LETTER TO HARRY J. PHILLIPS
http://www.sec/gov/Archives/edgar/data/1016152/000129598404000003/sc13da_071204.txt
(Event date July 9, 2004)
Mr. Harry J. Phillips, CEO
Cornell Companies, Inc.
1700 West Loop South, Suite 1500
Houston, TX 77027
Dear Harry,
As per your verbal request, we are detailing to you in writing why we seek a
meeting with you and the board of directors. We ask that this meeting be
scheduled at the earliest possible convenience. In addition:
1) We repeat our request sent to you by our legal counsel asking for a complete
list of shareholders.
2) We request the immediate release of the results of the shareholder vote from
the 2004 annual meeting. We estimate that a material percentage of the votes for
the current directors were withheld. You have been repeatedly asked for these
results by shareholders (the owners of the company), and have yet to make them
public.
Our reason for requesting a full meeting of the board is to discuss strategic
alternatives in order to increase shareholder value. We have spoken with both
strategic and financial buyers who have expressed interest in purchasing
Cornell. Fulcrum Global Partners’ Latest takeout analysis indicates a value
north of $18 per share. Our own internal analysis, which includes input from
multiple investment banks, suggests an even higher valuation. As owners of
Cornell, we want to know why you have admittedly rebuffed interested purchasers
of the company. We consider the refusal to explore the strategic sale of the
company to be a breach of the board’s fiduciary duty to shareholders. We
prefer (in the interest of confidentiality) to detail our discussions with
interested purchasers of Cornell to the board directly rather than through
written correspondence. If you refuse our request for a meeting, we will be
forced to communicate with the board via correspondence, which we will make
publicly available to other investors.
Unlike other shareholders who have expressed their concerns and like intentions
to you but don’t wish to lead the charge to maximize shareholder value, we are
prepared to take every step necessary to maximize the value of our investment in
Cornell, including the removal of directors at the next annual meeting. Such
removal will provide shareholders with an opportunity to elect directors who
will focus on the immediate creation of shareholder value and sound corporate
governance practices.
We would prefer to work with you and the existing board to consummate a
successful sale of the company, but have asked legal counsel to explore all our
options in the event you choose not to act in the best interest of shareholders.
We appreciate your prompt response.
Sincerely,
Zachary George
Pirate Capital LLC
LETTER TO BOARD OF DIRECTORS
August 11, 2004
http://www.sec.gov/Archives/edgar/data/1016152/000129598404000006/sc13da2_081004.txt
Mr. Harry J. Phillips, CEO
Cornell Companies, Inc.
1700 West Loop South, Suite 1500
Houston, TX 77027
Directors of Cornell Companies,
After the second quarter conference call, it should be clear that the owners of
Cornell have lost all confidence in the management team that you continue to
support.
I urge you to listen to the conference calls of Cornell’s competitors. Both
CCA and Geo reported strong financial results and are aggressively taking
advantage of short and long term expansion opportunities. Cornell’s operating
environment is extremely favorable. The common denominator in Cornell’s
consistent disappointments, downward revisions, and delayed project completions
is the current management team. There should be no confusion about the fact that
a positive announcement on Moshannon Valley, New Morgan Academy, or other
opportunity, will not restore the shareholder confidence that the board has been
complicit in allowing management to erode.
How many failures in the areas of financial control, operations, and business
development will it take for you to actually start protecting the interests of
shareholders? It seems likely that this question will remain unanswered and we
will be forced to take matters into our own hands.
You should ask yourselves two questions. First, who do you work for? A majority
of Cornell’s owners want the Company to be sold. No current director can claim
that they work for shareholders if they are not working towards this objective.
Second, under what circumstances do you want to leave the Company? Your legacy
can be one of shareholder rights and value creation or entrenchment and poor
corporate governance. Any director who thinks that they can ignore the concerns
of shareholders and remain for another term is not taking this situation
seriously.
I met with Harry Phillips in Houston and requested that the poison pill be
rescinded and that he publicly announce the retention of an investment advisor
to explore the sale of the Company. Neither request has been granted. The recent
work that JP Morgan has completed for Cornell, including advising on potential
acquisitions and completing the recent debt deal, creates a conflict of interest
that should bar them from being the investment advisor retained to explore the
sale of the Company. Harry’s mention on the conference call of 5 parties that
have approached the Company since 2002 should serve as an indication of strong
interest in Cornell’s assets. My sources lead me to conclude that no good
faith effort has been made to explore the sale of the Company in whole or in
part. Parties interested in the purchase of Cornell have told us that they were
sent away by Harry and that the Company was not for sale.
On the conference call, Harry stated that the Company is not "on the
block". Various media sources have quoted the Company as stating that it is
"not for sale". The decision to sell the Company should be made by its
owners. If you doubt that a majority of shareholders seek the sale of Cornell,
we propose that the board call a special meeting of shareholders to put the
matter to a vote. I have placed calls to all of the independent board members
and appreciate their timely response.
Sincerely,
Zachary George
Pirate Capital LLC
Cornell response to August 11, 2004, Pirate Capital letter
http://www.sec.gov/Archives/edgar/data/1016152/000110465904025922/a04-10032_1ex99d1.htm
August 25, 2004
Via Telecopy & U.S. Mail
Mr. Zachary George
Pirate Capital LLC
200 Connecticut Avenue, 4th Floor
Norwalk, CT 06854
Dear Mr. George:
Since your recent acquisition of an interest in Cornell, you have increasingly
pressed the board to sell the company. Yet you do not know, nor have you
tried to learn, the steps Cornell and its board have taken to explore the
company’s strategic alternatives. After significant consideration, the
board has determined that the sort of “fire sale” you propose would put the
board at much greater risk of a breach of its fiduciary duty.
Cornell’s board of directors has discussed at length your undated letter and
your comments on the recent earnings conference call. In your letter you
make two requests: first, that Cornell redeem its rights plan; and second, that
the company publicly announce that it has retained an investment advisor to
explore a sale of the company. We would like to respond to these requests.
First, the board has determined to not redeem the company’s rights plan at
this time. The board would consider redeeming the rights plan as part of a
value-maximizing transaction for its stockholders. But in the meantime,
the rights plan permits the board to protect the stockholders against an
otherwise unfair transaction.
Second, the company has previously announced that it has engaged a financial
advisor to advise and assist the company in evaluating strategic opportunities.
As communicated on the earnings conference call, the company and the board have
explored a number of opportunities to sell the company, and have done this with
the advice and assistance of a financial advisor where appropriate. We
remain open to those possibilities. But the board believes that actively
shopping the company is not in the best interest of the company’s stockholders
at this time. As a result, we will not publicly announce that the company
has retained an investment advisor to explore a sale of the company.
Cornell’s management and its board believe they are well informed about
potential market transactions available to Cornell.
Finally, I take this opportunity to correct a few of your misstatements about
Cornell.
You state that no good faith effort has been made to explore a sale of the
company, and that the company has turned away potential purchasers and told them
the company is not for sale. These inflammatory statements are
demonstrably false. Management and the board have spent considerable
effort towards this end. In fact, we have asked you on several occasions
if you have any proposals that you want to submit for our consideration.
You have submitted none.
You have stated that the company has not been responsive to your requests.
You have met with me and Mr. Taylor, and you have spoken with Mr. Vagt.
Our directors have shown beyond question that they are willing to listen very
carefully to you and all of the
company’s stockholders.
To conclude, our directors are focused on improving the company’s ability to
execute its business plan. We share this concern with our stockholders and
are working diligently towards this end. You should expect to see the
company take concrete steps designed to improve its management and the execution
of its business plan.
Please call me if you would like to discuss any of these matters.
Best regards,
/s/
Harry J. Phillips, Jr.
Chairman and Chief Executive Officer
Copy to:
Cornell Companies, Inc. Board of Directors
LETTER TO THE BOARD OF DIRECTORS OF CORNELL COMPANIES, INC.
http://www.sec.gov/Archives/edgar/data/1016152/000129598404000007/sc13da3_082504.txt
August 25, 2004
Directors of Cornell,
As the value of our company continues to erode, as evidenced in Cornell's
plummeting share price, I repeat our requests for the Board of Cornell to act
now!!
1. We request the rescission of Cornell's poison pill.
2. We request that Cornell retain an investment advisor to sell the company.
3. We request that Harry Phillips be immediately removed as Chairman of the
Board and CEO and an interim CEO be retained until the company is sold.
It has come to our attention that the current management of Cornell continues to
spin our demands as those of a "minority view" held only by
"hedge funds". Nothing could be further from the truth. I invite the
Board, employees of Cornell and all existing shareholders to listen to Cornell's
second quarter conference call. If you listen you will hear a principle for
Columbia Management Group, Inc. (a mutual fund) expressing his complete lack of
confidence in Cornell's current management. "...we own over a million
shares as you probably know... We want to go on record publicly as saying we
voted to withhold against the full slate to send a clear message to the Board.
We - I would also say have a no confidence - it's basically a no confidence vote
in current management. We think the franchise value is greater in the hands of
other operators. We, too, are highly frustrated with the continued string of
disappointments and when you say some mistakes made it just seems like we're
getting far too many mistakes. We're hearing about mistakes quarterly if not
more frequent than that..." If Cornell's management hadn't limited the
question and answer period of the conference call I have no doubt other angry
shareholders would have expressed their views.
Both current and former employees of Cornell have contacted us expressing their
own concerns with Cornell's operational failures, lack of leadership and an
absence of focus on profitability within the company. I have attached a sample
of the letters we are receiving for your review. It is remarkable that you
continue to stand behind the current management team.
What possible experience does Harry Phillips possess that would keep the Board
from asking for his resignation? Our own investigation into Harry Phillips'
background includes his experience as CEO of American Ecology. While pursing a
goal of revenue growth over profitability, Mr. Phillips drove the share price
down over 60% during his three year tenure. Harry Phillips does not have a
background in private corrections or juvenile services. Why is he the CEO of
Cornell?
While Cornell continues to miss earnings estimates, and contracts which should
have been finalized "years ago" like Moshannon Valley are still not
finalized; the overall industry is having its best year ever. Please act now for
the benefit of shareholders and the employees of Cornell which don't deserve to
have their jobs put in jeopardy as Cornell's earnings performance continues to
decline.
Sincerely,
Zachary George
Pirate Capital LLC
EXHIBIT 3
LETTER FROM EMPLOYEE
August 19, 2004
Harry J. Phillips, Jr.
Cornell Companies, Inc.
1700 West Loop South, Suite 1500
Houston, TX 77027
Dear Mr. Phillips:
First, I would like to thank you in advance for taking the time to read this
letter. Last week, my position was "eliminated" due to restructuring
at Cornell. This, as you well know, is a much more palatable way of saying that
an employee was laid off. In fact, I was one of a select group that was released
from the main office in Houston.
This letter is not about sour grapes, but rather my disappointment that the
Board of Directors has allowed the current Executive Management to continually
mishandle the company over the last few years. A couple of weeks ago, the
Houston office employees were assembled the day following the last earnings call
where the "A" word, (accountability), was mentioned. As I look back,
what is truly sad, sad only for those employees who make this company work day
in and day out, is that those in Executive and Senior Management who preach
"accountability" are not truly "accountable" themselves. In
my opinion, "accountability" had better run throughout the entire
organization, starting at the top. Why butcher positions that have no real
impact on the company's long-term profitability? Rather, why haven't those
individuals whose decisions have cost, (and in many of our cases, are still
costing), the company real dollars, your dollars in fact, each and every
month/quarter, been accountable for their actions? Why are they still on the
payroll? Here are a few examples of several projects that are draining the
company of profits that I have encountered in my brief tenure at Cornell:
New Morgan, Jos-Arz, Plankinton and most likely, RCC
This brings to mind another word. Profitability. Here is a word that has been
thrown around over the last few years but unfortunately, it may have been used
synonymously with revenue. As you know, there is a distinct difference in the
two. My experience confirms that Cornell's current Management seems to
consistently over-emphasize the project revenue while ignoring or down-playing
the real profitability ratio. This is a sure recipe for disaster...exactly what
we see happening and have heard over the last several earnings calls. Having
worked many years in profit and nonprofit organizations, my experience validates
the notion that most "nonprofit" managers have a difficult time making
the conversion to the "for profit" mentality. So it is in the case of
Cornell. How long will it be before the numbers get tight again and another
round of knee-jerk decisions is made, butchering even more positions and Cornell
goes the way of many other bungled companies in Houston?
For months now, the analysts have been pointing out the same problems over and
over again during the earnings calls. Having worked in the Houston office, I am
going on record to agree that the problem is an Operations failure. Over the
last twenty months, Cornell has consistently had issues with contracting,
executing and opening/running profitable new facilities, (i.e.: see list above).
Seems strange to me that Corporate America basically rewards an individual or
group of individuals who can destroy in two (2) years, what has taken eleven
(11) years to create, (CRN). Having been personally affected, I am calling on
you to take immediate action by replacing all Executive Management.
Former National Purchasing Manager,
Kevin Brown
LETTER TO HARRY J. PHILLIPS, JR.
http://www.sec.gov/Archives/edgar/data/1016152/000129598404000008/sc13da4_090104.txt
September 1, 2004
Harry J. Phillips, Jr.
Chairman and CEO
Cornell Companies, Inc.
1700 West Loop South, Suite 1500
Houston, Texas 77027
Mr. Phillips:
This letter is written in response to your letter dated August 25, which was
filed in Cornell's 8-K on August 27. Not surprisingly, to date you have refused
our requests and refused to call a special shareholder's meeting to allow the
owners of the company to assert control over their investment.
An evaluation of Cornell's performance during your tenure as CEO and Chairman
reveals that you, the board, and your management team lack the ability to
deliver value to shareholders through the consistent execution of a business
plan. I do not believe that you are in a better position than the owners of the
company to decide what is in their best interests, regardless of the information
you have as an insider. Our view, as you know, is shared by numerous
shareholders, as evidenced by the 37% of votes that were withheld from you in
the recent election. These votes were withheld both before your latest string of
financial and operational disappointments and before Pirate Capital took its
activist stance, (we are currently the second largest shareholder controlling
9.8% of the company). Many shareholders have written to you and voiced their
concerns during past conference calls. Many additional shareholders were unable
to speak on the last conference call because it was abruptly ended. In light of
the current circumstances, I consider any written correspondence you have
received from shareholders to be material, requiring an immediate 8-K filing.
In your letter, you state that we have not tried to learn of the steps that the
board has taken to explore the company's strategic options. This is not true. I
have been contacted repeatedly by interested strategic and financial buyers.
These buyers have consistently stated that their direct dealings with Cornell
have lead them to conclude that the management team is entrenched and that the
company is not for sale. They have also indicated their desire to bid on the
company once a formalized process is under way. It is important for you and the
board to realize that multiple independent parties have provided us with
consistent accounts of their dealings with you. I am inclined to believe these
parties and find your statements disingenuous given your record of failing to
deliver on your public statements and assurances.
Do not underestimate the amount of due diligence that we have conducted. We have
spoken with current and former employees, shareholders, investment bankers,
competitors, consultants, and interested buyers, some of whom have signed
confidentiality agreements with Cornell in the past. Incidentally, we have not
accepted your offer to execute a confidentiality agreement because we do not
want to inhibit our ability to purchase stock or speak publicly.
Further, your claim that we have proposed a "fire sale" is a material
misstatement of the facts. We have proposed that you retain an investment
advisor to assist in the sale of the company. As you know, a typical sale
process can easily take 5 to 9 months. This process should be initiated now,
regardless of the status of projects such as Moshannon Valley, which should be
resolved within this time frame. As an indication of the interest in Cornell's
assets and the timeliness of exploring its sale, one of several strategic buyers
has conveyed to us that they are willing to make a scaled bid that is tied to
the success of important projects that you have been unable to finalize. If you
are concerned that the sale of the company would put the directors at risk of
breaching their fiduciary duties, the best way to eliminate this risk is to ask
shareholders to vote on the matter.
You have refused to redeem the poison pill, stating that the rights plan permits
the board to protect the stockholders against an otherwise unfair transaction.
The board has demonstrated its inability to preserve shareholder capital and
protect them from the repeated failures of management. The redemption of the
poison pill will not only send a clear message to shareholders that you are open
to a change of control transaction, but will also enable shareholders to better
protect themselves through greater levels of ownership.
You state that the board believes that actively shopping the company is not in
the best interest of the company's stockholders and that the board and
management are well informed about the potential market transactions available
to Cornell. This response misses the point entirely. We are the owners of the
company, you work for us, and we want the company sold. If this is unclear in
any way, take your own poll of shareholders or put the matter to a vote. No
announcement regarding layoffs or new contracts will restore the shareholder
confidence that you have eroded. In short, you have made the ultimate removal of
the entire board and management team an easy task for an activist investor.
You contend that I have submitted no proposals. This is not true. I have already
proposed that Cornell take the following actions:
1) Rescind the poison pill;
2) Retain an investment advisor to sell the company; and
3) Remove Harry Phillips as CEO and Chairman of the Board.
Your letter dated August 25 certainly serves as a response to my proposals,
albeit not the response I was hoping for. To be clear, I initially called for a
full board meeting to discuss Pirate Capital's proposals. You refused this
request. Unfortunately, the board's stated willingness to "listen very
carefully" is meaningless to shareholders because the directors are
apparently unwilling to take appropriate action.
You state that the directors are working diligently towards improving the
company's ability to execute its business plan. Why has execution been such a
problem for you? Perhaps your ability to execute is hindered by the many other
responsibilities and conflicts that prevent you from focusing entirely on
Cornell Companies.
According to publicly available information, in addition to acting as the CEO
and Chairman of the Board of Cornell Companies, you also hold the following
positions:
President of Timberlake Interests, Inc.
President of Phillips Investments, Inc.
Director of Conservatek Industries, Inc.
Director of Aeriform, Inc.
General Partner of ECOL Partners
Trustee of Washington and Lee University
Director of the Metropolitan YMCA of Greater Houston
I applaud your philanthropic efforts, however, it is troubling that you have
actively maintained these positions and helped raise large amounts of capital
for non-profit organizations, including over $242 million for Washington and
Lee's recent capital campaign, while Cornell's operations have deteriorated. In
May of this year, you actually started your term as a trustee of Washington and
Lee shortly after Cornell announced poor results for the first quarter. It is
hard to believe that the many positions you hold have not resulted in
significant demands on your time, hindering your ability to focus on the
creation of value for Cornell shareholders. Cornell needs a full-time CEO.
Additionally, why is Marcus Watts still on the board? According to company
documents, legal fees paid to Locke Liddell & Sapp LLP, at which Marcus
Watts is a partner, were approximately $1.1 million, $1.5 million and $2.7
million for the years ended December 31, 2003, 2002 and 2001, respectively. The
conflict of interest between Marcus Watts and the shareholders of Cornell that
is currently disclosed as a related party transaction is completely
unacceptable. I challenge you to find a respected corporate governance expert
that would recommend that your outside counsel serve as a member of the board.
Your failure to either remove Marcus Watts from the board or retain a different
law firm to act as outside counsel, even after the escrow fiasco, and 35% of the
votes being withheld from him in the last election, shows that you are more
concerned about your relationship with Marcus Watts than enforcing good
corporate governance practices.
What possible incentive does Marcus Watts have to support the maximization of
shareholder value through the sale of the company? As a partner at his firm, Mr.
Watts has an interest in every single hour that a Locke Liddell associate bills
to Cornell. When Cornell is sold, both Locke Liddell and Marcus Watts will
suffer financially, assuming the buyer retains a different law firm. The fact
that the related party in this transaction is an attorney intensifies the
conflict as Marcus Watts and Locke Liddell benefit financially from all
transactions and even corporate problems that require the services of outside
counsel. The perverse truth is that Marcus Watts and Locke Liddell can benefit
financially from the destruction of shareholder value. While Marcus Watts has a
fiduciary duty to the shareholders of Cornell, the benefit he will receive from
the continued independence of Cornell, regardless of the value a sale would
generate for its owners, makes his position as director inappropriate.
In addition to the proposals that you have not accepted, I propose that Cornell
take the following actions:
4) Release all communications received from shareholders in one or several 8-K
filings;
5) Immediately remove Marcus Watts from the board;
6) Schedule a special shareholder meeting to vote on whether the company should
be sold;
7) Terminate all plans to make additional acquisitions;
8) Separate the role of CEO and Chairman; and
9) Appoint an interim CEO to get the company sold.
I want to make clear to you why the company should be sold now versus later.
This is not a case of a great management team suffering through an industry
downturn. The private corrections industry fundamentals are strong and Cornell's
competitors have performed well. Looking at the equity returns of the top three
companies in the industry over the last 12 months according to Bloomberg,
Corrections Corporation of America has gained 51%, The GEO Group has gained 8%,
and Cornell Companies has lost 25%. Why should anyone expect a CEO that has
overseen the destruction of so much shareholder value to be able to turn things
around now?
Mr. Phillips, you are simply too close to this situation. Your failure to take
action to protect shareholder capital has resulted in the erosion of shareholder
confidence in your ability to be successful going forward. Your fiduciary duty
will be best fulfilled by turning Cornell's assets over to a more efficient
operator of the business.
A company that relies on new contracts for a significant portion of its
incremental earnings will almost always be in the process of negotiating or
finalizing a new contract. This is no excuse to perpetually delay the sale of
the company. The due diligence process can be initiated at the same time that
measures are taken to reduce expenses and finalize current contracts. You
mentioned on the second quarter conference call that notification of the final
approval of the modified contract with the BOP for Moshannon Valley would be
received shortly. While we have heard nothing additional from Cornell, certainly
you expect this news within the time frame that a sale process could be
completed.
We envision a focused sale process that is limited to only the most qualified
buyers. This process will provide a market test on valuation and contract terms,
a staged information flow, and follow a stable timeline. The first step will
involve the retention of an investment advisor. Within the first six weeks that
a sale process is agreed upon, the advisor will be able to collect information,
conduct relevant due diligence, prepare an offering memorandum and create a list
of potential buyers of the business. Within 3 to 4 months, the advisor could
contact potential buyers, distribute the offering memorandum, receive
preliminary indications of interest, evaluate indications and select 2nd round
participants. By the end of six months, meetings with buyers and data room
visits could be completed. Draft purchase agreements could be distributed to
potential buyers, due diligence could be completed by buyers and final bids
could be submitted. The last four weeks of the process would be dedicated to the
evaluation of final offers, the negotiation and execution of a final purchase
agreement, and ultimately the closing of the transaction. This timeline would
probably take anywhere from 5 to 9 months and should begin today.
Current market conditions favor M&A transactions; there is a tremendous
amount of private capital seeking investment; and interest rates are still
extremely low. This is the ideal time for value to be realized for Cornell's
owners through the sale of the company. I urge you and the board to act now.
Sincerely,
Zachary George
Pirate Capital LLC
CC: Board of Directors