by Maureen Flanagan
Since its founding in 1991, Cornell Companies, Inc., (NYSE: CRN) has grown to become the third largest private owner and operator of correctional facilities in the United States. Working under contract from federal, state and local government agencies, the Houston, Texas-based firm designs, develops, builds and manages a full continuum of adult and juvenile correctional facilities. As of December 1999, Cornell operated 72 facilities in 13 states and the District of Columbia, with a total service capacity of 14,845. Combining outstanding fiscal performance with successful correctional programs that are viewed as models in the corrections system, Cornell achieves lower recidivism rates and makes a positive impact in the communities where it operates. As the company expands its facilities and programs, Cornell's management is seeking to enhance the company's position as a leading provider of private correctional, detention and pre-release services.
On July 31, 2000, American Capital Strategies, Ltd. (Nasdaq: ACAS) invested $30 million of seven-year senior subordinated debt with warrants to finance the continued growth of Cornell.
"American Capital's investment provides long-term junior capital, which allows Cornell to continue to build, own and operate new correctional facilities," said Cornell President and CEO Steven W. Logan. "We are pleased to have initiated this partnership and look forward to a productive working relationship."
Cornell is well positioned to capitalize on the expected growth in the corrections industry and increasing demand for privatized services. The number of incarcerated adult offenders is estimated to reach an estimated 2 million by the end of 2001, and government facilities -- now at over 110% capacity in state prisons and over 130% capacity in federal facilities - are already severely overcrowded. Since 90% of offenders in prison will eventually return to society, there is a growing need for Cornell's pre-release community correctional services. The number of juvenile offenders is also on the rise, further increasing the need for educational and treatment services to at-risk youth. As governments face continuing pressure to respond to the increasing offender populations, cut costs and improve services, the trend has been toward privatizing adult and juvenile correctional and detention services.
Cornell's three divisions provide a full range of correctional services, giving the company an in-depth relationship with government contractors and a balanced portfolio of business. At the end of 1999, Cornell's secure adult institutional division (Cornell Corrections) included nine facilities with a capacity to serve over 7,900 incarcerated adults. Its juvenile division (Cornell Abraxas) is designed to meet the multiple needs of troubled juveniles with programs such as counseling, substance abuse treatment and prevention and education services. The company's juvenile division includes residential and non-residential, community-based programs serving more than 3,200 youths.
The company's pre-release division, Cornell Pre-Release, is one of the country's largest for-profit providers of community correctional services for individuals who have been granted parole, sentenced to probation or require substance abuse or mental health treatment. Its pre-release facilities, which include more than 25 residential and non-residential, community-based programs, also provide a wide range of social services such as education programs, life skills and employment training, job placement assistance and chemical and substance abuse counseling.
At the core of Cornell's programs is a "restorative justice model" that focuses on accountability, competency development and community protection. Offenders learn that serving time does not relieve them of the obligation to repay their victims or perform community service. Supported by education and vocational instruction programs, the restorative justice model challenges individuals to demonstrate personal responsibility by holding them accountable for their decisions and behavior.
Cornell's focus on treatment and education and its proven success differentiate it from other providers of private correctional services. As the only publicly traded private operator that tracks and publishes recidivism rates, Cornell is focused on measuring the outcomes of its programs. The success of its approach has been confirmed by two independent studies documenting the lower recidivism rates in its juvenile programs in Pennsylvania and its adult substance abuse programs in Texas. These reductions in recidivism generate important cost savings for the company's government clients.
"Led by an exceptional management team, Cornell has one of the strongest corporate cultures in the industry," said American Capital Principal Darin Winn. "This is reflected in the philosophy and high standards of their operations which stress individual responsibility, community service and creating a positive impact on the environment. Cornell's programs in Santa Fe, New Mexico are a good illustration of how the company has provided a model for correctional services and made a difference in the way the industry is perceived," Winn noted.
In Santa Fe, inmates from Cornell's county adult detention facility helped Red Cross volunteers to aid victims of a May 2000 fire in Los Alamos. And, only a few weeks later, New Mexico Governor Gary Johnson commended the well-rounded treatment and education programs of Cornell's Santa Fe county youth development program -- one of the few in the country to offer services ranging from G.E.D. programs, anger management classes, parenting classes, Native American programming and a life skills curriculum.
"American Capital is pleased to partner with such a socially responsive company operating in a challenging industry." Winn said.
Cornell joins a group of middle market public companies for which American Capital has provided growth financing. American Capital's $30 million subdebt investment enables Cornell to refinance part of a $40 million bridge loan. TIAA-CREF, the world's largest retirement system with over $290 billion in assets under management, provided the remaining $10 million subdebt financing.
With capital resources exceeding $650 million, American Capital provides senior, subordinated debt, and equity for growth, acquisitions, management and employee buyouts, liquidity and restructurings.
American Capital's investment supports Cornell's growth strategy that includes all sectors of its business. Because of the increased prison population and shortage of beds, the private corrections industry is estimated to grow at least 15%-20% per year for the next five years. Increases in drug-related crimes, higher prosecution and imprisonment rates, stricter sentencing and longer incarceration continue to fuel the immediate and ongoing need for more prison capacity and services. Added to this are court and government mandates to improve prison conditions and expand services to offenders.
The juvenile corrections industry has also expanded rapidly, driven by increasing population and crime rates of youths aged 14 to 17, the most at-risk group. Industry analysts have projected a 23% rise in juvenile crime from 1995 to 2005. Pre-release correctional and treatment programs are also gaining widespread support as criminal justice systems focus on rehabilitation and reintegrating offenders into society. (In fact, these programs, which offer counseling, vocational training and other reform services in settings such as halfway houses, are believed to be instrumental in reducing recidivism rates.) Finally, drug-related crime is also a growing concern. The demand for substance abuse and mental health treatment services continues to rise and cannot be adequately met by government resources alone.
As Cornell continues to expand its programs and facilities, the company has opportunities to win significant government contracts. These include some 23,000 to 31,000 beds in secure facilities expected to be awarded in the year 2000 and an estimated $1 billion in new juvenile facilities over the next 10 years. With control over most of its real estate through direct ownership or long-term leases, the company has a significant advantage over the competition when contracts are up for renewal. Also, the company's ability to demonstrate lower recidivism rates enhances marketing efforts and future business prospects. (Cornell estimates that lower recidivism at just one of its many facilities will provide savings of over $1 million to that current government contractor.)
As the company grows and increases capacity, Cornell management seeks to further enhance operations through standardizing practices, increasing staffing efficiency, and maximizing productivity and profitability. In the longer term, expansion internationally to countries where prison privatization is on the agenda will further boost Cornell's profile in the industry.
"Cornell is committed to making a difference in the lives of those entrusted to our care," said Logan. "The company strives to provide the necessary resources and expertise to make our communities safer, to serve our society in a positive way and to give every individual who needs help the chance to lead a full, productive life."
