| CORNELL COMPANIES INC ITEM 1A RISK FACTORS Risk Factors and Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 |
| These statements are based on current plans and actual future activities and results of operations may be materially different from those set forth in the forward-looking statements |
| Where any forward-looking statement includes a statement of the assumptions or bases underlying the forward-looking statement, we caution that, while we believe these assumptions or bases to be reasonable and in good faith, assumed facts or bases almost always vary from the actual results, and differences between assumed facts or bases and actual results can be material, depending upon the circumstances |
| Where, in any forward-looking statement, we express an expectation or belief as to future results, that expectation or belief is expressed in good faith and is believed to have a reasonable basis |
| We cannot assure you, however, that the statement of expectation or belief will result or be achieved or accomplished |
| The words “believe,” “could,” “expect,” “estimate,” “anticipate,” “may” and similar expressions will generally identify forward-looking statements |
| All of our forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements |
| In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report |
| With this in mind, you should consider the risks discussed below and elsewhere in this report and other documents we file with the Commission from time to time and the following important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by us or on our behalf |
| 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, particularly of adult secure 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, religious organizations 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 |
| Furthermore, some government agencies are not legally permitted to delegate their traditional management responsibilities for correctional and detention facilities to private companies |
| In addition, as a private prison manager, we are subject to government legislation and regulation restricting the ability of private prison managers to house certain types of inmates, such as inmates from other jurisdictions or inmates at medium or higher security levels |
| Legislation has been enacted in several states, and has previously been proposed in the United States House of Representatives, containing such restrictions |
| Any such legislation may have a material adverse affect on us |
| 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, including the BOP, typically either have a very short term or are subject to termination on short notice without cause |
| The majority of our contracts have primary terms of one to three years |
| Our contracts with governmental agencies may contain one or more renewal options that may be exercised only by the contracting government agency |
| Some of these contracts may not be renewed by the governmental agency and no assurance can be given that the governmental agency will exercise a renewal option in the future |
| In addition, the governmental agency may elect to solicit bids pursuant to an RFP or RFQ rather than exercise a renewal option |
| No assurance of success can be given for any RFP or RFQ The non-renewal or termination of any of our significant contracts with governmental agencies or our failure to successfully respond to a RFP or RFQ could materially adversely affect our financial condition, results of operation and liquidity, including our ability to secure new facility management contracts from others |
| To the extent we have made significant capital expenditures and have short-term contracts with our customers that are not renewed or extended, we may not recover our entire capital investment |
| 14 ______________________________________________________________________ Budgetary pressure on federal, state and local governments may result in contract cancellation or a reduction in per diem rates, which would reduce our profitability |
| Our cash flow is subject to the receipt of sufficient funding of and timely payment by contracting governmental entities |
| If the appropriate government 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 |
| Federal, state and local governments have encountered, and are expected to continue to encounter, significant budgetary constraints that may result in a reduction of spending on the outsourced services that we provide |
| Such budgetary limitations may cause the contractual commitments to be reduced or even eliminated, which would make it unprofitable to continue operating a certain facility and require us to find alternate customers or close such facility |
| Many states are facing significant budget deficits and are under pressure to reduce current levels of spending or control additional spending |
| As a result of this increased budgetary pressure, we have granted a few of our customers relief from formulaic increase provisions in their agreements and some of our customers have not included in their appropriation legislation amounts that would increase the per diem rates payable to us |
| Contractual rate increases are generally intended to offset increases in expenses and inflation |
| To the extent rates are not increased or are reduced, our profitability will be adversely affected |
| 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 criminal laws |
| For instance, changes in laws relating to drugs and controlled substances or illegal immigration could reduce the number of persons arrested, convicted and sentenced, thereby potentially reducing demand for correctional facilities to house them and community-based services to transition offenders back into the community |
| Similarly, reductions in crime rates could lead to reductions in arrests, convictions and sentences requiring correctional facilities |
| When seeking bids, most governmental entities evaluate the financial strength of the bidders |
| To the extent they believe we do not have sufficient financial resources, we will be unable to effectively compete for bids |
| 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 on favorable terms |
| Furthermore, 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 or there is a shift in occupancy among our divisions |
| Our correctional, detention and treatment facilities are dependent upon governmental agencies supplying offenders and we do not control occupancy levels at our facilities |
| We believe the rate of growth experienced in the adult secure sector during the late 1980s and early 1990s is stabilizing |
| Historically, a substantial portion of our revenues has been 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 decrease in the occupancy of certain juvenile justice, education and treatment facilities would have a more significant impact on our operating results than a decrease in occupancy in the adult secure institutional services division due to higher per diem revenue at certain juvenile facilities |
| Social commentators and various political or governmental representatives suggest that community-based corrections of adults may be emphasized in the future as alternatives to traditional incarceration |
| We have historically experienced higher operating margins in the adult secure institutional services and the adult community-based corrections and treatment services sectors than in the juvenile services sector |
| A shift in occupancy among our segments of business operations could result in a decrease in our profitability |
| 15 ______________________________________________________________________ A failure to comply with existing regulations could result in material penalties or non-renewal or termination of our contracts |
| Our industry is subject to a variety of federal, state and local regulations, including education, environmental, 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 governmental 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 that subcontracts be awarded on a competitive basis or that we subcontract with businesses owned by members of minority groups |
| 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 |
| Governmental agencies may investigate and audit our contracts and, if any improprieties are found, we may be required to refund revenues we have received, and/or to forego anticipated revenues and may be subject to penalties and sanctions, including prohibitions on our bidding in response to RFPs |
| Governmental agencies we contract with have the authority to audit and investigate our contracts with them |
| As part of that process, some governmental agencies review 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 and significantly reduce the probability of our success in the bid process for future contracts |
| 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 |
| Although we have liability insurance, the policy limits may not be adequate to provide protection against all potential liabilities |
| Competitors in our industry may adversely affect the profitability of our business |
| We must compete with government entities and other private operators 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 |
| Certain areas of our operation may not pose a significant barrier to entry into the market by private operators |
| For example, private operators may not find it as difficult to bid for juvenile treatment, educational and detention services and pre-release correctional and treatment services as they do adult secure institutional, correctional and detention services |
| Further, our government customers may assume the management of a facility currently managed by us upon the termination of the corresponding management contract or, if such customers have capacity at their facilities, may take inmates currently housed in our facilities and transfer them to government run facilities |
| The resulting decrease in occupancy levels would reduce our revenue due to the per diem rate structure and could result in a significant decrease in the profitability of our business |
| 16 ______________________________________________________________________ A disturbance or violent occurrence in one of our facilities could result in closure of a facility or harm to our business |
| An escape, riot, disturbance or violent occurrence at one of our facilities could adversely affect the financial condition, results of operations and liquidity of our operations |
| Among other things, the negative 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 |
| Such negative events may also result in a significant increase in our liability insurance costs |
| Negative media coverage, including inaccurate or misleading information, could adversely affect our reputation and our ability to bid for government contracts |
| The media frequently focuses its attention on private operators’ contracts with governmental agencies |
| If the media coverage of private operators 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 often incur significant costs before receiving related revenues, which could result in cash shortfalls and a risk of not recovering our investment |
| When we are awarded a contract to manage a new facility, we may incur significant expenses before we receive contract payments |
| These expenses include purchasing real estate, constructing new facilities, leasing office space, purchasing office equipment and hiring and training personnel |
| As a result, when the government does not fund a facility’s 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 governmental agencies may be delayed due to billing cycles or as a result of failures by our governmental customers to attain necessary budget approvals and finalize contracts in a timely manner |
| Several juvenile services contracts related to educational services provide for annual collection several months after a school year is completed |
| In addition, a contract may be terminated prior to its scheduled expiration and as a result we may not recover these expenses or realize any return on our investment |
| We may choose to undertake development projects without written commitments to make use of such facilities |
| We may not be able to obtain contracts for these facilities in a timely fashion, if at all |
| To the extent we do not obtain contracts, we could be unable to recover our investment and our financial condition and results of operations would be adversely affected |
| We may be unable to attract and retain sufficient qualified personnel necessary to sustain our business |
| When we are awarded a contract, we must hire operating management, security, case management and other personnel |
| Our ability to recruit and retain qualified individuals varies by facility and is related to the socio-economic factors in the particular community in which the facility operates |
| The Department of Labor wages we offer our employees are often higher than wages they could obtain elsewhere in the community |
| However, if the local economy where a facility is located is robust and unemployment is low, we may have difficulty hiring and retaining qualified personnel |
| In addition, there are inherent risks associated with the nature of the services we provide and this could cause certain qualified individuals to seek other employment opportunities |
| We have experienced high turnover of personnel in our juvenile facilities within the first year of their employment |
| 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 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 |
| Acquisitions generally require the integration of facilities, some of which may be located in states in which we do not currently have operations |
| 17 ______________________________________________________________________ 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 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, and any facilities that we may acquire in the future, may be subject to unforeseen environmental risks |
| The federal Comprehensive Environmental Response, Compensation, and Liability Act, (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 |
| Other federal and state laws in certain circumstances may impose liability for environmental remediation, which costs may be substantial |
| Further, the operation of our facilities, and the development of new facilities, requires that we obtain, and comply with, permits and other authorizations under environmental laws |
| Obtaining such permits and authorizations can prove to be difficult and time consuming |
| We have in the past incurred, and may continue to incur, significant expenses for facilities that we no longer operate |
| If we close a facility, we may remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent for the balance of the lease term |
| We may also be required to incur other expenses with respect to such facilities |
| The potential losses associated with our inability to cancel leases may result in our keeping open underperforming facilities |
| As a result, ongoing lease operations at closed or under performing facilities could impair our results of operations |
| We may continue to operate under unprofitable contracts at facilities that we own to offset expenses associated with ownership of the facility |
| If we close a facility that we own, we will remain obligated for expenses associated with the facility |
| If our operations are unprofitable at a leased facility or if the leased facility is performing significantly below targeted levels, we would typically terminate the contract and the lease |
| However, we may continue to operate our contract at an owned facility to offset the expenses associated with ownership |
| Continued performance of such a contract could have a material adverse effect on our business and results of operations |
| We depend on a limited number of governmental customers for significant portion of our revenues |
| We currently derive, and expect to continue to derive, a significant portion of our revenues from the BOP and various state agencies |
| The loss of, or a significant decrease in, business from the BOP or those state agencies could seriously harm our financial condition and results of operations |
| The BOP accounted for approximately 23dtta0prca of our total revenues for the fiscal year ended December 31, 2005 (dlra71dtta6 million), 22dtta3prca for the fiscal year ended December 31, 2004 (dlra61dtta9 million) and 21dtta7prca for the fiscal year ended December 31, 2003 (dlra56dtta1 million) |
| Our contract to manage the Big Spring Correctional Center accounts for a significant amount of our total revenues attributable to the BOP We expect to continue to depend upon the BOP and a relatively small group of other governmental customers for a significant percentage of our revenues |
| Because our revenues can fluctuate from period to period, we may face short-term funding shortfalls from time to time |
| Revenues can fluctuate from year to year due to changes in government funding policies, changes in the number of clients referred to our facilities by governmental agencies, the opening of new facilities or the expansion of existing facilities and the termination of contracts for a facility or the closure of a facility |
| Our revenues fluctuate from quarter to quarter, based on the 18 ______________________________________________________________________ number of contracted days in each quarter |
| In addition, full-year results are not likely to be a direct multiple of any particular quarter or combination of quarters |
| We are subject to significant insurance costs |
| Worker’s compensation, employee health and general liability insurance represent significant costs to us |
| We continue to incur increasing insurance costs due to adverse claims experience and rising healthcare costs in general |
| Due to concerns over corporate governance and recent corporate accounting scandals, liability and other types of insurance have become more difficult and costly to obtain |
| In addition, as a result of the stockholder lawsuits brought within the last few years, our directors and officers liability insurance has increased |
| Unanticipated additional insurance costs could adversely impact our results of operations and cash flows, and the failure to obtain or maintain any necessary insurance coverage or the inability of an insurance carrier to perform under its obligations through issued coverage could have a material adverse effect on us |
| We may be adversely affected by inflation |
| Many of our facility management contracts provide for fixed management fees or fees that increase by only small amounts during their term |
| If, due to inflation or other causes, our operating expenses, such as wages and salaries of our employees, and insurance, medical and food costs, increase at rates faster than increases, if any, in our management fees, then our profitability would be adversely affected |
| We are subject to risks associated with ownership of real estate |
| Our ownership of correctional and detention facilities subjects us to risks typically associated with investments in real estate, and in particular, correctional and detention facilities, are relatively illiquid and, therefore, our ability to divest ourselves of one or more of our facilities promptly in response to changed conditions is limited |
| Investments in correctional and detention facilities subject us to risks involving potential exposure to uninsured loss |
| Our operating costs may be affected by the obligation to pay for the cost of complying with existing laws, ordinances and regulations, as well as, the cost of complying with future legislation |
| In addition, although we maintain insurance for many types of losses, there are certain types of losses, such as losses from earthquakes, riots and acts of terrorism, which may be either uninsurable or for which it may not be economically feasible to obtain insurance coverage |
| As a result, we could lose both our capital invested in, and anticipated profits from, one or more of the facilities we own |
| Further, it is possible to experience losses that may exceed the limits of insurance coverage |