Cornell Companies Reports Third-Quarter, Nine-Month 2005 Results

HOUSTON, Nov. 8 /PRNewswire-FirstCall/ -- Cornell Companies, Inc. today reported results for the period ended September 30, 2005. For the quarter ended September 30, 2005, the Company reported net income of $1.3 million, or $0.09 per diluted share, compared with a net loss of $0.9 million, or $0.07 per diluted share, in the same period last year. This year's third-quarter results included $0.5 million of start-up costs (net of start-up revenues) for new facilities, $0.3 million of losses from discontinued operations, and $0.5 million of losses associated with New Morgan Academy. The 2004 third-quarter results included a total of approximately $1.5 million for start-up costs (net of start-up revenues) for new facilities, $0.7 million of losses associated with New Morgan Academy and $1.0 million of losses from discontinued operations.

Third-quarter 2005 pro forma earnings were $2.3 million, or $0.17 per diluted share, versus pro forma earnings of $1.3 million, or $0.10 per diluted share, in the comparable 2004 quarter. Pro forma amounts exclude the effects of pre-opening and start-up costs (net of start-up revenues) for new facilities, losses associated with New Morgan Academy and charges related to the early extinguishment of debt. Cornell calculates pro forma amounts for comparative purposes to help analyze its business performance and assist investors to better understand the operating results attributable to the Company's core continuing business operations. Reconciliations of these non- Generally Accepted Accounting Principles (GAAP) measures to the comparable GAAP measures are included in the attachments hereto.

James E. Hyman, Cornell's chairman and chief executive officer, said, "We continued to progress in our core operations during the third quarter. As a result, the quarter exceeded our expectations on both an as-reported basis as well as on our pro forma outlook. For the programs that we identified as significant challenges during the second quarter, we still have work ahead of us, despite progress. Looking forward, our efforts remain the same: to fill our unutilized assets, fix where we have weakness and grow where we have strength."

Third-Quarter Summary (Amounts in thousands, except per share data) Third Quarter Nine Months Ended As Reported 9/30/2005 9/30/2004 9/30/2005 9/30/2004 Revenue from operations $79,198 $71,336 $231,340 $203,288 Income from operations 8,192 5,668 20,667 17,466 Net loss from discontinued operations (279) (988) (3,394) (1,721) Net income (loss) 1,277 (897) (1,307) (1,288) EPS - diluted $ 0.09 $(0.07) $(0.10) $(0.10) Shares outstanding used in per share computation 13,686 13,419 13,608 13,360 Pro Forma, excluding New Morgan Academy, charges related to the early extinguish- ment of debt, and pre-opening and start-up costs and related revenue: * Revenue $78,474 $70,366 $226,582 $202,288 Income from operations 9,427 8,588 25,467 22,474 Net income 2,311 1,295 2,435 3,973 EPS - diluted $ 0.17 $ 0.10 $ 0.18 $0.30 * See reconciliation of historical GAAP and non-GAAP information attached. Third-Quarter Results

Revenues increased 11.1 percent to $79.2 million for the third-quarter of 2005 from $71.3 million in the 2004 period. Strong contributions from existing facilities, certain alternative education programs initiated during the third-quarter of 2005, those facilities acquired April 1, 2005 from Correctional Systems, Inc., as well as those facilities/programs initiated in 2004 -- Walnut Grove Youth Correctional Facility, Regional Correctional Center and Southern Peaks Regional Treatment Center -- accounted for the revenue increase.

Pro forma third-quarter 2005 revenues, which exclude the impact of start-up revenues, were $78.5 million compared with $70.4 million in the prior year's quarter. Average contract occupancy levels were 97.6 percent in residential facilities compared with 96.8 percent in last year's third-quarter. Excluding start-up operations in both quarters, average contract occupancy was 101.9 percent in the Company's residential facilities in the 2005 quarter and 99.5 percent in the 2004 period.

The Company reported income from operations of $8.2 million for the third-quarter of 2005 compared with $5.7 million in the same quarter of 2004. The increase in 2005 third-quarter results was due to improved/increased operations at those facilities previously noted, and also reflected the continuing benefit of the restructuring activity undertaken in the first-quarter of 2005 to streamline management and eliminate underperforming programs. The increase in third-quarter results was also due to a decrease in professional fees, partially offset by an increase in depreciation for assets acquired and placed in service in 2004. Additionally, comparisons of income from operations were affected by $0.9 million in net start-up costs in 2005 and $2.5 million in 2004, and on-going costs related to New Morgan Academy of $0.4 million in each of 2005 and 2004.

Excluding the effects of start-up costs (net of start-up revenues) for new facilities, and losses associated with New Morgan Academy, pro forma income from operations was $9.4 million in the third-quarter of 2005 compared with $8.6 million in the 2004 quarter. The increase in the 2005 third-quarter results was principally attributed to the previously noted improved/increased operations, restructuring and program-closure activity.

Nine-Month Results

For the nine months ended September 30, 2005, revenues increased 13.8 percent to $231.3 million from $203.3 million in the nine months ended a year ago, principally due to contributions from those facilities/programs previously noted. Income from operations was $20.7 million for this year's nine-month period compared with $17.5 million in the prior-year period. Net loss was $1.3 million, or $0.10 per diluted share, compared with a net loss of $1.3 million, or $0.10 per diluted share, in the previous year's first nine months. The 2005 period included charges totaling $2.4 million to streamline management and close several underperforming programs. The 2004 period included a $2.4 million charge from the early extinguishment of debt.

Pro forma nine-month 2005 revenues were $226.6 million compared with $202.3 million in the prior year's period and pro forma income from operations was $25.5 million compared with $22.5 million. Pro forma net income was $2.4 million, or $0.18 per diluted share, compared with $4.0 million, or $0.30 per diluted share, for the nine months ended September 30, 2004.

Discontinued Operations

As previously announced, Cornell has taken actions to shut down operations at several underperforming facilities/programs during the first and second quarters of 2005. The increase in the 2005 net loss from discontinued operations over the 2004 period reflects reduced revenues as the programs are shut down, asset impairments and related closure costs.

Outlook for 2005

The Company expects fourth-quarter earnings to range from $0.03 to $0.07 per share on an as-reported basis, and $0.08 to $0.12 per share on a pro forma basis, which excludes pre-opening and start-up costs for new facilities, and losses associated with New Morgan Academy.

For the full year, the Company expects results to range from a loss of $0.03 to $0.07 per share on an as-reported basis, and earnings of $0.26 to $0.30 per share on a pro forma basis, which excludes pre-opening and start-up costs for new facilities, and losses associated with New Morgan Academy. Reconciliations of these forward-looking non-GAAP measures to the comparable GAAP measures are included in the attached financial data tables.

The 2005 guidance reflects an annual effective tax rate of approximately 35.0 percent on discontinued operations and 41.3 percent on continuing operations.

Quarterly Webcast

Cornell's management will host a conference call and simultaneous webcast at 11 a.m. Eastern today. The webcast may be accessed through Cornell's home page, http://www.cornellcompanies.com/ . A replay will also be available on the above web site and by dialing 800-405-2236 or 303-590-3000 and providing confirmation code 11042356. The replay will be available through November 15, 2005 by phone and for 30 days on the web site. This earnings release can be found on Cornell's website at http://www.cornellcompanies.com/ under "Investor Relations - Press Releases."

This press release 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. Important factors that could cause actual results to differ include, among others, (1) the outcomes of pending putative class action shareholder and derivative lawsuits, and related insurance coverage, (2) Cornell's ability to win new contracts and to execute its growth strategy, (3) risks associated with acquisitions and the integration thereof (including the ability to achieve administrative and operating cost savings and anticipated synergies), (4) the timing and costs of the opening of new programs and facilities or the expansions of existing facilities and the related ramp-up of expected occupancy, (5) Cornell's ability to negotiate contracts at those facilities for which it currently does not have an operating contract, (6) significant charges to expense of deferred costs associated with financing and other projects in development if management determines that one or more of such projects is unlikely to be successfully concluded, (7) results from alternative deployment or sale of facilities such as New Morgan Academy and Campbell Griffin Treatment Center or the inability to do so, (8) Cornell's ability to complete the construction of the Moshannon Valley Correctional Center as anticipated, (9) changes in governmental policy and/or funding to discontinue or not renew existing arrangements, to eliminate or discourage the privatization of correctional, detention and pre-release services in the United States, or to eliminate rate increase, (10) the availability of financing on terms that are favorable to Cornell, and (11) fluctuations in operating results because of occupancy levels and/or mix, competition (including competition from two competitors that are substantially larger than Cornell), increases in cost of operations, fluctuations in interest rates and risks of operations.

Cornell Companies, Inc. is a leading private provider of corrections, treatment and educational services outsourced by federal, state and local governmental agencies. Cornell provides 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 grades 3-12 alternative education in an environment of dignity and respect, emphasizing community safety and rehabilitation in support of public policy. The Company ( http://www.cornellcompanies.com/ ) has 81 facilities in 17 states and the District of Columbia, which includes two facilities under development or construction. Cornell has a total service capacity of 19,506, including capacity for 1,514 individuals that will be available upon completion of facilities under development or construction.

(Financial Tables Follow) CORNELL COMPANIES, INC. FINANCIAL HIGHLIGHTS ($000's except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 Revenues $79,198 $71,336 $231,340 $203,288 Operating expenses 60,805 53,282 174,844 156,234 Pre-opening and start-up expenses (A) 1,607 3,455 8,453 4,723 Depreciation and amortization 3,834 3,335 11,379 9,504 General and administrative expenses 4,760 5,596 15,997 15,361 Income from operations 8,192 5,668 20,667 17,466 Interest expense, net 5,395 5,548 16,719 14,412 Loss on extinguishment of debt -- 5 -- 2,361 Income before provision for income taxes and discontinued operations 2,797 115 3,948 693 Provision for income taxes 1,241 24 1,861 260 Income before discontinued operations 1,556 91 2,087 433 Discontinued operations, net of tax benefit (279) (988) (3,394) (1,721) Net income (loss) $1,277 $(897) $(1,307) $(1,288) Earnings (loss) per share: - Basic $0.09 $(0.07) $(0.10) $(0.10) - Diluted $0.09 $(0.07) $(0.10) $(0.10) Number of shares used in per share computation: - Basic 13,579 13,199 13,484 13,143 - Diluted 13,686 13,419 13,608 13,360 Total service capacity (end of period) (B) 19,506 17,508 19,506 17,508 Contracted beds in operation (end of period) (B) 11,761 10,695 11,761 10,695 Average contract occupancy (B) (C) 97.6% 96.8% 97.0% 99.5% Average contract occupancy excluding start-up operations (B) 101.9% 99.5% 103.1% 100.6% (A) Revenues associated with reported start-up expenses were $0.7 million and $1.0 million for the quarters ended September 30, 2005 and 2004, respectively. Revenues associated with reported start-up expenses were $4.8 million and $1.0 million for the nine months ended September 30, 2005 and 2004, respectively. (B) Data presented excludes discontinued operating facilities. (C) Average contract occupancy percentages are based on actual occupancy for the period as a percentage of the contracted capacity of residential facilities in operation. Since certain facilities have service capacities that exceed contracted capacities, average contract occupancy percentages can exceed 100% if the average actual occupancy exceeded contracted capacity. Balance Sheet Data: September 30, December 31, 2005 2004 Cash and cash equivalents $10,128 $9,895 Investment securities 20,800 51,740 Working capital 63,603 107,597 Property and equipment, net 310,978 282,255 Total assets 496,406 507,631 Long-term debt 267,416 279,528 Total debt 277,117 288,533 Stockholders' equity 163,243 161,312 Non-GAAP Financial Measures

The Company uses non-GAAP financial measures to assess the operating results and effectiveness of the Company's core continuing business operations. Pro forma measures exclude the effect of pre-opening and start-up revenues and costs, charges related to the early extinguishment of debt, and revenues and costs associated with New Morgan Academy. Earnings before interest, taxes, depreciation and amortization (EBITDA) measures operating income before depreciation and amortization, excluding the effect of pre- opening and start-up expenses, net of start-up revenue. The Company calculates EBITDA amounts for comparative purposes to assist investors to analyze its business performance. These non-GAAP financial measures may not be comparable to similarly titled measurements used by other companies and should not be used as a substitute for net income, earnings per share or other GAAP operating measurements. Set forth below are reconciliations to GAAP measures of non-GAAP measures used herein.

RECONCILIATION OF HISTORICAL GAAP BASIS RESULTS TO HISTORICAL NON-GAAP BASIS INFORMATION: Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 GAAP revenues from operations $79,198 $71,336 $231,340 $203,288 Less: Start-up revenue 724 970 4,758 1,000 Pro forma revenues from operations $78,474 $70,366 $226,582 $202,288 GAAP income from operations $8,192 $5,668 $20,667 $17,466 Plus: New Morgan Academy loss from operations 352 435 1,105 1,285 Pre-opening and start-up expenses, net of start-up revenue 883 2,485 3,695 3,723 Pro forma income from operations $9,427 $8,588 $25,467 $22,474 GAAP net income (loss) $1,277 $(897) $(1,307) $(1,288) Plus: New Morgan Academy net loss 513 723 1,562 1,671 Pre-opening and start-up expenses, net of start-up revenue 521 1,466 2,180 2,197 Loss on extinguishment of debt -- 3 -- 1,393 Pro forma net income $2,311 $1,295 $2,435 $3,973 GAAP income (loss) per share--diluted $0.09 $(0.07) $(0.10) $(0.10) Plus: New Morgan Academy 0.04 0.06 0.12 0.13 Pre-opening and start-up expenses, net of start-up revenue 0.04 0.11 0.16 0.16 Loss on extinguishment of debt -- -- -- 0.11 Pro forma earnings per share--diluted $0.17 $0.10 $0.18 $0.30 RECONCILIATION OF HISTORICAL GAAP BASIS RESULTS TO HISTORICAL NON-GAAP BASIS INFORMATION: Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 GAAP income from operations $8,192 $5,668 $20,667 $17,466 Plus: Depreciation and amortization 3,834 3,335 11,379 9,504 Pre-opening and start-up expenses, net of start-up revenue 883 2,485 3,695 3,723 EBITDA $12,909 $11,488 $35,741 $30,693 RECONCILIATION OF FORWARD-LOOKING INFORMATION: Fourth Quarter Twelve Months Ending Ending December 31, December 31 2005 2005 GAAP earnings (loss) per share - diluted $0.03 - 0.07 $(0.07) - (0.03) New Morgan Academy 0.04 0.16 Pre-opening and start-up expenses, net of start up revenue 0.01 0.17 Pro forma earnings per share - diluted $0.08 - 0.12 $0.26 - 0.30 Cornell Companies, Inc. Operating Statistics from Continuing Operations For the Three and Nine Months Ended September 30, 2005 and 2004 Three Months Nine Months Ended Ended September 30, September 30, 2005 2004 2005 2004 % % % % Contracted beds in operation: Secure Institutional (1) 7,695 65% 7,137 67% 7,695 65% 7,137 67% Adult Community- Based (1) 2,340 20% 1,854 17% 2,340 20% 1,854 17% Juvenile (1) 1,726 15% 1,704 16% 1,726 15% 1,704 16% Total 11,761 100% 10,695 100% 11,761 100% 10,695 100% Number of billed mandays: Secure Institutional 677,629 50% 637,838 52% 1,979,004 49% 1,715,099 49% Adult Community- Based Residential 240,453 18% 174,009 14% 674,558 17% 534,022 15% Non- residential (2) 133,027 10% 122,977 10% 386,431 10% 369,799 11% Juvenile: Residential 140,516 10% 141,404 12% 429,125 11% 420,531 12% Non- residential (2) 168,139 12% 145,647 12% 585,674 14% 454,208 13% Total 1,359,764 100% 1,221,875 100% 4,054,792 100% 3,493,659 100% Revenues (in 000's): Secure Institutional $33,275 42% $30,529 43% $96,428 42% $83,040 41% Adult Community- Based Residential 14,595 18% 11,054 15% 40,967 18% 32,991 16% Non-residential 1,276 2% 1,002 1% 3,439 1% 3,149 2% Juvenile: Residential 23,432 30% 23,502 33% 71,038 31% 69,112 34% Non-residential 6,620 8% 5,249 8% 19,468 8% 14,996 7% Total $79,198 100% $71,336 100% $231,340 100% $203,288 100% Average revenue per diem: Secure Institutional $49.11 $47.86 $48.73 $48.42 Adult Community-Based Residential $60.70 $63.53 $60.73 $61.78 Non- residential(2) $9.59 $8.15 $8.90 $8.52 Juvenile: Residential $166.76 $166.20 $165.54 $164.34 Non- residential(2) $39.37 $36.04 $33.24 $33.02 Total $58.24 $58.38 $57.05 $58.19 (1) Residential Contract Capacity Only (2) Non-residential "mandays" includes a mix of day units and hourly units. Mental health facilities are reported in hours.