and other information can also be inspected at the offices of
the New York Stock Exchange at 20 Broad Street, New York, New York 10005.
The Commission allows us to "incorporate by reference" into this prospectus
certain information that we file with it, which means that we can disclose
important information to you by referring you to documents on file or to be
filed with the Commission. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
Commission will automatically update and replace this information. Therefore,
before you decide to invest in a particular offering of ours under this shelf
registration, you should always check for information we may have filed with the
Commission after the date of this prospectus. We incorporate by reference the
documents listed below and any future filings we make with the Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
we have sold all of the securities that we have registered.
- Annual Report on Form 10-K for the fiscal year ended December 31, 1998;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
- Description of Common Stock set forth under the caption "Item 1.
Description of Registrant's Securities to be Registered" on Form 8-A filed
November 24, 1998; and
- Description of Rights set forth under the caption "Item 1. Description of
Registrant's Securities to be Registered" on Form 8-A filed November 24,
1998.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Cornell Corrections, Inc.
1700 West Loop South, Suite 1500
Houston, Texas 77027
Attention: Corporate Secretary
Telephone: (713) 623-0790
You should rely only on the information contained or incorporated by
reference in this prospectus or any prospectus supplement. We have not
authorized anyone else to provide you with any information. We are not making
offer of these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of those
documents.
3
<Page>
CORNELL CORRECTIONS
Cornell Corrections is one of the leading providers of privatized
correctional, detention and pre-release services in the United States based on
total offender capacity. We are the successor to entities that began developing
secure institutional correctional and detention facilities in 1984, pre-release
facilities in 1977 and juvenile facilities in 1973. We have significantly
expanded our operations through new contract awards, facility expansions and
acquisitions.
As of September 30, 1999, we had contracts to operate 56 facilities in 12
states and the District of Columbia with a total offender capacity of 13,063.
Our residential facilities had a total offender capacity of 11,395 beds, with 53
facilities in operation. In addition, since September 30, 1999, we have
announced the acquisition of various assets of Interventions and BHS Consulting
Corporation which increased our offender capacity by 1,750 to an aggregate total
offender capacity of 14,813. For the nine months ended September 30, 1999, our
revenues were $127.3 million, representing an increase of 46.5% from $86.9
million for the nine months ended September 30, 1998.
Our principal executive offices are located at 1700 West Loop South,
Suite 1500, Houston, Texas 77027, and our telephone number is (713) 623-0790.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
Our consolidated ratios of earnings to fixed charges for the periods
indicated are as follows:
<Table>
<Caption>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------------
Ratios of earnings to fixed charges
(1) (2).................................... -- -- -- 2.70x 1.98x 1.87x
</Table>
- ------------------------
(1) In computing the ratio of earnings to fixed charges, (a) earnings have been
based on income from continuing operations before income taxes and fixed
charges (exclusive of interest capitalized) and (b) fixed charges consist of
interest expense (including amounts capitalized) and the estimated interest
portion of rents.
(2) As a result of the net losses in 1994, 1995 and 1996, earnings did not cover
fixed charges for those years by $499,000, $989,000 and $2,304,000,
respectively.
4
<Page>
RISK FACTORS
BEFORE YOU INVEST IN OUR SECURITIES, YOU SHOULD UNDERSTAND THAT SUCH AN
INVESTMENT INVOLVES VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD
CAREFULLY CONSIDER THESE RISK FACTORS AS WELL AS ALL OF THE OTHER INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT BEFORE YOU DECIDE TO INVEST IN OUR SECURITIES.
WE HAVE MADE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934 IN THIS PROSPECTUS, AND IN THE DOCUMENTS THAT ARE INCORPORATED BY
REFERENCE. THOSE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES. THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXCEPT," "PLAN,"
"INTEND" AND SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS,
BUT ARE NOT THE ONLY MEANS OF IDENTIFYING THEM. IN GENERAL, ANY STATEMENT OTHER
THAN A STATEMENT OF HISTORICAL FACT IS A FORWARD-LOOKING STATEMENT. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS COULD BE ADVERSELY AFFECTED AND COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN ANY FORWARD-LOOKING STATEMENTS.
OUR REVENUE AND PROFIT GROWTH DEPEND ON OUR ABILITY TO OBTAIN NEW CONTRACTS AND
ON OUR CONSTRUCTION AND OPERATION OF NEW FACILITIES.
Our internal growth depends on our ability to obtain additional management
contracts for privatized correctional, detention and pre-release facilities. Our
ability to obtain new contracts depends on the extent to which federal, state
and local governmental agencies turn to the private sector to manage new or
existing facilities or to expand existing facilities.
Our growth rate also depends on the construction and operation of new
correctional and detention facilities because contracts to operate existing
public facilities generally have not been offered to private operators. In
addition, because correctional and detention services are essential public
services, governmental agencies and, in many states, state legislatures have to
be persuaded that privatization will result in high-quality services at less
cost than that which the agencies themselves could provide.
Our ability to obtain new contracts also depends on the extent to which we
are able to compete with other private-sector providers. Factors that affect our
ability to compete effectively in bidding against other providers include:
- the price and other terms of our bids;
- our financial ability to make capital investments or post bonds or other
credit support which may be required; and
- particularly in the case of secure institutional adult facilities, our
ability to compete effectively with the two companies now holding the
majority of contracts for currently privatized adult facilities.
We cannot guarantee that we will be able to obtain additional contracts to
develop or operate new facilities on favorable terms.
A DECREASE IN FACILITY OCCUPANCY LEVELS FOR ANY REASON COULD DECREASE OUR
PROFITABILITY.
A substantial portion of our revenues are generated under residential
facility management contracts that specify a per diem rate, which is a rate per
day per offender. A substantial portion of our cost structure is fixed. Under a
per diem rate structure, a decrease in occupancy rates would cause a decrease in
our revenues and profitability.
For each of our facilities, we depend on the contracting governmental agency
to supply the facility with enough offenders to meet and exceed the facility's
break-even design capacities. In most cases, the governmental agency is under no
obligation to provide offenders. Soliciting additional offenders from other
governmental agencies to meet capacity shortfalls in our facilities generally is
not possible. Because many of our facilities have offenders serving relatively
short sentences or only the last three to
5
<Page>
six months of their sentences, the high turnover rate of offenders requires a
constant influx of new offenders from the relevant governmental agencies to
achieve profitability. Moreover, occupancy rates during the "start-up" phase
when facilities are first opened typically result in capacity underutilization
for a one- to three-month period after the facilities first receive offenders.
As a result, as we open or begin operating new facilities under new contracts,
there may be a delay in reaching sufficient occupancies to meet break-even
levels and we may incur operating losses at new facilities until these occupancy
levels are reached. A failure of a governmental agency to supply a sufficient
number of offenders for any reason may cause us to forego revenues and income.
OUR FAILURE TO PROPERLY MANAGE ACQUISITIONS COULD ADVERSELY AFFECT OUR BUSINESS.
We have expanded, and plan to continue to expand, our operations through
acquisitions. Failure to manage our acquisition strategy successfully could have
an adverse effect on our business. We probably will compete with other potential
acquirors for acquisitions, and some of these potential acquirors may be larger
and have greater resources than us. We may not be able to continue to identify
and acquire businesses at prices and on terms we consider reasonable. In
addition, acquisitions involve a number of special risks, including:
- diversion of management's attention and resources;
- potential failure to retain key acquired personnel;
- assumption of unanticipated legal liabilities and other problems;
- difficulties integrating systems, operations and cultures;
- amortization of acquired intangible assets; and
- potential dilution of earnings per share.
Since 1994, we have made eight acquisitions. Prior to purchase by us,
certain of the companies we have acquired were operated as non-profit
organizations. We may not be able to profitably manage these acquired businesses
or successfully integrate any acquired businesses without substantial expense,
delay or other operational or financial problems. In addition, we cannot be sure
that an acquired business will achieve anticipated revenues and earnings.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE ON ACCEPTABLE
TERMS.
Our ability to compete in bidding for new contracts depends, in certain
circumstances, on our ability to make capital investments and finance
construction costs relating to secure institutional contract awards. In
addition, our acquisition strategy requires us to obtain financing for
acquisitions.
As of November 12, 1999, we had approximately $100 million in anticipated
unfunded capital requirements for new correctional and existing facility
expansion. We have a lease agreement with an unrelated entity that is available
to fund up to approximately $11.5 million of these facility investments.
Management believes that the remaining commitments of approximately $89 million
will be funded from (a) the expected net proceeds of a committed sale and
leaseback transaction of substantially all of our furniture, fixtures and
equipment, (b) a potential sale and leaseback transaction of one or more secure
institutions, (c) an expansion of our lease financing agreement, and/or (d)
other debt or equity financing arrangements. There is no assurance, however,
that any of these planned financing transactions can be consummated. If these
contemplated financing transactions are not consummated, we would be required to
seek alternative, and potentially dilutive, capital funding sources.
WE MAY NOT HAVE AVAILABLE CAPITAL IF WE ARE REQUIRED TO INVEST IN NEW
FACILITIES.
In general, governmental agencies require private operators to make capital
investments in new facilities and enter into direct financing arrangements in
connection with the development of facilities. We cannot be sure that we will
have available capital if and when we are required to make an investment to
secure a contract for developing a facility. In many cases the development and
construction of facilities we will manage are subject to obtaining permanent
facility financing.
6
<Page>
Financing currently is obtained through a variety of means, including private
bank debt, the sale of tax-exempt bonds or other obligations or direct
government appropriation. The sale of tax-exempt bonds or other obligations may
be adversely affected by changes in applicable tax laws or adverse changes in
the market for such securities.
In the past, we have 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. In other cases, we directly incur borrowings for
construction financing.
WE MAY LOSE MONEY ON PER-DIEM RATE CONTRACTS.
Most of our facility management contracts provide for payments to us of
either fixed per diem rates or per diem rates that increase by only small
amounts during the terms of the contracts. If we experience increases in
personnel costs, which are the largest component of facility management expense,
or other operating expenses at rates faster than increases, if any, in per diem
rates, then our results of operations would be adversely affected.
NON-RENEWAL OR EARLY TERMINATION OF CONTRACTS COULD ADVERSELY AFFECT OUR
BUSINESS.
Our facility management contracts typically have terms ranging from one to
five years, and renewal is at the option of the contracting governmental agency.
We cannot be sure that any agency will exercise a renewal option in the future.
In addition, contracting governmental agencies typically may terminate a
facility contract without cause by giving us written notice ranging from 30 to
180 days. Any non-renewal or termination could adversely affect our business.
WE RELY ON A LIMITED NUMBER OF GOVERNMENTAL AGENCIES FOR A SIGNIFICANT PORTION
OF OUR REVENUES.
We currently derive and expect to continue to derive a significant portion
of our revenues from a limited number of governmental agencies. The loss of, or
a significant decrease in, business from the Federal Bureau of Prisons or
various other state agencies could seriously harm our financial condition and
results of operations. For the year ended December 31, 1998, contracts with the
Federal Bureau of Prisons accounted for approximately 20.1% of our revenues.
Based on projects we have announced, we anticipate that the amount of business
we receive from the Federal Bureau of Prisons in future periods will increase.
OUR CONTRACTS COULD BE TERMINATED AND OUR FEES COULD BE REDUCED BECAUSE OUR
CONTRACTS ARE SUBJECT TO GOVERNMENT FUNDING.
Our facility management contracts are subject to either annual or bi-annual
governmental appropriations. If a governmental agency does not receive
appropriations, our contract could be terminated by the agency or our management
fee could be reduced. In addition, even if funds are appropriated, delays in
payments may occur which could negatively affect our cash flow.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY YEAR 2000 COMPLIANCE ISSUES.
During the next year, many software programs may not recognize calendar
dates beginning in the year 2000. This problem could force computers or machines
which use date dependent software to either shut down or provide incorrect
information. Although we have completed most of our information technology
systems and non-information technology systems readiness efforts and critical-
systems testing, we can not guarantee that unanticipated year 2000 problems will
not occur. If year 2000 problems result in the inability of our contracting
governmental agencies to pay us in a timely manner for our services or the
inability of third-party suppliers, such as utility, telecommunications, food
service and healthcare suppliers, to provide their products and services our
business could be seriously harmed.
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GOVERNMENT REGULATION, AUDITS AND INVESTIGATIONS COULD NEGATIVELY AFFECT OUR
BUSINESS BY CAUSING US TO SUBSTANTIALLY MODIFY THE WAY WE CONDUCT OUR BUSINESS
OR BY SUBJECTING US TO PENALTIES OR CONTRACT TERMINATIONS.
The corrections and detention industry is subject to national, federal,
state and local regulations which are administered by various regulatory
authorities. Prospective providers of correctional and detention services must
comply with a variety of applicable state and local regulations including
education, health care and safety regulations.
Our contracts with government agencies typically include extensive reporting
requirements and require supervision and on-site monitoring by representatives
of contracting governmental agencies. State law also typically requires
correctional officers to meet certain training standards. Some states deem
prison guards to be peace officers and require our personnel to be licensed and
may make them subject to background investigation. In addition, many state and
local governments are required to enter into a competitive bidding procedure
before awarding contracts for products or services. The laws of certain
jurisdictions may also require us to award subcontracts on a competitive basis
or to subcontract with businesses owned by members of minority groups. Our
failure to comply with any applicable laws, rules or regulations could subject
us to substantial penalties, including loss of a management contract, and could
have a material adverse effect on our financial condition and results of
operation. Furthermore, our current and future operations may be subject to
additional regulations as a result of, among other factors, new statutes and
regulations and changes in the manner in which existing statutes and regulations
are or may be interpreted or applied. Any additional regulations or changes in
existing regulations could require us to modify substantially the manner in
which we conduct business and could adversely affect us.
Our contracts give the contracting agency the right to conduct routine
audits of the facilities and operations we manage for the agency. An audit
involves a governmental agency's review of our compliance with the prescribed
policies and procedures established for the facility. We also may be subject to
investigations as a result of an audit, an offender's complaint or other causes.
Any contract termination or non-renewal as a result of an audit or investigation
could seriously harm our business.
OUR BUSINESS WILL BE HARMED IF THE ACCEPTANCE OF PRIVATIZED CORRECTIONAL AND
DETENTION FACILITIES DOES NOT CONTINUE.
Our future success depends heavily on the continued acceptance and use of
private entities to manage correctional and detention facilities. Many
governmental agencies currently do not accept management of correctional and
detention facilities by private entities. Some sectors of the federal government
and some state governments are legally unable to delegate their traditional
management responsibilities for correctional and detention facilities to private
companies. The operation of correctional and detention facilities by private
entities has encountered resistance from certain groups, such as labor unions,
local sheriff's departments and groups that believe correctional and detention
facility operations should be conducted only by governmental agencies. Such
resistance may cause a change in public and government acceptance of privatized
correctional facilities. In addition, changes in political parties in any of our
markets could result in significant changes in elected officials' previously
established views of privatization in such markets.
THE LOCATION OF OUR FACILITIES MAY BE SUBJECT TO OPPOSITION.
Our success in obtaining new awards and contracts may depend in part upon
our ability to locate land that can be leased or acquired on favorable terms by
us or other entities working with us in connection with a proposal to construct
and/or manage a facility. Some locations may be in or near populous areas and
may generate legal action or other forms of opposition from residents in areas
surrounding a proposed site. Typically, we must obtain and comply with zoning
approvals and/or land use permits from local governmental entities with respect
to a facility. In certain circumstances, public hearings are required before we
can obtain approvals and permits.
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NEGATIVE PUBLICITY ABOUT OUR INDUSTRY OR OUR COMPETITORS COULD HARM OUR
BUSINESS.
Negative publicity could adversely affect our business. In addition to
possible negative publicity about privatization in general, an escape,
absconsion, riot, internal incident or other disturbance at one of our
facilities or another privately operated facility, or placement of one or more
notorious offenders or criminal or violent actions by offenders at one of our
facilities may result in publicity adverse to us and our industry. Although we
have not experienced any material adverse effect on our business or operating
results as a result of previous escapes or absconsions, we cannot guarantee that
any future escapes or absconsions would not have an adverse affect on our
business or operating results.
WE COULD BE SUBJECT TO LEGAL LIABILITY BECAUSE MANY OF OUR FACILITIES CONTAIN
HIGH-RISK OFFENDERS AND BECAUSE MANY OF OUR CONTRACTS REQUIRE US TO INDEMNIFY
GOVERNMENTAL AGENCIES.
Our management of correctional, detention and pre-release facilities exposes
us to potential third-party claims or litigation by offenders or other persons
for personal injury or other damages resulting from contact with our facilities,
programs, personnel or offenders, including damages arising from an offender's
escape or absconsion or from a disturbance or riot at one of our facilities. The
U.S. Supreme Court has held that prison guards employed by private firms are not
entitled to qualified immunity from suit by prisoners for violations of their
rights. In addition, certain of our correctional, detention and pre-release
facilities contain a high-risk population, many of whom have been convicted of
or charged with violent offenses. As a result, certain offenders at our
facilities could pose risks to the public for which we may be held liable.
Our management contracts generally require us to indemnify the governmental
agency against any damages to which the governmental agency may be subject in
connection with claims or other liability risks we face, including personal or
bodily injury, death or property damage to a third party if we are found to be
negligent.
In order to obtain and maintain our management contracts, we are required to
have insurance. Although insurance generally is available, we cannot guarantee
that insurance will continue to be available on commercially reasonable terms or
will be adequate to cover all potential claims. In addition, we are unable to
secure insurance for some unique business risks including riot and civil
commotion or the acts of an escaped offender.
WE COMPETE WITH A WIDE VARIETY OF PRIVATE ENTITIES AND GOVERNMENTAL AGENCIES
THAT MAY HAVE GREATER FINANCIAL RESOURCES OR MAY BE PREFERRED PROVIDERS.
If we fail to compete successfully against current or future competitors,
our business, financial condition and operating results could be seriously
harmed. We compete with a number of publicly-traded companies, including Prison
Realty Trust Inc. (Corrections Corporation of America), Wackenhut Corrections
Corporation and Correctional Services Corporation. At December 31, 1998,
Corrections Corporation of America and Wackenhut Corrections Corporation
accounted for a substantial amount of the privatized secure institutional adult
beds under contract in the United States.
We also compete in some markets with small local companies that have better
knowledge of the local conditions and may be better able to gain political and
public acceptance. We may compete in some markets with governmental agencies
that operate correctional and detention facilities.
We may encounter significant competition in our efforts to achieve our
growth strategy. Other companies with growth objectives similar to ours may
enter the industry. These companies may have greater financial resources than to
finance acquisition and internal growth opportunities. Although some states
require substantial capital investments in new projects, other states may allow
potential competitors to enter our business without substantial capital
investment or previous experience in the management of correctional and
detention facilities.
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WE ARE SUBJECT TO ECONOMIC RISKS ASSOCIATED WITH OUR DEVELOPMENT ACTIVITIES THAT
COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
When we act as project manager for the design and construction of a
facility, we typically act as the primary contractor and subcontract with other
parties that act as the general contractors. As primary contractor, we are
subject to various risks of construction that could cause construction delays,
including shortages of labor and materials, work stoppages, labor disputes and
weather interference. We are also subject to the risk that the general
contractor will be unable to complete construction at the budgeted costs or to
fund any excess construction costs. We are ultimately liable for all late
delivery penalties and cost overruns. If we incur penalties and cost overruns,
our operating results could be adversely affected.
OUR ABILITY TO RETAIN OUR EXECUTIVE OFFICERS AND KEY PERSONNEL, AND OUR ABILITY
TO RECRUIT ADDITIONAL QUALIFIED PERSONNEL ARE CRUCIAL TO OUR SUCCESS.
We depend greatly on the efforts of our executive officers and key personnel
to obtain new contracts, to make acquisitions and to manage our operations. The
loss or unavailability of any of our executive officers could have an adverse
effect on us. Our ability to perform under current and new contracts also
depends, in part, on our ability to attract and retain qualified senior
executives and operating personnel. There is significant competition for
qualified facility administrators, managers, counselors and other key personnel.
We cannot be sure that we will be successful in recruiting or training a
sufficient number of qualified officers or employees to enable us to operate our
business and implement our growth strategy as planned.
OUR STOCK PRICE MAY BE VOLATILE BECAUSE OF OUR OPERATING RESULTS AND CERTAIN
FACTORS BEYOND OUR CONTROL.
The market price of our common stock may vary significantly from time to
time in response to many factors, including variations in our reported periodic
financial results, changing conditions in the economy or in our industry, and
negative publicity affecting us or our industry. In addition, stock markets and
the stock prices of our competitors experience significant price and volume
volatility from time to time which may affect the market price of our common
stock for reasons unrelated to our performance.
WE HAVE ANTI-TAKEOVER PROVISIONS THAT MAY PREVENT STOCKHOLDERS FROM EFFECTING A
CHANGE IN CONTROL.
Our certificate of incorporation and bylaws may discourage, delay or prevent
a change in control of Cornell that a stockholder may consider favorable. Our
certificate of incorporation and bylaws:
- prohibit cumulative voting in the election of directors;
- deny stockholders the ability to act by written consent unless the written
consent is unanimous;
- establish advance notice requirements for nominations for election to the
board of directors or proposing matters that can be acted upon by
stockholders at stockholder meetings;
- allow the board of directors to consider social, economic and other
factors in evaluating any offer of another party; and
- allow the alteration, amendment and repeal of the bylaws only in
accordance with our certificate of incorporation.
In addition, Section 203 of the Delaware General Corporation Law may discourage,
delay or prevent a change in control of Cornell by prohibiting a publicly held
Delaware corporation from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes an interested
stockholder.
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WE COULD LOSE OUR LEASE RIGHTS FOR OUR BIG SPRING COMPLEX. OUR BUSINESS WOULD BE
SERIOUSLY HARMED IF WE COULD NOT OPERATE THE BIG SPRING COMPLEX.
Our inability to continue to operate our facility in Big Spring, Texas,
known as the Big Spring Complex, would adversely affect our business. The Big
Spring Complex is part of a larger tract of land. The larger tract of land was
formerly part of a United States Air Force base conveyed to the City of Big
Spring by the United States government in 1978. The document conveying the
larger tract of land contains restrictive covenants that generally require (1)
use of the larger tract of land for public airport purposes unless otherwise
consented in writing by the Federal Aviation Administration, or the FAA, (2)
maintenance of facilities on the larger tract of land and (3) the availability
of the larger tract for use by federal aircraft. The United States government
also has the right to use the larger tract in the case of a national emergency
and the FAA has the right to portions of the larger tract and any structures
located on the larger tract for use in construction, operation or maintenance of
facilities for air traffic control activities. In some circumstances, at the
option of the grantor, title to the larger tract could revert to the grantor for
any breach of the provisions of the document conveying the larger tract.
The FAA has reviewed the agreements which permit us to operate the Big
Spring Complex and has advised the City of Big Spring in writing that it has no
objections to the agreements. We believe that (1) the City of Big Spring is in
substantial compliance with the terms of the conveyance and (2) even if not in
substantial compliance, the FAA is aware of and has not objected to all past and
present uses of the larger tract by the City of Big Spring and its lessees.
However, the FAA could assert that those uses of the larger tract violate the
conveyance.
The City of Big Spring has used and leased, and may in the future use or
lease, other portions of the larger tract for other purposes unrelated to our
business. The continued compliance by the City of Big Spring or its lessees with
the terms of the conveyance is not within our control, and any breach by the
City of Big Spring or its lessees could result in reversion of title of all or a
portion of the larger tract to the United States government. We do not have any
recourse against the City of Big Spring in the case of a reversion. In addition,
we do not have any guarantees from the FAA that it will honor our lease rights
in the event of a reversion. Accordingly, in the case of a reversion of the
larger tract, or in any case in which the United States government or the FAA
has superior rights to use the larger tract, our continued ability to lease and
use the Big Spring Complex could be subject to the discretion of the United
States government or the FAA.
USE OF PROCEEDS
We will use the net proceeds from the sale of the securities for our general
corporate purposes, which may include:
- repaying indebtedness;
- funding future acquisitions;
- funding future facility expansions or construction;
- making additions to our working capital; or
- any other purpose we may describe in an accompanying prospectus
supplement.
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DESCRIPTION OF DEBT SECURITIES
The following description is a summary of the general terms and conditions
that could apply to debt securities we may issue under this shelf registration
statement. If and when we offer debt securities, a prospectus supplement will
describe the particular terms and conditions that actually apply to the debt
securities included under the prospectus supplement. The debt securities will be
our unsecured general obligations and either senior debt securities or
subordinated debt securities.
If we offer senior debt securities or subordinated debt securities, we will
issue them under an indenture that we refer to in this prospectus as the
indenture. We will enter into the indenture with Chase Bank of Texas, National
Association, as trustee. In this prospectus, we will refer to Chase Bank of
Texas, National Association, together with any other trustees that are qualified
to act under the Trust Indenture Act of 1939 and chosen by us and appointed in a
supplemental indenture with respect to a particular series of debt securities,
as the Trustee. We will identify the Trustee for each series of debt securities
in the applicable prospectus supplement. These filings will be available for
inspection at the corporate trust office of the Trustee, or as described above
under "Where You Can Find More Information." The indenture will be subject to,
and governed by, the Trust Indenture Act of 1939.
The following description does not restate the entire indenture and is
qualified in its entirety by express reference to the indenture. The indenture
is incorporated by reference as a part of the following description. Capitalized
terms used but not defined in this description have the meanings given to those
terms in the indenture. You should read the entire indenture for a complete
description of the terms of the indenture. We have filed a copy of the indenture
with the Commission as an exhibit to the registration statement which includes
this prospectus.
SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT
A prospectus supplement relating to any series of debt securities we offer
will describe the specific terms of those debt securities. Those terms will
include some or all of the following:
- the designation, aggregate principal amount and authorized denominations;
- whether the debt securities are senior debt securities or subordinated
debt securities;
- the maturity date;
- the interest rate, if any, and the method for calculating the interest
rate;
- the interest payment dates and the record dates for the interest payments;
- the portion of the principal amount that will be payable if the maturity
of the debt securities is accelerated;
- any guaranties of the debt securities by any of our subsidiaries or
others, or other forms of credit support for the debt securities;
- any mandatory or optional redemption terms or prepayment, conversion,
sinking fund or exchangeability or convertibility provisions;
- the place where principal and interest will be payable;
- if other than denominations of $1,000 or multiples of $1,000, the
denominations in which the debt securities will be issued;
- whether the debt securities will be issued in the form of global
securities or certificates;
- the currency or currencies, if other than the currency of the United
States, in which principal and interest will be payable;
- additional provisions, if any, relating to the defeasance of the debt
securities;
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- whether the debt securities will be issuable in registered form or bearer
form or both and, if bearer securities are issuable, any restrictions
applicable to the exchange of one form for another and the offer, sale and
delivery of bearer securities;
- any applicable United States federal income tax consequences;
- the dates on which premium, if any, will be payable;
- our right, if any, to defer payment of interest and the maximum length of
the deferral period;
- any listing on a securities exchange;
- the initial public offering price; and
- other specific terms, including events of default and covenants provided
for with respect to the debt securities.
Any particular series of debt securities may contain covenants limiting:
- the incurrence of additional debt, including guarantees, by us and our
subsidiaries and affiliates;
- the making of various payments by us and our subsidiaries and affiliates;
- our business activities and those of our subsidiaries and affiliates;
- the issuance of other securities by our subsidiaries and affiliates;
- asset dispositions;
- transactions with affiliates;
- a change of control;
- the incurrence of liens; and
- mergers and consolidations involving us and our subsidiaries.
BOOK ENTRY, DELIVERY AND FORM
We may issue debt securities of a series in whole or part in registered,
bearer, coupon or global form. A global security is a security, typically held
by a depository, that represents the beneficial interest of a number of
purchasers of the security.
Unless otherwise stated in any prospectus supplement, The Depository Trust
Company, New York, New York will act as depositary. In this prospectus, we will
refer to The Depository Trust Company, in its capacity as depositary, as DTC. We
will issue book-entry debt securities of a series in the form of a global debt
security that will be deposited with DTC. This means that we will not issue
certificates to each holder. We will issue one global debt security to DTC who
will keep a computerized record of its participants, such as your broker, whose
clients have purchased the debt securities. The participant will then keep a
record of its clients who purchased the debt securities. Unless it is exchanged
in whole or in part for a certificated debt security, a global debt security may
not be transferred; except that DTC, its nominees and their successors may
transfer a global debt security as a whole to one another.
Beneficial interests in global debt securities will be shown on, and
transfers of global debt securities will be made only through, records
maintained by DTC and its participants.
DTC has provided us the following information: DTC is (1) a limited-purpose
trust company organized under the New York Banking Law, (2) a "banking
organization" within the meaning of the New York Banking Law, (3) a member of
the United States Federal Reserve System, (4) a "clearing corporation" within
the meaning of the New York Uniform Commercial Code and (5) a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act of
1934.
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DTC holds securities that its participants, known as direct participants,
deposit with DTC. DTC also records the settlement among direct participants of
securities transactions, such as transfers and pledges, in deposited securities
through computerized records for direct participants' accounts. This eliminates
the need to exchange certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations and some
other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
direct participant. The rules that apply to DTC and its participants are on file
with the Commission.
DTC is owned by a number of its direct participants and by the New York
Stock Exchange, the American Stock Exchange, and the National Association of
Securities Dealers.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global debt securities for
all purposes. Accordingly, we, the Trustee and any paying agent we may appoint
will have no direct responsibility or liability to pay amounts due on the global
debt securities to owners of beneficial interests in the global debt securities.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit direct participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global debt
securities as shown on DTC's records. In addition, it is DTC's current practice
to assign any consenting or voting rights to direct participants whose accounts
are credited with debt securities on a record date, by using an omnibus proxy.
Payments by participants to owners of beneficial interests in the global debt
securities, and voting by participants, will be governed by the customary
practices between the participants and owners of beneficial interests, as is the
case with debt securities held for the account of customers registered in
"street name." However, payments will be the responsibility of the participants
and not of DTC, the Trustee or us.
Debt Securities represented by a global debt security will be exchangeable
for certificated debt securities with the same terms in authorized denominations
only if:
- DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
- we determine not to require all of the debt securities of a series to be
represented by a global debt security and notify the Trustee of our
decision.
PROVISIONS RELATING ONLY TO THE SENIOR DEBT SECURITIES
The senior debt securities will rank equally in right of payment with all of
our other senior and unsubordinated debt and senior in right of payment to any
of our subordinated debt, including the subordinated debt securities. The senior
debt securities will be effectively subordinated to all of our secured debt. We
will disclose the amount of our secured debt in the prospectus supplement.
PROVISIONS RELATING ONLY TO THE SUBORDINATED DEBT SECURITIES
SUBORDINATION TO SENIOR INDEBTEDNESS
The subordinated debt securities will rank junior in right of payment to all
of our senior indebtedness. Senior indebtedness will be defined to include all
notes or other evidences of debt not expressed to be subordinate or junior in
right of payment to any other of our debt.
PAYMENT BLOCKAGES
The indenture may provide that no cash payment of principal, interest and
any premium on the subordinated debt securities may be made:
- if we fail to pay when due any amounts on any senior indebtedness;
- if our property or we are involved in any voluntary or involuntary
liquidation or bankruptcy; and
- in other instances specified in the indenture.
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PAYMENT AND TRANSFER
Principal, interest and any premium on fully registered securities will be
paid at the office of the paying agent that we may designate. We may make
payment by check mailed to persons in whose names the debt securities are
registered on days specified in the indenture or any prospectus supplement. Debt
security payments in other forms will be paid at a place designated by us and
specified in a prospectus supplement.
Fully registered securities may be transferred or exchanged at the corporate
trust office of the Trustee or at any other office or agency maintained by us
for these purposes, without payment of any service charge, except for any tax or
governmental charge.
EVENTS OF DEFAULT
The indenture will provide that each of the following is an Event of Default
with respect to any series of debt securities:
- default for 30 days in the payment when due of interest on the debt
securities;
- default in payment when due of the principal of or any premium on the debt
securities;
- default in payment when due of any sinking fund payment with respect to
the debt securities;
- default in the performance of or breach of various covenants after
applicable notice or grace period; and
- various events of bankruptcy or insolvency with respect to us.
The applicable prospectus supplement will describe any additional Events of
Default.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding debt securities of a
series may declare all debt securities of that series to be due and payable
immediately. The holders of a majority in principal amount of the debt
securities may, on behalf of all holders, waive any existing default or Event of
Default and its consequences, except (1) a default in the payment of principal
of, interest and any premium on, any of the debt securities and (2) a default in
respect of any provision of the indenture that cannot be modified or amended
without the consent of each holder affected.
No holder of debt securities may pursue any remedy under the indenture
unless:
- the holder gives the Trustee written notice of a continuing Event of
Default;
- the holders of at least 25% in principal amount of the then outstanding
debt securities of that series make a written request to the Trustee to
pursue the remedy;
- the holder or holders offer satisfactory indemnity to the Trustee against
costs, expenses and liabilities;
- the Trustee does not comply with the request within 60 days after receipt
of the request and offer of indemnity; and
- the Trustee has not received during that 60-day period contrary
instructions from the holders of at least a majority in principal amount
of the then outstanding debt securities.
The Trustee is required, within 90 days after the occurrence of a default
known to it, to give to the holders notice of the default. However, except in
the case of a default in the payment of principal of, interest or any premium on
any of the debt securities or in the making of any sinking fund payment, the
Trustee may withhold the notice if it in good faith determines that withholding
the notice is in the interests of the holders.
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MODIFICATION OF INDENTURE
From time to time, we, when authorized by resolutions of our board of
directors, and the Trustee, without the consent of the holders of debt
securities of any series, may amend, waive or supplement the indenture for
specified purposes, including, among other things:
- curing ambiguities, defects or inconsistencies;
- providing for the assumption of our obligations to holders of the debt
securities of a series in the case of a merger or consolidation;
- making any change that would provide any additional rights or benefits to
the holders of the debt securities of a series;
- adding guarantees with respect to the debt securities of a series;
- securing the debt securities of a series;
- providing for the acceptance of appointment by a successor Trustee or a
separate Trustee for one or more series of debt securities;
- maintaining the qualification of the indenture under the Trust Indenture
Act; or
- making any change that does not adversely affect the rights of any holder.
Other amendments and modifications of the indenture may be made by us and
the Trustee without notice to any holder but with the consent of the holders of
not less than a majority of the aggregate principal amount of the outstanding
debt securities of each series affected. However, no modification or amendment
may, without the consent of the holder of each outstanding debt security
affected:
- reduce the principal amount of or extend the stated maturity of the debt
securities, or alter or waive the redemption provisions of the debt
securities;
- reduce the percentage in principal amount outstanding of debt securities
of any series which must consent to an amendment, supplement or waiver or
consent to take any action under the indenture;
- reduce the premium payable upon the redemption of any debt security or
change the time at which any debt security may or shall be redeemed;
- make any debt security payable in currency other than that stated in the
debt security;
- make any change that adversely affects the rights of any holder in the
case of any debt security;
- reduce the rate of or extend the time for payment of interest on the debt
securities;
- release any security that may have been granted in respect of debt
securities; or
- make changes to the provisions regarding rights of the holders of a
majority in principal amount of the debt securities or the provisions
regarding modification of the indenture.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The indenture provides that we may not consolidate with or merge with or
into any Person, or convey, transfer or lease all or substantially all of our
assets, unless:
- either:
- we are the survivor in the case of a merger, or
- we are not the survivor and the survivor is a United States corporation
and expressly assumes by a supplemental indenture all of our
obligations under the debt securities and the indenture;
- immediately after giving effect to the transaction, no default or Event of
Default would have occurred and be continuing; and
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- we deliver to the Trustee an officer's certificate and an opinion of our
counsel stating that the transaction and the supplemental indenture comply
with the indenture.
DISCHARGING OUR OBLIGATIONS
Except as may otherwise be set forth in any prospectus supplement, we may
choose to either discharge our obligations on the debt securities of any series
in a legal defeasance or release ourselves from our covenant restrictions on the
debt securities of any series in a covenant defeasance.
If we choose to discharge our obligations in a legal defeasance, all of our
obligations with respect to the debt securities will be discharged, except for:
- obligations with respect to the registration of transfer and exchange of
debt securities;
- obligations with respect to mutilated, destroyed, lost or stolen debt
securities;
- obligations to maintain offices or agencies for the registration of
transfer, exchange and payment of debt securities;
- duties of paying agents;
- obligations to furnish the Trustee with information regarding the holders
of debt securities;
- requirements regarding compensation and reimbursement of the Trustee;
- provisions regarding the eligibility of the Trustee; and
- the defeasance provisions of the indenture.
If we choose to discharge our obligations in a covenant defeasance, the
events listed in the indenture as Events of Default will no longer constitute a
default or Event of Default, except for payment defaults and bankruptcy or
insolvency defaults.
We may choose legal or covenant defeasance at any time prior to the stated
maturity or redemption of the debt securities of the series if, among other
conditions,
- we deposit with the Trustee sufficient cash or U.S. Government Obligations
to pay the principal, interest, any premium and any other sums due to the
stated maturity date or redemption date of the debt securities of the
series;
- we deliver to the Trustee an opinion of our independent accountants
regarding the sufficiency of the cash and U.S. Government Obligations to
pay the principal, interest, any premiums and any other sums when due;
- 91 days pass after the deposit and during the 91-day period no default
relating to our bankruptcy or insolvency is continuing;
- no default is continuing on the date of deposit and after giving effect to
the deposit;
- the deposit is not a default under any of our other agreements and is not
prohibited by the subordination provisions of the indenture if the debt
securities are subordinated;
- we provide the Trustee with an opinion of our counsel that the trust
resulting from the deposit is not, or is qualified as, a regulated
investment company under the Investment Company Act of 1940;
- in the event of legal defeasance, we provide the Trustee with an opinion
of our counsel that
- we have received an Internal Revenue Service ruling; or
- since the date of the indenture there has been no change in the federal
income tax law, and confirming that the holders will not be affected
for U.S. federal income tax purposes by the defeasance;
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- in the case of covenant defeasance, we provide the Trustee with an opinion
of our counsel that the holders of the debt securities will not be
affected for U.S. federal income tax purposes by the defeasance; and
- we provide the Trustee with an officer's certificate and an opinion of our
counsel that all conditions precedent to the defeasance and discharge of
the debt securities have been complied with.
THE TRUSTEE
Chase Bank of Texas, National Association will serve as the initial Trustee
under the indenture. The indenture will govern the duties, responsibilities and
rights of the Trustee, including the following:
RESIGNATION OR REMOVAL OF TRUSTEE
Under provisions of the indenture and the Trust Indenture Act governing
trustee conflicts of interest, any uncured event of default under any series of
senior debt securities will force the Trustee to resign as Trustee for either
the subordinated debt securities or the senior debt securities. Also, any
uncured event of default under any series of subordinated debt securities will
force the Trustee to resign as Trustee for either the senior debt securities or
the subordinated debt securities. Any resignation of the Trustee will require
the appointment of a successor Trustee for the applicable debt securities in
accordance with the terms and conditions of the indenture.
The Trustee may resign or be removed by us for one or more series of debt
securities and a successor Trustee be appointed to act for that series. The
holders of a majority in aggregate principal amount of a series of debt
securities may remove the Trustee for that series.
LIMITATIONS ON TRUSTEE IF IT IS OUR CREDITOR
If the Trustee becomes our creditor, the indenture will limit the Trustee's
right to obtain payment of claims in some circumstances, or to realize on some
property received in respect of those claims as security or otherwise.
ANNUAL TRUSTEE REPORT TO HOLDERS OF DEBT SECURITIES
The indenture will require the Trustee to submit an annual report to the
holders of the debt securities regarding, among other things, (1) the Trustee's
eligibility to serve, (2) the priority of the Trustee's claims regarding
advances made by it and (3) any action taken by the Trustee materially affecting
those debt securities.
CERTIFICATE AND OPINIONS TO BE FURNISHED TO TRUSTEE
The indenture will provide that every application by us for action by the
Trustee requires an officers' certificate and an opinion of our counsel stating
that, in the opinion of the signers, we have complied with all conditions
precedent to the action.
GOVERNING LAW
The indenture and the debt securities will be governed by and construed in
accordance with the laws of the State of New York.
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DESCRIPTION OF COMMON STOCK
The following description of the material terms of our common stock is
qualified in its entirety by reference to applicable provisions of the Delaware
General Corporation Law, our certificate of incorporation, our bylaws and the
Rights Agreement dated as of May 1, 1998 between us and American Securities
Transfer & Trust, Inc., as rights agent.
AUTHORIZED AND OUTSTANDING COMMON STOCK
Our authorized capital stock includes 30,000,000 shares of common stock, par
value $.001 per share. As of October 31, 1999, we had 9,582,528 shares of common
stock outstanding. The outstanding shares of our common stock are listed on the
New York Stock Exchange under the symbol "CRN."
VOTING, LIQUIDATION AND DIVIDEND RIGHTS
Subject to the prior or special rights of holders of shares of preferred
stock, the holders of shares of common stock:
- are entitled to any dividends that may be declared by our board of
directors out of legally available funds;
- are entitled to one vote per share;
- have no preemptive or conversion rights;
- are not subject to, or entitled to the benefits of, any redemption or
sinking fund provision;
- are entitled upon liquidation to receive our assets remaining after the
payment of corporate debts and the satisfaction of the liquidation
preference of any outstanding preferred stock.
Voting is non-cumulative. The outstanding shares of our common stock are fully
paid and non-assessable.
We have never declared or paid cash dividends on our capital stock. We
currently anticipate that all of our excess earnings, if any, will be retained
for use in the operation and expansion of our business and we do not anticipate
paying cash dividends on our common stock in the foreseeable future. The payment
of dividends is within the discretion of our board of directors and will depend
upon, among other factors, our results of operations, financial condition,
capital requirements and restrictions, if any, imposed by financing commitments
and legal requirements. Our credit facilities and other financing arrangements
with our bank lenders currently prohibit the payment of dividends.
PROVISIONS AFFECTING CONTROL OF CORNELL
Our certificate of incorporation and bylaws contain the following provisions
which are intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by our
board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control. These provisions include:
- prohibiting cumulative voting in the election of directors;
- denying stockholders the ability to act by written consent unless the
written consent is unanimous;
- establishing advance notice requirements for nominations for election to
the board of directors or proposing matters that can be acted upon by
stockholders at stockholder meetings;
- allowing the board of directors to consider social, economic and other
factors in evaluating any offer of another party; and
- allowing the alteration, amendment and repeal of the bylaws only in
accordance with our certificate of incorporation.
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In addition, Section 203 of the Delaware General Corporation Law may discourage,
delay or prevent a change in control of Cornell by prohibiting a publicly held
Delaware corporation from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes an interested
stockholder.
RIGHTS AGREEMENT
On April 22, 1998 our board of directors authorized the issuance of one
preferred share purchase right, known as a Right, for each outstanding share of
our common stock to the stockholders of record at the close of business on May
11, 1998. Each Right entitles the registered holder to purchase from us one unit
of a share, which is currently one one-thousandth of a share, of our Series A
Junior Participating Preferred Stock, par value $.01 per share, at a price of
$120 per unit of a Series A Preferred Share, subject to adjustment. The
description and terms of the Rights are set forth in the Rights Agreement.
Until a Distribution Date, the Rights will be evidenced by the common stock
certificates. The Rights Agreement states that a Distribution Date occurs upon
the earlier to occur of (a) 10 days following a public announcement that a
person or group of affiliated or associated persons, known as an Acquiring
Person, has acquired beneficial ownership of 15% or more of our outstanding
Voting Shares (as defined in the Rights Agreement) or (b) 10 business following
the commencement or announcement of an intention to make a tender offer or
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of our outstanding Voting Shares,
the earlier of such dates being called the Distribution Date.
Until the Distribution Date or earlier redemption or expiration of the
Rights:
- the Rights will be evidenced by the certificates representing common
stock;
- the Rights will be transferred with and only with the common stock;
- new common stock certificates issued after May 11, 1998, upon transfer or
new issuance of the common stock will contain a notation incorporating the
Rights Agreement by reference; and
- the surrender for transfer of any certificates for common stock
outstanding as of May 11, 1998, even without the notation, will also
constitute the transfer of the Rights associated with the common stock
represented by the certificates.
As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights will be mailed to holders of record of the
common stock as of the close of business on the Distribution Date and the
separate Right certificates alone will then evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on May 1, 2008, which is the Final Expiration Date, unless the Final
Expiration Date is extended or the Rights are earlier redeemed or exchanged by
us as described below.
If an Acquiring Person acquires 15% or more of our Voting Shares, each Right
then outstanding, other than Rights beneficially owned by the Acquiring Person
which would become null and void, will become a right to buy that number of
shares of common stock that at the time of the acquisition would have a market
value of two times the purchase price of the Right. If, however, our board of
directors determines in good faith that a person who would otherwise be an
Acquiring Person has become an Acquiring Person inadvertently, and that person
divests a sufficient number of Voting Shares by a deadline set by our board of
directors, then that person shall not be deemed to be an Acquiring Person for
any purposes of the Rights Agreement.
If, after any person has become an Acquiring Person, we are acquired in a
merger or other business combination transaction or more than 50% of our
consolidated assets or earning power are sold, proper provision will be made so
that each holder of a Right will have the right to receive, upon the exercise of
the Right at the then current purchase price of the Right, that number of shares
of
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common stock of the acquiring company which at the time of the transaction would
have a market value of two times the purchase price of the Right.
The offer and sale of the Series A Preferred Shares or other securities
issuable upon exercise of the Rights will be registered with the Commission but
the registration will not be effective until the Rights become exercisable. As
described above, the Rights will not be transferable separately from the common
stock until the Distribution Date.
The number of Series A Preferred Shares or other securities or property
issuable upon exercise of the Rights, and the purchase price payable, are
subject to customary adjustments from time to time to prevent dilution.
The number of outstanding Rights and the number of Series A Preferred Shares
or other securities issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the common stock or a stock dividend
on the common stock payable in common stock or subdivisions, consolidations or
combinations of the common stock occurring prior to the Distribution Date.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 15% or more of our outstanding
Voting Shares and before the acquisition by a person or group of 50% or more of
our outstanding Voting Shares, our board of directors may, at its option, issue
common stock or Series A Preferred Shares in mandatory redemption of, and in
exchange for, all or part of the then outstanding exercisable Rights (other than
Rights owned by such Acquiring Person or group which would become null and void)
at an exchange ratio of one share of common stock or one unit of a Series A
Preferred Share for each Right which is then exercisable, subject to adjustment.
At any time prior to the first public announcement that a person or group
has become the beneficial owner of 15% or more of our outstanding Voting Shares,
our board of directors may redeem all, but not less than all, of the then
outstanding Rights at a price of $0.01 per Right. The redemption of the Rights
may be made effective at the time, on the basis and with the conditions as our
board of directors in its sole discretion may establish. Immediately upon the
action of our board of directors ordering redemption of the Rights, the right to
exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the redemption price.
Until a Right is exercised, the holder of the Right, as a holder, will have
no rights as a stockholder of Cornell, including, without limitation, the right
to vote or to receive dividends.
The terms of the Rights may be amended by our board of directors without the
consent of the holders of the Rights, including amendment to extend the Final
Expiration Date. However, after the Distribution Date no amendment may
materially and adversely affect the interests of holders of the Rights.
REGISTRATION RIGHTS AGREEMENTS
1994 REGISTRATION RIGHTS AGREEMENT
We and certain of our stockholders are parties to a Registration Rights
Agreement dated as of March 31, 1994, as amended. In this prospectus, we will
refer to this agreement as the 1994 Registration Rights Agreement. Under the
terms of the 1994 Registration Rights Agreement, the stockholders that are
parties to the 1994 Registration Rights Agreement are entitled to demand and
piggyback registration rights.
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The Registration Rights Agreement contains no termination provision,
although securities cease to be registrable under the 1994 Registration Rights
Agreement upon the earlier of:
- being disposed of pursuant to an effective registration statement;
- being transferred so that subsequent disposition of those securities does
not require registration or qualification of those securities under the
Securities Act of 1933 or any state securities laws; and
- ceasing to be outstanding.
1999 REGISTRATION RIGHTS AGREEMENT
We have issued warrants to purchase common stock, which are currently held
in escrow on behalf of ING (U.S.) Capital LLC. Pursuant to these warrants, we
and ING (U.S.) Capital LLC entered into a Registration Rights Agreement dated as
of October 14, 1999. In this prospectus, we will refer to this agreement as the
1999 Registration Rights Agreement. Under the terms of the 1999 Registration
Rights Agreement, ING (U.S.) Capital LLC is entitled to demand and piggyback
registration rights. The 1999 Registration Rights Agreement terminates when the
warrants, the securities issuable upon exercise of the warrants and any common
stock or other securities issued in respect thereof which are held by ING (U.S.)
Capital LLC have been sold pursuant to a registration statement or pursuant to
Rule 144 under the Securities Act.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Securities
Transfer & Trust, Inc.
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DESCRIPTION OF PREFERRED STOCK
The following description of the terms of the preferred stock sets forth the
general terms and provisions of the preferred stock to which any prospectus
supplement may relate. Other terms of any series of the preferred stock offered
by any prospectus supplement will be described in that prospectus supplement.
The description of the provisions of the preferred stock set forth below and in
any prospectus supplement does not purport to be complete and is subject to and
qualified in its entirety by reference to our certificate of incorporation and
the certificate of designations relating to each series of the preferred stock.
The certificate of designations will be filed with the Commission and
incorporated by reference in the registration statement of which this prospectus
is a part at or prior to the time of the issuance of each series of the
preferred stock.
We have authority to issue 10,000,000 shares of preferred stock, par value
$.001 per share. As of the date of this prospectus, no shares of our preferred
stock are outstanding.
The preferred stock may be issued from time to time by our board of
directors as shares of one or more classes or series. Subject to the provisions
of our certificate of incorporation and limitations prescribed by law, our board
of directors is expressly authorized to adopt resolutions to issue the shares,
to fix the number of shares, to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any class or series of the
preferred stock, in each case without any action or vote by the holders of
common stock.
The issuance of shares of preferred stock, or the issuance of rights to
purchase shares of preferred stock, could be used to discourage an unsolicited
acquisition proposal. For instance, the issuance of a series of preferred stock
might impede a business combination by including class voting rights that would
enable the holders to block such a transaction; or the issuance might facilitate
a business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under some circumstances, the
issuance of preferred stock could adversely affect the voting power of the
holders of the common stock. Although our board of directors is required to make
any determination to issue preferred stock based on its judgment as to the best
interests of our stockholders, the board of directors could act in a manner that
would discourage an acquisition attempt or other transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then market
price of the stock. The board of directors does not currently intend to seek
stockholder approval prior to any issuance of currently authorized stock, unless
otherwise required by law or the rules of any market on which our securities are
traded.
The preferred stock shall have the dividend, liquidation, redemption and
voting rights set forth in a prospectus supplement relating to a particular
series of the preferred stock. Reference is made to the prospectus supplement
relating to the particular series of the preferred stock offered by the
prospectus supplement for specific terms, including:
- the designation and stated value per share of such preferred stock and the
number of shares offered;
- the amount of liquidation preference per share;
- the initial public offering price at which the preferred stock will be
issued;
- the dividend rate or method of calculation, the dates on which dividends
shall be payable, the form of dividend payment and the dates from which
dividends shall begin to cumulate, if any;
- any redemption or sinking fund provisions;
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- any conversion or exchange rights; and
- any additional voting, dividend, liquidation, redemption, sinking fund and
other rights, preferences, privileges, limitations and restrictions.
The preferred stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights. The rights of the holders of each series of the
preferred stock will be subordinate to the rights of our general creditors.
PLAN OF DISTRIBUTION
We may sell the securities in any of the following three ways, or in any
combination thereof:
- through underwriters or dealers;
- directly to a limited number of purchasers or to a single purchaser; or
- through agents.
The prospectus supplement with respect to any securities will set forth the
terms of the offering of the securities, including:
- the name or names of any underwriters, dealers or agents and the
respective amounts of the securities underwritten or purchased by each of
them;
- the public offering price of the securities and the proceeds to us and any
discounts, commissions or concessions allowed or reallowed or paid to
dealers;
- any securities exchanges on which the securities may be listed; and
- the time and place of delivery for the securities.
Any public offering price and any discounts or concessions allowed or reallowed
or paid to dealers may be changed from time to time.
If underwriters are used in the sale of any securities, those securities
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Those securities may be either offered to the public
through underwriting syndicates represented by managing underwriters, or
directly by underwriters. Unless otherwise set forth in the applicable
prospectus supplement, the obligations of the underwriters to purchase those
securities will be subject to certain conditions precedent and the underwriters
will be obligated to purchase all of those securities if any are purchased.
The securities may be sold directly by us or through agents designated by us
from time to time. Any agent involved in the offer or sale of the securities for
which a prospectus supplement is delivered will be named, and any commissions
payable by us to that agent will be disclosed, in the prospectus supplement.
Unless otherwise indicated in the prospectus supplement, any agent will be
acting on a best efforts basis for the period of its appointment.
If indicated in the applicable prospectus supplement, we will authorize
underwriters, dealers or agents to solicit offers by purchasers to purchase the
securities from us at the public offering price set forth in the prospectus
supplement pursuant to delayed delivery contracts providing for payment and
delivery on a specified date in the future. Those contracts will be subject only
to those conditions disclosed in the prospectus supplement, and the prospectus
supplement will state the commission payable for solicitation of those
contracts.
Some or all of the securities may be new issues of securities with no
established trading market. We may elect to list any of the securities on an
exchange, and in the case of our common stock, on any additional exchange.
However, unless otherwise specified in the applicable prospectus supplement, we
will not be obligated to do so. Any underwriters who buy securities from us for
public offering and sale
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may make a market in those securities, but will not be obligated to do so and
may discontinue any market making at any time without notice. We cannot
guarantee the liquidity of or the trading markets for any securities.
To facilitate the offering of the securities, any underwriters or agents
involved in the offering of our securities may engage in transactions that
stabilize, maintain or otherwise affect the price of our securities or any other
securities the prices of which may be used to determine payments on our
securities. Specifically, the underwriters or agents may overallot in connection
with the offering, creating a short position in our securities for their own
account. In addition, to cover overallotments or to stabilize the price of our
securities or any other securities, the underwriters or agents may bid for, and
purchase, our securities or any other securities in the open market. Finally, in
any offering of our securities through a syndicate of underwriters, the
underwriting syndicate may reclaim selling concessions allotted to an
underwriter or a dealer for distributing our securities in the offering if the
syndicate repurchases previously distributed securities in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the securities
above independent market levels. The underwriters or agents are not required to
engage in these activities, and may end any of these activities at any time.
Agents and underwriters may be entitled under agreements entered into with
us to indemnification by us against certain civil liabilities, including
liabilities under the Securities Act, or to contribution with respect to
payments which the agents or underwriters may be required to make in respect of
those liabilities. Some agents and underwriters may be customers of, engage in
transactions with, or perform services for us in the ordinary course of
business. Those relationships will be disclosed in the applicable prospectus
supplement.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for us by Locke Liddell & Sapp LLP, Houston, Texas. The underwriters' own
legal counsel will advise them about other issues relating to any offering.
EXPERTS
The audited financial statements incorporated by reference in this
prospectus and the registration statement on Form S-3 of which this prospectus
is a part have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect to such audited financial
statements, and are incorporated in this prospectus and the registration
statement on Form S-3 in reliance upon the authority of said firm as experts in
giving said report.
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3,000,000 SHARES
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COMMON STOCK
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PROSPECTUS SUPPLEMENT
NOVEMBER 27, 2001
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LEHMAN BROTHERS
JEFFERIES & COMPANY, INC.
FIRST ANALYSIS SECURITIES CORPORATION