NORWALK, Conn. (HedgeWorld.com)-Pirate Capital LLC believes that there is value to be unlocked in the for-profit prison administration industry but doesn't believe that the existing board of directors of Cornell Companies Inc., Houston, is up to the job.
Cornell held its annual meeting in June, re-electing its board of directors without opposition. After some pressing by Pirate in July, Cornell disclosed that substantial votes had been withheld in that election-37% in the case of the chairman of the board and chief executive, Harry J. Phillips Jr., indicating serious shareholder dissatisfaction Previous HedgeWorld Story.
In August, Zachary George, a research analyst with Pirate, which currently owns 9.8% of the equity in Cornell, wrote to the directors asking that they rescind the company's "poison pill," that they remove Mr. Phillips and that they hire an investment adviser to sell the company.
His letter referred to Cornell's continuing troubles with the Moshannon Valley project, Pennsylvania, on which Cornell began construction in 1999 under a contract from the federal Bureau of Prisons. Disputes about environmental impact and building design held up this project. In October 2003, Cornell received final approval from the Bureau of Prisons for a revised design. It expects to resume work in the third quarter of this year for a facility that will have a population of 1,300 low-security or minimum-security offenders.
As of June 30, Cornell said in its 10-K, it had incurred approximately US$18.6 million "for the design, construction and development costs and capitalized interest related to the Moshannon Valley Correctional Center facility. The Company is in the process of submitting a claim to the BOP for reimbursement of costs related to the original construction efforts incurred beginning in 1999."
Mr. George, writing to the directors, said that under Mr. Phillips, Cornell has been underperforming the other players in its industry and that "contracts which should have been finalized 'years ago' like Moshannon Valley are still not finalized." He said that the management has been trying to characterize his views as those only held by hedge funds. He said that this "spin" is faulty and quoted a principal of a mutual fund, Columbia Management Group Inc., who said in the second quarter earnings conference call that Columbia is "highly frustrated with the continuing string of disappointments … we're getting far too many mistakes."
