SecProbe.io

CORRESP
1
filename1.htm

May
5, 2005

Mr. Rufus Decker

Accounting Branch Chief

Mail Stop 0510

U.S. Securities and Exchange Commission

450 5th Street, N.W.

Washington, D.C. 20549

RE:      SEC Comment Letter dated
April 21, 2005 Related to Cornell Companies, Inc.

Form 10-K for the fiscal year ended December 31, 2004

File
No. 1-14472

Dear Mr. Decker:

This letter responds to the
comments Cornell Companies, Inc. (the “Company”) received from the Accounting
Branch of the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”)
by letter dated April 21, 2005.

Where requested, the Company
addressed the comments by providing the disclosures or revisions that will be
included in the Company’s future filings.
In other instances we have provided the supplemental information you
have requested.

We hope this letter is
responsive to your comments and requests for information.  The Company’s goal is to resolve these
outstanding comments in a manner that is acceptable to the SEC Staff.  We have reviewed and discussed this letter with
our Audit Committee, and they concur with our conclusions in this letter.

Our responses utilize the
same captions contained in the April 21, 2005 letter, and are numbered to
correspond to the numbers assigned in your letter.  For your convenience, our responses are
prefaced by the Commission’s corresponding comment in bold text:

Comments applicable to your overall filing

1.              Where a
comment below requests additional disclosures or other revisions to be made,
please show us in your supplemental response what the revisions will look like.
These revisions should be included in your future filings.

                        Response
of Cornell Companies, Inc.

                        When a SEC
comment has requested additional disclosures or other revisions to be made, we
have shown in our supplemental responses what the revisions will look like.
These revisions will be incorporated in our future filings, beginning with our
first quarter filing Form 10-Q for the three months ended March 31, 2005, as
applicable.

Item 8 —
Financial Statements and Supplementary Data

Statements of Operations and Comprehensive Income (Loss), page 68

2.     We have reviewed your
response to comment 4. You indicate that you are in discussions with Locke
Liddell & Sapp, in addition to your audit committee and PricewaterhouseCoopers,
LLP, regarding your recognition of the amounts reflected in other comprehensive
income at gross, and not net, amounts. Please tell us the results of those
discussions and the basis for the conclusion you reached.

                        Response
of Cornell Companies, Inc.

Our analysis gives
consideration to both quantitative and qualitative factors pursuant to SEC
staff accounting bulletin No. 99 (“SAB 99”).

In accordance with SAB 99,
we have performed the following quantitative analysis for the years ended
December 31:

  2002

  2003

  2004

  Deferred tax liabilities, as reported

  $

  4,954

  $

  7,006

  $

  8,088

  Total liabilities, as reported

  281,331

  282,868

  346,319

  Total stockholders’ equity, as reported

  159,952

  166,235

  161,312

  Comprehensive income (loss), as reported

  8,258

  3,602

  (7,269

  )

  Accumulated other comprehensive income, as reported

  1,896

  1,528

  1,692

  Deferred tax liabilities, as adjusted

  5,718

  7,619

  8,701

  Total liabilities, as adjusted

  282,095

  283,481

  346,932

  Total stockholders’ equity, as adjusted

  159,188

  165,622

  160,699

  Comprehensive income (loss), as adjusted

  7,494

  3,753

  (7,269

  )

  Accumulated other comprehensive Income, as adjusted

  1,132

  915

  1,079

  Impact on Operating Income/Net Income/EPS

  None

  None

  None

  Impact on working capital

  None

  None

  None

  Impact on Operating Cash Flow

  None

  None

  None

  % change in total liabilities

  0.27

  %

  0.22

  %

  0.18

  %

  % change in total equity

  0.48

  %

  0.37

  %

  0.38

  %

  % change in comprehensive income (loss)

  9.25

  %

  4.19

  %

  None

  % change in accumulated other comprehensive income

  40.29

  %

  40.13

  %

  36.24

  %

Additional analysis for the
quarterly periods in 2003 and 2004 are included as “Attachment A”.

We strongly believe, in
light of the facts and circumstances (i.e. the “total mix” of information
presented in our consolidated financial statements), that the adjustments
between deferred tax liabilities and other comprehensive income in the financial
statements would not change or influence the judgment of a reasonable person.

With respect to public
disclosures and commentary by the Company, other comprehensive income is not
included in the Company’s quarterly earnings releases. The Company does not
speak to other comprehensive income on its quarterly earnings calls, nor has it
fielded any questions during such calls on this topic. In addition, the Company
does not discuss other comprehensive income on its website. Moreover, during
public forums, shareholder and analyst presentations this subject is not
included, and no questions have been asked with respect to other comprehensive
income. In addition, reports issued by those analysts who cover the Company do
not discuss or provide data on other comprehensive income. Thus, the Company
does not believe that other comprehensive income is utilized in the evaluation
of the Company by the public.

Furthermore, the guidance
issued by the Company is on an earnings per share basis, as are the market
expectations provided by those analysts who follow the Company. Thus other
comprehensive income is neither provided nor utilized to monitor or evaluate
the Company. The misstatement has no implications with respect to meeting or
failing to meet analysts’ expectations.

Moreover, the misstatement
does not “mask” a change in earnings during the period or any other trend in
the operations of the Company.  Key
operating metrics typically utilized by the market, such as occupancy
(utilization), income from operations, net income, operating margins, earnings
per share, etc. are not impacted by other comprehensive income, and thus any
apparent trends would not be impacted.

The Company is evaluated by
the market based on its overall performance, and in greater detail based on the
performance of its three primary business segments (Adult secure institutional,
Juvenile justice, educational and treatment programs and Adult community-based
corrections and treatment programs). For each of these segments the Company

reports such information as
revenues, depreciation and amortization, income from operations, capital
expenditures and assets. The Company does not report other comprehensive income
on a segment level. Accordingly, if an analyst or shareholder has identified a
particular segment as playing a significant role in the Company’s operations or
profitability, the misstatement would have no impact on such an assessment.

In addition, neither
management nor the board of directors utilizes other comprehensive income as a
metric in the analysis of its business operations. From a global perspective,
capacity, occupancy (utilization), income from operations, net income, and the
major cost categories are incorporated in the various reviews that occur. On a
detail level, the specific revenues (reimbursement rates), expenses and
occupancy associated at the facility and program levels are evaluated each
period. Other comprehensive income is not incorporated into any of these
reviews.

We have also conducted an
assessment on any potential impact of the misstatement on our compliance with
regulatory requirements. 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. The contracts typically include extensive reporting requirements
and supervision and on-site monitoring by representatives of contracting
governmental agencies.

In addition, governmental
agencies we contract with have the authority to audit and investigate our
contracts with them. As part of that process, some agencies review our
performance on the contract, our pricing practices, our cost structure and our
compliance with applicable laws, regulations, and standards.

Such reporting requirements
and cost reviews are on operating expense items. They do not include other
comprehensive income, nor are there any requirements related to or driven by
other comprehensive income. Thus, the misstatement in other comprehensive
income does not have any impact on the Company’s compliance with its regulatory
or other contractual requirements.

The Company also evaluated
the potential impact on its compliance with its loan covenants during the
period of the misstatement. During the period January 1, 2003 through March 31,
2004, the Company had the following covenants:

  a)

  EBITDAR Ratio 1- defined
  as: EBITDAR:

  1)

  Net
  income less any extraordinary gains for such period to the extent included in
  net income for such period, plus

  2)

  Interest
  expense for such period, plus

  3)

  Provisions
  for federal, state and local and foreign income taxes for such period…., plus

  4)

  The aggregate amount of
  depreciation and amortization expenses for such period……., plus

  5)

  The aggregate amount of
  (i) accretion expense with respect to options or rights to acquire the
  Company’s common stock and (ii) any write-off
  of expenses  arising in
  connection with the Loans…….,plus

  6)

  The net income of any
  Person that is accounted for by the equity method of accounting, but only to
  the extent of dividends paid to the Company
  or any of its Subsidiaries, plus

  7)

  The aggregate amount of
  non-cash expense for such period associated with the closure and post-closure
  reserves of a plant or facility owned by the Company or any of its
  Subsidiaries, plus

  8)

  The aggregate amount of al
  other non-cash expenses for such period,…..plus

  9)

  The aggregate amount of
  Rent Expense for such period; plus

  10)

  The aggregate amount of
  pre-opening expenses and start-up expenses for such period

  The ratio to be computed
  is of EBITDAR to all indebtedness of the Obligors on such date. This
  calculation does not incorporate other comprehensive income, thus there was
  no impact on the Company’s compliance

  b)

  EBITDAR Ratio II- same as
  a), thus not impacted by change in other comprehensive income.

  c)

  Net Worth- actual vs.
  calculated minimum (by formula incorporating a base amount, subsequent
  earnings, and net equity issuance proceeds).

  For the impact of the
  other comprehensive income misstatement on this ratio calculation, please see
  “Attachment A”.

  d)

  Interest coverage ratio:
  defined as EBITDAR divided by interest expense Interest expense includes
  interest expense (gross) and rent expense.

  As
  this calculation does not include other comprehensive income, there was no
  impact on the Company’s compliance.

  d)

  Fixed charges ratio- ratio
  of EBITDAR (as adjusted for maintenance capex and cash taxes paid) to fixed
  charges (including required principal payments and total interest expense).

  As
  this calculation does not include other comprehensive income, there was no
  impact on the Company’s compliance.

  e)

  Capital expenditures-
  maintenance capex cannot exceed 3% of revenues for defined periods.

  As
  this calculation does not include other comprehensive income, there was no
  impact on the Company’s compliance.

During
the period June 30, 2004 through December 31, 2004, the Company had the
following covenants:

1)                                      Bank leverage ratio- defined as bank debt to EBITDA
(similar description as noted above for EBITDAR, excluding rent expense).

As this calculation does not
include other comprehensive income, there was no impact on the Company’s
compliance.

2)                                      Total leverage ratio- ratio of total debt to EBITDA.

As this calculation does not
include other comprehensive income, there was no impact on the Company’s
compliance.

3)             Fixed charge coverage ratio-same as d) noted above.

As this calculation does not
include other comprehensive income, there was no impact on the Company’s
compliance.

3)                                      Tangible net worth-similar calculation as noted in
c) above-

For the impact of the other comprehensive income misstatement on this ratio
calculation, please see “Attachment B”.

4)                                      Asset coverage- defined as eligible accounts
receivable to bank debt.

As this calculation does not
include other comprehensive income, there was no impact on the Company’s
compliance.

5)                                      Capital expenditures- may not exceed 3% of total
revenues (with certain defined exceptions).

As this calculation does not
include other comprehensive income, there was no impact on the Company’s
compliance.

Thus, based on the analysis provided, the misstatement of other
comprehensive income had no impact on the Company’s compliance with its debt
covenants.

We have also conducted an
assessment on the impact on management compensation as a result of the
misstatement of other comprehensive income. There were minimal bonuses paid
during the period, and those were not based on other comprehensive income.
There were no performance awards granted during the period which were tied to
levels of other comprehensive income. The primary awards granted during this
period were stock options. Their vesting was principally driven by time. Thus,
there was not any impact on

management compensation during
the period as a result of the misstatement of other comprehensive income.

In addition, the
misstatement clearly does not result from the concealment of an unlawful
transaction.

We have concluded, based on
the quantitative and qualitative analysis previously performed, and with
consideration of the factors noted above, that our previous reporting is not
considered a material error requiring a “restatement” of our consolidated
balance sheets or consolidated statement of comprehensive income for the periods
indicated. It remains our intent to record the cumulative adjustment in other
comprehensive income in the quarter ending March 31, 2005 (to be included in
our Form 10-Q to be filed on or before May 10, 2005). We have discussed this
matter with our audit committee, Locke Liddell & Sapp (our external SEC
counsel) and our independent public accounting firm, PricewaterhouseCoopers,
LLP, who are in agreement with our assessment and proposed treatment.

Note 11 — Stockholders Equity

Employee Stock Purchase Plan, page 93

3.              We have
reviewed your response to comment 15. Based upon your original disclosure, it
appears that your employees purchase common stock at the lower of the beginning
or end of year market value, less a 15% discount. Paragraphs 26 and 27 of FIN
44 state that as long as the exercise prices on the grant date of the option is
no less than 85 percent of the stock price on that date, the discount is
considered reasonable for purposes of determining whether the plan is
noncompensatory. Please tell us how your policy complies with this requirement
in FIN 44.

                Response of Cornell
Companies, Inc.

As noted in APB 25,
paragraph 7(d), and upheld in FIN 44 paragraphs 28 and 29, an example of a
noncompensatory plan is one that qualifies under Section 423 of the U.S.
Internal Revenue Code. Our plan qualifies under Section 423. Section 423
permits a qualified employee stock purchase plan to contain a look-back option
(an example of which is a provision in an employee stock purchase plan that
establishes the purchase price as an amount based on the lesser of the stock’s
market price at the grant date or its