Table
of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
(Amendment No. 2)
(Mark One)
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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|
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For fiscal
year ended December 31, 2008
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|
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OR
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|
|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the transition period from
to
|
Commission File Number 1-14472
CORNELL COMPANIES, INC.
(Exact Name of Registrant as Specified In Its
Charter)
Delaware
|
|
76-0433642
|
(State
or Other Jurisdiction
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|
(I.R.S.
Employer
|
of
Incorporation or Organization)
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|
Identification
No.)
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1700 West
Loop South, Suite 1500, Houston, Texas
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77027
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(Address
of Principal Executive Offices)
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(Zip
Code)
|
Registrants telephone number, including area
code:
(713) 623-0790
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
|
Name of Each Exchange on Which Registered
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Common Stock, $.001 par value per share
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New York Stock Exchange
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Preferred Stock Purchase Rights
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|
New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of
the Act:
None
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
o
No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act.
Yes
o
No
x
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained
herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
o
.
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller
reporting company. See the definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Check one.
Large accelerated Filer
o
|
|
Accelerated filer
x
|
Non-accelerated filer
o
|
|
Smaller Reporting Company
o
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
The
aggregate market value of voting stock held by non-affiliates of the registrant
was $263,852,896 on June 30, 2008. The registrant has 14,766,758 shares of
common stock outstanding on March 6, 2009.
Documents
Incorporated by Reference
The information required by Part III of this Report, to the extent
not set forth herein, is incorporated by reference from the registrants
definitive proxy statement relating to its Annual Meeting of Stockholders to be
held in 2009, which definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to
which this Report relates.
Table of Contents
Explanatory Note
This
Amendment No. 2 to Form 10-K (this Second Amendment) amends Cornell
Companies, Inc.s (the Company) Annual Report on Form 10-K for the
year ended December 31, 2008 (the Original 10-K) which was filed with
the Securities and Exchange Commission on March 6, 2009, as subsequently
amended by Amendment No. 1 to the Original 10-K filed on July 2,
2009. The Company is filing this
Amendment No. 2 for the sole purpose of filing the revised Exhibits 31.1
and 31.2 included in Amendment No. 1 together with the entire Original
10-K. The conformed signatures of the
Companys Chief Executive Officer, President and Chairman of the Board and
Chief Financial Officer, Senior Vice President and Treasurer to these exhibits
were inadvertently not included in the Original 10-K. Amendment No. 1 did not include the
entire Original 10-K and this Amendment No. 2 is being filed to include
the entire Original 10-K.
Except
as described above, no other changes have been made to the Original 10-K or
Amendment No. 1. The Original 10-K
continues to speak as of the date of the Original Filing, and Cornell Companies, Inc.
has not updated the disclosures contained therein to reflect any events which
occurred subsequent to the filing of the Original 10-K, or to modify the
disclosure contained in the Original 10-K other than to reflect the changes
described above.
Forward-Looking Information
The statements
included in this annual report regarding future financial performance and
results of operations and other statements that are not historical facts are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements in this
annual report include, but are not limited to, statements about the following
subjects:
·
revenues,
·
revenue mix,
·
expenses, including personnel and medical
costs,
·
results of operations,
·
operating margins,
·
supply and demand,
·
market outlook in our various markets,
·
our other expectations with regard to
market outlook,
·
utilization,
·
parolee, detainee, inmate and youth
offender trends,
·
pricing and per diem rates,
·
contract commencements,
·
new contract opportunities,
·
operations at, future contracts for, and
results from our Regional Correctional Center,
·
the timing (including construction,
completion and ramp of facility population), cost of completion and other
aspects of planned expansions, including without limitation the D. Ray James
Prison and Walnut Grove Youth Correctional Facility expansions, and client
contracts for such facilities,
·
the construction
and
lease of the new facility in Hudson,
Colorado and our contracts with the Colorado Department of Corrections,
·
impact from
Hurricane
Ike,
·
adequacy of insurance,
·
debt levels,
·
debt reduction,
·
the effect of FIN No. 48,
·
our effective tax rate,
·
tax assessments,
·
results and effects of legal proceedings
and governmental audits and assessments,
·
liquidity, including future liquidity and
our ability to obtain financing,
·
financial markets,
·
cash flow from operations,
·
adequacy of cash flow for our
obligations,
·
capital requirements,
·
capital expenditures,
·
effects of accounting changes and
adoption of accounting policies,
·
changes in laws and regulations,
·
adoption of accounting policies,
·
benefit payments, and
·
changes in laws and regulations.
Forward-looking
statements in this annual report are identifiable by use of the following words
and other similar expressions among others:
·
anticipates
·
believes
·
budgets
·
could
·
estimates
·
expects
·
forecasts
2
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·
intends
·
may
·
might
·
plans
·
predicts
·
projects
·
scheduled
·
should
Such statements are subject to numerous risks,
uncertainties and assumptions, including, but not limited to:
·
those described under Item 1A. Risk Factors,
·
the adequacy of sources of liquidity,
·
the effect and results of litigation,
audits and contingencies, and
·
other factors discussed in this annual
report and in the Companys other filings with the SEC, which are available
free of charge on the SECs website at
www.sec.gov
.
Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those indicated.
All subsequent written
and oral forward-looking statements attributable to the Company or to persons
acting on our behalf are expressly qualified in their entirety by reference to
these risks and uncertainties. You should not place undue reliance on
forward-looking statements. Each forward-looking statement speaks only as of
the date of the particular statement, and we undertake no obligation to
publicly update or revise any forward-looking statements.
3
Table of
Contents
PART I
ITEM 1.
BUSINESS
Company Overview
Cornell Companies, Inc.
(together with its subsidiaries and predecessors, unless the context requires
otherwise, Cornell, the Company, we, us or our) was incorporated in
Delaware in 1996. We are a leading provider of correctional, detention,
educational, rehabilitation and treatment services outsourced by federal,
state, county and local government agencies for adults and juveniles. We
partner with these agencies to deliver quality, cost-efficient programs that we
believe enable our customers to achieve their missions while saving taxpayers
money. Our customers include the Federal Bureau of Prisons (BOP), U.S.
Marshals Service (USMS), various state Departments of Corrections, and city,
county and state departments of human services and similar agencies.
We offer a
diverse portfolio of services in structured and secure environments throughout
three operating divisions: (1) Adult
Secure Services; (2) Abraxas Youth and Family Services; and (3) Adult
Community-Based Services. Cornell, through predecessor entities, began juvenile
operations in 1973, adult community-based programs in 1974, and adult secure
operations in 1984. Our three divisions are our reportable operating segments.
Financial information and a discussion concerning these segments for fiscal
years 2008, 2007, and 2006 is included in Note 15 Segment Disclosure of the
Notes to Consolidated Financial Statements included in this Form 10-K.
As of December 31,
2008, we operated 68 facilities among the three operating divisions,
representing a total operating service capacity of 19,875. We also had one
facility that was vacant, representing additional service capacity of 70.
Service capacity is comprised of the number of beds currently available for
service in residential facilities and the average program capacity of
non-residential community-based programs.
Our facilities are located in 15 states and the District of Columbia.
Additional
information about Cornell can be found on our website,
www.cornellcompanies.com
. We make
available on our website, free of charge, access to our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these
reports as soon as reasonably practicable after such materials are
electronically filed with or furnished to the Securities and Exchange
Commission (SEC). Information provided on our website is not part of this Form 10-K.
Company Operations
We
provide a continuum of care to adults and juveniles in institutional,
residential, and community-based settings. Regardless of operating division,
each of our facilities emphasizes the importance of engaging in the community
as a productive, responsible citizen. In many of our adult secure institutions,
we offer vocational training curricula, as well as literacy and General
Equivalency Diploma (GED) programs. In our adult community-based programs, we
offer job placement services, instruction on personal finance management and
other skill-based training. In most of our juvenile facilities, we provide
family counseling services and behavioral counseling. In facilities throughout
the organization, we provide drug and alcohol counseling for our clients.
We operate our
facilities and programs under the framework of our Seven Key Principles of Care
â
.
These principles state that our operations must maintain the safety and
security of our clients, our employees, and the local community. In addition,
the principles require that we hold the individuals in our care accountable for
their actions and expect them to assume responsibility. Furthermore, we expect
our employees to act as role models, to communicate effectively and professionally,
and to treat our clients with dignity and respect. Finally, our principles call
for us to manage physically clean and appropriately maintained facilities that
are safe and conducive to an environment of care.
Quality of
Operations
We
operate our facilities in accordance with both company and facility-specific
policies and procedures. Where required by contract or otherwise deemed
appropriate for our service environments, these policies and procedures are
designed to meet requirements set forth by independent industry oversight
organizations, including the American Correctional Association (ACA), Joint
Commission on Accreditation of Healthcare Organizations (JCAHO), and National
Commission on Correctional Health Care (NCCHC). Standards may also be
implemented to meet the requirements of state departments of public welfare,
departments of protective and regulatory services and departments of human
services and education. We believe that accreditation and the corresponding
standards of operation enhance our ability to provide quality programs and
contribute to the publics increased acceptance of our services.
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Internal
quality control, conducted by senior facility staff and senior management,
takes the form of periodic operational, programmatic and fiscal audits;
facility inspections; regular review of logs, reports and files; and strict
maintenance of personnel standards, including an active training program. Each
of our facilities is further subject to periodic audits and reviews performed
by our contracting agencies.
Industry and
Business Segment Summary
Incarceration, detention, education and treatment services
for adults and juveniles have historically been provided by various government
entities. In the United States, the incarcerated and sentenced populations of
adults and juveniles has continued to increase while federal, state and local governments
face continuing pressures to control costs and improve service quality. We
believe these trends have caused growing consideration and acceptance towards
outsourcing certain government services and functions. Moreover, the increasing
demand facing governments (from areas such as healthcare,
maintenance/development of public infrastructure, etc.) has also created
competition for resources funding such services.
Services
offered among our three divisions include incarceration and detention, transition
from incarceration, drug and alcohol counseling and treatment, behavioral
rehabilitation and treatment, vocational training and academic education for
grades 312. Private-sector companies, like us, contract with government
agencies to deliver these services, at what we believe are the same or higher
quality and for a lower cost than what the agency can otherwise provide.
Although outsourcing these services has historically faced opposition in the
U.S., public and government acceptance has increased as standards of service
improve and cost savings are documented. As government agencies face fiscal
budget constraints, outsourcing to private providers can offer economically
positive alternatives. In addition, as a cost relief measure, government
agencies have sought alternatives to incarceration, including reentry,
education, substance abuse and behavioral health programs all of which are
services we provide.
Outsourcing has a longer history in the juvenile justice and
adult community-based corrections sectors. Increasingly, states, counties and
local governments have used both for-profit and not-for-profit organizations to
meet the needs of troubled youth and adults reintegrating into society after a
time in residential treatment or prison. Governments have sought alternatives
to the rising costs of incarceration for offenders who are non-violent and need
treatment, education and rehabilitation. Adult community-based reentry programs
as well as education, substance abuse and behavioral health programs that can
successfully divert an offender from prison address this need.
Adult
Secure Services
Increasingly, federal and state systems are relying
upon private providers to address their incarceration needs. We also believe that the heightened attention
that has been placed on border patrol and immigration enforcement will continue
to drive demand for services such as those offered by private providers.
We
believe that our adult secure services division is well positioned to respond
to these marketplace conditions. We provide low-to-maximum-security
incarceration and detention services. In doing so, we ensure public safety
through the operation of a physically secure environment, which entails, among
other security and safety measures, a routine patrol of the premises by trained
correctional officers, alarmed fencing and razor wire and centralized
monitoring of activity via closed circuit camera systems. While incarcerated,
offenders are offered a variety of educational, counseling and vocational
programs aimed at providing a successful return to the community and a
subsequent reduction in recidivism.
As of December 31,
2008 we operated 10 adult secure facilities with an aggregate service capacity
of 12,841. Within the division, we offer the following:
·
Low-to-maximum-security incarceration and
detention,
·
Confinement of juveniles adjudicated as
adults,
·
Facility design, construction and
operation,
·
Use of modern security technology,
including electronic controls and surveillance equipment,
·
Education courses, including preparation
and testing for the GED, English as a Second Language classes, and Adult Basic
Education (ABE),
·
Holistic healthcare services, including
medical, dental, vision, psychiatric, and individual and group counseling
services,
·
Substance abuse counseling,
5
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·
Life skills training, including anger
management, hygiene, personal finance, employment and housing issues, and
parenting skills,
·
Religious opportunities and culturally
sensitive programs,
·
Food and laundry service, and
·
Recreational activities, including
exercise programs.
Abraxas
Youth and Family Services
The
juvenile justice industry sector includes residential, detention, shelter care
and community-based services, along with educational, rehabilitation and
treatment programs. This sector is highly fragmented with several thousand
providers operating across the country. Most of the private providers are small
and operate in specific geographic areas.
Juvenile
justice issues present a growing area of concern for many states due to the
number of youth within the judicial system, as well as the related annual
expenditures for placement and treatment. Beyond addressing capacity issues
within the juvenile justice system, states are also facing challenges posed by
the unique needs of specialized juvenile populations, such as those with
mental/behavioral health issues. Partnerships with private providers such as
Cornell can provide quality alternatives for care.
We
believe that our Abraxas Youth and Family Services division is uniquely
equipped to address the issues currently facing the juvenile justice system.
While the market is fragmented with providers located across the country, we
offer a national presence with locations in both urban areas as well as
suburban and rural settings. We provide
a broad array of services to youth, typically between the ages of 10 and 18, in
residential and community-based settings. The programs and services provided at
our facilities are designed to rehabilitate juveniles, hold them accountable
for their actions and behaviors, and help them successfully reintegrate back
into the community. An underlying principle of our juvenile programming is the
Balanced and Restorative Justice (BARJ) model, which provides a restorative
component to the victim, be it an individual, family, or community. The use of
the BARJ model, in connection with our Seven Key Principles of Care
â
,
emphasizes accountability, competency development and community protection.
As of December 31,
2008, we operated 17 residential facilities and 10 non-residential
community-based programs within our Abraxas division, representing operating
service capacity of 3,237. We also had one vacant facility with a service
capacity of 70. Within the division, we offer the following:
·
Diverse treatment settings, including
physically-secure, staff-secure, and community-based,
·
Specialized treatment for unique
populations, including females, drug addicts, sex offenders, fire starters, and
families,
·
Accredited alternative and special
education services,
·
Wilderness training programs and
nationally accredited ropes course challenges,
·
Individualized treatment planning and
case management,
·
Individual, group and family counseling
and therapy, cognitive behavior therapy and stress and anger management
instruction,
·
Substance abuse counseling and treatment,
relapse prevention and education,
·
Life skills training, including hygiene,
personal finance, employment and housing issues, and parenting skills,
·
Holistic healthcare services, including
medical, dental, behavioral health and psychiatric services, and
·
Recreational activities, including exercise
programs.
Adult Community-Based Services
Community-based
corrections services involve the supervision of adult parolees and
probationers. Parolees are persons who have served time in a correctional
facility and have been released due to either mandatory conditional release or
a parole board decision. Probationers have been charged with a crime but
sentenced to probation in lieu of incarceration. Services provided to parolees
and probationers include temporary housing, employment assistance, anger management
instruction, personal finance management training, academic opportunities,
vocational training and substance abuse or addiction counseling.
Community-based
treatment services include both residential and outpatient substance abuse
programs. Services include short-term and long-term residential care,
counseling, HIV/AIDS testing, counseling and prevention education, substance
abuse and addiction testing, detoxification and methadone maintenance.
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We
believe that our adult community-based programs provide positive environments
of care for both corrections and treatment clients. The market is fragmented
with providers located across the country. Whereas most providers in the
industry are small and have limited geographic reach, Cornell offers a national
presence with locations in large urban areas, as well as suburban and rural
settings. The adult community-based programs provide an alternative to
incarceration and a focus on transitioning offenders from a correctional
facility back into society. Through a system of education, employment training,
treatment, monitoring and accountability, clients are given the necessary tools
to make positive life choices that can reduce the incidence of recidivism.
As of December 31,
2008, we operated 28 residential community-based facilities and three
non-residential community-based programs with a combined total service capacity
of 3,797. Within the division, we offer
the following:
·
Minimum-security and staff-secure
residential services,
·
Home confinement and electronic
monitoring,
·
Substance-abuse counseling and treatment,
including detoxification, testing, 12-step programs and relapse prevention
services,
·
Employment training and assistance,
·
Education, including preparation and
testing for the GED, ABE, computer courses, college-level courses and access to
libraries,
·
Vocational training,
·
Individual, group and family counseling
and therapy, cognitive behavior therapy and stress and anger management
instruction,
·
Life skills training, including hygiene,
personal finance, housing issues, and parenting skills, and
·
Municipal jail
management.
Facilities
At December 31,
2008, we operated 68 facilities and had one vacant facility. In addition to
providing management services, we develop, design and/or construct many of our
facilities.
Either
through outright ownership or long-term leases, we control operating facilities
representing a large majority of our revenues. We believe that such control
increases the likelihood of contract renewal, allows us to expand existing
facilities and thereby realize economies of scale, and enhances our ability to
win new contracts and control repair costs. In addition, we believe that
long-term control of our operating facilities allows us to better manage
cost-escalation pressures.
7
Table of
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The
following table summarizes certain additional information with respect to our
facilities as of December 31, 2008.
As indicated, the majority of the facilities at which we provide
services are either owned or leased under long-term leases, which are generally
under terms ranging from one to 45 years.
Facility Name and Location
|
|
Total
Service
Capacity (1)
|
|
Initial
Contract
Date (2)
|
|
Company
Owned,
Leased or
Managed
(3)
|
|
|
|
|
|
|
|
|
|
Adult Secure Services Facilities:
Residential Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baker Community Correctional Facility
Baker, California
|
|
262
|
|
1987
|
|
Owned
|
|
Big Spring Correctional Center
Big Spring, Texas
|
|
3,509
|
|
1989
|
|
Leased
|
(4)
|
D. Ray James Prison
Folkston, Georgia
|
|
2,170
|
|
1998
|
|
Leased
|
(4)
|
Great Plains Correctional Facility
Hinton, Oklahoma
|
|
2,048
|
|
2007
|
|
Leased
|
(4)
|
High Plains Correctional Facility
Brush, Colorado
|
|
272
|
|
2007
|
|
Owned
|
|
Leo Chesney Community Correctional Facility
Live Oak, California
|
|
305
|
|
1988
|
|
Leased
|
|
Mesa Verde Community Correctional Facility
Bakersfield, California
|
|
360
|
|
2006
|
|
Leased
|
|
Moshannon Valley Correctional Center
Philipsburg, Pennsylvania
|
|
1,495
|
|
2006
|
|
Owned
|
|
Regional Correctional Center
Albuquerque, New Mexico
|
|
970
|
|
2004
|
(5)
|
Leased
|
|
Walnut Grove Youth Correctional Facility
Walnut Grove, Mississippi
|
|
1,450
|
|
2004
|
|
Managed
|
|
|
|
|
|
|
|
|
|
Abraxas Youth and Family Services Facilities:
Residential Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contact
Wauconda, Illinois
|
|
51
|
|
|
(6)
|
Owned
|
|
Cornell Abraxas Academy
New Morgan, Pennsylvania
|
|
214
|
|
2006
|
|
Owned
|
|
Cornell Abraxas I
Marienville, Pennsylvania
|
|
274
|
|
1973
|
|
Leased
|
(4)
|
Cornell Abraxas II
Erie, Pennsylvania
|
|
23
|
|
1974
|
|
Owned
|
|
Cornell Abraxas III
Pittsburgh, Pennsylvania
|
|
24
|
|
1975
|
|
Owned
|
|
Cornell Abraxas Center for Adolescent Females
Pittsburgh, Pennsylvania
|
|
108
|
|
1989
|
|
Owned
|
|
Cornell Abraxas of Ohio
Shelby, Ohio
|
|
108
|
|
1993
|
|
Leased
|
(4)
|
Cornell Abraxas Youth Center
South Mountain, Pennsylvania
|
|
72
|
|
1999
|
|
Leased
|
|
(Table continued on following page)
8
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Abraxas Youth and Family Services Facilities:
Residential Facilities (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DuPage Adolescent Center
Hinsdale, Illinois
|
|
38
|
|
|
(6)
|
Owned
|
|
Erie Residential Behavioral Health Program
Erie, Pennsylvania
|
|
17
|
|
1999
|
|
Owned
|
|
Hector Garza Residential Treatment Center
San Antonio, Texas
|
|
122
|
|
2007
|
(7)
|
Leased
|
(4)
|
Leadership Development Program
South Mountain, Pennsylvania
|
|
120
|
|
1994
|
|
Leased
|
|
Psychosocial Rehabilitation
Unit
Erie, Pennsylvania
|
|
13
|
|
1994
|
|
Owned
|
|
Schaffner Youth Center
Steelton, Pennsylvania
|
|
63
|
|
2001
|
|
Managed
|
|
Southern Peaks Regional Treatment Center
Canon City, Colorado
|
|
160
|
|
2004
|
|
Owned
|
|
Texas Adolescent Treatment Center
San Antonio, Texas
|
|
124
|
|
2003
|
|
Owned
|
|
Washington Facility
Washington, D.C.
|
|
70
|
|
|
(8)
|
Owned
|
|
Woodridge
Woodridge, Illinois
|
|
122
|
|
|
(6)
|
Owned
|
|
|
|
|
|
|
|
|
|
Abraxas Youth and Family Services Facilities:
Non-Residential Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delaware Community-Based Programs
Milford, Delaware
|
|
66
|
|
1994
|
|
Leased
|
|
Harrisburg Day Treatment
Harrisburg, Pennsylvania
|
|
45
|
|
1996
|
|
Leased
|
|
Lebanon Alternative Education
Lebanon, Pennsylvania
|
|
225
|
|
2004
|
|
Managed
|
|
Lehigh Valley Community-Based Programs
Lehigh Valley, Pennsylvania
|
|
60
|
|
1992
|
|
Leased
|
|
Non-Residential Detention/Non-Residential Treatment
Harrisburg, Pennsylvania
|
|
91
|
|
1999
|
|
Leased
|
|
Philadelphia Alternative Education
Philadelphia, Pennsylvania
|
|
165
|
|
2004
|
|
Managed
|
|
Philadelphia Community-Based Programs
Philadelphia, Pennsylvania
|
|
71
|
|
1992
|
|
Owned
|
|
State Reintegration Program
Harrisburg, Pennsylvania
|
|
225
|
|
1991
|
|
Managed
|
|
WorkBridge
Pittsburgh, Pennsylvania
|
|
600
|
|
1994
|
|
Leased
|
|
York County Community Programs
Harrisburg, Pennsylvania
|
|
36
|
|
1999
|
|
Leased
|
|
(Table continued on following page)
9
Table of Contents
Adult Community-Based Services Facilities:
Residential Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beaumont Transitional Treatment Center
Beaumont, Texas
|
|
180
|
|
2002
|
|
Owned
|
|
Cordova Center
Anchorage, Alaska
|
|
192
|
|
1985
|
|
Leased
|
(4)
|
Dallas County Judicial Treatment Center
Wilmer, Texas
|
|
300
|
|
1991
|
|
Managed
|
|
El Monte Center
El Monte, California
|
|
55
|
|
1993
|
|
Leased
|
|
Grossman Center
Leavenworth, Kansas
|
|
150
|
|
2002
|
|
Leased
|
|
Las Vegas Community Correctional Center
Las Vegas, Nevada
|
|
100
|
|
2004
|
|
Owned
|
|
Leidel Comprehensive Sanction Center
Houston, Texas
|
|
190
|
|
1996
|
|
Leased
|
(4)
|
Los Angeles County Jails (9)
Los Angeles Metropolitan Area,
California
|
|
264
|
|
|
(9)
|
Managed
|
|
Marvin Gardens Center
Los Angeles, California
|
|
52
|
|
1981
|
|
Leased
|
|
McCabe Center
Austin, Texas
|
|
90
|
|
1999
|
|
Owned
|
|
Mid Valley House
Edinburg, Texas
|
|
96
|
|
1998
|
|
Leased
|
|
Midtown Center
Anchorage, Alaska
|
|
32
|
|
1998
|
|
Owned
|
|
Northstar Center
Fairbanks, Alaska
|
|
135
|
|
1990
|
|
Leased
|
|
Oakland Center
Oakland, California
|
|
61
|
|
1981
|
|
Owned
|
|
Parkview Center
Anchorage, Alaska
|
|
112
|
|
1993
|
|
Leased
|
(4)
|
Reality House
Brownsville, Texas
|
|
66
|
|
1998
|
|
Owned
|
|
Reid Community Residential Facility
Houston, Texas
|
|
500
|
|
1996
|
|
Leased
|
(4)
|
Salt Lake City Center
Salt Lake City, Utah
|
|
78
|
|
1995
|
|
Leased
|
|
Seaside Center
Nome, Alaska
|
|
48
|
|
1999
|
|
Leased
|
|
Taylor Street Center
San Francisco, California
|
|
177
|
|
1984
|
|
Owned
|
|
Tundra Center
Bethel, Alaska
|
|
85
|
|
1986
|
|
Leased
|
(4)
|
(Table continued on following page)
10
Table of Contents
Adult Community-Based Services Facilities:
Non-Residential Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East St. Louis East
St. Louis, Illinois
|
|
164
|
|
(6
|
)
|
Leased
|
|
LifeWorks
Joliet, Illinois
|
|
116
|
|
(6
|
)
|
Leased
|
|
Southwood
Chicago, Illinois
|
|
554
|
|
(6
|
)
|
Owned
|
|
(1)
|
|
Residential
service capacity is comprised of the number of beds currently available for
service in our residential facilities. Non-residential service capacity is
based on either contractual terms or our estimate of the number of clients to
be served. We update these estimates at least annually based on the programs
budget and other factors.
|
(2)
|
|
Date from which
we, or our predecessor, have had a contract for services on an uninterrupted
basis.
|
(3)
|
|
We do not incur
any facility use costs, such as debt service, rent or depreciation for
facilities that we operate under a management contract only; however, we are
responsible for all other facility operating costs at these managed
facilities.
|
(4)
|
|
Facility was
sold in August 2001 to Municipal Corrections Finance, L.P. (MCF) as
part of the 2001 Sale and Leaseback Transaction as discussed in Note 11
Derivative Financial Instruments and Guarantees of the Notes to
Consolidated Financial Statements in Item 8 of this Form 10-K.
|
(5)
|
|
We lease the Regional Correctional Center from Bernalillo County, New
Mexico. The lease commenced in January 2003 and we renovated the
facility in 2003 and 2004. The facility commenced operations in July 2004
and the lease runs to June 2009, and we have five one-year renewal options.
Refer to Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations - Significant 2008 Events Regional
Correctional Center of this report for further discussion concerning this
facility.
|
(6)
|
|
These facilities
are operated pursuant to the Cornell Interventions programs/facilities
contract with numerous agencies throughout Illinois. Initial contract dates
vary by agency and range from 1974 to 1997.
|
(7)
|
|
We closed the Hector Garza Residential Treatment Center in the fourth
quarter of 2005 and subsequently reactivated the facility in August 2007.
Refer to Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations Contractual Uncertainties Related to
Certain Facilities Hector Garza Residential Treatment Center of this
report for further discussion concerning this facility.
|
(8)
|
|
We closed the formerly leased Washington D.C. Facility in 2005 (we
acquired the facility in September 2007) and are currently considering
several options for use, including the operation of a new program.
|
(9)
|
|
Los Angeles County Jails represents eight individual locations in Los
Angeles County, California and the surrounding area. Initial contract dates
vary by agency and range from 1994 to 2008.
|
11
Table of
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Marketing and Business Development
Our principal customers are federal, state and local
government agencies responsible for adult and juvenile corrections, treatment
and educational services. We manage our business development efforts to address
opportunities available in all of our divisions and potential markets. While
such opportunities necessarily include forming relationships with new
customers, we also believe that further potential lies in the management of our
existing relationships through improved bed management (including both
utilization and customer mix) and through enhancements of our contract terms. From
time to time, we will also evaluate opportunities for accretive acquisition.
In most instances, we pursue development
opportunities through Requests for Proposal (RFPs) or Requests for
Qualifications (RFQs), which are submitted in response to government agencies
solicitations for bids. The decision to respond to such solicitations is based
upon several factors, including managements assessment of customer needs, our
ability to service the needs in an operationally successful and acceptably
profitable manner, and the fit of the potential program within our existing
portfolio and strategic objectives. The solicitations generally require the
bidder to demonstrate relevant operational experience. Furthermore, the
response must also include descriptions of the services to be provided by the
bidder and the price at which the bidder is willing to provide them. Services
can include not only direct care, but also the design, construction, or
renovation of the related facility.
If we believe a project described in an RFP is
consistent with our strategic business plan, we will submit a proposal to the
requesting agency. When responding to RFPs, we typically incur costs ranging
from $10,000 to $100,000 per proposal. In addition, we could incur substantial
costs to acquire options to lease or purchase land for a proposed facility or
to lease or purchase an existing building to house a program. The preparation
of a response usually requires four to 12 weeks. The award process usually
takes an additional three to nine months. If new construction is required by
the contract, the selected companys operation of the facility generally begins
between nine and 18 months following award announcement, although in some cases
as early as four months. In instances where construction is required, our
success depends, in part, upon our ability to acquire property that is not only
satisfactory for programmatic needs but also that lies in a community where
social opposition does not significantly impede our ability to operate. We may
incur significant expenses in responding to such opposition, and our response
may not be successful. In addition, we may choose not to respond to an RFP or
may withdraw a submitted proposal if significant legal action or other forms of
opposition are anticipated or encountered.
In addition to responding to RFPs, we also rely upon
court-referrals, insurance- or managed care-referrals, and self-referrals for
business growth, particularly in our juvenile and adult community-based
treatment programs. In such instances, court and community liaisons play a
significant role in developing our growing network of clients.
Contracts
Our facility operating contracts generally provide
that we will be compensated via an occupant per diem rate, fees for treatment
services, guaranteed take-or-pay terms, a fixed fee, or cost-plus
reimbursement. Factors we consider in determining billing rates include (1) the
specified programs provided for by the contract and the related staffing
levels, (2) wage levels customary in the respective geographic area, (3) whether
the proposed facility is to be leased or purchased, and (4) the
anticipated average occupancy levels that we believe could reasonably be
maintained (and the ramp up schedule required to reach stable populations). Compensation
is invoiced in accordance with the applicable contract and is typically paid on
a monthly basis. Some of our juvenile education contracts provide for annual
payments.
We pursue new contracts that leverage our existing
infrastructure and capabilities. A significant portion of our opportunities are
contracts producing revenue that varies with the number of individuals housed
or served, the types of services provided and/or the frequency of the service.
The balance of our contracts are take-or-pay contracts, which provide a fixed
minimum revenue stream regardless of occupancy.
Competition
Because our services encompass several diverse
markets, we view our competition within these separate markets. We believe our
principal non-governmental competitors in the Adult Secure market are
Corrections Corporation of America, Inc., The Geo Group, Inc., and
Management and Training Corporation. Within our two other segments Abraxas
Youth and Family Services and Adult Community-Based Services we typically encounter
a significantly more fragmented competitor base, which includes not only
for-profit operators like ourselves but also not-for-profit organizations.
Within the Abraxas Youth and Family Services division, some of our primary
non-governmental competitors include ViaQuest, Youth and Family Centered
Services, Securicor New Century and Ramsay Youth Services. Our larger
non-governmental competitors in the adult community-based market include Dismas
House, Bannum, Gateway, Salvation Army and Volunteers of America.
12
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Employees
At December 31, 2008, we had 4,109 full-time
employees and 300 part-time employees. We employ management, administrative and
clerical, security, educational and counseling services, health services and
general maintenance personnel. Approximately 828 employees at four of our
facilities are represented by labor unions.
Regulations
The industry in which we operate is subject to
federal, state and local regulations administered by a variety of regulatory
authorities. Generally, prospective providers of correctional, detention,
educational, treatment and community-based services must comply with a variety
of applicable federal, state and local regulations, including correctional,
education, healthcare, environmental and safety regulations. Our contracts
frequently include extensive reporting requirements, including mandatory
supervision with on-site monitoring by representatives of our contracting
government agencies, as well as audits by these and other governmental
departments.
In addition to regulations requiring certain
contracting government agencies to enter into a competitive bidding procedure
before awarding contracts, the laws of certain jurisdictions may also require
us to award subcontracts on a competitive basis or to subcontract with
businesses owned by women or members of minority groups.
Business Concentration
For the years ended December 31, 2008, 2007 and
2006, 34.2%, 32.6% and 29.1%, respectively, of our consolidated revenues were
derived from multiple contracts with the BOP. No other single customer makes up
greater than 10% of our consolidated revenues for these years.
Insurance
We maintain general liability insurance for all of
our operations at an amount equal to $10 million per occurrence per facility
and in the aggregate. We also maintain insurance in amounts management deems
adequate to cover property and casualty risks, workers compensation, and
directors and officers liability.
Our contracts and the statutes of certain states in
which we operate typically require us to maintain insurance. Our contracts
provide that, in the event we do not maintain such insurance, the contracting
agency may terminate its agreement with us. We believe that we are in
compliance in all material respects with these requirements.
Environmental
Matters
We
are subject to various federal, state, and local environmental laws and
regulations, and these laws can impose strict liability for the discharge of
hazardous or toxic substances. As an owner and operator of facilities, we are
subject to these laws and could be responsible for the discharge of
contaminants at our facilities. We are not currently incurring material costs
associated with environmental compliance or remediation, although in the event
we had an environmental issue at any of our current or previously-owned
facilities,
the cost
of complying with these environmental laws could materially adversely affect
our financial condition and results of operations.
13
Table of
Contents
ITEM 1A
.
RISK FACTORS
Our significant level of indebtedness could
adversely affect our financial condition.
We
have a significant amount of indebtedness. Our total consolidated
indebtedness as of December 31, 2008 was approximately $320.5
million. Our ability to make scheduled payments or to refinance our debt
obligations depends on our financial and operating performance, which is
subject to prevailing economic and competitive conditions and to certain other
financial, business and other factors beyond our control. We cannot assure you
that we will maintain a level of cash flows from operating activities
sufficient to permit us to pay the principal, premium, if any, and interest and
additional interest, if any, on our indebtedness. We may need to reduce
or delay capital expenditures, sell assets, seek additional capital or
restructure or refinance all or a portion of our indebtedness on or before
maturity. However, we may not be able to complete these alternative
measures on commercially reasonable terms or at all. Additionally, a
significant portion of our assets is owned, and a significant percentage of our
revenue is generated, by our subsidiaries. Our cash flows and our ability to
repay our indebtedness depends upon the performance of these subsidiaries and
their ability to make distributions. See Managements Discussion and
Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources.
Certain
of our borrowings, including any borrowings under our Amended Credit Facility,
will be at variable rates of interest and expose us to interest rate risk. If
interest rates increase, our debt service obligations on the variable rate indebtedness
would increase even though the amount borrowed remained the same, and our net
income would decrease.
The volatility and disruption of the
capital and credit markets and adverse changes in the economy may negatively
impact our ability to access financing, revenues and earnings.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than twelve months. Since the third quarter of 2008
and continuing through the first quarter of 2009, the volatility and disruption
have reached unprecedented levels. The markets have exerted downward
pressure on availability of liquidity and credit capacity for many issuers,
including us.
While we intend
to finance our operations with existing cash, cash flow from operations and
borrowing under our Amended Credit Facility, we may require additional
financing to support our continued growth. However, due to the existing
uncertainty in the capital and credit markets, access to capital, including
capital through the accordion feature of our Amended Credit Facility, on terms
acceptable to us may be limited or unavailable.
Several large financial institutions have either recently failed or been
dependent on the assistance of the federal government to continue to operate as
a going concern. We can provide no assurance that all of the banks that have
made commitments to us under our revolving credit facility will continue to
operate as a going concern in the future or that such banks would be willing to
participate in an expansion to the Amended Credit Facility in the event the
Company desires to exercise the accordion feature of the Amended Credit
Facility.
If any of the banks in the lending group were to fail or decline to
participate in the expansion of the credit facility under the accordion
feature, it is possible that the capacity under the revolving credit facility
would not be expanded by the full amount that might be requested by us under
the accordion feature and might even be reduced to below the existing committed
availability. In the event that we could not obtain an increased commitment by
virtue of the accordion feature of the Amended Credit Facility, we could be
required to obtain capital from alternate sources in order to continue our
growth through future development and expansion initiatives. Our options for addressing such capital
constraints would include, but not be limited to (i) obtaining commitments
from the remaining banks in the lending group or from new banks to fund
increased amounts under the terms of the Amended Credit Facility, or its
accordion feature, (ii) accessing the public capital markets, or (iii) delaying
certain of the Companys planned expansion projects. Such alternatives in the
current market would likely be on terms less favorable than under existing
terms, which could have a material effect on the Companys consolidated
financial position, results of operations, or cash flows.
The restrictive covenants in our Senior Notes and
Amended Credit Facility may affect our ability to operate our business
successfully.
The
indenture governing our Senior Notes and our Amended Credit Facility contain
various covenants that limit our ability to engage in specified types of
transactions. These covenants limit our ability to, among other things: incur
additional debt; pay dividends or other distributions; make certain types of
investments; incur liens; restrict distributions from our subsidiaries; enter
into transactions with affiliates; and consolidate or merge with or into, or
sell substantially all of our assets to, another.
14
Table of
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In
addition, our Amended Credit Facility requires us to maintain specified
financial ratios. Any failure to comply with the restrictions of our Amended
Credit Facility and the indenture governing our Senior Notes or any other
subsequent financing agreements may result in an event of default. An
event of default may allow the creditors to accelerate the related debt as well
as any other debt to which a cross-acceleration or cross-default provision
applies and terminate all commitments to extend further credit.
Furthermore, we have pledged a significant portion of our assets as collateral
under our Amended Credit Facility. If we default on the financial
covenants in our Amended Credit Facility, our lenders could proceed against the
collateral granted to them to secure that indebtedness, which would have a
material adverse effect on our business, results of operation and financial
condition.
Despite current indebtedness levels, we may
still be able to incur substantially more debt. This could further exacerbate
the risks described above.
The
terms of the indenture governing our Senior Notes and our Amended Credit
Facility restrict our ability to incur but do not prohibit us from incurring
significant additional indebtedness in the future. We have several
ongoing expansion projects underway and anticipate commencing other projects,
and we will likely need to finance these future outlays of capital since our
cash on hand and cash flows from operations will not be sufficient to fully
fund all of these potential expenditures. Depending on market conditions
and other factors, we will consider additional debt financing to fund these
outlays of capital as well as to refinance a portion of our existing
indebtedness. If new indebtedness is added to our and our
subsidiaries current debt levels, the related risks that we and they now face
could intensify.
We are dependent on government appropriations, which may not
be made on a timely basis or at all and may be adversely impacted by budgetary
constraints at the federal, state and local levels.
Our
cash flow is subject to the receipt of sufficient funding of and timely payment
by contracting governmental entities. If the appropriate governmental agency
does not receive sufficient appropriations to cover its contractual
obligations, a contract may be terminated or the amounts payable to us may be deferred
or reduced. Also, we are dependent upon funding for anticipated future
contracts, including those for certain facility expansions and new construction
projects that we have undertaken, such as those at D. Ray James and Hudson,
Colorado.
Federal, state, county and local governments have encountered, and are
expected to continue to encounter, significant budgetary constraints that may
result in a reduction of spending on the outsourced services that we provide.
Such budgetary limitations may cause the contractual commitments to be reduced
or even eliminated, which would make it unprofitable to continue operating a
certain facility and require us to find alternate customers or close such
facility.
Any delays
in payment, or the termination of a contract, could have a material adverse
effect on our cash flow and financial condition, which may make it difficult to
satisfy our payment obligations on our indebtedness, including the Amended
Credit Facility, in a timely manner.
In addition, as a
result of, among other things, recent economic developments, federal, state and
local governments have encountered, and may continue to encounter, unusual
budgetary constraints. As a result, a number of state and local governments are
under pressure to control additional spending or reduce current levels of
spending which could limit or eliminate appropriations for the facilities that
we operate. Additionally, as a result of these factors, we may be requested in
the future to reduce our existing per diem contract rates or forego prospective
increases to those rates. Budgetary limitations may also make it more difficult
for us to renew our existing contracts on favorable terms or at all. Further, a
number of states in which we operate are experiencing significant budget deficits
for fiscal year 2009. We cannot assure that these deficits will not result in
reductions in per diems, delays in payment for services rendered or unilateral
termination of contracts. Recently, the State of California has notified
vendors providing services to the state that it might have to temporarily issue
IOUs. We have not received notice that our services will be subject to such
IOUs and our outstanding receivables related to California are consistent with
normal payment practices for the State.
As
a result of this increased budgetary pressure, in certain cases we have granted
a few of our customers relief from formulaic increase provisions in their
agreements and some of our customers have not included in their appropriation
legislation amounts that would increase the per diem rates payable to us or
have otherwise attempted to reduce the contract value. Contractual rate
increases are generally intended to offset increases in expenses and inflation.
To the extent rates are not increased or are reduced, our profitability will be
adversely affected. Examples of this budget pressure include the need of
the federal government to operate under a continuing resolution as a result of
its failure to pass a new 2008/2009 year budget and reported budget pressures
in most states including Alaska, Arizona, California, Colorado, Georgia,
Illinois, Pennsylvania and Texas.
15
Table of Contents
We are subject to the short-term nature of
government contracts.
Many
governmental agencies are legally limited in their ability to enter into fixed
long-term contracts that would bind elected officials responsible for future
budgets. Therefore, many contracts with government agencies, including the BOP,
typically either have a very short term or, even when for a longer term, are
subject to termination on short notice without cause. The majority of our
contracts have primary terms of one to three years. Our contracts with
governmental agencies may contain one or more renewal options that may be
exercised only by the contracting governmental agency. Some of these contracts
may not be renewed by the governmental agency and no assurance can be given that
the governmental agency will exercise a renewal option in the future. In
addition, the governmental agency may elect to solicit bids pursuant to a RFP
or RFQ rather than exercise a renewal option. We may not be successful in
responding to a RFP or RFQ.
The
non-renewal or termination of any of our significant contracts with
governmental agencies, our inability to secure new facility management
contracts from others or our failure to successfully respond to a RFP or RFQ
could materially adversely affect our financial condition, results of operation
and liquidity. To the extent we have made significant capital expenditures and
have short-term contracts with our customers that are not renewed or extended,
we may not recover our entire capital investment.
Our ability to win new contracts to develop and manage
correctional, detention and treatment facilities depends on many factors
outside our control.
Our
growth is generally dependent upon our ability to win new contracts to develop
and manage new or expanded correctional, detention and treatment facilities.
This depends on a number of factors we cannot control, including crime rates
and sentencing patterns in various jurisdictions. Accordingly, the demand for
our facilities could be adversely affected by the relaxation of enforcement
efforts, leniency in conviction and sentencing practices or through the legal
decriminalization of certain activities that are currently proscribed by
criminal laws. For instance, changes in laws relating to drugs and controlled
substances or illegal immigration could reduce the number of persons arrested,
convicted and sentenced, thereby potentially reducing demand for correctional
facilities to house them and community-based services to transition offenders
back into the community. Similarly, reductions in crime rates could lead to
reductions in arrests, convictions and sentences requiring correctional
facilities.
When
seeking bids, most governmental entities evaluate the financial strength of the
bidders. To the extent they believe we do not have sufficient financial
resources, we will be unable to effectively compete for bids. Additionally, our
success in obtaining new awards and contracts may depend, in part, upon our
ability to locate land that can be leased or acquired on favorable terms.
Furthermore, desirable locations may be in or near populated areas and,
therefore, may generate legal action or other forms of opposition from
residents in areas surrounding a proposed site.
Our profitability may suffer if the number
of offenders occupying our correctional, detention and treatment facilities
decreases or there is a shift in occupancy among our divisions.
Our
correctional, detention and treatment facilities are dependent upon
governmental agencies supplying offenders and we do not control occupancy
levels at our facilities. We believe the rate of growth experienced in the
adult secure sector during the late 1980s and early 1990s is stabilizing.
Historically,
a substantial portion of our revenues has been generated under contracts that
specify a net rate per day per resident, or a per diem rate, sometimes with no
minimum guaranteed occupancy levels, even though most correctional facility
cost structures are relatively fixed. Under such a per diem rate structure, a
decrease in occupancy levels at a particular facility could have a material
adverse effect on the financial condition and results of operations at such
facility. A decrease in the occupancy of certain juvenile justice, education
and treatment facilities would have a more significant impact on our operating
results than a decrease in occupancy in the Adult Secure division due to higher
per diem revenue at certain juvenile facilities.
Certain
social commentators and various political or governmental representatives suggest
that community-based corrections of adults may be emphasized in the future as
alternatives to traditional incarceration. We have historically experienced
higher operating margins in the Adult Secure and the Adult Community-Based
sectors than in the juvenile services sector. A shift in occupancy among our
segments of business operations could result in a decrease in our
profitability.
16
Table of
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A failure to comply with existing
regulations could result in material penalties or non-renewal or termination of
our contracts.
Our
industry is subject to a variety of federal, state, county and local
regulations, including education, environmental, health care and safety
regulations, which are administered by various regulatory authorities. We may
not always successfully comply with these regulations, and failure to comply
could result in material penalties or non-renewal or termination of facility
management contracts. The contracts typically include extensive reporting
requirements and supervision and on-site monitoring by representatives of
contracting governmental agencies. Corrections officers are customarily
required to meet certain training standards, and in some instances facility
personnel are required to be licensed and subject to background investigation.
Certain jurisdictions also require that subcontracts be awarded on a
competitive basis or that we subcontract with businesses owned by members of
minority groups. The failure to comply with any applicable laws, rules or
regulations and the loss of any required license could adversely affect the
financial condition and results of operations at our affected facilities.
Governmental agencies may investigate and
audit our contracts and, if any improprieties are found, we may be required to
refund revenues we have received, and/or to forego anticipated revenues and may
be subject to penalties and sanctions, including prohibitions on our bidding in
response to RFPs.
Governmental
agencies we contract with have the authority to audit and investigate our
contracts with them. As part of that process, some governmental agencies review
our performance on the contract, our pricing practices, our cost structure and
our compliance with applicable laws, regulations and standards. If the agency
determines that we have improperly allocated costs to a specific contract, we
may not be reimbursed for those costs and we could be required to refund the
amount of any such costs that have been reimbursed. If a government audit
uncovers improper or illegal activities by us or we otherwise determine that
these activities have occurred, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeitures of profits, suspension of payments, fines and suspension or
disqualification from doing business with the government. Any adverse
determination could adversely impact our ability to bid in response to RFPs in
one or more jurisdictions and significantly reduce the probability of our
success in the bid process for future contracts.
If we fail to satisfy our contractual
obligations, our ability to compete for future contracts and our financial condition
may be adversely affected.
Our
failure to comply with contract requirements or to meet our clients
performance expectations when performing a contract could materially and
adversely affect our financial performance and our reputation, which, in turn,
would impact our ability to compete for new contracts. Our failure to meet
contractual obligations could also result in substantial actual and
consequential damages. In addition, our contracts often require us to indemnify
clients for our failure to meet performance standards. Some of our contracts
contain liquidated damages provisions and financial penalties related to
performance failures. Although we have liability insurance, the policy limits
may not be adequate to provide protection against all potential liabilities.
Competitors in our industry may adversely
affect the profitability of our business.
We
must compete with government entities and other private operators on the basis
of cost, quality and range of services offered, experience in managing
facilities, reputation of personnel and ability to design, finance and
construct new facilities on a cost effective competitive basis. While there are
some barriers for companies seeking to enter into the management and operation
of correctional, detention and treatment facilities, these barriers have not
been sufficient to materially limit additional competition. Certain areas of
our operation may not pose a significant barrier to entry into the market by
private operators. For example, private operators may not find it as difficult
to bid for juvenile treatment, educational and detention services and
pre-release correctional and treatment services as they do adult correctional
and detention services.
Further,
our government customers may assume the management of a facility currently
managed by us upon the termination of the corresponding management contract or,
if such customers have capacity at their facilities, may take inmates currently
housed in our facilities and transfer them to government run facilities. The
resulting decrease in occupancy levels would reduce our revenue due to the per
diem rate structure and could result in a significant decrease in the
profitability of our business.
17
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A disturbance or violent occurrence in one
of our facilities could result in closure of a facility or harm to our
business.
An
escape, riot, disturbance or violent occurrence at one of our facilities could
adversely affect the financial condition, results of operations and liquidity
of our operations. Among other things, the negative publicity generated as a
result of an event could adversely affect our ability to retain an existing
contract or obtain future ones. In addition, if such an event were to occur,
there is a possibility that the facility where the event occurred may be shut
down by the relevant governmental agency. A closure of certain of our
facilities could adversely affect the financial condition, results of
operations and liquidity of our operations. Such negative events (including an
occurrence at a competitors facility) may also result in a significant
increase in our liability insurance costs.
Negative media coverage, including
inaccurate or misleading information, could adversely affect our reputation and
our ability to bid for government contracts.
The
media frequently focuses its attention on private operators contracts with
governmental agencies. If the media coverage of private operators is negative,
it could influence government officials to slow the pace of outsourcing
government services, which could reduce the number of RFPs. The media may also
focus its attention on the activities of political consultants engaged by us,
even when their activities are unrelated to our business, and we may be tainted
by adverse media coverage about their activities. Moreover, inaccurate,
misleading or negative media coverage about us could harm our reputation and, accordingly,
our ability to bid for and win government contracts.
We often incur significant costs before
receiving related revenues, which could result in cash shortfalls and a risk of
not recovering our investment.
When
we are awarded a contract to manage a new facility, we may incur significant
expenses before we receive contract payments. These expenses include purchasing
real estate, constructing new facilities, leasing office space, purchasing
office equipment and hiring and training personnel. As a result, when the
government does not fund a facilitys pre-opening and start-up costs, we may be
required to invest significant sums of money before receiving related contract
payments. In addition, payments due to us from governmental agencies may be delayed
due to billing cycles or as a result of failures by our governmental customers
to attain necessary budget approvals and finalize contracts in a timely manner.
Several juvenile services contracts related to educational services provide for
annual collection several months after a school year is completed. In addition,
a contract may be terminated prior to its scheduled expiration and as a result
we may not recover these expenses or realize any return on our investment.
We
may choose to undertake development projects without written commitments to
make use of such facilities. We may not be able to obtain contracts for these
facilities in a timely fashion, if at all. To the extent we do not obtain
contracts, we could be unable to recover our investment and our financial
condition and results of operations would be adversely affected.
We may be unable to attract and retain sufficient
qualified personnel necessary to sustain our business.
Our
delivery of services is labor-intensive. When we are awarded a contract, we
must hire operating management, security, case management and other personnel.
The success of our business requires that we attract, develop, motivate and
retain these personnel. Our ability to recruit and retain qualified individuals
varies by facility and is related to the socio-economic factors in the
particular community in which the facility operates. The Department of Labor
wages we offer our employees are often higher than wages they could obtain
elsewhere in the community. However, if the local economy where a facility is
located is robust and unemployment is low, we may have difficulty hiring and
retaining qualified personnel. In addition, there are inherent risks associated
with the nature of the services we provide, which could cause certain qualified
individuals to seek other employment opportunities. We have typically
experienced high turnover of personnel in our juvenile and adult secure
facilities within the first year of their employment. Our inability to hire
sufficient personnel on a timely basis or the loss of significant numbers of
personnel could adversely affect our business.
If we do not successfully integrate the
businesses that we acquire, our results of operations could be adversely
affected.
We
may be unable to manage businesses that we may acquire profitably or integrate
them successfully without incurring substantial expenses, delays or other
problems that could negatively impact our results of operations. Acquisitions
generally require the integration of facilities, some of which may be located
in states in which we do not currently have operations.
18
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Moreover,
business combinations involve additional risks, including:
·
diversion of
managements attention;
·
loss of key
personnel;
·
assumption of
unanticipated legal or financial liabilities;
·
our becoming
significantly leveraged as a result of the incurrence of debt to finance an
acquisition;
·
unanticipated
operating, accounting or management difficulties in connection with the
acquired entities;
·
amortization
or possible impairment charges of acquired intangible assets, including
goodwill; and
·
dilution to
our earnings per share.
Also,
client dissatisfaction or performance problems with an acquired business could
materially and adversely affect our reputation as a whole. Further, the
acquired businesses may not achieve the revenues and earnings we anticipated.
Because environmental laws impose strict,
as well as joint and several, liability for clean up costs, unforeseen
environmental risks could prove to be costly.
Our
facilities, and any facilities that we may acquire in the future, may be
subject to unforeseen environmental risks. The federal Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) imposes
strict, as well as joint and several, liability for certain environmental
cleanup costs on several classes of potentially responsible parties, including current
owners and operators of the property. Other federal and state laws in certain
circumstances may impose liability for environmental remediation, which costs
may be substantial. Further, the operation of our facilities, and the
development of new facilities, requires that we obtain, and comply with,
permits and other authorizations under
environmental laws. Obtaining
such permits and authorizations may affect our existing facilities or could
delay the opening of new facilities, which could have a material adverse effect
on our business and results of operations.
We have in the past incurred, and may
continue to incur, significant expenses for facilities that we no longer
operate.
If
we close a facility, we may remain committed to perform our obligations under
the applicable lease, which would include, among other things, payment of the
base rent for the balance of the lease term. We may also be required to incur
other expenses with respect to such facilities. The potential losses associated
with our inability to cancel leases may result in our keeping open
underperforming facilities. As a result, ongoing lease operations at closed or
under-performing facilities could impair our results of operations.
We may continue to operate under
unprofitable contracts at facilities that we own to offset expenses associated
with ownership of the facility.
If
our operations are unprofitable at a leased facility or if the leased facility
is performing significantly below targeted levels, we would typically terminate
the contract and the lease. However, we may continue to operate our contract at
an owned facility to offset the expenses associated with ownership. Continued
performance of such a contract could have a material adverse effect on our
business and results of operations.
We depend on a limited number of
governmental customers for a significant
portion of our revenues.
We
currently derive, and expect to continue to derive, a significant portion of
our revenues from the BOP and various state agencies. The loss of, or a
significant decrease in, business from the BOP or those state agencies could
seriously harm our financial condition and results of operations. Our BOP
contracts accounted for approximately 34.2% of our total revenues for the year
ended December 31, 2008 ($132.3 million), 32.6% of our total revenues for
the year ended December 31, 2007 ($117.5 million) and 29.1% of our total
revenues for the year ended December 31, 2006 ($105.1 million). We expect
to continue to depend upon the BOP and a relatively small group of other
governmental customers for a significant percentage of our revenues.
Because our revenues can fluctuate from
period to period, we may face short-term funding shortfalls from time to time.
Revenues
can fluctuate from year to year due to changes in government funding policies,
changes in the number of clients referred to our facilities by governmental
agencies, the opening of new facilities or the expansion of existing facilities
and the termination of contracts for a facility or the closure of a facility.
Our revenues fluctuate from quarter to quarter, based on the number of
contracted days in each quarter. Because our revenues can vary, we may face
short-term funding shortfalls from time to time. In addition, full-year results
are not likely to be a direct multiple of any particular quarter or combination
of quarters.
19
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Resistance to privatization of correctional
and detention facilities could result in our inability to obtain new contracts
or the loss of existing contracts.
Management
of correctional and detention facilities, particularly of adult secure
facilities, by private entities has not achieved complete acceptance by either
the government or the public. The movement toward privatization of correctional
and detention facilities has also encountered resistance from certain groups,
such as labor unions, local sheriffs departments, religious organizations and
groups believing that correctional and detention facility operations should
only be conducted by government agencies. Changes in the dominant political
party in any market in which correctional facilities are located could have an
adverse impact on privatization. Furthermore, some government agencies are not
legally permitted to delegate their traditional management responsibilities for
correctional and detention facilities to private companies.
In
addition, as a private prison manager, we are subject to government legislation
and regulation restricting the ability of private prison managers to house
certain types of inmates, such as inmates from other jurisdictions or inmates
at medium or higher security levels. Legislation has been enacted in several
states, and has previously been proposed in the United States House of
Representatives, containing such restrictions. Any such legislation may have a
material adverse affect on us.
Any
of these resistances may make it more difficult for us to renew or maintain
existing contracts, to obtain new contracts or sites on which to operate new
facilities or to develop or purchase facilities and lease them to government or
private entities, any or all of which could have a material adverse effect on
our business.
We are subject to significant insurance
costs.
Workers
compensation, employee health and general liability insurance represent
significant costs to us. We may continue to incur increasing insurance costs,
typically due to adverse claims experience or rising healthcare costs in
general. Due to concerns over corporate governance and recent corporate
accounting scandals, liability and other types of insurance have become more
difficult and costly to obtain. In addition, stockholder lawsuits will
generally serve to increase our directors and officers liability insurance.
Unanticipated additional insurance costs could adversely impact our results of
operations and cash flows, and the failure to obtain or maintain any necessary
insurance coverage or the inability of an insurance carrier to perform under
its obligations through issued coverage could have a material adverse effect on
us.
We are subject to risks associated with
ownership of real estate and related operation of our facilities.
Our
ownership of correctional and detention facilities subjects us to risks
typically associated with investments in real estate. Moreover, correctional
and detention facilities are relatively illiquid and therefore, our ability to
divest ourselves of one or more of our facilities promptly in response to
changed conditions is limited. Investments in correctional and detention
facilities subject us to risks involving potential exposure to uninsured loss.
Our operating costs may be affected by the obligation to pay for the cost of
complying with existing laws, ordinances and regulations, as well as the cost
of complying with future legislation. Our facilities are also subject to
hazards such as fire, hurricanes, earthquakes and other natural disasters.
For example, Hurricane Ike that came ashore in Texas in September 2008
damaged our Beaumont Transitional Treatment Center, Leidel Comprehensive
Sanction Center and Reid Community Residential Facility. See Item 7- Managements
Discussion and Analysis of Financial Condition and Results of
OperationsSignificant 2008 Events. In addition, although we maintain
insurance for many types of losses, there are certain types of losses, such as
losses from earthquakes, riots and acts of terrorism, which may be either uninsurable
or for which it may not be economically feasible to obtain insurance coverage.
As a result, we could lose both our capital invested in, and anticipated
profits from, one or more of the facilities we own. Further, we could
experience losses that may exceed the limits of our insurance coverage.
We may be adversely affected by inflation.
Many
of our facility management contracts provide for fixed management fees or fees
that increase by only small amounts during their term. If, due to inflation or
other causes, our operating expenses, such as wages and salaries of our
employees, and insurance, medical and food costs, increase at rates faster than
increases, if any, in our management fees, then our profitability would be
adversely affected.
20
Table of
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ITEM 1B
.
UNRESOLVED
STAFF COMMENTS
None
ITEM 2
.
PROPERTIES
We
lease office space for our corporate headquarters in Houston, Texas and a
regional administrative office in Pittsburgh, Pennsylvania. We also lease
various facilities we are currently operating or developing. For a listing of
owned, leased and managed facilities, see Business - Facilities in Item 1 of
this report.
ITEM 3.
LEGAL PROCEEDINGS
We
are party to various legal proceedings, including those noted below. While
management presently believes that the ultimate outcome of these proceedings
will not have a material adverse effect on our financial position, overall
trends in results of operations or cash flows, litigation is subject to
inherent uncertainties, and unfavorable rulings could occur. An unfavorable
ruling could include monetary damages or equitable relief, and could have a
material adverse impact on the net income of the period in which the ruling
occurs.
Valencia County Detention Center
In
April 2007, a lawsuit was filed against the Company in the Federal
District Court in Albuquerque, New Mexico, by Joe Torres and Eufrasio Armijo,
who each alleged that he was strip searched at the Valencia County Detention
Center (VCDC) in New Mexico in violation of his federal rights under the
Fourth, Fourteenth and Eighth amendments to the U.S. Constitution. The
claimants also alleged violation of their rights under state law and sought to
bring the case as a class action on behalf of themselves and all detainees at
VCDC during the applicable statutes of limitation. The plaintiffs sought
damages and declaratory and injunctive relief. Valencia County is also a
named defendant in the case and operated the VCDC for a significantly greater
portion of the period covered by the lawsuit.
In
December 2008, the parties agreed to a proposed stipulation of settlement
and the Court has preliminarily approved the settlement. The settlement amount under the terms of the
agreement is $3.3 million.
Cornells portion of the stipulated
settlement, based on the number of inmates housed at VCDC during the time
Cornell operated the facility in comparison to the number of inmates housed at
the facility during the time Valencia County operated the facility, is $1.2
million and was funded principally through our general liability and
professional liability coverage.
In
the year ended December 31, 2007, we previously provided insurance
reserves for this matter (as part of our regular review of reported and
unreported claims) totaling approximately $0.5 million. During the fourth quarter of 2008, we
recorded an additional settlement charge of approximately $0.7 million and the
related reimbursement from our general liability and professional liability
insurance. The charge and reimbursement
were recognized in general and administrative expenses for the year ended December 31,
2008. The reimbursement was funded by
the insurance carrier in the first quarter of 2009 into
a settlement account, where it will
remain until payments are made to the settlement class members. The Court
granted preliminary approval of the settlement in the first quarter of 2009,
and the claims administration process is underway. We expect the claims
administration process to be completed and the final court approval of the
settlement in the fourth quarter of 2009.
Shareholder Lawsuits
On
October 19, 2006, a purported class action complaint was filed in the
District Court of Harris County, Texas, 269th Judicial District (No. 2006-67413)
by Ted Kinbergy, an alleged stockholder of Cornell. The complaint names as
defendants Cornell and each member of the board of directors at the time of the
suit, as well as Veritas Capital Fund III, L.P. (Veritas). The complaint
alleges, among other things, that (i) the defendants have breached
fiduciary duties they assertedly owed to our stockholders in connection with
our entering into the Agreement and Plan of Merger, dated as of October 6,
2006, with Veritas, Cornell Holding Corp., and CCI Acquisition Corp., and (ii) the
merger consideration is unfair and inadequate. The plaintiffs sought, among
other things, an injunction against the consummation of the merger. The
proposed merger was rejected at a special meeting of our stockholders held on January 23,
2007. Consequently, we believe the case is moot and expect the plaintiffs to
seek dismissal of their claims accompanied by a request for legal fees that may
be owed. We do not expect the resolution of this matter to have a
material adverse effect on our financial condition, results of operations or
cash flows.
21
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Other
We
hold insurance policies to cover potential director and officer liability, some
of which may limit our cash outflows in the event of a decision adverse to us
in the matters discussed above. However, if an adverse decision in these
matters exceeds the insurance coverage or if the insurance coverage is deemed
not to apply to these matters, it could have a material adverse effect on us,
our financial condition, results of operations and future cash flows.
Additionally,
we currently and from time to time are subject to claims and suits arising in
the ordinary course of business, including claims for damages for personal
injuries or for wrongful restriction of or interference with offender
privileges and employment matters. If an adverse decision in these matters
exceeds our insurance coverage, or if our coverage is deemed not to apply to
these matters, or if the underlying insurance carrier was unable to fulfill its
obligation under the insurance coverage provided, it could have a material
adverse effect on our financial condition, results of operations or cash flows.
While
the outcome of such other matters cannot be predicted with certainty, based on
the information known to date, we believe that the ultimate resolution of these
matters will not have a material adverse effect on our financial condition, but
could be material to operating results or cash flows for a particular reporting
period.
ITEM
4
.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
PART II
ITEM 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Our
common stock is listed on the New York Stock Exchange (NYSE) under the symbol
CRN. As of March 6, 2009, there
were approximately 504 shareholders of record of our common stock. The
quarterly high and low closing sales prices for our common stock for fiscal
years 2008 and 2007 are shown below.
|
|
High
|
|
Low
|
|
2007:
|
|
|
|
|
|
First Quarter
|
|
$
|
21.45
|
|
$
|
18.22
|
|
Second Quarter
|
|
25.43
|
|
20.32
|
|
Third Quarter
|
|
25.42
|
|
19.14
|
|
Fourth Quarter
|
|
27.69
|
|
21.44
|
|
2008:
|
|
|
|
|
|
First Quarter
|
|
$
|
23.01
|
|
$
|
16.15
|
|
Second Quarter
|
|
24.50
|
|
20.16
|
|
Third Quarter
|
|
28.32
|
|
22.00
|
|
Fourth Quarter
|
|
26.00
|
|
16.50
|
|
We
have never declared or paid cash dividends on our capital stock. We currently
intend to retain excess cash flow, if any, for use in the operation and
expansion of our business (which could include the reduction of outstanding
borrowings) and do not anticipate paying cash dividends on our common stock in
the foreseeable future. The payment of dividends is within the discretion of
the Board of Directors and is dependent upon, among other factors, our results
of operations, financial condition, capital requirements, restrictions, if any,
imposed by financing commitments and legal requirements. Our 10.75% Senior
Notes, as well as our revolving credit facility contain certain restrictions on
our ability to pay dividends. See Managements Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
Long-Term Credit Facilities in Item 7 of this report.
We
did not purchase any of our common stock in the fourth quarter of 2008.
22
Table of
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The
following table summarizes as of December 31, 2008 certain information
regarding equity compensation to our employees, officers, directors, and other
persons under our plans:
|
|
(A)
Number of
Securities to be
Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
|
|
(B)
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
|
(C)
Number of
Securities Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column A)
|
|
Plan Category
|
|
|
|
|
|
|
|
Equity compensation plans approved by security
holders
|
|
408,825
|
|
$
|
15.82
|
|
746,317
|
(1)
|
Equity compensation plans not approved by security
holders
|
|
76,874
|
|
$
|
10.83
|
|
266,753
|
(2)
|
Total
|
|
485,699
|
|
$
|
15.03
|
|
1,013,070
|
|
(1)
Includes 133,550 shares issuable pursuant
to our Employee Stock Purchase Plan and 43,623 shares issuable pursuant to our
2000 Directors Stock Plan. The total number of shares issuable pursuant to our
Amended and Restated 1996 Stock Option Plan is equal to the greater of
1,500,000 shares or 15.0% of the number of shares issued and outstanding
immediately after the grant of any option under the Plan. Also includes 569,144 shares issuable
pursuant to our 2006 Equity Incentive Plan.
(2)
Includes 100,000 shares issuable pursuant
to our Deferred Compensation Plan and 166,753 shares issuable pursuant to our
2000 Broad-Based Employee Plan. The number of shares issuable pursuant to our
2000 Broad-Based Plan (2000 Plan) is equal to the greater of 400,000 shares or 4.0%
of the shares issued and outstanding immediately after the grant of any option
under the Plan.
Equity
Compensation Plans Not Approved by Security Holders
Deferred Compensation Plan
We
maintain a Deferred Compensation Plan for the purpose of providing deferred
compensation for eligible employees. The Deferred Compensation Plan is a
nonqualified plan.
A
participant in the Deferred Compensation Plan may defer into an account a
percentage of compensation each year up to 75.0% of the participants compensation
received from Cornell. In addition, we may make contributions to the Deferred
Compensation Plan on behalf of each participant. Compensation deferred by a
participant, or contributions made by us on behalf of a participant, will be
invested in mutual funds or the common stock of Cornell. Participants are fully
vested in their accounts and may elect to receive the amounts credited to their
accounts either in a lump sum or in five or ten-year annual installment
payments. In the event of a change of control (as defined in the Plan), the
amounts in each participants account will be paid to the participant in a lump
sum.
Warrants
In
conjunction with the issuance of subordinated notes in July 2000 (which
notes are no longer outstanding), we issued warrants to purchase 290,370 shares
of our common stock at an exercise price of $6.70. The warrants could only be
exercised by payment of the exercise price in cash to us, by cancellation of an
amount of warrants equal to the
fair market value of the
exercise price, or by the cancellation of indebtedness owed to the warrant
holder. During 2001, 168,292 shares of common stock were issued in conjunction
with the exercise and cancellation of 217,778 warrants. During 2007, the remaining 72,592 shares of
common stock were issued in conjunction with the exercise and cancellation of
the remaining 72,592 warrants.
23
Table of
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2000 Broad-Based Employee Plan
Under
our 2000 Plan, we may grant non-qualified stock options to our employees,
directors and eligible consultants for up to the greater of 400,000 shares or
4.0% of the aggregate number of shares of common stock issued and outstanding immediately
after the grant of any option under the 2000 Plan. The 2000 Plan options vest
over a period of up to five years and expire ten years from the grant date. The
vesting schedule and term are set by the Compensation Committee of the
Board of Directors. The exercise price of options issued pursuant to the 2000
Plan can be no less than the market price of our common stock on the date of
grant.
Upon
notice of an extraordinary transaction (as defined in the 2000 Plan), options
granted under the 2000 Plan become fully vested. Upon consummation of the
extraordinary transaction, such options, to the extent not previously
exercised, automatically terminate.
Performance Graph
The
following performance graph compares our cumulative total stockholder return at
December 31, 2008 to the Russell 2000 Stock Index and the Companys peer
group, assuming the investment of $100 on January 1, 2004, at closing
prices on December 31, 2003 and reinvestment of dividends. The peer group
companies are Corrections Corporation of America and The Geo Group, Inc.
Company Name
|
|
Dec-03
|
|
Dec-04
|
|
Dec-05
|
|
Dec-06
|
|
Dec-07
|
|
Dec-08
|
|
Cornell
Companies, Inc.
|
|
100.00
|
|
111.21
|
|
101.25
|
|
134.30
|
|
170.85
|
|
136.20
|
|
Peer
Group
|
|
100.00
|
|
136.18
|
|
146.31
|
|
236.53
|
|
317.95
|
|
184.26
|
|
Russell
2000 Index
|
|
100.00
|
|
118.32
|
|
123.72
|
|
146.42
|
|
144.16
|
|
95.44
|
|
24
Table of
Contents
ITEM 6
.
SELECTED
FINANCIAL DATA
The
following data has been derived from our audited financial statements,
including those included in this Form 10-K for the year ended December 31,
2008 and should be read in conjunction with the consolidated financial
statements and notes thereto and Item 7 - Managements Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere in this
report.
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006 (1)
|
|
2005 (2)
|
|
2004 (3)
|
|
|
|
(in thousands, except per share data)
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
386,724
|
|
$
|
360,604
|
|
$
|
360,855
|
|
$
|
310,775
|
|
$
|
277,190
|
|
Income from operations
|
|
62,197
|
|
45,009
|
|
44,798
|
|
27,866
|
|
14,459
|
|
Income (loss) from continuing operations before
provision (benefit) for income taxes and minority interest in consolidated
special purpose entity
|
|
38,239
|
|
20,745
|
|
21,728
|
|
6,143
|
|
(8,256
|
)
|
Income (loss) from continuing operations
|
|
22,636
|
|
11,910
|
|
12,580
|
|
3,928
|
|
(5,000
|
)
|
Minority interest in consolidated special purpose
entity
|
|
445
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
(707
|
)
|
(3,622
|
)
|
(2,433
|
)
|
Net income (loss)
|
|
22,191
|
|
11,910
|
|
11,873
|
|
306
|
|
(7,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
·
Basic
|
|
|
|
|
|
|
|
|
|
|
|
·
Income (loss) from continuing operations
|
|
$
|
1.55
|
|
$
|
.84
|
|
$
|
.90
|
|
$
|
.29
|
|
$
|
(.38
|
)
|
Discontinued operations, net of tax
|
|
|
|
|
|
(.05
|
)
|
(.27
|
)
|
(.18
|
)
|
Net income (loss)
|
|
$
|
1.55
|
|
$
|
.84
|
|
$
|
.85
|
|
$
|
.02
|
|
(.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
1.51
|
|
$
|
.82
|
|
$
|
.89
|
|
$
|
.29
|
|
(.38
|
)
|
Discontinued operations, net of tax
|
|
|
|
|
|
(.05
|
)
|
(.27
|
)
|
(.18
|
)
|
Net income (loss)
|
|
$
|
1.51
|
|
$
|
.82
|
|
$
|
.84
|
|
$
|
.02
|
|
(.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used to compute EPS:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
14,298
|
|
14,149
|
|
13,918
|
|
13,580
|
|
13,203
|
|
Diluted
|
|
14,698
|
|
14,480
|
|
14,059
|
|
13,695
|
|
13,203
|
|
25
Table of
Contents
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in thousands, except occupancy data)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential:
|
|
|
|
|
|
|
|
|
|
|
|
Service capacity (4) (9)
|
|
17,592
|
|
15,634
|
|
14,659
|
|
14,682
|
|
13,494
|
|
Contracted beds in operation (end of period)
(5) (9)
|
|
16,821
|
|
14,211
|
|
13,492
|
|
11,929
|
|
11,479
|
|
Average contract occupancy on contracted beds in
operation (6) (7) (9)
|
|
92.0
|
%
|
99.6
|
%
|
97.5
|
%
|
96.0
|
%
|
98.6
|
%
|
Average contract occupancy excluding start-up
operations (6) (7) (9)
|
|
92.0
|
%
|
99.6
|
%
|
97.5
|
%
|
100.4
|
%
|
101.9
|
%
|
Non-Residential:
|
|
|
|
|
|
|
|
|
|
|
|
Service capacity (8) (9)
|
|
2,353
|
|
2,953
|
|
3,921
|
|
4,792
|
|
3,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
48,395
|
|
$
|
47,757
|
|
$
|
75,078
|
|
$
|
57,286
|
|
$
|
107,597
|
|
Total assets
|
|
636,921
|
|
562,287
|
|
523,533
|
|
510,628
|
|
507,631
|
|
Long-term debt, net of current portion
|
|
308,070
|
|
275,298
|
|
255,471
|
|
266,659
|
|
279,528
|
|
Stockholders equity
|
|
227,722
|
|
200,449
|
|
181,564
|
|
165,461
|
|
161,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to
Selected Consolidated Financial Data
(1)
Income from operations for
the year ended December 31, 2006 includes a charge of approximately $0.4
million to record impairments to the carrying value of two of our adult
community-based facilities. Refer to Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of this report.
(2)
The statement of operations
and balance sheet data presented for the year ended December 31, 2005
includes the assets, liabilities and operations of Correction Systems, Inc.
(CSI) acquired in April 2005.
(3)
L
oss from continuing
operations for the year ended December 31, 2004 includes a charge of $9.3
million to record an impairment to the carrying value of the Cornell Abraxas
Academy. Additionally, income (loss) from continuing operations includes a loss
on extinguishment of debt of approximately $2.4 million related to the early
retirement of the Synthetic Lease Investor Notes A and B and the revolving line
of credit under our amended 2000 Credit Facility. Discontinued operations, net
of tax for the year ended December 31, 2004 include charges totaling $0.8
million to record impairments to the carrying values of two of our juvenile
facilities.
(4)
Residential service capacity is comprised of the
number of beds currently available for service in our residential facilities.
(5)
At certain residential facilities, the contracted
capacity is lower than the facilitys service capacity. We could increase a
facilitys contracted capacity by obtaining additional contracts or by
renegotiating existing contracts to increase the number of beds covered.
However, we may not be able to obtain contracts that provide occupancy levels
at a facilitys service capacity or be able to maintain current contracted
capacities in future periods.
(6)
O
ccupancy percentages reflect less than normalized
occupancy during the start-up phase of any applicable facility, resulting in a
lower average occupancy in periods when we have substantial start-up
activities.
(7)
Average
contract occupancy percentages are calculated based on actual occupancy for the
period as a percentage of the contracted capacity for residential facilities in
operation. These percentages do not reflect the operations of non-residential
community-based programs. At certain residential facilities, our contracted
capacity is lower than the facilitys service capacity. Additionally, certain
facilities have and are currently operating above the contracted capacity. As a
result, average contract occupancy percentages can exceed 100% if the average
actual occupancy exceeded contracted capacity.
(8)
S
ervice capacity for non-residential programs is based on either contractual
terms or an estimate of the number of clients to be served. We update these
estimates at least annually based on the programs budget and other factors.
(9)
Data presented excludes
discontinued operating facilities.
26
Table of
Contents
ITEM 7
.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
|
Generalzz
Cornell is a leading provider of correctional,
detention, educational, rehabilitation and treatment services outsourced by
federal, state and local government agencies. We provide a diversified
portfolio of services for adults and juveniles through our three operating
divisions: (1) Adult Secure Services; (2) Abraxas Youth and Family
Services; and (3) Adult Community-Based Services. At December 31,
2008, we operated 68 facilities with a total service capacity of 19,875
and had one
facility with a service capacity of 70 beds that was vacant.
Our facilities
are located in 15 states and the District of Columbia.
The
following table (which excludes data related to discontinued operating
facilities) sets forth for the periods indicated total residential service
capacity and contracted beds in operation at the end of the periods shown,
average contract occupancy percentages and total non-residential service
capacity.
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Residential
|
|
|
|
|
|
|
|
Service capacity (1) (2)
|
|
17,592
|
|
15,634
|
|
14,659
|
|
Contracted beds in operation (end of period) (1) (3)
|
|
16,821
|
|
14,211
|
|
13,492
|
|
Average contract occupancy based on contracted beds in operation
(1) (4) (5)
|
|
92.0
|
%
|
99.6
|
%
|
97.5
|
%
|
Average contract occupancy excluding start-up operations
(1) (4) (5)
|
|
92.0
|
%
|
99.6
|
%
|
97.5
|
%
|
Non-Residential
|
|
|
|
|
|
|
|
Service capacity (1) (6)
|
|
2,353
|
|
2,953
|
|
3,921
|
|
(1)
Data presented excludes
discontinued operating facilities.
(2)
Residential service capacity is comprised
of the number of beds currently available for service in our residential
facilities.
(3)
At certain residential facilities, the
contracted capacity is lower than the facilitys service capacity. We could
increase a facilitys contracted capacity by obtaining additional contracts or
by renegotiating existing contracts to increase the number of beds covered.
However, there is no guarantee that we will be able to obtain contracts that
provide occupancy levels at a facilitys service capacity or that current
contracted capacities can be maintained in future periods.
(4)
O
ccupancy percentages reflect less than
normalized occupancy during the start-up phase of any applicable facility,
resulting in a lower average occupancy in periods when we have substantial
start-up activities.
(5)
Average contract occupancy percentages
are calculated based on actual occupancy for the period as a percentage of the
contracted capacity for residential facilities in operation. These percentages
do not reflect the operations of non-residential community-based programs. At
certain residential facilities, our contracted capacity is lower than the
facilitys service capacity. Additionally, certain facilities have and are
currently operating above the contracted capacity. As a result, average
contract occupancy percentages can exceed 100% if the average actual occupancy
exceeded contracted capacity.
(6)
S
ervice capacity for non-residential
programs is based on either contractual terms or an estimate of the number of
clients to be served. We update these estimates at least annually based on the
programs budget and other factors.
Our operating results for 2008 were significantly
impacted by a few major events. We
completed and activated expansions at several facilities including the D. Ray
James Prison (300 beds in February 2008), the Great Plains Correctional
Facility (1,100 beds in September 2008) and the Walnut Grove Youth
Correctional Facility (500 beds in September 2008). We also began an
additional 700 bed expansion at D. Ray James Prison and started construction on
a new 1,250 bed facility in Hudson, Colorado. Our 2008 results of operations
were positively affected by a $1.5 million contract-based revenue adjustment
recorded in March 2008 related to the Regional Correctional Center and a
$1.55 million legal settlement (against which we incurred approximately $0.2
million in expenses in 2008) we received relating to a lawsuit we had brought
against certain parties with regard to the operation of the Cornell Abraxas
Academy facility (see Significant 2008 Events).
Our operating results for 2007 were significantly
impacted by a few major events. At our Great Plains Correctional Facility in
Hinton, Oklahoma, we transitioned from our operating contract with the Oklahoma
Department of Corrections (OK DOC) to our new contract with the Arizona
Department of Corrections. During the marketing and transition phases, that
facility was idle from April 2007 to September 2007, when the current
inmate ramp began. We also began expansions at several facilities including the
Big Spring Correctional Facility, the D. Ray James Prison and the Great Plains
Correctional Facility. Our 2007 results of operations were also negatively
impacted by a reduction of Immigration and Customs
27
Table of
Contents
Enforcement
(ICE) detainees at our Regional Correctional Center (RCC) and positively
affected by a $1.85 million legal settlement (against which we incurred
approximately $0.4 million in expenses in 2007) we received relating to legal
representation provided to us in connection with the Southern Peaks Regional
Treatment Center.
Although we believe we will continue to see steady
demand across our various business segments and our customer base (federal,
state and local) in 2009, we are monitoring the declining economic trends and
related government budget plans and the effect tightened spending plans could
have on our business. We expect a key driver for our performance in 2009 to be
our ability to manage our various facility expansions currently in process and
bring them on line. We also plan to remain focused on our operating margins, on
increasing utilization (particularly in the Abraxas division) and improving
customer mix as we believe those initiatives are key elements of our financial
performance.
Management Overview
Demand
.
Our business is driven generally by demand for incarceration or
treatment services, and specifically by demand for private incarceration or
treatment services, within our three primary business segments: Adult Secure
Services; Abraxas Youth and Family Services; and Adult Community-Based
Services. The demand for adult and juvenile corrections and treatment services
has generally increased at a steady rate over the past ten years, largely as a
result of increasing sentence terms and/or mandatory sentences for criminals
and as well a greater range of criminal acts, increasing demand for
incarceration of illegal aliens and a public recognition of the need to provide
services to juveniles that will improve the possibility that they will lead
productive lives. Moreover, demand for our services is also affected by the
amount of available capacity in the government systems to enable governments to
provide the services themselves, as well as desire and ability of these systems
to add additional capacity. In addition, the balance between community-based
corrections treatment of adults as an alternative to traditional incarceration
continues to be analyzed by many political and societal parties. Among other things, we monitor federal, state
and industry communications and statistics relative to trends in prison
populations, juvenile justice statistics and initiatives, and developments in
alternatives to traditional incarceration or detention of adults for
opportunities to expand our scope or delivery of services.
The
federal government contracts with private providers for the incarceration of
adults, whether they are serving prison sentences, detained as illegal aliens,
detained in anticipation of pending judicial administration or transitioning
from prison to society. Chief among the
federal agencies which use private providers are the BOP, U.S. Immigration and
Customs Enforcement (ICE) and USMS. We provide adult secure and adult
community-based services to the federal government. Most of the federal
involvement in juvenile administration in the federal system is handled via
Medicare and Medicaid assistance to state governments. Although there are
circumstances in which we may contract with a federal agency on a sole source
basis, the primary means by which we secure a contract with a federal agency is
via the RFP bidding process. From time
to time, we contract to provide management services to a local governmental
unit who then bids on a federal contract.
States
and smaller governmental units remain divided on the issue of private prisons
and private provision of juvenile and community-based programs, although a
majority of states permit private provision for our services. We anticipate that increasing budget pressure
on states and smaller governmental units may cause more states and smaller
governmental units to consider utilizing private providers such as us to
provide these services on a more economical basis. We believe capital budget
constraints among prison agencies may encourage them to continue to explore
outsourcing to private operators as an alternative to deploying their own
capital for prison construction or major refurbishment. Although it varies from
governmental unit to governmental unit, the primary political forces who
typically oppose privatization of prisons are organized labor and religious
groups.
Private
juvenile and community-based programs are utilized by states and local
governmental units and are organized on a profit and not-for-profit basis. We monitor opportunities in these segments via
our corporate and business division development officials. Many opportunities are not published in any
manner and, accordingly, we believe that taking the initiative at the state and
local levels is key in developing sole source opportunities.
Performance
.
We track a number of factors as we monitor financial performance. Chief among them are:
·
capacity (the number of beds
within each business segments facilities),
·
occupancy (utilization),
·
per diem reimbursement
rates,
·
revenues,
·
operating margins, and
·
operating expenses.
28
Table of
Contents
Capacity.
Capacity, commonly expressed in terms of
number of beds, is primarily impacted by the number and size of the facilities
we own or lease and the facilities we operate on behalf of a third party owner
or lessee. We view capacity as one of
the measures of our development efforts, through which we may increase capacity
by adding new projects or by expanding existing projects (as we have done in
2007 and 2008 at several of our facilities including Great Plains Correctional
Facility and D. Ray James Prison). As
part of the evaluation of our development efforts, we will assess (a) whether
a given development project was brought into service in accordance with our
expectation as to time and expense; and (b) the number of projects in
development or under consideration at the relevant point in time. In addition to the focus on new projects,
capacity will reflect our success in renewing and maintaining existing
contracts and facilities. It will also
reflect any closure of programs or facilities due to underutilization or
failure to earn an adequate risk-adjusted rate of return. We must also be cognizant of the possibility
that state or local budgetary limitations may cause the contractual commitment
to a given facility to be reduced or even eliminated, which would require us to
either secure an alternate customer or close the operation.
Occupancy.
Occupancy is typically expressed in terms
of percentage of contract capacity utilized.
We look at occupancy to assess the efficacy of both our efforts to
market our facilities and our efforts to retain existing customers or
contracts. Because revenue varies
directly with occupancy, occupancy is a driver of our revenues. Our industry
experiences significant economics of scale, whereby as occupancy rises,
operating costs per resident decline. Some of our contracts are take-or-pay,
meaning that the agency making use of the facility is obligated to pay for beds
even though they are not used.
Historically, occupancy percentages in many of our facilities have been
high and we are mindful of the need to maintain such occupancy levels. As new development projects are brought into
service, occupancy percentages may decline until the projects reach full
utilization (as, for example, with the activation of the 1,100 bed expansion at
Great Plains Correctional Facility during the fourth quarter of 2008). Where we
have commitments for utilization before the commencement of operations, occupancy
percentages reflect the speed at which a facility achieves full
service/implementation. However, we may decide to undertake development
projects without written commitments to make full use of a facility. In these
instances, we have performed our own assessment, based on discussions with
local government or other potential customer representatives and analysis of
other factors, of the demand for services at the facility. There is no assurance that we would recover
our initial investment in these projects.
We will monitor occupancy as a measure of the accuracy of our estimation
of the demand for the services of a development facility, and will incorporate
this information in future assessments of potential projects.
Per Diem Reimbursement
Rates.
Per diem reimbursement rates are another key element
of our gross revenue and operating margin since per diem contracts represent a
majority of our revenues (54.0% for the year ended December 31,
2008). Per diem rates are a function of
negotiation between management and a governmental unit at the inception of a
contract or through the bidding process.
Actual per diem rates vary dramatically across our business segments,
and as well as within each business segment depending upon the particular
service or program provided. The initial per diem rates often change during the
term of a contract in accordance with a schedule. The amount of the change can be a fixed
amount set forth within the contract, an amount determined by formulas set
forth within the contract or an amount determined by negotiations between
management and the governmental unit (often these negotiations are along the
same lines as the original per diem negotiation a review of expenses and
approval of an amount to recompense for expenses and assure the potential of an
operating profit). In recent years, as
budgetary pressures on governmental units have increased, some of our customers
have negotiated relief from formulaic increase provisions within their agreements
or have declined to include in their appropriation legislation amounts that
would increase the per diem rates payable under the contract. Based on the
economic turmoil which began in the second half of 2008, we are expecting such
pressures to continue in 2009 for many of our customers. In similar prior
situations we have attempted to mitigate the impact of these developments by
negotiating services provided, obtaining commitments for increased volume and
other measures. We may also choose to
consider terminating an existing relationship at a given facility and replacing
it with a new customer (as was done with the Great Plains Correctional Facility
in 2007).
Revenues.
We derive
substantially all of our revenues from providing adult corrections and
treatment and juvenile justice, educational and treatment services outsourced
by federal, state and local government agencies in the United States. Revenues
for our services are generally recognized on a per diem rate based upon the
number of occupant days or hours served for the period, on a guaranteed
take-or-pay basis or on a cost-plus reimbursement basis. For the year ended December 31,
2008, our revenue base consisted of 54.0% for services provided under per diem
contracts, 40.0% for services provided under take-or-pay and management contracts,
3.8% for services provided under cost-plus reimbursement contracts, 2.0% for
services provided under fee-for-service contracts and 0.2% from other
miscellaneous sources. For the year
ended December 31, 2007, our revenue base consisted of 74.3% for services
provided under per diem contracts, 18.6% for services provided under
take-or-pay and management contracts, 4.7% for services provided under
cost-plus reimbursement contracts, 2.1% for services provided under
fee-for-service contracts and 0.3% from other miscellaneous sources. The increase in the percentage of revenues
provided under take-or-pay and management contracts for 2008 was due primarily
to the take-or-pay contract
29
Table of
Contents
awarded
by the BOP to our Big Spring Correctional Center in 2007 and the 916 inmate
take-or-pay contract awarded by the Arizona Department of Corrections at our
Great Plains Correctional Facility under which we began operations in September 2007. The increase in the percentage of revenues
provided under take-or-pay contracts was partially offset by 1) the transition
of certain of our management contracts including the Donald W. Wyatt Detention
Center (in July 2007) to the facility owner and 2) the termination of our
management contract for the Harrisburg Alternative Education School Program for
the 2007-2008 school year (due to lack of funding by the contracting
agency). The decrease in the percentage
of revenues provided under per diem contracts in 2008 as compared to the prior
year was due primarily to the transition of the contracts at the Great Plains
Correctional Facility and the Big Spring Correctional Center as previously
noted. This decrease was partially
offset by the addition of the High Plains Correctional Facility acquired in May 2007.
Revenues can fluctuate from
year to year due to changes in government funding policies, changes in the
number or types of clients referred to our facilities by governmental agencies,
changes in the types of services delivered to our customers, the opening of new
facilities or the expansion of existing facilities and the termination of
contracts for a facility or the closure of a facility.
Factors
considered in determining billing rates to charge include: (1) the
programs specified by the contract and the related staffing levels; (2) wage
levels customary in the respective geographic areas; (3) whether the
proposed facility is to be leased or purchased; and (4) the anticipated
average occupancy levels that could reasonably be expected to be maintained and
the duration of time required to reach such occupancy levels.
Revenues-Adult Secure Services.
Revenues for our Adult Secure Services
division are primarily generated from per diem, take-or-pay and management
contracts. For the years ended December 31,
2008, 2007 and 2006, we realized average per diem rates on our adult secure
facilities of approximately $54.07, $54.69 and $56.12, respectively. The
decrease in the 2007 rate is due primarily to the increase in occupancy at the
Moshannon Valley Correctional Center during 2007 over the prior year. This
facility operates under a take-or-pay contract; as a result, the effective
average per diem rate will decrease as the population at the facility
increases. The 2006 average per diem
rate also benefited from the receipt of a contract-based revenue adjustment for
the contract year ended March 2006 in the amount of $2.4 million at the
RCC. We periodically have experienced pressure from contracting governmental
agencies to limit or even reduce per diem rates. Many of these governmental
entities are under severe budget pressures and we anticipate that governmental
agencies may periodically approach us about per diem rate concessions (or
decline to provide funding for contractual rate increases). Decreases in, or the lack of anticipated
increases in, per diem rates could adversely impact our operating margin.
Revenues-Abraxas Youth and Family Services.
Revenues for our Abraxas Youth and Family
Services division are primarily generated from per diem, fee-for-service and
cost-plus reimbursement contracts. For
the years ended December 31, 2008, 2007 and 2006, we realized average per
diem rates on our residential youth and family services facilities of
approximately $192.15, $174.93 and $170.33, respectively. The increase in the
average per diem rate for 2008 reflects the continued ramp-up of the Cornell
Abraxas Academy (reactivated in the fourth quarter of 2006), the reactivation
of the Hector Garza Residential Treatment Center in August 2007 as well as
changes in the mix of services provided and customers served at other
facilities. For the years ended December 31,
2008, 2007 and 2006, we realized average fee-for-service rates for our
non-residential community-based Abraxas Youth and Family Services facilities
and programs, including rates that are limited by Medicaid and other private
insurance providers, of approximately $48.28, $44.35 and $37.59, respectively.
The increase in the average fee-for-service rates for 2008 and 2007 is due to
changes in the mix of services provided at our non-residential facilities. The
majority of our Abraxas Youth and Family Services contracts renew annually.
Revenues-Adult Community-Based Services.
Revenues for our Adult Community-Based Services
division are primarily generated from per diem and fee-for-service contracts.
For the years ended December 31, 2008, 2007 and 2006, we realized average
per diem rates on our residential adult community-based facilities of
approximately $68.47, $62.91 and $61.71, respectively. For the years ended December 31,
2008, 2007 and 2006, we realized average fee-for-service rates on our
non-residential Adult Community-Based Services facilities and programs of
approximately $11.00, $13.70 and $11.23, respectively. Our average fee-for-service rates fluctuate
from year to year principally due to changes in the mix of services provided by
our various Adult Community-Based Services programs and facilities.
Operating Margins.
We have historically experienced higher
operating margins in our Adult Secure Services and Adult Community-Based
Services divisions as compared to our Abraxas Youth and Family Services
division. Our operating margin, in a given period, will be impacted by those
facilities which may either be dormant or have been reactivated during the
period. As previously discussed, we have reactivated several facilities,
including the Cornell Abraxas Academy and the Hector Garza Residential Treatment
Center in 2006 and 2007, respectively. We have also expanded several of our
Adult Secure facilities (D. Ray James Prison, Great Plains Correctional
Facility and Walnut Grove Youth Correctional Facility, for example), which
provides the opportunity to leverage existing infrastructure. Additionally, our
operating margins within a
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division can vary from facility to facility
based on whether a facility is owned or leased, the level of competition for
the contract award, the proposed length of the contract, the mix of services
provided, the occupancy levels for a facility, the level of capital commitment
required with respect to a facility, the anticipated changes in operating costs
over the term of the contract and our ability to increase a facilitys contract
revenue. Under take-or-pay contracts, such as the contract at the Moshannon
Valley Correctional Center, operating margins are typically higher during the
early stages of the contract as the facilitys population ramps up (as revenues
are received at contract percentages regardless of actual occupancy). As the
variable costs (primarily resident-related and certain facility costs) increase
with the growth in population, operating margins will generally decline to a
stabilized level. Following its activation in April 2006, we experienced
such operating margin impact pertaining to the Moshannon Valley Correctional
Center in the third and fourth quarters of 2006. A decline in occupancy at our
Abraxas Youth and Family Services facilities can have a more significant impact
on operating margins than our Adult Secure Services division due to the longer
periods typically required to ramp resident population at a youth facility.
We
have experienced and expect to continue to experience interim period operating
margin fluctuations due to factors such as the number of calendar days in the
period, higher payroll taxes (generally in the first half of the year) and
salary and wage increases and insurance cost increases that are incurred prior
to certain contract rate increases. Periodically, many of the governmental
agencies with whom we contract may experience budgetary pressures and may
approach us to limit or reduce per diem rates (including contractual price
increases as well). We anticipate such customer behavior in 2009. Decreases in,
or the lack of anticipated increases in, per diem rates could adversely impact
our operating margin. Additionally, a decrease in per diem rates without a
corresponding decrease in operating expenses could also adversely impact our
operating margin.
Operating Expenses.
We
track several different areas of our operating expenses. Foremost among these expenses are employee
compensation and benefits and expenses, risk related areas such as general
liability, medical and workers compensation, client/inmate costs such as food,
clothing, medical and programming costs, financing costs and administrative
overhead expenses. Increases or decreases in one or more of these expenses,
such as our experience with rising insurance costs, can have a material effect
on our financial performance. Operating
expenses are also impacted by decisions to close or terminate a particular
program or facility. Such decisions are
based on our assessments of operating results, operating efficiency and
risk-adjusted returns and are an ongoing part of our portfolio management. In addition, decisions to restructure
employee positions will typically increase period costs initially (at the time
of such actions), but generally reduce post-restructuring expense levels.
We
are responsible for all facility operating costs, except for certain debt
service and interest or lease payments for facilities where we have a
management contract only. At these facilities, the facility owner is
responsible for all debt service and interest or lease payments related to the
facility. We are responsible for all other operating expenses at these facilities.
We operated 14 facilities under management contracts at December 31, 2008,
15 facilities at December 31, 2007 and 18 facilities at December 31,
2006.
Included in the 14 facilities under management contracts at December 31,
2008 were the Walnut Grove Youth Correctional Facility and the eight Los
Angeles County Jails, which represented 1,714 beds of service capacity, or
approximately 83% of the residential service capacity represented by management
contracts.
A
majority of our facility operating costs consists of fixed costs. These fixed
costs include lease and rental expense, insurance, utilities and
depreciation. As a result, when we
commence operation of new or expanded facilities, fixed operating costs may
increase. The amount of our variable operating costs, including food, medical
services, supplies and clothing, depend on occupancy levels at the facilities.
Our largest single operating cost, facility payroll expense and related
employment taxes and expenses, has both a fixed and a variable component. We
can adjust a facilitys staffing levels and the related payroll expense to a
certain extent based on occupancy at a facility; however a minimum fixed number
of employees is required to operate and maintain any facility regardless of
occupancy levels. Personnel costs are subject to increases in tightening labor
markets based on local economic environments and other conditions.
We
incur pre-opening and start-up expenses including payroll, benefits, training
and other operating costs prior to opening a new or expanded facility and
during the period of operation while occupancy is ramping up. These costs vary
by contract (and the pace/scale of the activation and related population ramp).
Since pre-opening and start-up costs are generally factored into the revenue
per diem rate that is charged to the contracting agency, we typically expect to
recover these upfront costs over the life of the contract. Because occupancy
rates during a facilitys start-up phase typically result in capacity
under-utilization for at least 90 to 180 days, we may incur additional
post-opening start-up costs. We do not anticipate post-opening start-up costs
at any adult secure facilities operated under any future contracts with the BOP
which are take-or-pay contracts, meaning that the BOP will pay at least 80.0%
of the contractual monthly revenue once the facility opens, regardless of
actual occupancy.
Newly
opened facilities are staffed according to applicable regulatory or contractual
requirements when we begin receiving offenders or clients. Offenders or clients
are typically assigned to a newly opened facility on a phased-in basis over a
one- to six-month period. Our start-up period for new juvenile operations is 12
months from the date we begin recognizing revenue unless break-even occupancy
levels are achieved before then. The actual time required to ramp a juvenile
facility (with approximate capacity of 100 to 200 beds) may be a period of one
to three years. Our start-up period for new adult operations is nine months from
the date we begin recognizing revenue unless break-even occupancy levels are
achieved before then. The approximate
time to ramp an adult facility of approximately 1,000 beds may be a period of
three to six months, depending upon the customer requirements. Although
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we typically recover these upfront costs over
the life of the contract, quarterly results can be substantially affected by
the timing of the commencement of operations as well as the development and
construction of new facilities.
Working
capital requirements generally increase immediately prior to commencing
management of a new or expanded facility as we incur start-up costs and
purchase necessary equipment and supplies before facility management revenue is
realized.
General
and administrative expenses consist primarily of costs for corporate and
administrative personnel who provide senior management, legal, finance,
accounting, human resources, investor relations, payroll and information
systems, costs of business development and outside professional and consulting
fees.
Significant
2008 Events
D. Ray James Prison
In
February 2008, we completed the initial expansion of the D. Ray James
Prison in Georgia to increase its service capacity by approximately 300 beds to
a total service capacity of 2,170 beds.
In
August 2007, we announced that we were initiating a second expansion of
the D. Ray James Prison. This expansion project will increase the facilitys
service capacity by an additional 700 beds for a total service capacity of
approximately 2,800 beds. This expansion project began in the first quarter of
2008 and is expected to be completed by the end of the first quarter of 2009.
We are marketing this additional expansion to multiple customers but believe those beds are well suited for a
Georgia Department of Corrections (Georgia DOC) bid that requires expansion
of an existing Georgia DOC-contracted facility. We can make no assurance that
we will be awarded this contract. We
currently estimate that the capital expenditures related to this expansion
project will be approximately $34.7 million. As of December 31,
2008, we had incurred and capitalized total costs (including interest) of
approximately $33.9 million related to this expansion. We believe that our
existing cash flow and available balance under our Amended Credit Facility will
provide adequate funding to complete this facility expansion.
Great Plains Correctional Facility
In
May 2007, we were awarded a contract by the Arizona Department of
Corrections (Arizona DOC) for our Great Plains Correctional Facility in
Hinton, Oklahoma. The contract calls for a total of 2,000 medium-security
inmates to be housed at the facility. We initially housed approximately 916
inmates and the remainder was housed through the expansion of the existing
facility which was completed in the fourth quarter of 2008. As of December 31,
2008 the ramp-up to approximately 2,000 inmates was complete.
Hudson, Colorado
In
August 2008, we entered into an agreement pursuant to which we will lease a new
1,250 male bed adult secure facility in Hudson, Colorado. The facility is owned
by a third party and is being built on land we sold to the third party. We
retained approximately 270 acres out of the original 320 acres we acquired in
2007. We anticipate the construction, which began in the third quarter of 2008,
to be completed in late 2009. We have signed an implementation agreement with
the Colorado Department of Corrections (Colorado DOC), which governs the
construction of the facility and contemplates a service agreement which can be
entered into upon completion of the implementation agreement. We would
expect to begin receiving inmates upon the activation of the facility. We
expect to enter into a service agreement for the facility with the Colorado DOC
but can make no assurances that we will do so (or what the possible timing
might be).
Hurricane Ike
Hurricane
Ike, which came ashore in Texas in September 2008, damaged our Beaumont
Transitional Treatment Center, Leidel Comprehensive Sanction Center and Reid
Community Residential Facility. These damages are covered by our insurance,
subject to normal deductibles, for which we recorded a charge of approximately
$0.5 million in the year ended December 31, 2008. The Leidel facility was
able to continue near normal operations. The Beaumont facility reopened in mid-October 2008
at near normal capacity. The Reid facility reopened in mid-October 2008 at
approximately 40 percent of its previous capacity of approximately 500. We
believe the remainder of the operating capacity will be operational in the
first quarter 2009. Reid generated revenues of approximately $4.9 million and
$5.4 million in the years ended December 31, 2008 and 2007, respectively.
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Regional Correctional Center
The
Office of Federal Detention Trustee (OFDT) holds the contract for use of the
Regional Correctional Center on behalf of ICE, USMS and the BOP with Bernalillo
County through an intergovernmental services agreement, and we have an
operating and management agreement with Bernalillo County. In August 2007, the Bureau of
Immigration and Customs Enforcement (ICE) removed all ICE detainees from the
Regional Correctional Center in Albuquerque, New Mexico. ICE informed us in February 2008
that it would not resume use of the facility. The facility is still being
utilized by the USMS, and since May 2008 by the BOP, but not at its full
capacity. In February 2008, the OFDT, attempted to unilaterally amend its
agreement to reduce the number of minimum annual guaranteed mandays under the
agreement from 182,500 to 66,300. Neither we nor Bernalillo County believe OFDT
has the right to unilaterally amend the contract in this manner, and OFDT has
been informed of our position. Although either party to the intergovernmental
services agreement has the right to terminate upon 180 days notice, neither party
has exercised such right as of December 31, 2008. Refer to Results of Operations Liquidity
and Capital Resources - Contractual Uncertainties Related to Certain Facilities
- Regional Correctional Center for more information concerning this and
other developments concerning the Regional Correctional Center. We recorded a
contract-based revenue adjustment (in March 2008) of approximately $1.5
million for the contract year ended March 2008, for which the related
receivable is carried in accounts receivable trade at December 31,
2008.
Walnut Grove Youth Correctional
Facility
In
August 2007, we were notified by the State of Mississippi that funding had
been approved for a 500 bed expansion of the 941 bed Walnut Grove Youth
Correctional Facility that we have been managing since 2004. Expansion of the
facility, which was entirely funded by the State of Mississippi, began in the
third quarter of 2007 and was completed and became operational in the third
quarter of 2008.
Settlement of Claim
On
December 12, 2008, we settled a lawsuit the Company had filed in the
United States District Court for the Eastern District of Pennsylvania against
the Borough of New Morgan (the Borough), New Morgan Borough Council and
certain individual council members. The lawsuit involved the operation of
the Companys Abraxas Academy in New Morgan, Pennsylvania and a sewage
treatment facility that is owned by the Borough.
In
connection with the settlement, all claims have been terminated and finally
settled, including those concerning the operation and occupancy of the facility
and the sewage treatment plant. Neither party has admitted liability for
any claim or contention made by the other party. The Company received $1.55
million from the Borough and agreed to pay the Borough unpaid sewage treatment
bills in the amount of $0.2 million through September 30, 2008. The $1.55 million settlement is reflected in
operating expenses in the accompanying financial statements.
Critical Accounting Policies and Estimates
The preparation of our financial statements in
conformity with GAAP requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosures of contingent assets and liabilities at
the balance sheet date and the amounts of revenues and expenses recognized
during the reporting period. We analyze our estimates based on our historical
experience and various other assumptions that we believe to be reasonable under
the circumstances. However, actual results could differ from such estimates.
The following is a discussion of our critical accounting estimates. Management
considers an accounting estimate to be critical if:
·
it requires
assumptions to be made that were uncertain at the time the estimate was made;
and
·
changes in the estimate or
different estimates that could have been selected could have a material impact
on our consolidated financial position or results of operations.
For a summary of all of our significant accounting
policies see Note 2-Significant Accounting Policies of the Notes to Consolidated Financial Statements in Item 8
of this Form 10-K.
Revenue Recognition
Substantially
all of our revenues are derived from contracts with federal, state and local
governmental agencies which pay either per diem rates based upon the number of
occupant days or hours served for the period, on a take-or-pay basis,
management fee basis, cost-plus reimbursement or fee-for-service basis. Revenues are recognized as services are
provided under our established contractual agreements to the extent collection
is considered probable.
Accounts Receivable and Related Allowance
for Doubtful Accounts
We
extend credit to the governmental agencies contracted with and other parties in
the normal course of business. We
regularly review our outstanding receivables and historical collection
experience and provide for estimated losses through an allowance for doubtful
accounts. In evaluating the adequacy of our allowance for doubtful accounts, we
make judgments regarding our customers ability to make required payments,
economic events and other factors. As
the financial condition of
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these
parties change, circumstances develop or additional information becomes
available, adjustments to the allowance for doubtful accounts may occur. If,
after reasonable collection efforts have been made, a receivable is determined
to be permanently uncollectible, it is written off.
Insurance Reserves
We
maintain insurance coverage for various aspects of our business and
operations. We retain a portion of
losses that occur through the use of deductibles and retention under
self-insurance programs. We regularly
review our estimates of reported and unreported claims and provide for these
losses through insurance reserves. These reserves are influenced by rising
costs of health care and other costs, increases in claims, time lags in claims
information and levels of insurance coverage carried. As claims develop and
additional information becomes available to us, adjustments to the related loss
reserves may occur. Our reserves for
medical and workers compensation claims are subject to change based on our
estimate of the number and the magnitude of claims to be incurred.
Impairment or Disposal of Long-Lived Assets
We
review our long-lived assets for impairment at least annually or when changes
in circumstances or a triggering event indicates that the carrying amount of
the asset may not be recoverable in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived
assets to be held and used recognize an impairment loss only if the carrying
amount of the long-lived asset is not recoverable. Long-lived assets to be held and used are to
be reported at the lower of their carrying amount or fair value. Assets to be disposed of by sale are recorded
at the lower of their carrying amount or fair value less estimated selling
costs. We estimate fair value based upon the best information available, which
may include expected future discounted cash flows to be produced by the asset
and/or available market prices. Factors that significantly influence estimated
future discounted cash flows include the periods and levels of occupancy for
the facility, expected per diem or reimbursement rates, assumptions regarding
the levels of staffing, services and future operating and capital expenditures
necessary to generate forecasted revenues, related costs for these activities
and future rate of increases or decreases associated with these factors. We
also consider the results of any appraisals on the properties when assessing
fair value. These estimates may be highly subjective, particularly in
circumstances where there is no current operating contract in place and changes
in the assumptions and estimates could result in the recognition of impairment
charges. The most subjective estimates made in this analysis for 2008 relate to
Cornell Abraxas 1, the Regional Correctional Center and the Hector Garza
Residential Treatment Center. The most subjective estimates made in this
analysis for 2007 relate to the Regional Correctional Center and the Hector
Garza Residential Treatment Center. We may be required to record an impairment
charge in the future if we are unable to successfully negotiate a replacement
contract on any of our facilities for which we currently have an operating
contract.
Goodwill and Intangible Assets
We
account for goodwill in accordance with the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets, which states that there is no amortization of
goodwill or intangible assets with indefinite lives. Impairment of these assets is assessed
annually to determine if the estimated fair value of the reporting unit exceeds
the net carrying value of the reporting unit, including the applicable
goodwill. The estimates of fair value are
based upon our estimates of the present value of future cash flows. We make assumptions regarding the estimated
cash flows and if these estimates or their related assumptions change, an
impairment charge may be incurred.
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Results
of Operations
Material fluctuations in
our results of operations are principally the result of the level of new
contract development activity, the timing and effect of facility expansions,
occupancy or contract rates, contract renewals or terminations and facility
closures and non-recurring charges.
The following table sets forth for the periods
indicated the percentages of revenue represented by certain items in our
Consolidated Statements of Income and Comprehensive Income (Loss).
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
72.6
|
|
76.0
|
|
76.4
|
|
Pre-opening and start-up expenses
|
|
¾
|
|
¾
|
|
0.7
|
|
Depreciation and amortization
|
|
4.6
|
|
4.4
|
|
4.5
|
|
General and administrative expenses
|
|
6.7
|
|
7.1
|
|
6.0
|
|
Income from operations
|
|
16.1
|
|
12.5
|
|
12.4
|
|
Interest expense, net
|
|
6.2
|
|
6.7
|
|
6.4
|
|
Income from continuing operations before provision for income taxes
|
|
9.9
|
|
5.8
|
|
6.0
|
|
Provision for income taxes
|
|
4.0
|
|
2.5
|
|
2.5
|
|
Income from continuing operations
|
|
5.9
|
|
3.3
|
|
3.5
|
|
Minority interest in consolidated special purpose entity
|
|
0.2
|
|
|
|
|
|
Discontinued operations, net of taxes
|
|
¾
|
|
¾
|
|
(0.2
|
)
|
Net income
|
|
5.7
|
%
|
3.3
|
%
|
3.3
|
%
|
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues
.
Revenues increased
approximately $26.1 million, or 7.2%, to $386.7 million for the year ended December 31,
2008 from $360.6 million for the year ended December 31, 2007.
Adult Secure Services.
Adult Secure
Services revenues increased approximately $26.1 million, or 14.2%, to $209.3
million for the year ended December 31, 2008 from $183.2 million for the
year ended December 31, 2007 due primarily to (1) an increase in
revenues of $17.6 million at the Great Plains Correctional Facility which began
operating under a contract with the Arizona DOC in September 2007 (this
facility was vacant from April through August 2007) as well as
increased occupancy as a result of a facility expansion completed in September 2008,
(2) an increase in revenues of $10.1 million at the Big Spring
Correctional Center due to increased occupancy resulting from a facility
expansion completed in November 2007 related to the take-or-pay contract
awarded to us by the BOP in 2007, (3) an increase in revenues of $4.8
million at the D. Ray James Prison due to a facility expansion completed in February 2008,
(4) an increase in revenues of $2.0 million at the High Plains
Correctional Facility which we acquired in May 2007 and (5) an
increase in revenues of $1.2 million at the Walnut Grove Youth Correctional
Facility due to a facility expansion completed in September 2008. The increase in revenues due to the above was
offset, in part, by (1) a decrease in revenues of $8.0 million at the
Donald W. Wyatt Detention Center due to the transition of our management
contract to the facilitys owner in July 2007 and (2) a decrease in
revenues of approximately $2.9 million at the Regional Correctional Center due
to the withdrawal of all ICE inmates as of August 2007 (revenues for 2008
include a $1.5 million contract-based revenue adjustment for the contract year
ended March 25, 2008). The
remaining net increase in revenues of approximately $1.3 million was due to
fluctuations in revenues at our other adult secure facilities.
Average
contract occupancy was 91.8% for the year ended December 31, 2008 compared
to 100.4% for the year ended December 31, 2007. The decrease in the
average contract occupancy is primarily due to the additional capacity of
approximately 1,600 beds brought into operations in September 2008 (at the
Great Plains Correctional Facility and Walnut Grove Youth Correctional
Facility), which we began ramping during the fourth quarter of 2008.
The average per diem rate was $54.07 for
the year ended December 31, 2008 compared to $54.69 for the year ended December 31,
2007.
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Abraxas Youth and Family Services
.
Abraxas Youth and Family Services revenues decreased approximately $2.0
million, or 1.9%, to $107.3 million for the year ended December 31, 2008
from $109.3 million for the year ended December 31, 2007 due primarily to (1)
a decrease in revenues of $5.1 million at the Cornell Abraxas I facility (A-1)
due to decreased occupancy, (2) a decrease in revenues of $1.6 million at
the Texas Adolescent Treatment Center (TATC) due to decreased occupancy, (3) a
decrease in revenues of $1.8 million due to the termination of our management
contract for the Harrisburg Alternative Education School Program for the
2007-2008 school year (due to lack of funding by the contracting agency), (4) a
decrease in revenues of $1.3 million due to the termination of our management
contract for the Salt Lake Valley Detention Center as of September 2008
and (5) a decrease in revenues of $1.2 million due to the termination of
our management contract for the Reading Alternative Education School Program in
June 2008. The decrease in revenues
due to the above was offset, in part, by (1) an increase in revenues of
$4.5 million at the Cornell Abraxas Academy due to improved occupancy, (2) an
increase in revenues of $2.5 million at the Southern Peaks Regional Treatment Center
due to improved occupancy and mix of clients at the facility, (3) an
increase in revenues of $1.6 million at the Cornell Abraxas of Ohio facility
due to a new residential program activated in 2008 and (4) an increase in
revenues of $0.9 million at the Hector Garza Residential Treatment Center which
we reactivated in August 2007. The
remaining net decrease in revenues of approximately $0.5 million was due to
various insignificant fluctuations in revenues at our other Abraxas Youth and
Family Services facilities and programs.
Average contract
occupancy was 80.6% for the year ended December 31, 2008 compared to 92.0%
for the year ended December 31, 2007. The decrease in the 2008 average
contract occupancy reflects the under-utilization at certain facilities,
including A-1and TATC.
The average per diem rate
for our Abraxas Youth and Family Services facilities was approximately $192.15
for the year ended December 31, 2008 compared to approximately $174.93 for
the year ended December 31, 2007. The increase in the 2008 average per
diem rate reflects the continued ramp-up of the Cornell Abraxas Academy
(reactivated in the fourth quarter of 2006), the reactivation of the Hector
Garza Residential Treatment Center in 2007 as well as changes in the mix of
services provided at other facilities, including a new residential program at
our Cornell Abraxas of Ohio facility.
The average fee-for-service rate for our non-residential community-based
Abraxas Youth and Family Services facilities and programs was approximately
$48.28 for the year ended December 31, 2008 compared to approximately
$44.35 for the year ended December 31, 2007. Our average fee-for-service rate can
fluctuate from year to year depending on the mix of services provided at our
various non-residential Abraxas Youth and Family Services facilities and
programs.
Adult Community-Based Services.
Adult
Community-Based Services revenues increased approximately $2.1 million, or
3.1%, to $70.2 million for the year ended December 31, 2008 from $68.1
million for the year ended December 31, 2007 due to (1) an increase
in revenues of $1.1 million at the Cordova Center due to improved occupancy, (2) an
increase in revenues of $0.5 million at the Midtown Center which was reactivated
in September 2007, (3) an increase in revenues of $0.6 million at
Southwood due to increased occupancy, (4) revenues of $0.3 million at a
new jail (Bell Gardens Jail) we began operating in March 2008 and (5) an
increase in revenues of $0.5 million at the Oakland Center due to improved
occupancy. The increase in revenues was
offset, in part, by (1) a decrease in revenues of $1.3 million due to the
termination of our management contract for the Lincoln County Detention Center
in May 2008 (we gave notice of early termination of our management
contract for the facility in February 2008 due to continual staffing and
other issues in the rural area. This contract generated revenues of
approximately $0.6 million and $1.9 million in the years ended December 31,
2008 and 2007, respectively), (2) a decrease in revenues of $0.9 million
at the Grossman Center due to reduced occupancy and (3) a decrease in
revenues of $0.5 million at the Reid Correctional Facility as a result of
decreased occupancy due to the damages caused by Hurricane Ike. The remaining net increase in revenues of
$1.8 million was due to various insignificant fluctuations in revenues at our
various other adult community-based facilities and programs.
Average contract
occupancy was 99.0% for the year ended December 31, 2008 compared to
101.1% for the year ended December 31, 2007.
The average per diem rate
for our residential Adult Community-Based Services facilities was $68.47 for
the year ended December 31, 2008 compared to $62.91 for the year ended December 31,
2007. The average fee-for-service rate for our non-residential Adult
Community-Based Services facilities and programs was approximately $11.00 for
the year ended December 31, 2008 compared to approximately $13.70 for the
year ended December 31, 2007. Our
average fee-for-service rates can fluctuate from year to year due to changes in
the mix of services provided by our various non-residential Adult
Community-Based Services facilities and programs.
Operating Expenses.
Operating expenses, excluding depreciation
and amortization, increased approximately $6.5 million, or 2.4%, to $280.6
million for the year ended December 31, 2008 from $274.1 million for the
year ended December 31, 2007.
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Adult Secure Services.
Adult Secure
Services operating expenses increased approximately $5.1 million, or 3.9%, to
$135.6 million for the year ended December 31, 2008 from
$130.5 million for the year ended December 31,
2007 due primarily to (1) an increase in operating expenses of $8.8
million at the Great Plains Correctional Facility due to increased occupancy
following the facility expansion completed in September 2008, (2) an
increase in operating expenses of $3.5 million at the D. Ray James Prison due
to increased occupancy following the facility expansion completed in February 2008,
(3) an increase in operating expenses of $1.8 million at the High Plains
Correctional Facility acquired in May 2007, (4) an increase in
operating expenses of $1.5 million at the Big Spring Correctional Center due to
increased occupancy following a facility expansion completed in November 2007
and (5) an increase in operating expenses of $1.3 million at the Walnut
Grove Youth Correctional Facility due to increased occupancy following a
facility expansion completed in September 2008. The increase in operating expenses due to the
above was offset, in part, by (1) a decrease in operating expenses of $7.5
million due to the transition of our management contract at the Donald W. Wyatt
Detention Center to the facilitys owner in July 2007 and (2) a
decrease in operating expenses of $3.1 million at the Regional Correction
Center due to decreased occupancy following the removal of all ICE inmates in August 2007. The remaining net decrease in operating
expenses of approximately $1.2 million was due to various insignificant
fluctuations in operating expenses at our other adult secure facilities and divisional
operating expenses.
As a percentage of
segment revenues, adult secure services operating expenses were 64.8% for the
year ended December 31, 2008 compared to 71.2% for the year ended December 31,
2007. The 2008 operating margin was
favorably impacted by the $1.5 million contract-based revenue adjustment for
the contract year ended March 2008 at the Regional Correctional
Center. Additionally, the 2007 operating
margin was negatively impacted by the termination of our contract at the Great
Plains Correctional Facility in April 2007 as we transitioned to its
reactivation in September 2007 under our new contract with the Arizona
Department of Corrections.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services operating expenses increased $2.1
million, or 2.2%, to approximately $95.6 million for the year ended December 31,
2008 from $93.5 million for the year ended December 31, 2007 due primarily
to (1) an increase in operating expenses of $1.7 million at the Cornell
Abraxas Academy due to increased occupancy, (2) an increase in operating
expenses of $1.2 million at the Hector Garza Residential Treatment Center due
to increased occupancy, (3) an increase in operating expenses of $0.8
million at our Cornell Abraxas of Ohio facility due to the addition of a new
residential program in 2008, and (4) an increase in operating expenses of
$0.4 million at the Southern Peaks Regional Treatment Center due to increased
occupancy. The increase in operating
expenses was offset, in part, by (1) a decrease in operating expenses of
$1.8 million due to the termination of our management contract for the
Harrisburg Alternative Education School Program for the 2007-2008 school year
(due to lack of funding by the contracting agency), (2) a decrease in
operating expenses of $0.9 million due to the termination of our management
contract for the Salt Lake Valley Detention Center as of September 2008, (3) a
decrease in operating expenses of $0.9 million due to the termination of our
management contract for the Reading Alternative Education School Program in June 2008
and (4) a decrease in operating expenses of $0.6 million at the Texas
Adolescent Treatment Center due to reduced occupancy. The remaining net increase in operating
expenses of $2.2 million was due to various insignificant fluctuations in
operating expenses at our various Abraxas Youth and Family Services facilities
and programs.
As a percentage of segment revenues, Abraxas
operating expenses were 89.1% for the year ended December 31, 2008
compared to 85.5% for the year ended December 31, 2007. The 2008 operating
margin was negatively impacted by the lower utilization at those facilities
previously noted.
Adult Community-Based Services.
Adult Community-Based Services operating expenses decreased $0.7
million, or 1.4%, to $49.4 million for the year ended December 31, 2008
from $50.1 million for the year ended December 31, 2007 due primarily to (1) a
decrease in operating expenses of $1.2 million due to the termination of our
management contract at the Lincoln County Detention Center as of September 2008,
(2) a decrease in operating expenses of $0.5 million at the Grossman
Center due to reduced occupancy and (3) a decrease in operating expenses
of $0.1 million at the Reid Community Residential Facility due to reduced
occupancy resulting from damages sustained during Hurricane Ike. The decrease
in operating expenses was offset, in part, by (1) an increase in operating
expenses of $0.4 million at the Midtown Center which we reactivated in September 2007
and (2) operating expenses of $0.3 million at a new jail we began
operating in March 2008. The
remaining net increase in operating expenses of $0.4 million was due to various
insignificant fluctuations in operating expenses at our numerous adult
community-based facilities and programs.
As
a percentage of segment revenues, the segments operating expenses were 70.5%
for the year ended December 31, 2008 compared to 73.5% for the year ended December 31,
2007. The 2008 operating margin was
favorably impacted by increased operations driven by a change in the mix of
services provided during the year.
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Pre-Opening and Start-up Expenses.
There were no pre-opening and start-up costs for the
years ended December 31, 2008 and 2007.
Pre-opening and start-up costs were approximately $2.7 million for the
year ended December 31, 2006 and were attributable to the Moshannon Valley
Correctional Center. These expenses consisted primarily of personnel and
related expenses, professional and recruiting expenses.
Depreciation and Amortization
.
Depreciation and amortization
increased approximately $1.9 million, or 11.9%, to $17.9 million for the year
ended December 31, 2008 from $16.0 million for the year ended December 31,
2007.
Depreciation
increased approximately $2.2 million due primarily to 1) an increase of $1.2
million due to depreciation expense resulting from the facility expansion
activations and related furniture, fixtures and equipment purchases at the Big
Spring Correctional Center (in November 2007), the Great Plains
Correctional Facility (in September 2008) and the D. Ray James Prison (in February 2008)
and 2) additional depreciation expense of $0.1 million as a result of the
purchase of the High Plains Correctional Facility in May 2007 and the
Washington, D.C. Facility in October 2007.
Amortization of intangibles was approximately $2.2 million and $2.4
million the years ended December 31, 2008 and 2007, respectively.
General and Administrative Expenses.
General and administrative expenses increased
approximately $0.5 million, or 2.0%, to $26.0 million for the year ended December 31,
2008 from approximately $25.5 million for the year ended December 31,
2007. General and administrative
expenses for 2007 include our reimbursement to Veritas of approximately $2.5
million of costs related to the Merger Agreement (see Note 13 to the
consolidated financial statements concerning this Merger Agreement) and legal
and professional fees and development costs of approximately $1.2 million
related to the Merger Agreement.
Additionally, general and administrative costs for 2007 include a net
$1.5 million legal claims settlement received in August 2007.
Interest.
Interest expense, net of interest income, decreased
approximately $0.3 million to $24.0 million for the year ended December 31,
2008 from $24.3 million for the year ended December 31, 2007. Interest
income for the year ended December 31, 2008 includes a net gain of
approximately $1.2 million related to the change in fair value of certain derivative
instruments pertaining to MCF, a special purpose entity
(see Note 11 to
the consolidated financial statements).
Additionally,
for the year ended December 31, 2008, we capitalized interest of $2.9
million related to the facility expansion projects at the Great Plains
Correctional Facility and the D. Ray James Prison. These were partially offset
by increased interest expense of approximately $2.4 million primarily driven by
higher average borrowings outstanding in 2008 under our Amended Credit
Facility, partially offset by a declining interest rate environment in
2008. For the year ended December 31,
2007, we capitalized interest of approximately $1.2 million related to the
facility expansion projects at the Big Spring Correctional Center, the D. Ray
James Prison and the Great Plains Correctional Facility.
Income Taxes.
For the year ended December 31,
2008, we recognized a provision for income taxes on our income from continuing
operations at an estimated effective rate of 40.8%. For the year ended December 31,
2007, we recognized a provision for income taxes at an estimated effective rate
of 42.6%. The reduction in the estimated income tax rate in 2008 is principally
due to an increase in operating income across certain of our business segments,
the decreased impact of certain nondeductible expenses and the utilization of
various tax credits.
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues
.
Revenues decreased
approximately $0.3 million, or 0.08%, to $360.6 million for the year ended December 31,
2007 from $360.9 million for the year ended December 31, 2006.
Adult Secure Services.
Adult Secure
Services revenues increased approximately $4.4 million, or 2.5%, to $183.2
million for the year ended December 31, 2007 from $178.8 million for the
year ended December 31, 2006 due primarily to (1) an increase in
revenues of $9.7 million at the
Moshannon Valley Correctional Center which opened in April 2006, (2) revenues
of $2.9 million at the High Plains Correctional Facility acquired in May 2007,
(3) an increase in revenues of $2.1 million at the Big Spring Correctional
Center due to an increase in the effective per diem rate under our new
take-or-pay contract with the BOP as well as increased occupancy as a result of
the facility expansion completed in November 2007 and (4) an increase in revenues of
approximately $1.8 million at the Leo Chesney Community Correctional Facility
and $1.4 million at the D. Ray James Prison, both due primarily to per diem
rate increases. The increase in revenues
from the above was offset, in part, by (1) a decrease in revenues of $7.2
million due to our termination of our management contract with OK DOC at the
Great Plains Correctional Facility in April 2007 (the facility began
receiving inmates under a new operating contract with the Arizona Department of
Corrections in September 2007), (2) a decrease in revenues of
approximately $4.9 million at the Regional Correctional Center due to the
withdrawal of inmates by ICE during the latter half of 2007 and (3) a
decrease in revenues of $2.1 million at the Donald W. Wyatt Detention Center
due to the transition of our management contract to the
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facilitys
owner in July 2007. The remaining
net increase in revenues of approximately $0.7 million was due to various
insignificant fluctuations in revenues at our other adult secure facilities.
Average
contract occupancy was 100.4% for the year ended December 31, 2007
compared to 98.2% for the year ended December 31, 2006.
The average per diem rate
was $54.69 for the year ended December 31, 2007 compared to $56.12 for the
year ended December 31, 2006. The
2007 average per diem rate was unfavorably impacted by the increase in
population at the Moshannon Valley Correctional Center which opened in April 2006. This facility is operated under a take-or-pay
contract. As a result, the average per
diem rate will decrease as population increases. The facility was ramping up in population
subsequent to its April 2006 opening; as a result, the higher occupancy in
2007 lowered the average per diem rate for the Adult Secure Services
division. Additionally, the 2006 average
per diem rate benefited from the receipt of a contract based revenue adjustment
for the contract year ended March 2006 in the net amount of $2.4 million
at the RCC. There were no revenues
attributable to start-up operations for the years ended December 31, 2007
and 2006.
Abraxas Youth and Family Services
.
Abraxas Youth and Family Services revenues decreased approximately $6.5
million, or 5.6%, to $109.3 million for the year ended December 31, 2007
from $115.8 million for the year ended December 31, 2006 due primarily to (1) a
decrease in revenues of $9.9 million due to the termination of our management
contract at the Alexander Youth Services Center in January 2007, (2) a
decrease in revenues of $1.9 million due to the termination of our management
contract at the South Mountain Secure Treatment Unit (SMSTU) in June 2006
and (3) a decrease in revenues of $1.2 million due to the termination of
our management contract for the Harrisburg Alternative Education School
Program. In July 2007, we were
notified that the funding for this program was discontinued for the 2007-2008
school year. The decrease in revenues
due to the above was offset, in part, by (1) an increase in revenues of
$3.5 million at the Cornell Abraxas Academy which we reactivated in October 2006,
(2) revenues of approximately $0.7 million at the Hector Garza Residential
Treatment Center which we reactivated in August 2007 and (3) an
increase in revenues of approximately $1.6 million at the Leadership
Development Program due to increased occupancy. The remaining net increase in
revenues of approximately $0.7 million was due to various insignificant
fluctuations in revenues at our other Abraxas Youth and Family Services
facilities and programs.
Average contract
occupancy was 92.0% for the year ended December 31, 2007 compared to 93.2%
for the year ended December 31, 2006.
The average per diem rate
for our Abraxas Youth and Family Services facilities was approximately $174.93
for the year ended December 31, 2007 compared to approximately $170.33 for
the year ended December 31, 2006. The increase in the 2007 average per
diem rate was due primarily to the reactivation of the Cornell Abraxas Academy
in October 2006 and the Hector Garza Residential Treatment Center in August 2007. Additionally, we received annual rate
increases at certain of our other Abraxas Youth and Family Services residential
facilities. The average fee-for-service rate
for our non-residential community-based Abraxas Youth and Family Services
facilities and programs was approximately $44.35 for the year ended December 31,
2007 compared to approximately $37.59 for the year ended December 31,
2006. Our average fee-for-service rate
can fluctuate from year to year depending on the mix of services provided at
our various non-residential Abraxas Youth and Family Services facilities and
programs. There were no revenues
attributable to start-up operations for the years ended December 31, 2007
and 2006.
Adult Community-Based Services.
Adult
Community-Based Services revenues increased approximately $1.8 million, or
2.7%, to $68.1 million for the year ended December 31, 2007 from $66.3
million for the year ended December 31, 2006 principally due to an
increase in revenues of approximately $0.8 million from the operations of two
jails in California which we began managing in January 2007 and an
increase in revenues of approximately $0.5 million at the Las Vegas Center due
to increased occupancy. Additionally, we
had a decrease in revenues of approximately $0.9 million due to the termination
of our management contract for the SWICC Turning Point Program in October 2006. The remaining net increase in revenues of
$1.4 million was due to various insignificant fluctuations in revenues at our
various adult community-based facilities and programs.
Average contract
occupancy was 101.1% for the year ended December 31, 2007 compared to
97.7% for the year ended December 31, 2006.
The average per diem rate
for our residential Adult Community-Based Services facilities was $62.91 for
the year ended December 31, 2007 compared to $61.71 for the year ended December 31,
2006. The average fee-for-service rate for our non-residential Adult Community-Based
Services facilities and programs was approximately $13.70 for the year ended December 31,
2007 compared to approximately $11.23 for the year ended December 31,
2006. Our average fee-for-service rates
can fluctuate from year to year due to changes in the mix of services provided
by our various non-residential Adult
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Community-Based Services
facilities and programs. There were no revenues attributable to start-up
operations for the years ended December 31, 2007 and 2006.
Operating Expenses.
Operating expenses decreased approximately
$0.9 million, or 0.3%, to $274.1 million for the year ended December 31, 2007
from $275.0 million for the year ended December 31, 2006.
Adult Secure Services.
Adult Secure
Services operating expenses increased approximately $7.2 million, or 5.8%, to
$130.5 million for the year ended December 31, 2007 from
$123.3 million for the year ended December 31,
2006 due primarily to (1) an increase in operating expenses of $7.9
million at the Moshannon Valley Correctional Center which opened in April 2006
(approximately $2.7 million of operating expenses at this facility were
included in pre-opening and start-up expenses in 2006), (2) an increase in
operating expenses of $2.6 million at the High Plains Correctional Facility
purchased in May 2007, (3) an increase in operating expenses of $0.8
million at the Big Spring Correctional Center due to increased occupancy
following completion of a facility expansion in November 2007 and (4) an
increase in operating expenses of $0.5 million at the Leo Chesney Correctional
Center due to increased occupancy. The
increase in operating expenses due to the above was offset, in part, by (1) a
decrease in operating expenses of $2.2 million due to our termination of our
contract at the Great Plains Correctional Facility with the OK DOC in April 2007
(the facility began receiving inmates under our contract with the Arizona
Department of Corrections in September 2007) and (2) a decrease in
operating expenses of $1.7 million due to the transition of our management
contract at the Donald W. Wyatt Detention Center to the facilitys owner in July 2007. The remaining net decrease in operating
expenses of approximately $0.7 million was due to various insignificant
fluctuations in operating expenses at our other adult secure facilities.
As a percentage of
segment revenues, Adult Secure Services operating expenses were 71.2% for the
year ended December 31, 2007 compared to 68.9% for the year ended December 31,
2006. The increase in the 2007
percentage reflects the stabilization of the operating margin at the Moshannon
Valley Correctional Center (which operates under a take-or-pay contract)
subsequent to its activation in April 2006. Additionally, the 2007 operating margin was
negatively impacted by the termination of our contract at the Great Plains
Correctional Facility in April 2007 as we transitioned to its reactivation
in September 2007 under our new contract with the Arizona Department of
Corrections.
Abraxas Youth and Family Services.
Abraxas Youth and Family Services operating expenses decreased
approximately $6.6 million, or 6.6%, to approximately $93.5 million for the
year ended December 31, 2007 from $100.1 million for the year ended December 31,
2006 due primarily to (1) a decrease in operating expenses of $9.1 million
due to the termination of our management contract at the Alexander Youth
Services Center in January 2007, (2) a decrease in operating expenses
of $1.6 million due to the termination of our management contract at the SMSTU
in June 2006 and (3) a decrease in operating expenses of $0.7 million
due to the termination of our management contract for the Harrisburg
Alternative Education School Program (in July 2007, we were notified that
the funding for this program was discontinued for the 2007-2008 school
year). The decrease in operating
expenses due to the above was offset, in part, by various increases (totaling
approximately $4.8 million) in operating expenses at both our residential and
non-residential Abraxas Youth and Family Services facilities and programs,
including an increase in operating expenses of approximately $1.7 million due
to the reactivation of the Cornell Abraxas Academy in October 2006, as
well as an increase in operating expenses of $0.6 million at our Washington,
D.C. facility as 2006 operating expenses at this facility were reflected in
discontinued operations in the year ended December 31, 2006.
As a percentage of segment revenues, Abraxas
operating expenses were 85.5% for the year ended December 31, 2007
compared to 86.4% for the year ended December 31, 2006.
Adult Community-Based Services.
Adult Community-Based Services operating expenses decreased
approximately $1.6 million, or 3.1%, to $50.1 million for the year ended December 31,
2007 from $51.7 million for the year ended December 31, 2006 due to
various fluctuations in operating expenses at our numerous adult community-based
facilities and programs including a decrease in operating expenses of
approximately $0.9 million due to the termination of our management contract
for the SWICC Turning Point Program in October 2006 and a decrease in
divisional administrative costs of approximately $1.1 million. Additionally, we had an increase in operating
expenses of approximately $0.6 million from the two jails in California we
began operating in January 2007.
As
a percentage of segment revenues, the segments operating expenses were 73.5%
for the year ended December 31, 2007 compared to 78.0% for the year ended December 31,
2006. The 2007 operating margin was
favorably impacted by lower divisional administrative costs in year ended December 31,
2007 as compared to the year ended December 31, 2006.
Pre-Opening and Start-up Expenses.
There were no pre-opening and start-up costs for the
year ended December 31, 2007.
Pre-opening and start-up costs were approximately $2.7 million for the
year ended December 31, 2006 and were
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attributable
to the Moshannon Valley Correctional Center. These expenses consisted primarily
of personnel and related expenses, professional and recruiting expenses.
Depreciation and Amortization
.
Depreciation and amortization
decreased approximately $0.3 million, or 1.8%, to $16.0 million for the year
ended December 31, 2007 from $16.3 million for the year ended December 31,
2006.
Depreciation
and amortization of property and equipment declined approximately $0.6 million
due to a decrease in depreciation expenses related to certain fully depreciated
(in 2007) furniture and fixtures, computer and other equipment of approximately
$1.1 million, offset, in part, by an increase in building depreciation expense
of approximately $0.8 million related primarily to the Moshannon Valley
Correctional Center which opened in April 2006, the High Plains
Correctional Facility purchased in May 2007 and the purchase of the
Washington, D.C. facility in October 2007.
Amortization of intangibles was approximately $2.4 million and $2.2
million the years ended December 31, 2007 and 2006, respectively.
General and Administrative Expenses.
General and administrative expenses increased
approximately $3.8 million, or 17.5%, to $25.5 million for the year ended December 31,
2007 from approximately $21.7 million for the year ended December 31, 2006
due primarily to (1) our reimbursement to Veritas of approximately $2.5
million of costs related to the Merger Agreement (see Note 13 to the
consolidated financial statements concerning this Merger Agreement), (2) an
increase in legal and professional fees and development costs of approximately
$1.2 million related to the Merger Agreement and (3) an increase in
stock-based compensation expense of approximately $0.7 million. The increase in general and administrative
expenses due to the above was offset, in part, by the net $1.5 million legal
claims settlement received in August 2007.
Interest.
Interest expense, net of interest income, increased
approximately $1.2 million to $24.3 million for the year ended December 31,
2007 from $23.1 million for the year ended December 31, 2006. For the year ended December 31, 2007,
we capitalized interest of approximately $1.2 million related to the facility
expansion projects at the Big Spring Correctional Center, the D. Ray James
Prison and the Great Plains Correctional Facility. For the year ended December 31, 2006, we
capitalized interest of approximately $1.5 million related to the Moshannon
Valley Correctional Center. Furthermore,
we incurred interest expense of approximately $0.4 million related to our
Amended Credit Facility during the year ended December 31, 2007 (none
incurred in 2006). The decrease was also
due to a reduction in interest income from approximately $3.1 million in the
year ended December 31, 2006 to approximately $2.0 million in the year
ended December 31, 2007 (due to lower levels of invested funds (and rates)
due to the on-going 2007 expansion projects and acquisitions). These were partially offset by reduced
interest expense of approximately $0.8 million on the MCF bonds due to a $10.5
million principal payment made in July 2007.
Income Taxes.
For the year ended December 31,
2007, we recognized a provision for income taxes on our income from continuing
operations at an estimated effective rate of 42.6%. For the year ended December 31, 2006, we
recognized a provision for income taxes at an estimated effective rate of
42.1%.
Liquidity and Capital Resources
General
.
Our primary capital requirements are for (1) purchases,
construction or renovation of new facilities, (2) expansions of existing
facilities, (3) working capital, (4) pre-opening and start-up costs
related to new operating contracts, (5) acquisitions of businesses or facilities, (6) information
systems hardware and software and (7) furniture, fixtures and
equipment. Working capital requirements
generally increase immediately prior to commencing management of a new facility
(or activation of facility expansion) as we incur start-up costs and purchase
necessary equipment and supplies before facility management revenue is
realized.
Cash Flows From Operations.
Cash provided by
operating activities was approximately $59.0 million for the year ended December 31,
2008 compared to approximately $27.2 million for the year ended December 31,
2007. The increase over the prior year was principally due to higher net income
as well as changes in certain working capital accounts (including principally
accounts receivable and accounts payable) due to timing of payments received
and made.
Cash Flows From Investing Activities
.
Cash used in investing activities was approximately
$81.7 million for the year ended December 31, 2008 due to (1) capital
expenditures of $79.9 million related primarily to the facility expansion
projects at the Great Plains Correctional Facility and the D. Ray James Prison,
(2) net payments to the restricted debt payment account of approximately
$2.9 million, (3) proceeds from the sale of fixed assets of $0.8 million
and (4) sales of investment securities of $0.3 million.
Cash
used in investing activities
was
approximately $64.5 million in the year ended December 31, 2007 due to (1) capital
expenditures of approximately $50.9 million related primarily to construction
costs associated with the Big Spring Correctional Center and the D. Ray James
Prison expansions and development of the Hudson, Colorado site, (2) net sales
of investment securities of $11.7 million, (3) the
purchase of the Washington, D.C. facility
for $9.6 million, (4) the purchase of the High Plains Correctional
Facility for approximately $8.9 million, (5) the Hudson, Colorado site
acquisition of
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approximately $5.1 million and (6) net payments
to the restricted debt payment account of approximately $2.1 million.
Cash Flows From Financing Activities
.
Cash provided by financing activities was
approximately $34.3 million for the year ended December 31, 2008 due to (1) net
borrowings on our Amended Credit Facility of $45.0 million and (2) proceeds
from the exercise of stock options of $0.6 million, partially offset by
payments on MCF bonds of $11.4 million.
Cash provided by financing
activities was approximately $21.8 million for the year ended December 31,
2007 due primarily to borrowings on our Amended Credit Facility of $30.0
million, partially offset by a $10.5 million payment on MCFs bonds in July 2007
and proceeds from the exercise of stock options and warrants of approximately
$2.8 million. Additionally, we
recognized a tax benefit on stock option exercises of approximately $0.4
million and had payments of approximately $0.8 million for financing costs
related to our Amended Credit Facility.
Long-Term Credit Facilities.
Our Amended Credit Facility
provides for borrowings up to $100.0 million (including letters of credit),
matures in December 2011 and bears interest, at our election depending on
our total leverage ratio, at either the LIBOR rate plus a margin ranging from
1.50% to 2.25%, or a rate which ranges from 0.00% to 0.75% above the applicable
prime rate. The available commitment under our Amended Credit Facility was
approximately $10.1 million at December 31, 2008. We had outstanding
borrowings under our Amended Credit Facility of $75.0 million and we had
outstanding letters of credit of approximately $14.9 million at December 31,
2008. Subject to certain requirements, we have the right to increase the
commitments under our Amended Credit Facility up to $150.0 million, although
the indenture for our Senior Notes limits our ability, subject to certain
conditions, to expand the Amended Credit Facility beyond $100.0 million. We can provide no assurance that all of the
banks that have made commitments to us under our Amended Credit Facility would
be willing to participate in an expansion to the Amended Credit Facility should
we desire to do so. The Amended Credit Facility is collateralized by
substantially all of our assets, including the assets and stock of all of our
subsidiaries. The Amended Credit Facility is not secured by the assets of MCF,
a special purpose entity. Our Amended Credit Facility contains commonly used
covenants including compliance with laws and limitations on certain financing
transactions and mergers and also includes various financial covenants.
We believe the most restrictive covenant under our Amended Credit
Facility is the fixed charge coverage ratio. At December 31, 2008,
we were in compliance with all of our debt financial covenants.
MCF is obligated for the outstanding
balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47%
per annum and are payable in semi-annual installments of interest and annual
installments of principal. All unpaid
principal and accrued interest on the bonds is due on the earlier of August 1,
2016 (maturity) or as noted under the bond documents. The bonds are limited, nonrecourse
obligations of MCF and secured by the property and equipment, bond reserves,
assignment of subleases and substantially all assets related to the facilities
included in the 2001 Sale and Leaseback Transaction (in which we sold eleven
facilities (as identified in Item 1 of this report) to MCF). The bonds are not guaranteed by Cornell.
In June 2004, we issued $112.0
million in principal of 10.75% Senior Notes the (Senior Notes) due July 1,
2012. The Senior Notes are unsecured
senior indebtedness and are guaranteed by all of our existing and future
subsidiaries (collectively, the Guarantors).
The Senior Notes are not guaranteed by MCF (the Non-Guarantor). Interest on the Senior Notes is payable
semi-annually on January 1 and July 1 of each year, commencing January 1,
2005. On or after July 1, 2008, we
may redeem all or a portion of the Senior Notes at the redemption prices
(expressed as a percentage of the principal amount) listed below, plus accrued
and unpaid interest, if any, on the Senior Notes redeemed, to the applicable
date of redemption, if redeemed during the 12-month period commencing on July 1
of each of the years indicated below:
Year
|
|
Percentages
|
|
|
|
|
|
2008
|
|
105.375
|
%
|
2009
|
|
102.688
|
%
|
2010 and thereafter
|
|
100.000
|
%
|
Upon the occurrence of
specified change of control events, unless we have exercised our option to
redeem all the Senior Notes as described above, each holder will have the right
to require us to repurchase all or a portion of such holders Senior Notes at a
purchase price in cash equal to 101% of the aggregate principal amount of the
notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes
repurchased, to the applicable date of purchase. The Senior Notes were issued under an
indenture which limits our ability and the ability of our Guarantors to, among
other things, incur additional indebtedness, pay dividends or make other
distributions, make other restricted payments and investments, create liens,
incur restrictions on the ability of the Guarantors to pay dividends or other
payments to us, enter into transactions with affiliates, and engage in mergers,
consolidations and certain sales of assets.
In conjunction with the
issuance of the Senior Notes, we entered into an interest rate swap transaction
with a financial
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institution
to hedge our exposure to changes in the fair value on $84.0 million of our
Senior Notes. The purpose of this
transaction was to convert future interest due on $84.0 million of the Senior
Notes to a variable rate. The terms of
the interest rate swap contract and the underlying debt instrument were
identical. The swap agreement was
designated as a fair value hedge. The
swap had a notional amount of $84.0 million and matured in July 2012 to
mirror the maturity of the Senior Notes.
Under the agreement, we paid, on a semi-annual basis (each January 1
and July 1), a floating rate based on a six-month U.S. dollar LIBOR rate,
plus a spread, and receive a fixed-rate interest of 10.75%. For the year ended December 31,
2007, we recorded interest expense related to this interest rate swap of
approximately $0.1 million. Because the swap agreement was an effective
fair-value hedge, there was no effect on our results of operations from the
mark-to-market adjustment while the swap was in effect. In October 2007, we terminated the swap
agreement. We received approximately
$0.2 million in conjunction with the termination, which is being amortized over
the remaining term of the Senior Notes.
Future Liquidity
Our
shelf registration statement on Form S-3 for potential offerings from time
to time of up to $75.0 million in gross proceeds of debt securities, common
stock, preferred stock, warrants or certain other securities was declared
effective by the Securities and Exchange Commission in September 2008.
We
expect to use existing cash balances, internally generated cash flows and
borrowings from our Amended Credit Facility to fulfill anticipated obligations
such as capital expenditures, working-capital needs and scheduled debt
maturities over at least the next twelve months. As of December 31, 2008
we have approximately $10.1 million of available capacity under our Amended
Credit Facility. We will continue to analyze our capital structure, including a
potential refinancing of our Senior Notes and financing for our expected future
capital expenditures, including any potential acquisitions. We will consider
potential acquisitions from time to time. Our principal focus for acquisitions
is anticipated to be in our Adult Secure and Adult Community-Based divisions,
although we would also pursue attractively priced acquisitions in our Abraxas Youth
and Family Services division. We may decide to use internally generated funds,
bank financing, equity issuances, debt issuances or a combination of any
of the foregoing to finance our future capital needs. At December 31, 2008
we believe we have sufficient liquidity necessary to complete those projects
for which we have outstanding commitments.
Our
internally generated cash flow is directly related to our business. Should the
private corrections and juvenile businesses deteriorate, or should we
experience poor results in our operations, cash flow from operations may be
reduced. We have, however, continued to generate positive cash flow from
operating activities over recent years and expect that cash flow will continue
to be positive over the next year. Our access to debt and equity markets may be
reduced or closed to us due to a variety of events, including, among others,
restrictions under our Senior Notes indenture or our Amended Credit Facility,
industry conditions, general economic conditions, market conditions, credit
rating agency downgrades of our debt and/or market perceptions of us and our
industry. The extreme volatility seen in the financial markets beginning in the
third quarter of 2008 has continued into the first quarter of 2009 and is
expected to be present for the near term. Such volatility could result in
decreased availability of capital at economical terms and could also put
additional financial and budgetary pressure on our customers. Such conditions
could potentially result in our inability to pursue additional future growth
opportunities (such as facility expansions or new facility construction) and,
if coupled with unexpected client, operational or other issues affecting our cash
flow, in a need to seek additional financing at terms we would otherwise not
accept.
In
addition, our accounts receivable are with federal, state, county and local
government agencies, which we believe generally reduces our credit risk.
However, it is possible that situations such as continuing budget resolutions,
delayed passage of budgets or budget pressures, may increase the length of
repayment of certain of these receivables.
Contractual Uncertainties Related to
Certain Facilities
Regional Correctional Center.
The Office of Federal Detention Trustee
(OFDT) holds the contract for the use of the Regional Correctional Center on
behalf of ICE, USMS and the BOP with Bernalillo County through an
intergovernmental services agreement, and we have an operating and management
agreement with Bernalillo County. In July 2007,
we were notified by ICE that it was removing all ICE detainees from the
Regional Correctional Center and the removal was completed in early August 2007.
The facility is still being utilized by the USMS, and since May 2008 by the
BOP, but not at its full capacity. In February 2008,
ICE informed us that it would not resume use of the facility. In February 2008, OFDT attempted to
unilaterally amend its agreement with the County to reduce the number of
minimum annual guaranteed mandays under the agreement from 182,500 to
66,300. Neither we nor the County believe OFDT has the right to
unilaterally amend the contract in this manner, and OFDT has been informed of
our position. Although either party to the intergovernmental services agreement
has the right to terminate upon 180 days notice, neither party has exercised
such right as of December 31, 2008.
Also,
there is a motion pending in a lawsuit against the County concerning the County
jail system that could involve the Regional Correctional Center in such case.
Jimmy McClendon and other plaintiffs sued the County in federal district
court in
43
Table of
Contents
the
District of New Mexico in 1994 over conditions at the county jail, which was
then located at what is now the Regional Correctional Center and run by the
County. The County subsequently built their new Metropolitan Detention
Center to house the County inmates and also negotiated two stipulated
agreements in 2004 designed to end the McClendon lawsuit. The court in
that case is considering the application of the lawsuit to the Regional
Correctional Center as a result of the Countys ownership of the
facility. The County has informed us that, should the court rule that
the case applies to the facility, it plans to appeal the decision since the
County does not believe McClendon should apply to the Regional Correctional
Center. We do not believe we are contractually obligated to bear any
incremental costs of complying with McClendon although the County has
expressed its desire for us to absorb a portion of any costs that would be
incurred. Should the court rule that the lawsuit applies to the facility,
we would further discuss the matter with the County. We plan to continue to
operate the facility and also continue with our marketing plans for the
Regional Correctional Center.
Revenues
for this facility were approximately $9.9 million (including a $1.5 million
contract-based revenue adjustment for the contract year ended March 2008)
and $12.8 million for the years ended December 31, 2008 and 2007,
respectively. The net carrying value of the leasehold improvements for this
facility was approximately $1.1 million and $3.0 million at December 31,
2008 and 2007, respectively. Our lease for this facility requires monthly rent
payments of approximately $0.13 million for the remaining term of the lease
(through June 2009). To date, we have brought in the BOP as an
additional customer for this facility; however the facility still has
available capacity. Our inability to expand the existing population with
current or new customers could have an adverse effect on our financial
condition, results of operations and cash flows. We believe that pursuant
to the provisions of SFAS No. 144, no impairment to the carrying value of
the leasehold improvements for this facility has occurred.
Hector Garza Residential Treatment
Center.
In October 2005,
we initiated the temporary closure of this MCF leased facility in San Antonio,
Texas. We reactivated the facility during the third quarter of 2007. The net
carrying value for this facility was approximately $4.0 million and $4.2
million at December 31, 2008 and 2007, respectively. We believe
that, pursuant to the provisions of SFAS No. 144, no impairment to the
carrying value of this facility has occurred due to existing demand from
current customers and anticipated incremental demand from additional multiple
customers to whom the facility is being marketed.
Projects Under Development, Construction or Renovation
For a discussion of our
expansion projects at the Great Plains Correctional Facility in Hinton,
Oklahoma, the D. Ray James Prison in Folkston, Georgia and the Walnut Grove
Youth Correctional Facility in Walnut Grove, Mississippi, see -Significant
2008 Events.
Treasury Stock Repurchases
We did not purchase any of our common
stock in the years ended December 31, 2008 and 2007.
Under
the terms of our Senior Notes and our Amended Credit Facility, we can purchase
shares of our stock subject to certain cumulative restrictions.
Contractual Obligations and Commercial Commitments
We
have assumed various financial obligations and commitments in the ordinary
course of conducting our business. We
have contractual obligations requiring future cash payments, such as
management, consulting and non-competition agreements.
We
maintain operating leases in the ordinary course of our business activities. These leases include those for operating
facilities, office space and office and operating equipment, and the agreements
expire between 2009 and 2075. As of December 31, 2008, our total
commitment under these operating leases was approximately $120.6 million.
44
Table of Contents
The
following table details the known future cash payments (on an undiscounted
basis) related to various contractual obligations as of December 31, 2008
(in thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
2009
|
|
2010 - 2011
|
|
2012 - 2013
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt principal
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
$
|
112,000
|
|
$
|
|
|
$
|
|
|
$
|
112,000
|
|
$
|
|
|
·
Special Purpose Entities
|
|
134,100
|
|
12,400
|
|
28,000
|
|
33,000
|
|
60,700
|
|
Long-term debt interest
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
42,140
|
|
12,040
|
|
24,080
|
|
6,020
|
|
|
|
·
Special Purpose Entities
|
|
55,936
|
|
11,358
|
|
19,482
|
|
14,534
|
|
10,562
|
|
Revolving line of credit-principal
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
75,000
|
|
|
|
75,000
|
|
|
|
|
|
Revolving line of credit-interest
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
6,518
|
|
2,205
|
|
4,313
|
|
|
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
26
|
|
12
|
|
14
|
|
|
|
|
|
Construction commitments
|
|
6,795
|
|
6,795
|
|
|
|
|
|
|
|
Operating leases
|
|
120,635
|
|
7,598
|
|
16,662
|
|
21,748
|
|
74,627
|
|
Consultative and non-competition agreements
|
|
324
|
|
324
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
553,474
|
|
$
|
52,732
|
|
$
|
167,551
|
|
$
|
187,302
|
|
$
|
145,889
|
|
Approximately $2.5 million of unrecognized tax
benefits have been recorded as liabilities in accordance with FIN 48 but are
not included in the contractual obligations table because we are uncertain as
to if or when such amounts may be settled.
Related to the unrecognized tax benefits not included in the table
above, we have also recorded a liability for potential penalties of
approximately $0.1 million and for interest of approximately $0.1 million.
We enter into letters of credit in the ordinary
course of operating and financing activities.
As of December 31, 2008, we had outstanding letters of credit of
approximately $14.9 million primarily for certain workers compensation
insurance and other operating obligations.
The following table details our letter of credit commitments as of December 31,
2008 (in thousands):
|
|
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Total Amounts Committed
|
|
Less than 1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
More Than 5 Years
|
|
Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
14,854
|
|
$
|
13,604
|
|
$
|
1,250
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Table of Contents
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to
market risk, primarily from changes in interest rates. We continually monitor
exposure to market risk and develop appropriate strategies to manage this risk.
We are not exposed to any other significant market risks, including commodity
price risk, foreign currency exchange risk or interest rate risks from the use
of derivative financial instruments. In conjunction with the issuance of the
Senior Notes, we had previously entered into an interest rate swap of $84.0
million related to the interest obligations under the Senior Notes, in effect
converting them to a floating rate based on six-month LIBOR. As discussed in Part II,
Item 8, Note 8 to the accompanying financial statements, we terminated the
interest rate swap in October 2007.
Credit Risk
Due
to the short duration of our investments, changes in market interest rates
would not have a significant impact on their fair value. In addition, our
accounts receivables are with federal, state, county and local government
agencies, which we believe generally reduces our credit risk. However, it is
possible that such situations as continuing budget resolutions, delayed
passage of budgets or budget pressures may increase the length of repayment of
certain receivables.
Interest Rate Exposure
Our exposure to changes in interest rates
primarily results from our Amended Credit Facility, as these borrowings have
floating interest rates. The debt on our
consolidated financial statements at December 31, 2008 with fixed interest
rates consist of the 8.47% Bonds issued by MCF in August 2001 in
connection with the 2001 Sale and Leaseback Transaction and $112.0 million of
Senior Notes. The detrimental effect of
a hypothetical 100 basis point increase in interest rates on our current
borrowings under our Amended Credit Facility would be to reduce income before
provision for income taxes by approximately $0.8 million for the year ended December 31,
2008. At December 31, 2008, the
fair value of our consolidated fixed rate debt was approximately $308.0 million
based upon quoted market prices or discounted future cash flows using the same
or similar securities.
Inflation
Other
than personnel, resident/inmate medical costs at certain facilities, and employee
medical and workers compensation insurance costs, we believe that inflation
has not had a material effect on our results of operations during the past two
years. We have experienced significant increases in resident/inmate
medical costs and employee medical and workers compensation insurance costs,
and we have also experienced higher personnel costs during the past two years.
Most of our facility management contracts provide for payments of either fixed
per diem fees or per diem fees that increase by only small amounts during the
term of the contracts. Inflation could substantially increase our personnel
costs (the largest component of our operating expenses), medical and insurance
costs or other operating expenses at rates faster than any increases in
contract revenues. Food costs (part of our resident/inmate care costs) have
also been subject to rising prices in 2008. We believe we have limited our
exposure through long-term contracts with fixed term pricing.
ITEM 8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
46
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
Cornell
Companies, Inc.
In
our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of shareholders
equity, and of cash flows present fairly, in all material respects, the
financial position of Cornell Companies, Inc. and its subsidiaries
at December 31, 2008 and 2007, and the results of
their operations and their
cash flows for
each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on criteria established
in
Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on
these financial statements and on the Companys internal control over financial
reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such
other procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.
As
discussed in Note 7 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertainty in income taxes
effective January 1, 2007, in accordance with Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes.
A
companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
A companys internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
PricewaterhouseCoopers
LLP
Houston,
Texas
March 6,
2009
47
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED BALANCE
SHEETS
(in thousands, except share data)
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,613
|
|
$
|
3,028
|
|
Investment securities available for sale
|
|
|
|
250
|
|
Accounts receivable - trade (net of allowance for doubtful accounts
of $4,272 and $4,372, respectively)
|
|
64,622
|
|
69,787
|
|
Other receivables (net of allowance for doubtful accounts of $4,926
and $5,126, respectively)
|
|
4,766
|
|
3,201
|
|
Debt service fund and other restricted assets
|
|
31,370
|
|
27,523
|
|
Deferred tax assets
|
|
9,151
|
|
6,750
|
|
Prepaid expenses and other
|
|
6,368
|
|
6,131
|
|
Total current assets
|
|
130,890
|
|
116,670
|
|
PROPERTY AND EQUIPMENT, net
|
|
450,354
|
|
383,952
|
|
OTHER ASSETS:
|
|
|
|
|
|
Debt service reserve fund
|
|
23,750
|
|
23,638
|
|
Goodwill, net
|
|
13,308
|
|
13,355
|
|
Intangible assets, net
|
|
2,320
|
|
4,520
|
|
Deferred costs and other
|
|
16,299
|
|
20,152
|
|
Total assets
|
|
$
|
636,921
|
|
$
|
562,287
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
69,093
|
|
$
|
57,502
|
|
Current portion of long-term debt
|
|
12,412
|
|
11,411
|
|
Total current liabilities
|
|
81,505
|
|
68,913
|
|
LONG-TERM DEBT, net of current portion
|
|
308,070
|
|
275,298
|
|
DEFERRED TAX LIABILITIES
|
|
17,491
|
|
13,226
|
|
OTHER LONG-TERM LIABILITIES
|
|
1,688
|
|
4,401
|
|
Total liabilities
|
|
408,754
|
|
361,838
|
|
|
|
|
|
|
|
MINORITY INTEREST
|
|
445
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
Preferred stock, $.001 par value, 10,000,000 shares authorized, none
issued
|
|
|
|
|
|
Common stock, $.001 par value, 30,000,000 shares authorized,
16,238,685 and 16,068,677 shares issued and 14,732,522 and 14,553,631 shares
outstanding, respectively
|
|
16
|
|
16
|
|
Additional paid-in capital
|
|
164,746
|
|
160,319
|
|
Retained earnings
|
|
73,318
|
|
51,127
|
|
Treasury stock (1,506,163 and 1,515,046 shares of common stock, at
cost, respectively)
|
|
(12,034
|
)
|
(12,105
|
)
|
Accumulated other comprehensive income
|
|
1,676
|
|
1,092
|
|
Total stockholders equity
|
|
227,722
|
|
200,449
|
|
Total liabilities and stockholders equity
|
|
$
|
636,921
|
|
$
|
562,287
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
48
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share
data)
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
386,724
|
|
$
|
360,604
|
|
$
|
360,855
|
|
OPERATING EXPENSES, EXCLUDING DEPRECIATION
|
|
280,630
|
|
274,110
|
|
275,395
|
|
PRE-OPENING AND START-UP EXPENSES
|
|
|
|
|
|
2,657
|
|
DEPRECIATION AND AMORTIZATION
|
|
17,943
|
|
15,986
|
|
16,285
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
25,954
|
|
25,499
|
|
21,720
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
62,197
|
|
45,009
|
|
44,798
|
|
INTEREST EXPENSE
|
|
26,946
|
|
26,215
|
|
26,130
|
|
INTEREST INCOME
|
|
(2,988
|
)
|
(1,951
|
)
|
(3,060
|
)
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST
|
|
38,239
|
|
20,745
|
|
21,728
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
15,603
|
|
8,835
|
|
9,148
|
|
|
|
|
|
|
|
|
|
Income from Continuing operations
|
|
22,636
|
|
11,910
|
|
12,580
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST IN CONSOLIDATED SPECIAL PURPOSE ENTITY
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF $381 in 2006
|
|
|
|
|
|
(707
|
)
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
22,191
|
|
$
|
11,910
|
|
$
|
11,873
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
BASIC:
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.55
|
|
$
|
.84
|
|
$
|
.90
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
(.05
|
)
|
Net income
|
|
$
|
1.55
|
|
$
|
.84
|
|
$
|
.85
|
|
|
|
|
|
|
|
|
|
DILUTED:
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.51
|
|
$
|
.82
|
|
$
|
.89
|
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
(.05
|
)
|
Net income
|
|
$
|
1.51
|
|
$
|
.82
|
|
$
|
.84
|
|
|
|
|
|
|
|
|
|
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
|
|
|
|
|
|
|
|
BASIC
|
|
14,298
|
|
14,149
|
|
13,918
|
|
DILUTED
|
|
14,698
|
|
14,480
|
|
14,059
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,191
|
|
$
|
11,910
|
|
$
|
11,873
|
|
Unrealized gain (loss) on derivative instruments, net of tax
provision (benefit) of $324, $425 and ($75), respectively
|
|
584
|
|
612
|
|
(108
|
)
|
Comprehensive income
|
|
$
|
22,775
|
|
$
|
12,522
|
|
$
|
11,765
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
49
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
Par
|
|
Paid-In
|
|
Retained
|
|
Treasury Stock
|
|
Deferred
|
|
Comprehensive
|
|
|
|
Shares
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Cost
|
|
Compensation
|
|
Income(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT
JANUARY 1, 2006
|
|
15,352,159
|
|
15
|
|
151,329
|
|
27,091
|
|
1,562,987
|
|
(12,573
|
)
|
(990
|
)
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXERCISE OF STOCK
OPTIONS
|
|
165,531
|
|
1
|
|
1,830
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
INCOME TAX
BENEFIT FROM STOCK OPTION EXERCISES
|
|
¾
|
|
¾
|
|
224
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
ADOPTION OF SFAS
NO. 123R
|
|
¾
|
|
¾
|
|
(990
|
)
|
¾
|
|
¾
|
|
¾
|
|
990
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
(108
|
)
|
DEFERRED AND
OTHER STOCK COMPENSATION
|
|
58,327
|
|
|
|
1,622
|
|
|
|
|
|
|
|
¾
|
|
|
|
ISSUANCE OF
COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
(22,593
|
)
|
265
|
|
¾
|
|
¾
|
|
ISSUANCE OF
COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
27,900
|
|
¾
|
|
396
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
NET INCOME
|
|
¾
|
|
¾
|
|
¾
|
|
11,873
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT
DECEMBER 31, 2006
|
|
15,603,917
|
|
16
|
|
154,411
|
|
38,964
|
|
1,540,394
|
|
(12,308
|
)
|
¾
|
|
481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADOPTION OF FIN
48
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
EXERCISE OF STOCK
OPTIONS AND WARRANTS
|
|
234,182
|
|
|
|
2,490
|
|
|
|
|
|
|
|
¾
|
|
¾
|
|
INCOME TAX
BENEFIT FROM STOCK OPTION EXERCISES
|
|
|
|
|
|
355
|
|
|
|
|
|
|
|
¾
|
|
¾
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
611
|
|
DEFERRED AND
OTHER STOCK COMPENSATION
|
|
221,428
|
|
|
|
2,644
|
|
|
|
|
|
|
|
¾
|
|
¾
|
|
ISSUANCE OF
COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
94
|
|
|
|
(25,348
|
)
|
203
|
|
¾
|
|
¾
|
|
ISSUANCE OF
COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
9,150
|
|
|
|
325
|
|
|
|
|
|
|
|
¾
|
|
¾
|
|
NET INCOME
|
|
|
|
|
|
|
|
11,910
|
|
|
|
|
|
¾
|
|
¾
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT
DECEMBER 31, 2007
|
|
16,068,677
|
|
16
|
|
160,319
|
|
51,127
|
|
1,515,046
|
|
(12,105
|
)
|
|
|
1,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXERCISE OF STOCK
OPTIONS
|
|
36,390
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX
BENEFIT FROM STOCK OPTION EXERCISES
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
584
|
|
DEFERRED AND
OTHER STOCK COMPENSATION
|
|
120,137
|
|
|
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE OF
COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
82
|
|
|
|
(8,883
|
)
|
71
|
|
|
|
|
|
ISSUANCE OF
COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
13,481
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
|
|
|
|
|
22,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT
DECEMBER 31, 2008
|
|
16,238,685
|
|
$
|
16
|
|
$
|
164,746
|
|
$
|
73,318
|
|
1,506,163
|
|
$
|
(12,034
|
)
|
$
|
|
|
$
|
1,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
50
Table of Contents
CORNELL
COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,191
|
|
$
|
11,910
|
|
$
|
11,873
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
Minority interest in consolidated special purpose entity
|
|
445
|
|
¾
|
|
¾
|
|
Impairment of long-lived assets
|
|
250
|
|
¾
|
|
355
|
|
Depreciation
|
|
15,742
|
|
13,580
|
|
14,042
|
|
Amortization of intangibles and other assets
|
|
2,200
|
|
2,406
|
|
2,243
|
|
Amortization of deferred financing costs
|
|
2,728
|
|
1,552
|
|
1,772
|
|
Amortization of Senior Notes discount
|
|
184
|
|
184
|
|
184
|
|
Stock-based compensation
|
|
3,570
|
|
2,645
|
|
1,970
|
|
Provision for bad debts
|
|
2,741
|
|
2,063
|
|
2,702
|
|
Gain on derivative instruments
|
|
1,160
|
|
|
|
|
|
Loss/(gain) on sale of property and equipment
|
|
84
|
|
(190
|
)
|
(119
|
)
|
Deferred income taxes
|
|
1,458
|
|
397
|
|
3,216
|
|
Change in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
614
|
|
(3,757
|
)
|
(10,432
|
)
|
Other restricted assets
|
|
(1,058
|
)
|
(665
|
)
|
976
|
|
Other assets
|
|
1,783
|
|
2,060
|
|
44
|
|
Accounts payable and accrued liabilities
|
|
7,771
|
|
(4,890
|
)
|
780
|
|
Other liabilities
|
|
(2,884
|
)
|
(51
|
)
|
58
|
|
Net cash provided by operating activities
|
|
58,979
|
|
27,244
|
|
29,664
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(79,915
|
)
|
(50,890
|
)
|
(12,317
|
)
|
Purchases of investment securities
|
|
¾
|
|
(241,425
|
)
|
(427,600
|
)
|
Sales of investment securities
|
|
250
|
|
253,100
|
|
422,925
|
|
Facility acquisitions
|
|
¾
|
|
(18,554
|
)
|
¾
|
|
Site acquisition
|
|
¾
|
|
(5,053
|
)
|
¾
|
|
Proceeds from sale of property and equipment
|
|
846
|
|
375
|
|
2,892
|
|
Payments to restricted debt payment account, net
|
|
(2,901
|
)
|
(2,084
|
)
|
(3,367
|
)
|
Net cash used in investing activities
|
|
(81,720
|
)
|
(64,531
|
)
|
(17,467
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
49,000
|
|
30,000
|
|
¾
|
|
Payments of MCF bonds
|
|
(11,400
|
)
|
(10,500
|
)
|
(9,700
|
)
|
Payments of line of credit
|
|
(4,000
|
)
|
¾
|
|
¾
|
|
Payments of capital lease obligations
|
|
(11
|
)
|
(10
|
)
|
(11
|
)
|
Payments for debt issuance and other financing costs
|
|
¾
|
|
(845
|
)
|
¾
|
|
Tax benefit of stock option exercises
|
|
140
|
|
355
|
|
224
|
|
Proceeds from exercise of stock options and warrants
|
|
597
|
|
2,786
|
|
2,096
|
|
Net cash (used in) provided by financing
activities
|
|
34,326
|
|
21,786
|
|
(7,391
|
)
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
11,585
|
|
(15,501
|
)
|
4,806
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
3,028
|
|
18,529
|
|
13,723
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
14,613
|
|
$
|
3,028
|
|
$
|
18,529
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURE:
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest of $2,886, $1,172 and
$1,494, respectively
|
|
$
|
18,596
|
|
$
|
30,672
|
|
$
|
25,317
|
|
Income taxes paid
|
|
$
|
12,048
|
|
$
|
7,613
|
|
$
|
3,947
|
|
|
|
|
|
|
|
|
|
OTHER NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
Decrease in fair value of interest rate swap
|
|
$
|
¾
|
|
$
|
(1,053
|
)
|
$
|
(908
|
)
|
Purchases and additions to property and equipment included in
accounts payable and accrued liabilities
|
|
3,409
|
|
4,156
|
|
¾
|
|
Common stock issued for board of directors fees
|
|
490
|
|
325
|
|
396
|
|
Equipment additions under capital leases
|
|
¾
|
|
¾
|
|
56
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
51
Table of Contents
CORNELL
COMPANIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
DESCRIPTION
OF THE BUSINESS
Cornell Companies, Inc. (collectively with its
subsidiaries and consolidated special purpose entities, unless the context
requires otherwise, Cornell, the Company, we, us, or our,) a Delaware
corporation provides integrated development, design, construction and
management of facilities to governmental agencies within three operating
segments: (1) Adult Secure Services; (2) Abraxas Youth and Family
Services and (3) Adult Community-Based Services.
2.
SIGNIFICANT
ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements
include the accounts of the Company, our wholly-owned subsidiaries, and our
activities relative to a financing of operating facilities. All significant
intercompany balances and transactions have been eliminated. Minority interest
in consolidated special purpose entities represents equity that other investors
have contributed to the special purpose entities. Minority interest is adjusted
for income and losses allocable to the owners of the special purpose entities.
As the cumulative losses of the special purpose entity exceed the equity that
is recorded as minority interest, the excess losses are recorded in our
Statements of Operations and Comprehensive Income (Loss).
Cash and Cash
Equivalents
We consider all highly liquid unrestricted
investments with original maturities of three months or less to be cash
equivalents. We invest our available cash balances in short term money market
accounts, short term certificates of deposit and commercial paper.
Investment Securities
We had no investment securities at December 31,
2008. Our investment securities at December 31, 2007 consisted of
certificates of deposit.
Our certificates of deposit which totaled
approximately $0.3 million at December 31, 2007 earned interest at a rate
of 3.80% at December 31, 2007. They
had original maturities of one year.
Our marketable securities were categorized as
available-for-sale securities. Unrealized marketable securities gains and
temporary losses were reflected as a net amount under the caption of
accumulated other comprehensive income within the statement of stockholders
equity. Realized gains and losses were recorded within the statement of income
under the caption interest income or interest expense. For the purpose of
computing realized gains and losses, cost was identified on a specific
identification basis.
Contractual maturities of the underlying investment
securities held at December 31, 2007 matured in less than one year.
Accounts
Receivable and Related Allowance for Doubtful Accounts
We extend credit to the governmental agencies and
other parties with which we contract in the normal course of business. We
regularly review our outstanding receivables and historical collection
experience, and provide for estimated losses through an allowance for doubtful
accounts. In evaluating the adequacy of our allowance for doubtful accounts, we
make judgments regarding our customers ability to make required payments,
economic events and other factors. As the financial condition of these parties
change, circumstances develop or additional information becomes available,
adjustments to the allowance for doubtful accounts may occur. If, after
reasonable collection efforts have been made, a receivable is determined to be
permanently uncollectible, it will be written off.
At December 31, 2008 and 2007, other
receivables include approximately $4.9 million and $5.1 million related to
misappropriated escrow funds for the Southern Peaks Regional Treatment Center,
which is fully reserved at December 31, 2008 and 2007.
52
Table
of Contents
The
changes in allowance for doubtful accounts associated with trade accounts
receivable for the years ended December 31, 2008, 2007 and 2006 are as
follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
4,372
|
|
$
|
3,644
|
|
$
|
3,278
|
|
Provision for bad debts
|
|
2,741
|
|
2,063
|
|
2,702
|
|
Write-offs of uncollectible accounts
|
|
(2,841
|
)
|
(1,335
|
)
|
(2,336
|
)
|
Balance at end of period
|
|
$
|
4,272
|
|
$
|
4,372
|
|
$
|
3,644
|
|
Restricted Assets
Restricted assets at December 31, 2008 and 2007
include approximately $27.9 million and $25.0 million, respectively, of Municipal
Correctional Finance, LPs (MCF) restricted cash accounts. MCFs restricted
accounts primarily consist of a debt service fund used to segregate rental
payment funds from us to MCF for MCFs semi-annual debt service. MCFs funds
are typically invested in short term certificates of deposit, money market
accounts and commercial paper. They will be used to fund a portion of MCFs
debt service due in the coming year.
At certain facilities, we maintain bank accounts for
restricted cash belonging to facility residents, commissary operations and
equipment replacement funds used in certain state programs.
Restricted
assets at December 31, 2008 and 2007 include approximately $3.4 million
and $2.5 million, respectively, for these accounts. A corresponding liability
for these obligations is included in accrued liabilities in the accompanying
financial statements.
Property and
Equipment
Property and equipment are recorded at cost.
Ordinary maintenance and repair costs are expensed, while renewal and betterment
costs are capitalized. Buildings and improvements are depreciated over their
estimated useful lives of 30 to 50 years using the straight-line method.
Prepaid facility use cost, which resulted from the July 1996 acquisition
of the Big Spring Correctional Center and the December 1999 transfer of
ownership of the Great Plains Correctional Facility to a leasehold interest, is
being amortized over 50 years using the straight-line method. Furniture and
equipment are depreciated over their estimated useful lives of 3 to 10 years
using the
straight-line method. Amortization of leasehold improvements (including those
funded by landlord incentives or allowances) is recorded using the
straight-line method based upon the shorter of the economic life of the asset
or the term of the respective lease. Landlord incentives or allowances under
operating leases are recorded as deferred rent and amortized as a reduction of
rent expense over the lease term. See Note 4 to the consolidated financial
statements for further details concerning our property and equipment balances
at December 31, 2008 and 2007.
We
review our long-lived assets for impairment at least annually or when changes
in circumstances or a triggering event indicates that the carrying amount of
the asset may not be recoverable in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived
assets to be held and used recognize an impairment loss only if the carrying
amount of the long-lived asset is not recoverable from its undiscounted cash
flows and to measure an impairment loss as the difference between the carrying
value and the fair value of the asset.
Assets to be disposed of by sale are recorded at the lower of their carrying
amount or fair value less estimated selling costs. We estimate fair value based
upon the best information available, which may include expected future
discounted cash flows to be produced by the asset and/or available market
prices. Factors that significantly influence estimated future discounted cash
flows include the periods and levels of occupancy for the facility, expected
per diem or reimbursement rates, assumptions regarding the levels of staffing,
services and future operating and capital expenditures necessary to generate
forecasted revenues, related costs for these activities and future rate of
increases or decreases associated with these factors. We also consider the
results of any appraisals on the properties when assessing fair value. These
estimates may be highly subjective, particularly in circumstances where there
is no current operating contract in place and changes in the assumptions and
estimates could result in the recognition of impairment charges.
Capitalized
Interest
We capitalize interest on facilities while under
construction. Interest capitalized for the year ended December 31, 2008
was approximately $2.9 million and related to the expansion projects at the D.
Ray James Prison and the Great Plains Correctional Facility. Interest
capitalized for the year ended December 31, 2007 was approximately $1.2
million and related to the expansion projects at the Big Spring Correctional
Center, the D. Ray James Prison and the Great Plains Correctional
53
Table of
Contents
Facility.
Interest capitalized for the year ended December 31, 2006 was
approximately $1.5 million and related to construction of the Moshannon Valley
Correctional Center.
Debt Service
Reserve Fund
The debt service reserve fund was established at the
closing of MCFs bond issuance and is to be used solely for MCFs debt service
to the extent that funds in MCFs debt service accounts are insufficient. The
debt service reserve fund is invested
principally in short term commercial instruments. See Note 11 to the
consolidated financial statements.
Intangible Assets
We
evaluate the carrying value of our existing intangibles (which are the result
of prior acquisitions both business facilities and operating contracts) for
impairment annually. We have evaluated the carrying value of our existing
intangibles and believe there has not been impairment to the carrying value of
our existing intangibles as of December 31, 2008. See Note 5 to the
consolidated financial statements for further details concerning our intangible
assets.
Deferred Costs
Costs incurred related to obtaining debt financing
are capitalized and amortized over the term of the related indebtedness. At December 31,
2008 and 2007, we had net deferred debt issuance costs of approximately $7.6
million and $8.6 million, respectively. In the year ended December 31,
2007 we incurred approximately $0.8 million in financing costs related to our
Amended Credit Facility.
Revenue
Recognition
Substantially all of our revenues are derived from
contracts with federal, state and local governmental agencies, which pay either
per diem rates based upon the number of occupant days or hours served for the
period, on a take-or-pay basis, management fee basis, cost-plus reimbursement
or fee-for-service basis. Revenues are recognized as services are provided
under our established contractual agreements to the extent collection is
considered probable.
Pre-opening and
Start-up Expenses
Pre-opening and start-up expenses are charged to
operations as incurred. Pre-opening and start-up expenses include payroll,
benefits, training and other operating costs during periods prior to opening a
new or expanded facility and during the period of operation while occupancy is
ramping up. These costs vary by contract. Newly opened facilities are staffed
according to applicable regulatory or contractual requirements when we begin
receiving offenders or clients. Offenders or clients are typically assigned to
a newly opened facility on a phased-in basis over a one-to-six month period.
Our start-up period for new juvenile operations is 12 months from the date we
begin recognizing revenue unless break-even occupancy is achieved before then.
Our start-up period for new adult operations is nine months from the date we
begin recognizing revenue unless break-even occupancy is achieved before then.
Proposal Costs
We incur various expenses in conjunction with our
participation in the proposal process with government agencies for their
procurement of our services. These costs include such items as payroll and
related employee benefits and taxes, research, consulting, legal and
reproduction costs and are expensed in the periods incurred.
Operating and
General and Administrative Expenses
We incur various expenses within the normal course
of our business. Included in operating expenses are direct expense items such
as personnel/employee benefits, resident/inmate care expenses and building/utility
costs pertaining to the operations of our facilities and programs. Included in
general and administrative expenses are expense items such as
personnel/employee benefits, professional services and building/utility costs
pertaining to our corporate activities.
Business
Concentration
Contracts with federal, state and local governmental
agencies account for nearly all of our revenues. The loss of, or a significant
decrease in, business from one or more of these governmental agencies could
have a material adverse effect on our financial condition and results of
operations. For the years ended December 31, 2008, 2007 and 2006, 34.2%,
32.6% and
54
Table of Contents
29.1%,
respectively, of our consolidated revenues were derived from contracts with the
Federal Bureau of Prisons (BOP), the only customer constituting more than
10.0% of our revenues during each of these periods.
Self Insurance
Reserves
We
maintain insurance coverage for various aspects of our business and operations.
We retain a portion of losses that occur through the use of deductibles and
retention under self-insurance programs. These programs include workers
compensation and employers liability, general liability and professional
liability, directors and officers liability and medical and dental insurance.
We maintain deductibles under these programs in amounts ranging from $0.5
million to $1.0 million. We maintain excess loss insurance for amounts
exceeding our deductibles.
We
regularly review our estimates of reported and unreported claims and provide
for these losses through insurance reserves. These reserves are influenced by
rising costs of health care and other costs, increases in claims, time lags in
claim information and levels of insurance coverage carried. As claims develop
and additional information becomes available to us, adjustments to the related
loss reserves may occur. Our estimated reserves for workers compensation claims
incorporate the use of a 5% discount factor. Our reserves for medical and
workers compensation claims are subject to change based on our estimate of the
number and magnitude of claims to be incurred.
Stock-Based
Compensation
We have an employee stock purchase plan
(ESPP)
under which
employees can make contributions to purchase our common stock. Participation in
the plan is elected annually by employees. The plan year begins on January 1st
(the Beginning Date) and ends on December 31st (the Ending Date). For
2007, however, the plan year began April 1, 2007. Purchases of common
stock are made at the end of the year using the lower of the fair market value
on either the Beginning Date or Ending Date, less a 15% discount.
Under SFAS No. 123R, our
employee-stock purchase plan is considered to be a compensatory ESPP, and
therefore, we recognize compensation expense over the requisite service period
for grants made under the ESPP.
Our stock incentive plans
provide for the granting of stock options (both incentive stock options and
nonqualified stock options), stock appreciation rights, restricted stock shares
and other stock-based awards to officers, directors and employees of the
Company. Grants of stock options made to date under these plans vest over
periods up to seven years after the date of grant and expire no more than 10
years after grant.
At December 31,
2007, 127,500 shares of restricted stock outstanding were subject to
performance-based vesting criteria (32,500 of these restricted shares were
considered market-based restricted stock under SFAS No. 123R). There were
also 79,000 stock options outstanding subject to performance-based vesting
criteria. We recognized $0.6 million of expense associated with these shares of
restricted stock and stock options during the year ended December 31,
2007.
At December 31,
2008, 184,000 shares of restricted stock were outstanding subject to
performance-based vesting criteria (32,500 of these restricted shares were
considered market-based restricted stock under SFAS No. 123R). There were
also 52,700 stock options outstanding subject to performance-based vesting
criteria. We recognized $1.1 million of expense associated with these shares of
restricted stock and stock options during the year ended December 31,
2008.
The amounts above relate to the impact of recognizing
compensation expense related to stock options and restricted stock.
Compensation expense related to stock options (52,700 shares) and restricted
stock (151,500 shares) that vest based upon performance conditions is not
recorded for such performance-based awards until it has been deemed probable
that the related performance targets allowing the vesting of these options and
restricted stock will be met. We are required to periodically re-assess the
probability that these performance-based awards will vest and record expense at
that point in time. During the year ended December 31, 2008 it was deemed
probable that certain performance targets pertaining to certain restricted
stock and stock options would be achieved by their vesting date. Accordingly,
compensation expense of approximately $1.0 million was recognized in the year
ended December 31, 2008 related to these performance-based awards.
We recognize expense for our stock-based compensation over the vesting
period, which represents the period in which an employee is required to provide
service in exchange for the award. We recognize compensation expense for
stock-based awards immediately if the award has immediate vesting.
55
Table of Contents
Assumptions
The
fair values for the significant stock-based awards granted during the years
ended December 31, 2008, 2007 and 2006 were estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
|
|
Years Ended December, 31
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Risk-free rate of return
|
|
3.35%
|
|
4.56%
|
|
4.31%
|
|
Expected life of award
|
|
5.7
years
|
|
5.6
years
|
|
5
years
|
|
Expected dividend yield of stock
|
|
0%
|
|
0%
|
|
0%
|
|
Expected volatility of stock
|
|
38.74%
|
|
42.19%
|
|
45.48%
|
|
Weighted-average fair value
|
|
$9.46
|
|
$9.86
|
|
$6.24
|
|
The
expected volatility of stock assumption was derived by referring to changes in
the Companys historical common stock prices over a timeframe similar to that
of the expected life of the award. We currently have no reason to believe that
future stock volatility will significantly differ from historical stock
volatility. Estimated forfeiture rates are derived from historical forfeiture
patterns. We believe the historical experience method is the best estimate of
forfeitures currently available.
In
accordance with SAB 107, we generally considered the simplified method for plain
vanilla options to estimate the expected term of options granted during the
periods noted (where appropriate). For
those grants during these periods wherein we had sufficient historical or
impartial data to better estimate the expected term, we have done so.
Stock-based
award activity during the year ended December 31, 2008 was as follows
(aggregate intrinsic value in millions):
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
739,056
|
|
$
|
12.25
|
|
5.0
|
|
$
|
9.1
|
|
Granted
|
|
158,000
|
|
|
|
|
|
|
|
Exercised
|
|
(164,661
|
)
|
|
|
|
|
|
|
Forfeited or canceled
|
|
(78,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
653,747
|
|
12.87
|
|
6.1
|
|
$
|
8.4
|
|
Granted
|
|
72,950
|
|
|
|
|
|
|
|
Exercised
|
|
(161,590
|
)
|
|
|
|
|
|
|
Forfeited or canceled
|
|
(74,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
490,842
|
|
14.19
|
|
7.3
|
|
$
|
7.0
|
|
Granted
|
|
45,000
|
|
22.68
|
|
|
|
|
|
Exercised
|
|
(36,390
|
)
|
12.20
|
|
|
|
|
|
Forfeited or canceled
|
|
(13,753
|
)
|
17.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
485,699
|
|
$
|
15.03
|
|
6.5
|
|
$
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2008
|
|
477,218
|
|
$
|
14.93
|
|
6.5
|
|
$
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
390,581
|
|
$
|
14.77
|
|
6.3
|
|
$
|
5.8
|
|
56
Table of
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The
total intrinsic value of stock options exercised during the years ended December 31,
2008, 2007 and 2006 was $0.5 million, $1.5 million and $0.6 million,
respectively. Net cash proceeds from the exercise of stock options were
approximately $0.4 million, $2.5 million and $2.1 million for the years ended December 31,
2008, 2007 and 2006, respectively.
As
of December 31, 2008, approximately $0.2 million of estimated expense with
respect to nonvested stock-based awards had yet to be recognized and will be
amortized into expense over the employees estimated remaining weighted average
service period of approximately 7.9 months.
The
following table summarizes information with respect to stock options
outstanding and exercisable at December 31, 2008.
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.75 to $10.00
|
|
20,855
|
|
2.6
|
|
$
|
5.90
|
|
20,855
|
|
$
|
5.90
|
|
10.01 to 13.50
|
|
156,519
|
|
5.6
|
|
12.82
|
|
143,576
|
|
12.81
|
|
13.51 to 14.50
|
|
193,500
|
|
6.7
|
|
13.95
|
|
135,000
|
|
13.87
|
|
14.51 to 25.00
|
|
114,825
|
|
8.2
|
|
21.52
|
|
91,150
|
|
21.21
|
|
|
|
485,699
|
|
6.5
|
|
$
|
15.03
|
|
390,581
|
|
$
|
14.77
|
|
Stock-based
award activity for nonvested awards during the year ended December 31,
2008 was as follows:
|
|
Number
of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested at December 31, 2005
|
|
362,669
|
|
$
|
13.14
|
|
Granted
|
|
158,000
|
|
14.02
|
|
Vested
|
|
(191,919
|
)
|
13.43
|
|
Canceled
|
|
(8,093
|
)
|
13.16
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
320,657
|
|
13.40
|
|
Granted
|
|
72,950
|
|
21.40
|
|
Vested
|
|
(101,683
|
)
|
15.68
|
|
Canceled
|
|
(74,265
|
)
|
13.48
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
217,659
|
|
14.99
|
|
Granted
|
|
45,000
|
|
22.68
|
|
Vested
|
|
(153,788
|
)
|
16.32
|
|
Canceled
|
|
(13,753
|
)
|
17.73
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
95,118
|
|
$
|
16.09
|
|
Restricted Stock
We have previously issued
restricted stock under certain employment agreements and stock incentive plans
which vests either over a specific period of time, generally three to five
years, or which will vest subject to certain market or performance
conditions. During the year ended December 31,
2008, we issued restricted stock as part of our normal equity awards under our
2006 Equity Incentive Plan. These shares
of restricted common stock are subject to restrictions on transfer and certain
conditions to vesting.
57
Table of
Contents
Restricted stock activity
for the year ended December 31, 2008 was as follows:
|
|
Number
of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
Nonvested at December 31, 2005
|
|
111,673
|
|
$
|
12.37
|
|
Granted
|
|
¾
|
|
¾
|
|
Vested
|
|
(15,676
|
)
|
17.15
|
|
Canceled
|
|
(10,997
|
)
|
17.15
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
85,000
|
|
10.87
|
|
Granted
|
|
287,000
|
|
22.30
|
|
Vested
|
|
(5,000
|
)
|
21.33
|
|
Canceled
|
|
(64,000
|
)
|
9.80
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
303,000
|
|
21.75
|
|
Granted
|
|
161,000
|
|
22.38
|
|
Vested
|
|
(33,876
|
)
|
16.77
|
|
Canceled
|
|
(27,000
|
)
|
21.47
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
403,124
|
|
$
|
22.44
|
|
We recognized $1.5
million of expense associated with nonvested time-based restricted stock awards
during the year ended December 31, 2008.
As of December 31, 2008, approximately $3.0 million of estimated
expense with respect to nonvested time-based restricted stock awards had yet to
be recognized and will be amortized over a weighted average period of 2.3
years.
Approximately $3.1 million of estimated expense with respect to
nonvested performance-based restricted stock option awards had yet to be
recognized as of December 31, 2008.
Income Taxes
We utilize the liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying values of existing assets and liabilities and
their respective tax bases based on enacted tax rates. In providing for
deferred taxes, we consider current tax regulations, estimates of future
taxable income and available tax planning strategies. If tax regulations,
operating results or the ability to implement tax planning strategies vary,
adjustments to the carrying value of tax assets and liabilities may occur. See
Note 7 to the consolidated financial statements.
Earnings Per
Share
Basic earnings per share (EPS) are computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS reflects the potential dilution from
common stock equivalents such as stock options and warrants. For the year ended
December 31, 2008, there were 64,200 shares ($23.24 average price) of
stock options that were not included in the computation of diluted EPS because
to do so would have been anti-dilutive.
For the year ended December 31, 2007, there were 19,200 shares
($24.56 average price) of stock options that were not included in the
computation of diluted EPS because to do so would have been anti-dilutive. For
the year ended December 31, 2006, there were no anti-dilutive shares.
58
Table of
Contents
The following
table summarizes the calculation of income (loss) and the weighted average
common shares and common equivalent shares outstanding for purposes of the
computation of earnings (loss) per share (in thousands, except per share data):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Income from continuing
operations
|
|
$
|
22,191
|
|
$
|
11,910
|
|
$
|
12,580
|
|
Loss from discontinued
operations, net of tax
|
|
¾
|
|
¾
|
|
(707
|
)
|
Net income
|
|
$
|
22,191
|
|
$
|
11,910
|
|
$
|
11,873
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
14,298
|
|
14,149
|
|
13,918
|
|
Weighted average common share
equivalents outstanding
|
|
400
|
|
331
|
|
141
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
and common share equivalents outstanding
|
|
14,698
|
|
14,480
|
|
14,059
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
1.55
|
|
$
|
.84
|
|
$
|
.90
|
|
Loss from discontinued
operations, net of tax
|
|
¾
|
|
¾
|
|
(.05
|
)
|
Net income
|
|
$
|
1.55
|
|
$
|
.84
|
|
$
|
.85
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
$
|
1.51
|
|
$
|
.82
|
|
$
|
.89
|
|
Loss from discontinued
operations, net of tax
|
|
¾
|
|
¾
|
|
(.05
|
)
|
Net income
|
|
$
|
1.51
|
|
$
|
.82
|
|
$
|
.84
|
|
Financial
Instruments
The
carrying amounts of our financial instruments, including cash and cash
equivalents, investment securities, accounts receivable and accounts payable
and accrued expenses, approximate fair value due to the short maturities of
these financial instruments. At December 31, 2008, the carrying amount of
consolidated debt was $320.5 million, and the estimated fair value was $308.0
million. At December 31, 2007, the carrying amount was $286.7 million, and
the estimated fair value was $303.2 million. The estimated fair value of
long-term debt is based primarily on quoted market prices or discounted cash
flow analysis for the same or similar issues.
Derivative
Instruments
Derivatives are recognized at fair value in the
consolidated balance sheet. For
derivatives designated as hedging the exposure to changes in fair value of an asset
or liability, the gain or loss is recognized in earnings together with the
offsetting gain or loss on the hedged item.
For derivatives designated as hedging the exposure of variable cash
flows, the effective portion is reported in other comprehensive income and
subsequently reclassified to earnings when the forecasted transaction affects
earnings. For derivatives not designated
or de-designated as a hedging instrument, the gain or loss is recognized in
earnings in the period of change.
Use of Estimates
Our financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America,
which require that we make certain estimates and judgments that affect our
reported amounts of assets, liabilities, revenues and expenses and the
disclosures of contingent assets and liabilities. We evaluate our estimates on
an on-going basis, based on historical experience and on various other
assumptions that we believe to be reasonable based on the information available.
Actual results could differ from these estimates under different assumptions or
conditions. The significant estimates that we make in the accompanying
consolidated financial statements include the allowance for doubtful accounts,
accruals for insurance and legal claims, accruals for compensated employee
absences, valuation allowance for deferred tax accounts, the realizability of
long-lived tangible and intangible assets and the fair value of financial
instruments.
Reclassifications
Certain reclassifications have been made to the
prior period financial statements contained herein to conform to current year
presentation. The impairment charge of $0.4 million in the year ended December
31, 2006 was reclassed to operating expenses in the accompanying Consolidated
Statements of Income and Comprehensive Income (Loss).
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3.
NEW ACCOUNTING PRONOUNCEMENTS
Statement
of Financial Accounting Standards No. 157
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a framework for
measuring fair value within generally accepted accounting principles and
expands disclosures about fair value measurements for financial assets and
liabilities, as well as for any other assets and liabilities that are carried
at fair value on a recurring basis in the financial statements. SFAS No. 157
became effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. This statement applies
prospectively to financial assets and liabilities. In February 2008, the
FASB issued FSP 157-2, which delayed the effective date of SFAS No. 157 by
one year for nonfinancial assets and liabilities. Our adoption of SFAS No. 157 on January 1,
2008 with respect to financial assets and liabilities did not have a material
financial impact on our consolidated results of operations or financial
condition. We are currently evaluating
the impact of implementation with respect to nonfinancial assets and
liabilities on our consolidated financial statements.
We
adopted SFAS No. 157 on January 1, 2008 for our financial assets and
liabilities measured on a recurring basis.
As defined in SFAS No. 157, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price). SFAS No. 157 requires disclosure that
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157
requires that fair value measurements be classified and disclosed in one of the
following categories:
Level 1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities;
|
|
|
Level 2
|
Quoted
prices in markets that are not active, or inputs that are observable, either
directly or indirectly, for substantially the full term of the asset or
liability; and
|
|
|
Level 3
|
Prices
or valuation techniques that require inputs that are both significant to the
fair value measurement and unobservable (i.e., supported by little or no
market activity).
|
As
required by SFAS No. 157, financial assets and liabilities are classified
based on the lowest level of input that is significant for the fair value
measurement. The following table
summarizes the valuation of our financial assets and liabilities by pricing
levels, as defined by the provisions of SFAS No. 157, as of December 31,
2008:
|
|
Fair Value as of
December 31, 2008 (in thousands)
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
14,613
|
|
$
|
|
|
$
|
|
|
$
|
14,613
|
|
Corporate Bonds
|
|
|
|
10,286
|
|
|
|
10,286
|
|
Money Market Funds
|
|
|
|
41,402
|
|
|
|
41,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
corporate bonds and money market funds are carried in debt service fund and
other restricted assets and the debt service reserve fund in the accompanying
balance sheet. The derivative instrument was carried in other long term
liabilities in the accompany balance sheet. The derivative instrument was
determined to have no fair value at December 31, 2008. See Note 11 to the
consolidated financial statements.
SFAS
No. 157 requires a reconciliation of the beginning and ending balances for
fair value measurements using Level 3 inputs. The table below sets forth a
reconciliation for assets and liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) during the year ended
December 31, 2008 (in thousands):
Derivative instruments as of December 31, 2007
|
|
$
|
2,151
|
|
Change in fair value
|
|
(2,151
|
)
|
Derivative instruments as of December 31, 2008
|
|
$
|
|
|
The
counterparty to our derivative became insolvent in 2008. We did not record an
asset due to the insolvency.
60
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FASB Staff Position SFAS No. 157-3
In
October 2008, the FASB issued FSP SFAS No. 157-3, Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP
SFAS 157-3). This FSP clarifies the
application of SFAS No. 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. This FSP was effective upon issuance,
including prior periods for which financial statements have not been
issued. We applied this FSP to financial
assets measured at fair value on a recurring basis at December 31, 2008. The
adoption of FSP SFAS 157-3 did not have a significant impact on our
consolidated financial position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 159
In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115
(SFAS No. 159). SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation
and disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 became effective for financial statements issued
for fiscal years beginning after November 15, 2007, provided the entity
elects to apply the provisions of SFAS No. 157. Our adoption of SFAS No. 159
on January 1, 2008 did not have any impact on our consolidated results of
operations or financial condition as we have elected not to apply the
provisions of SFAS No. 159 to our financial instruments or other eligible
items that are not required to be measured at fair value.
New Accounting Pronouncements Not Yet Adopted
Statement
of Financial Accounting Standards No. 141 (Revised)
In December 2007,
the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS
No. 141R). SFAS No. 141R
significantly changes the accounting for business combinations. Under SFAS No. 141R, an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value with limited
exceptions. SFAS No. 141R changes
the accounting treatment for certain specific items, including acquisition
costs, noncontrolling interests, acquired contingent liabilities, in-process
research and development costs, restructuring costs and changes in deferred tax
asset valuation allowances and income tax uncertainties subsequent to the
acquisition date. SFAS No. 141R
applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. Earlier
adoption is not permitted.
FASB
Staff Position No. FAS 142-3
This
FASB Staff Position (FSP) amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets. The intent of this
FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS No. 141 (Revised
2007), Business Combinations and other U.S. generally accepted accounting
principles. This FSP is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is not permitted. We do not expect this FSP to have a
significant impact on our consolidated financial position, results of
operations or cash flows.
Statement of Financial Accounting Standards
No. 160
In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes new accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary.
SFAS No. 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. This statement clarifies that changes in a
parents ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. Such gain
or loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date.
SFAS No. 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
61
Table
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interest. SFAS No. 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15,
2008. Earlier adoption is prohibited.
Statement of Financial Accounting Standards No. 161
In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities an Amendment of FASB Statement
133 (SFAS No. 161). SFAS No. 161
is intended to improve financial reporting about derivatives and hedging
activities by requiring enhanced qualitative and quantitative disclosures
regarding derivative instruments, gains and losses on such instruments and
their effects on an entitys financial position, financial performance and cash
flows. SFAS No. 161 is effective
for fiscal years and interim periods beginning after November 15, 2008. We
are currently evaluating the impact that this pronouncement may have on our
consolidated financial statements.
Statement of Financial Accounting Standards No. 162
In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States of America. SFAS No. 162
is effective sixty days following the SECs approval of Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect this pronouncement to have a
significant impact on our consolidated financial position, results of
operations or cash flows.
FASB Staff Position No. EITF 03-6-1
This FASB Staff Position (FSP) addresses whether instruments granted
in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share (EPS) under the two-class method described in
FASB Statement No. 128, Earnings Per Share. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
the interim periods within those years.
All prior-period EPS data will have to be adjusted retrospectively
(including interim financial statements, summaries of earnings, and selected
financial data) to conform to the provisions of this FSP. Early application is not permitted. We do not expect this FSP to have a
significant impact on our earnings per share.
4.
PROPERTY
AND EQUIPMENT
Property and equipment were as follows (in
thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Land
|
|
$
|
43,005
|
|
$
|
38,763
|
|
Prepaid facility use
|
|
71,323
|
|
71,323
|
|
Buildings and improvements
|
|
353,093
|
|
284,041
|
|
Furniture and equipment
|
|
39,514
|
|
33,954
|
|
Construction in progress
|
|
41,154
|
|
38,261
|
|
Sub-total
|
|
548,089
|
|
466,342
|
|
Accumulated depreciation and amortization
|
|
(97,735
|
)
|
(82,390
|
)
|
Total property and equipment
|
|
$
|
450,354
|
|
$
|
383,952
|
|
The increase in land was due primarily to the
Hudson, Colorado site acquisition. The
increase in buildings and improvements was due primarily to the purchase of the
High Plains Correctional Facility, the Washington, DC Facility and the facility
expansion completed at the Big Spring Correctional Center. The increase in construction in progress was
due primarily to development costs associated with the Hudson, Colorado site
and construction costs related to the facility expansions at the D. Ray James
Prison and the Great Plains Correctional Facility.
We
review our long-lived assets for impairment at least annually or when changes in
circumstances or a triggering event indicates that the carrying amount of the
asset may not be recoverable in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived
assets to be held and used recognize an impairment loss only if the carrying
amount of the long-lived asset is not recoverable from its
62
Table of Contents
undiscounted
cash flows and to measure an impairment loss as the difference between the
carrying value and the fair value of the asset.
Assets to be disposed of by sale are recorded at the lower of their
carrying amount or fair value less estimated selling costs. We estimate fair
value based upon the best information available, which may include expected
future discounted cash flows to be produced by the asset and/or available
market prices. Factors that significantly influence estimated future discounted
cash flows include the periods and levels of occupancy for the facility,
expected per diem or reimbursement rates, assumptions regarding the levels of
staffing, services and future operating and capital expenditures necessary to
generate forecasted revenues, related costs for these activities and future
rate of increases or decreases associated with these factors. We also consider
the results of any appraisals on the properties when assessing fair value.
These estimates may be highly subjective, particularly in circumstances where
there is no current operating contract in place and changes in the assumptions
and estimates could result in the recognition of impairment charges. The most
subjective estimates made in this analysis for 2008 relate to Cornell Abraxas 1
and the Hector Garza Residential Treatment Center. The most subjective
estimates made in this analysis for 2007 relate to the Regional
Correctional Center and the
Hector Garza
Residential Treatment Center. We may be
required to record an impairment charge in the future if we are unable to
successfully negotiate a replacement contract on any of our facilities for
which we currently have an operating contract. Given the nature of the
evaluation of future cash flows and the application to specific assets and
specific times, it is not possible to reasonably quantify the impact of changes
in these assumptions.
In conjunction with our
review of certain of our long-lived assets based on estimated market values
associated with these assets, we determined that our carrying value for a
currently vacant site of land was not fully recoverable and exceeded its fair
value and, as a result, we recorded an impairment charge of $0.3 million in the
year ended December 31, 2008 (none in the year ended December 31,
2007). This charge is reflected in operating
expenses in the accompanying financial statements.
In conjunction with our review of our long-lived
assets based on forecasted operating and cash flow losses associated with these
assets at December 31, 2006, we determined that our carrying value for two
of our adult community-based facilities was not fully recoverable and exceeded
their fair value and, as a result, we recorded an impairment charge of $0.4
million in the year ended December 31, 2006. This charge is reflected in
operating expenses in the accompanying financial statements.
5.
INTANGIBLE
ASSETS
Intangible assets at December 31, 2008 and 2007
consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Non-compete agreements
|
|
$
|
8,200
|
|
$
|
9,040
|
|
Accumulated amortization
non-compete agreements
|
|
(7,595
|
)
|
(7,541
|
)
|
Acquired contract value
|
|
6,240
|
|
6,442
|
|
Accumulated amortization
acquired contract value
|
|
(4,525
|
)
|
(3,421
|
)
|
Identified intangibles, net
|
|
2,320
|
|
4,520
|
|
Goodwill, net
|
|
13,308
|
|
13,355
|
|
Total intangibles, net
|
|
$
|
15,628
|
|
$
|
17,875
|
|
The changes in
the carrying amount of goodwill for the year ended December 31, 2008 are
as follows (in thousands):
|
|
Adult Secure
|
|
Abraxas Youth and Family
|
|
Adult Community-Based
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
2,902
|
|
$
|
1,060
|
|
$
|
8,377
|
|
$
|
12,339
|
|
Reduction to goodwill
|
|
|
|
|
|
1,016
|
|
1,016
|
|
Balance as of December 31, 2007
|
|
2,902
|
|
1,060
|
|
9,393
|
|
13,355
|
|
Reduction to goodwill
|
|
|
|
|
|
(47
|
)
|
(47
|
)
|
Balance as of December 31, 2008
|
|
$
|
2,902
|
|
$
|
1,060
|
|
$
|
9,346
|
|
$
|
13,308
|
|
In 2008, we
recorded a reduction to goodwill as a result of the final release of amounts
previously placed in escrow related to the acquisition of Correctional Systems, Inc.
(CSI) in April 2005. At December 31,
2008, we believe that there is no impairment to our existing goodwill.
63
Table of Contents
Amortization
expense for our acquired contract value was approximately $1.1 million in each
of the years ended December 31, 2008, 2007 and 2006. Amortization expense
for our acquired contract value is expected to be approximately $1.1 million
for the year ended December 31, 2009 and approximately $0.6 million for
the year ended December 31, 2010.
Amortization expense for
our non-compete agreements was approximately $0.8 million, $1.3 million and
$1.1 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Amortization expense for our non-compete agreements is expected to be
approximately $0.6 million in the year ended December 31, 2009.
6.
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued
liabilities consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Accounts payable
|
|
$21,754
|
|
$20,321
|
|
Accrued compensation
|
|
10,242
|
|
9,837
|
|
Accrued interest payable
|
|
11,329
|
|
5,707
|
|
Accrued taxes payable
|
|
6,680
|
|
3,926
|
|
Accrued insurance
|
|
8,003
|
|
7,779
|
|
Accrued legal
|
|
5,197
|
|
5,306
|
|
Resident funds
|
|
3,538
|
|
2,598
|
|
Other
|
|
2,350
|
|
2,028
|
|
Total accounts payable and accrued liabilities
|
|
$69,093
|
|
$57,502
|
|
7.
INCOME
TAXES
In July 2006,
the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an Interpretation of FASB
Statement No. 109 (FIN 48). FIN
48 established a single model to address the accounting for uncertain tax
positions. FIN 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides
guidance on the measurement, recognition, classification and disclosure of tax
positions, as well as the accounting for the related interest and penalties,
transition and accounting in interim periods.
The
Company adopted the provisions of FIN 48 effective January 1, 2007. As a result of our adoption of FIN 48, we
recorded a cumulative effect adjustment of approximately $0.3 million which
increased retained earnings at January 1, 2007. As of December 31, 2007 and December 31,
2008, we had unrecognized tax benefits in the amount of $3.0 million and $2.5
million, respectively. If these unrecognized tax benefits were recognized in
future periods, approximately $0.8 million and $0.9 million would reduce our
income tax expense and our effective tax rate for the years ended December 31,
2007 and 2008, respectively. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2007
|
|
$
|
2,948
|
|
Additions based on tax positions related to current year
|
|
569
|
|
Additions for tax positions in prior year
|
|
4
|
|
Reductions for tax positions in prior year
|
|
|
|
Lapse in Statutes of Limitations
|
|
(503
|
)
|
Balance at December 31, 2007
|
|
$
|
3,018
|
|
Additions based on tax positions related to current year
|
|
521
|
|
Additions for tax positions in prior year
|
|
23
|
|
Reductions for tax positions in prior year
|
|
|
|
Lapse in Statutes of Limitations
|
|
(1,094
|
)
|
Balance at December 31, 2008
|
|
$
|
2,468
|
|
Estimated
interest and penalties related to the underpayment of income taxes are
classified as a component of income tax expense in the accompanying
Consolidated Statements of Income and Comprehensive Income and totaled
approximately $0.1 million in the year ended December 31, 2007 and ($0.1)
million in the year ended December 31, 2008.
Accrued interest and penalties were approximately $0.3 million and $0.2
million at December 31, 2007 and 2008, respectively.
64
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We are
subject to income tax in the United States and many of the individual states we
operate in. We currently have
significant operations in Texas, California and Pennsylvania. State income tax returns are generally
subject to examination for a period of three to five years after filing. The state impact of any changes made to the
federal return remains subject to examination by various states for a period up
to one year after formal notification to the state. We are open to United States Federal Income
Tax examinations for the tax years December 31, 2005 through December 2007.
The 2006 federal income tax return is currently under audit by the
Internal Revenue Service. We expect the
audit to close within the next 12 months.
We do
not anticipate a significant change in the balance of our unrecognized tax
benefits within the next 12 months.
The
following is an analysis of our deferred tax assets and liabilities (in
thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
Accrued liabilities and allowances
|
|
$
|
10,582
|
|
$
|
8,535
|
|
State operating loss carryforwords
|
|
3,005
|
|
2,088
|
|
Deferred compensation
|
|
2,276
|
|
1,176
|
|
Other
|
|
157
|
|
1,878
|
|
Total deferred tax assets
|
|
16,020
|
|
13,677
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
|
18,769
|
|
15,531
|
|
Prepaid expenses
|
|
917
|
|
832
|
|
Other
|
|
1,155
|
|
749
|
|
Total deferred tax liabilities
|
|
20,841
|
|
17,112
|
|
|
|
|
|
|
|
Valuation allowance
|
|
(3,005
|
)
|
(2,088
|
)
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
7,826
|
|
$
|
5,523
|
|
As of December 31,
2008, we have net operating losses for state income taxes of approximately
$34.4 million. Our tax returns are subject to periodic audit by the various
jurisdictions in which we operate. These audits, including those currently
underway, can result in adjustments of taxes due or adjustments of the NOLs
which are available to offset future taxable income.
Valuation
allowances of $3.0 million have been established for uncertainties in realizing
the benefit of certain state income tax loss carryforwards. For the years ended
December 31, 2008, 2007 and 2006, changes in our state operating loss
carryforwards (decreased)/increased our valuation allowance by $0.9 million,
($0.4) million and $0.3 million, respectively. In assessing the realizability
of carryforwards, we consider whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The valuation
allowance will be adjusted in the periods that we determine it is more likely
than not that deferred tax assets will or will not be realized.
The components of our income tax provision were as
follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Federal current provision
|
|
$
|
11,200
|
|
$
|
6,213
|
|
$
|
4,332
|
|
State current provision
|
|
2,947
|
|
1,276
|
|
1,617
|
|
Total current provision
|
|
14,147
|
|
7,489
|
|
5,949
|
|
|
|
|
|
|
|
|
|
Federal deferred provision
|
|
1,250
|
|
1,034
|
|
3,114
|
|
State deferred provision
|
|
206
|
|
312
|
|
85
|
|
Total deferred provision
|
|
1,456
|
|
1,346
|
|
3,199
|
|
|
|
|
|
|
|
|
|
Total provision from continuing operations
|
|
$
|
15,603
|
|
$
|
8,835
|
|
$
|
9,148
|
|
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Our tax returns are subject to periodic audits by
the various jurisdictions in which we operate. These audits including those
currently underway can result in adjustments of taxes due or adjustments of the
NOLs which are available to offset future taxable income.
The following is a reconciliation of income taxes at
the statutory federal income tax rate of 35% to the income tax provision
recorded by us (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Computed taxes at statutory rate
|
|
$
|
13,384
|
|
$
|
7,263
|
|
$
|
7,602
|
|
State income taxes, net of federal benefit
|
|
2,046
|
|
1,109
|
|
1,042
|
|
Other
|
|
173
|
|
463
|
|
504
|
|
|
|
$
|
15,603
|
|
$
|
8,835
|
|
$
|
9,148
|
|
8.
CREDIT
FACILITIES
Our long-term debt consisted
of the following (in thousands):
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Debt of Cornell Companies, Inc.:
|
|
|
|
|
|
Senior Notes, unsecured, due July 2012 with an interest rate of
10.75%, net of discount
|
|
$
|
111,356
|
|
$
|
111,172
|
|
Revolving Line of Credit due December 2011 with an interest rate
of LIBOR plus 1.50% to 2.25% or prime plus 0.00% to 0.75% (the Amended
Credit Facility)
|
|
75,000
|
|
30,000
|
|
Capital lease obligations
|
|
26
|
|
37
|
|
Subtotal
|
|
186,382
|
|
141,209
|
|
|
|
|
|
|
|
Debt of Special Purpose Entities:
|
|
|
|
|
|
8.47% Bonds due 2016
|
|
134,100
|
|
145,500
|
|
|
|
|
|
|
|
Total consolidated debt
|
|
320,482
|
|
286,709
|
|
|
|
|
|
|
|
Less: current maturities
|
|
(12,412
|
)
|
(11,411
|
)
|
|
|
|
|
|
|
Consolidated long-term debt
|
|
$
|
308,070
|
|
$
|
275,298
|
|
Long-Term Credit Facilities.
Our Amended
Credit
Facility provides for borrowings up to $100.0 million (including letters of
credit), matures in December 2011 and bears interest, at our election
depending on our total leverage ratio, at either the LIBOR rate plus a margin ranging
from 1.50% to 2.25%, or a rate which ranges from 0.00% to 0.75% above the
applicable prime rate.
The available commitment under our Amended Credit
Facility was approximately $10.1 million at December 31, 2008. We had outstanding borrowings under our
Amended Credit Facility of $75.0 million and we had outstanding letters of
credit of approximately $14.9 million at December 31, 2008. Subject to certain requirements, we have the
right to increase the commitments under our Amended Credit Facility up to
$150.0 million, although the indenture for our Senior Notes limits our ability,
subject to certain conditions, to expand the Amended Credit Facility beyond
$100.0 million. We can provide no
assurance that all of the banks that have made commitments to us under our
Amended Credit Facility would be willing to participate in an expansion to the
Amended Credit Facility should we desire to do so. The Amended Credit Facility
is collateralized by substantially all of our assets, including
the assets and stock of all of our subsidiaries. The Amended Credit Facility is
not secured by the assets of MCF, a special purpose entity. Our Amended Credit
Facility contains commonly used covenants including compliance with laws and
limitations on certain financing transactions and mergers and also includes
various financial covenants. We believe
the most restrictive covenant under our Amended Credit Facility is the fixed
charge coverage ratio. At December 31,
2008, we were in compliance with all of our debt financial covenants.
MCF is obligated for the outstanding
balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47%
per annum and are payable in semi-annual installments of interest and annual
installments of principal. All unpaid
principal and accrued interest on the bonds is due on the earlier of August 1,
2016 (maturity) or as noted under the bond documents.
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The bonds are limited, nonrecourse
obligations of MCF and secured by the property and equipment, bond reserves,
assignment of subleases and substantially all assets related to the facilities
included in the 2001 Sale and Leaseback Transaction (in which we sold eleven
facilities to MCF). The bonds are not guaranteed by Cornell.
In June 2004, we issued $112.0 million in principal of 10.75%
Senior Notes (the Senior Notes) due July 1, 2012. The Senior Notes are unsecured senior
indebtedness and are guaranteed by all of our existing and future subsidiaries
(collectively, the Guarantors). The
Senior Notes are not guaranteed by MCF (the Non-Guarantor). Interest on the Senior Notes is payable
semi-annually on January 1 and July 1 of each year, commencing January 1,
2005. On or after July 1, 2008, we
may redeem all or a portion of the Senior Notes at the redemption prices
(expressed as a percentage of the principal amount) listed below, plus accrued
and unpaid interest, if any, on the Senior Notes redeemed, to the applicable
date of redemption, if redeemed during the 12-month period commencing on July 1
of each of the years indicated below:
Year
|
|
Percentages
|
|
|
|
|
|
2008
|
|
105.375
|
%
|
2009
|
|
102.688
|
%
|
2010 and thereafter
|
|
100.000
|
%
|
As
the Senior Notes are now redeemable at our option (subject to the requirements
noted) we anticipate we will monitor the capital markets and continue to assess
our capital needs and our capital structure, including a potential refinancing
of the Senior Notes.
Upon
the occurrence of specified change of control events, unless we have exercised
our option to redeem all the Senior Notes as described above, each holder will
have the right to require us to repurchase all or a portion of such holders Senior
Notes at a purchase price in cash equal to 101% of the aggregate principal
amount of the notes repurchased plus accrued and unpaid interest, if any, on
the Senior Notes repurchased, to the applicable date of purchase. The Senior Notes were issued under an
indenture which limits our ability and the ability of our Guarantors to, among
other things, incur additional indebtedness, pay dividends or make other
distributions, make other restricted payments and investments, create liens,
incur restrictions on the ability of the Guarantors to pay dividends or other
payments to us, enter into transactions with affiliates, and engage in mergers,
consolidations and certain sales of assets.
In
conjunction with the issuance of the Senior Notes, we entered into an interest
rate swap transaction with a financial institution to hedge our exposure to
changes in the fair value on $84.0 million of our Senior Notes. The purpose of this transaction was to
convert future interest due on $84.0 million of the Senior Notes to a variable
rate. The terms of the interest rate
swap contract and the underlying debt instrument were identical. The swap agreement was designated as a fair
value hedge. The swap had a notional
amount of $84.0 million and matured in July 2012 to mirror the maturity of
the Senior Notes. Under the agreement,
we paid, on a semi-annual basis (each January 1 and July 1), a
floating rate based on a six-month U.S. dollar LIBOR rate, plus a spread, and
received a fixed-rate interest of 10.75%. For the three and nine months ended September 30,
2007, we recorded interest expense related to this interest rate swap of
approximately $0.1 million and $0.2 million, respectively.
The swap
agreement was marked to market each quarter with a corresponding mark-to-market
adjustment reflected as either a discount or premium on the Senior Notes. The carrying value of the Senior Notes as of
this date was adjusted accordingly by the same amount. Because the swap
agreement was an effective fair-value hedge, there was no effect on our results
of operations from the mark-to-market adjustment as long as the swap was in
effect. In October 2007, we terminated the swap agreement. We received
approximately $0.2 million in conjunction with the termination, which is being
amortized over the remaining term of the Senior Notes.
Scheduled maturities of our consolidated long-term
debt are as follows (in thousands):
|
|
Cornell
Companies, Inc.
|
|
MCF
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
For the year ending December 31,
|
|
|
|
|
|
|
|
2009
|
|
$
|
12
|
|
$
|
12,400
|
|
$
|
12,412
|
|
2010
|
|
12
|
|
13,400
|
|
13,412
|
|
2011
|
|
75,002
|
|
14,600
|
|
89,602
|
|
2012
|
|
112,000
|
|
15,800
|
|
127,800
|
|
Thereafter
|
|
|
|
77,900
|
|
77,900
|
|
Total
|
|
$
|
187,026
|
|
$
|
134,100
|
|
$
|
321,126
|
|
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9. COMMITMENTS
AND CONTINGENCIES
Financial
Guarantees
During the normal course of business, we enter into
contracts that contain a variety of representations and warranties and provide
general indemnifications. Our maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against us that
have not yet occurred. However, based on experience, we believe the risk of
loss to be remote.
Operating Leases
We lease office space, certain facilities and
furniture and equipment under long-term operating leases. Rent expense for all
operating leases for the years ended December 31, 2008, 2007 and 2006 was
approximately $10.2 million, $10.4 million and $11.5 million, respectively.
Landlord incentives or allowances under operating
leases are recorded as deferred rent and amortized as a reduction of rent
expense over the lease term. Those operating leases with step rent provisions
or escalation clauses that are not considered contingent rent are recognized on
a straight-line basis over the lease term. For those leases that include an
existing index or rate, such as the consumer price index or the prime interest
rate, the related minimum lease payments are recognized on a straight-line
basis over the lease term and the amount of rent considered to be contingent is
recorded as incurred and is not included in the straight-line basis rent
expense. We do not receive significant sublease rentals under any of our
existing operating leases.
Certain of our leases contain renewal options, which
range from additional rental periods of one to five years. Escalation clauses
are also included in certain of our leases. There are no significant
restrictions imposed by our lease agreements concerning such issues as dividend
payments, incurrence of additional debt or further leasing.
As of December 31, 2008, we had the following
rental commitments under noncancelable operating leases (in thousands):
For the year
ending December 31,
|
|
|
|
2009
|
|
$
|
7,598
|
|
2010
|
|
5,428
|
|
2011
|
|
11,234
|
|
2012
|
|
10,978
|
|
Thereafter
|
|
85,398
|
|
Total
|
|
$
|
120,636
|
|
The following schedule shows the composition of
total rental expense for all operating leases (in thousands):
|
|
Year Ended
December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Minimum rentals
|
|
$
|
9,708
|
|
$
|
9,911
|
|
$
|
11,107
|
|
Contingent rentals
|
|
449
|
|
458
|
|
426
|
|
Less: sublease rentals
|
|
(221
|
)
|
(246
|
)
|
(232
|
)
|
Total
|
|
$
|
9,936
|
|
$
|
10,123
|
|
$
|
11,301
|
|
401(k) Plan
We have a defined contribution 401(k) plan. Our
matching contribution currently represents 50% of a participants contribution,
up to the first 6% of the participants salary. We recorded contribution
expense of approximately $1.7 million, $1.3 million and $1.2 million for each
of the years ended December 31, 2008, 2007 and 2006, respectively.
Legal Proceedings
We are party to various legal proceedings, including
those noted below. While management presently believes that the ultimate
outcome of these proceedings will not have a material adverse effect on our
financial position, overall trends in results of operations or cash flows,
litigation is subject to inherent uncertainties, and unfavorable rulings could
occur. An
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unfavorable
ruling could include monetary damages or equitable relief, and could have a
material adverse impact on the net income of the period in which the ruling
occurs or in future periods.
Valencia County Detention Center
In
April 2007, a lawsuit was filed against the Company in the Federal
District Court in Albuquerque, New Mexico, by Joe Torres and Eufrasio Armijo,
who each alleged that he was strip searched at the Valencia County Detention
Center (VCDC) in New Mexico in violation of his federal rights under the
Fourth, Fourteenth and Eighth amendments to the U.S. Constitution. The
claimants also alleged violation of their rights under state law and sought to
bring the case as a class action on behalf of themselves and all detainees at
VCDC during the applicable statutes of limitation. The plaintiffs sought
damages and declaratory and injunctive relief. Valencia County is also a
named defendant in the case and operated the VCDC for a significantly greater
portion of the period covered by the lawsuit.
In
December 2008, the parties agreed to a proposed stipulation of settlement
and the Court has preliminarily approved the settlement. The settlement amount under the terms of the
agreement is $3.3 million.
Cornells portion of the stipulated
settlement, based on the number of inmates housed at VCDC during the time
Cornell operated the facility in comparison to the number of inmates housed at
the facility during the time Valencia County operated the facility, is $1.2
million and was funded principally through our general liability and
professional liability coverage.
In
the year ended December 31, 2007, we previously provided insurance
reserves for this matter (as part of our regular review of reported and unreported
claims) totaling approximately $0.5 million.
During the fourth quarter of 2008, we recorded an additional settlement
charge of approximately $0.7 million and the related reimbursement from our
general liability and professional liability insurance. The charge and reimbursement were recognized
in general and administrative expenses for the year ended December 31,
2008. The reimbursement was funded by
the insurance carrier in the first quarter of 2009 into
a settlement account, where it will remain
until payments are made to the settlement class members. The Court granted preliminary approval of the
settlement in the first quarter of 2009, and the claims administration process
is underway. We expect the claims
administration process to be completed and the final court approval of the
settlement in the fourth quarter of 2009.
Shareholder Lawsuits
On
October 19, 2006, a purported class action complaint was filed in the
District Court of Harris County, Texas, 269th Judicial District (No. 2006-67413)
by Ted Kinbergy, an alleged stockholder of Cornell. The complaint names as
defendants Cornell and each member of the board of directors at the time of the
suit, as well as Veritas Capital Fund III, L.P. (Veritas). The complaint
alleges, among other things, that (i) the defendants have breached
fiduciary duties they assertedly owed to our stockholders in connection with
our entering into the Agreement and Plan of Merger, dated as of October 6,
2006, with Veritas, Cornell Holding Corp., and CCI Acquisition Corp., and (ii) the
merger consideration is unfair and inadequate. The plaintiffs sought, among
other things, an injunction against the consummation of the merger. The
proposed merger was rejected at a special meeting of our stockholders held on January 23,
2007. Consequently, we believe the case is moot and expect the plaintiffs to
seek dismissal of their claims accompanied by a request for legal fees that may
be owed. We do not expect the resolution of this matter to have a
material adverse effect on our financial condition, results of operations or
cash flows.
Settlement of Claim
On
December 12, 2008, we settled a lawsuit the Company had filed in the
United States District Court for the Eastern District of Pennsylvania against
the Borough of New Morgan (the Borough), New Morgan Borough Council and
certain individual council members. The lawsuit involved the operation of
the Companys Abraxas Academy in New Morgan, Pennsylvania and a sewage
treatment facility that is owned by the Borough.
In
connection with the settlement, all claims have been terminated and finally
settled, including those concerning the operation and occupancy of the facility
and the sewage treatment plant. Neither party has admitted liability for
any claim or contention made by the other party. The Company received $1.55
million from the Borough and agreed to pay the Borough unpaid sewage treatment
bills in the amount of $0.2 million through September 30, 2008. The $1.55 million settlement is reflected in
operating expenses in the accompanying financial statements.
Other
We
hold insurance policies to cover potential director and officer liability, some
of which may limit our cash outflows in the event of a decision adverse to us
in the matters discussed above. However, if an adverse decision in these
matters exceeds the insurance coverage or if the insurance coverage is deemed
not to apply to these matters, it could have a material adverse effect on us,
our financial condition, results of operations and future cash flows.
Additionally,
we currently and from time to time are subject to claims and suits arising in
the ordinary course of business, including claims for damages for personal
injuries or for wrongful restriction of or interference with offender
privileges and employment matters. If an adverse decision in these matters
exceeds our insurance coverage, or if our coverage is deemed not to apply to
these matters, or if the underlying insurance carrier was unable to fulfill its
obligation under the insurance coverage provided, it could have a material
adverse effect on our financial condition, results of operations or cash flows.
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While
the outcome of such other matters cannot be predicted with certainty, based on
the information known to date, we believe that the ultimate resolution of these
matters will not have a material adverse effect on our financial condition, but
could be material to operating results or cash flows for a particular reporting
period.
10. STOCKHOLDERS
EQUITY
Preferred Stock
Preferred stock may be issued from time to time by
our Board of Directors, which is responsible for determining the voting,
dividend, redemption, conversion and liquidation features of any preferred
stock.
Options and
Warrants
Under our 2000 Broad-Based Employee Plan (the 2000
Plan) we may grant non-qualified stock options to our employees, directors and
eligible consultants for up to the greater of 400,000 shares or 4% of the
aggregate number of shares of common stock issued and outstanding immediately
after grant of any option under the 2000 Plan. The 2000 Plan options vest up to
five years and expire ten years from the grant date. Under our 1996 Stock
Option Plan, as amended and restated in April 1998 (the 1996 Plan) we
may grant non-qualified and incentive stock options for up to the greater of
1,932,119 shares or 15.0% of the aggregate number of shares of common stock
outstanding. The 1996 Plan options vest up to seven years and expire seven to
ten years from the grant date. The Compensation Committee of the Board of
Directors, which consists entirely of independent directors, is responsible for
determining the exercise price and vesting terms for the granted options. The
1996 Plan and 2000 Plan option exercise prices can be no less than the market
price of our common stock on the date of grant.
In conjunction with the issuance of subordinated
notes in July 2000 (which are no longer outstanding), we issued warrants
to purchase 290,370 shares of the common stock at an exercise price of $6.70.
We recognized the fair value of these warrants of $1.1 million as additional
paid-in capital. The warrants could only be exercised by payment of the
exercise price in cash to us, by cancellation of an amount of warrants equal to
the fair market value of the exercise price, or by the cancellation of our
indebtedness owed to the warrant holder. During 2001, 168,292 shares of our
common stock were issued in conjunction with the exercise and cancellation of
217,778 warrants. At December 31, 2006, 72,592 warrants were
outstanding. During 2007, all 72,592
warrants were exercised and canceled.
For a summary of the status of our various option
plans at December 31, 2007, see Note 2 to the consolidated financial
statements.
Treasury Stock
We did not repurchase any of our common stock in the
years ended December 31, 2008 and 2007. Under the terms of our Senior
Notes and our Amended Credit Facility, we can purchase shares of our stock
subject to certain cumulative restrictions.
Employee Stock
Purchase Plan
We have an employee stock purchase plan under which
employees can make contributions to purchase our common stock. Participation in
the plan is elected annually by employees. The plan year begins each January 1
st
(the Exercise Date) and ends on December 31
st
(the Ending Date). For 2007, however, the
plan year began April 1, 2007. Purchases of common stock are made at the
end of the year using the lower of the fair market value on either the
Beginning Date or Ending Date, less a 15.0% discount. For the years ended December 31,
2008, 2007 and 2006, employee contributions of approximately $0.1 million, $0.2
million and $0.3 million were used to purchase 8,883, 25,348 and 22,593,
respectively, of our common stock.
2006 Equity
Incentive Plan
Our stockholders approved the establishment of the
2006 Equity Incentive Plan (the 2006 Plan) at our June 29, 2006 annual
meeting. The purpose of the 2006 Plan is to promote the interests of the
Company and its stockholders by (i) attracting and retaining employees,
directors, and consultants of the Company and its affiliates, (ii) motivating
such individuals by means of performance-related incentives to achieve longer-range
performance goals, and (iii) enabling such individuals to participate in
the long-term growth and financial success of the Company. At the discretion of
the Compensation Committee, any employee, director, or consultant of the
Company or its affiliates may be granted an award under the 2006 Plan. The
Compensation Committee administers the 2006 Plan.
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A total of 1,400,000 shares of common stock are
authorized for issuance under the 2006 Plan, all of which may be issued
pursuant to incentive stock options. These shares of common stock will be in a fungible
pool with shares subject to restricted stock, stock compensation and other
stock-based awards counted against this limit as two (2) shares for every
one (1) share granted and any shares subject to any other type of award to
be counted against this limit as one (1) share for every one (1) share
granted. Stock options (both non-qualified stock options and incentive stock
options), stock appreciation rights, restricted stock, restricted stock units,
performance awards, stock compensation and other stock-based awards may be
granted under the 2006 Plan.
In the event of a Change of Control, as defined in
the 2006 Plan, any outstanding stock option, stock appreciation right,
non-performance based restricted stock or restricted stock unit award, and
performance based restricted stock, restricted stock units, performance share
or performance unit award (unless otherwise provided in the performance award
agreement) will automatically vest. Upon a Change of Control, the Board of
Directors may also take any one or more of the following actions: (i) provide
for the purchase of any outstanding awards by the Company; (ii) make
adjustments to any outstanding awards; or (iii) allow for the assumption
or substitution of outstanding awards by the acquiring or surviving
corporation. Grants of 287,000 shares of
restricted stock were made under the 2006 Plan during the year ended December 31,
2007. No grants were made to any
individual under the 2006 Plan during the year ended December 31, 2006.
11. DERIVATIVE
FINANCIAL INSTRUMENTS AND GUARANTEES
Debt Service
Reserve Fund and Debt Service Fund
In August 2001, MCF completed a bond offering
to finance the 2001 Sale and Leaseback Transaction (in which we sold eleven
facilities (as identified in Item 1 of this report) to MCF. In connection with
this bond offering, two reserve fund accounts were established by MCF pursuant
to the terms of the indenture: (1) MCFs Debt Service Reserve Fund,
aggregating $23.8 million at December 31, 2008, was established to make
payments on MCFs outstanding bonds in the event we (as lessee) should fail to
make the scheduled rental payments to MCF and (2) MCFs Debt Service Fund,
aggregating $27.9 million at December 31, 2008, was established to
accumulate the monthly lease payments that MCF receives from us until such
funds are used to pay MCFs semi-annual bond interest and annual bond principal
payments. These reserve funds are typically invested in short-term money
markets and commercial paper. Both reserve fund accounts are subject to the
agreements with the MCF Equity Investors (Lehman Brothers, Inc. (Lehman)) whereby
guaranteed rates of return of 3.0% and 5.08%, respectively, are provided for in
the balance of the Debt Service Reserve Fund and the Debt Service Fund. The
guaranteed rates of return are characterized as cash flow hedge derivative
instruments. At inception, the derivatives had an aggregate fair value of $4.0
million, which has been recorded as a decrease to the equity investment in MCF
made by the MCF Equity Investors (MCF minority interest) and as a liability in
our Consolidated Balance Sheets. Changes in the fair value of the derivative
instruments were recorded as an adjustment to other long-term liabilities and
reported as other comprehensive income (loss) in our Consolidated Statements of
Operations and Comprehensive Income (Loss). Due to the bankruptcy of Lehman in
2008, the derivative instrument no longer qualified as a hedge and was de-designated.
Amounts included in accumulated other comprehensive income are reclassified
into earnings during the same periods in which interest is earned on the debt
service funds. Changes in the fair value of this derivative after de-designation
are recorded into earnings. At December 31, 2008, the fair value was
deemed to be zero, and the change in fair value of $1.2 million was credited to
interest income.
In connection with MCFs bond offering, Lehman also provided
a guarantee of the Debt Service Reserve Fund if a bankruptcy of the Company
were to occur and a trustee for the estate of the Company were to include the
Debt Service Reserve Fund as an asset of the Companys estate. This guarantee
was characterized as an insurance contract and its fair value was being
amortized to expense over the life of the debt. Due to the bankruptcy of Lehman
in 2008, the full carrying value of the guarantee was determined to be
unrecoverable. Accordingly, we recorded
a charge of $1.3 million in the year ended December 31, 2008. This charge
is included in interest expense in the accompanying consolidated financial
statements.
12. RELATED
PARTY TRANSACTIONS
In
September 1999, we entered into a consulting agreement with Cornells
founder, David Cornell, who was a director of Cornell through October 2003. Services rendered under the consulting
agreement included serving as a director of Cornell over the initial four years
of the term of the agreement and assisting in such areas as the development of
new business, acquisitions, financings and executive management
assimilation. As compensation for
consulting services, we agreed to an annual payment of at least $255,000 for
each of the first four years of the seven-year initial term of the consulting
agreement with an annual payment of at least $180,000 for each of the last
three years of the initial term. As additional compensation,
71
Table of Contents
we
agreed to an annual bonus, subject to certain limitations, equal to $75,000
during the first four years of the initial term and an annual bonus of $60,000
during the last three years of the initial term. The initial term concluded in
2006 and the final bonus payment of $60,000 was paid. The agreement was not renewed.
We
also entered into a non-compete agreement with Mr. Cornell. The non-compete agreement has a term of 10
years and required us to pay a monthly fee of $10,000 for the seven-year
initial term of the consulting agreement.
We capitalize the monthly payments and amortize the amounts over the 10-year
term of the non-compete agreement. Due to his death in December 2008, the
remaining unamortized balance was written-off. We recognized amortization
expense related to this agreement of approximately $84,000 for each of the
years ended December 31, 2008, 2007 and 2006.
We
maintained a life insurance policy for Mr. Cornell and made payments
related to this policy of approximately $0.2 million for each of the years
ended December 31, 2008, 2007 and 2006. As a result of Mr. Cornells
death in December 2008, we received a return of cash premiums previously
paid of approximately $2.0 million in December 2008.
Total
payments made for the above to Mr. Cornell were $0.06 million and $0.5
million for the years ended December 31, 2007 and 2006, respectively. No
payments were made to Mr. Cornell in the year ended December 31, 2008.
We
entered into a consulting agreement with a former director, Arlene Lissner,
which expired in December 2008.
Services rendered under this agreement include research and analysis for
various topics including data collection, support and training for program
development; performance-based contractual requirements and
performance-improvement processes, accreditations and regulatory
requirements. Payments under this
agreement totaled $0.3 million for each of the years ended December 31,
2008, 2007 and 2006. The agreement
concluded in 2008 and was not renewed.
13. TERMINATED
MERGER
AGREEMENT
On
October 6, 2006, we entered into an Agreement and Plan of Merger (the Merger
Agreement) with The Veritas Capital Fund III, L.P., a Delaware limited
partnership (Veritas), Cornell Holding Corp., a Delaware corporation (Parent)
and CCI Acquisition Corp., a Delaware corporation and wholly owned subsidiary
of Parent (Merger Sub), pursuant to which the Merger Sub would be merged with
and into us (the Merger), with Cornell surviving after the Merger as a wholly
owned subsidiary of Parent.
Our
Board of Directors unanimously approved the Merger Agreement. In connection
with the Merger, the Parent and certain of our stockholders entered into a
Voting Agreement dated on or about October 6, 2006, whereby such
stockholders agreed, among other things, to vote their respective shares of our
stock in favor of the Merger Agreement, the Merger and the transactions
contemplated thereby. At a special meeting of our stockholders held on January 23,
2007, the proposed Merger Agreement was rejected.
Under
the terms of the Merger Agreement, because the Merger was terminated, we
reimbursed $2.5 million of costs incurred by Veritas, Parent and Merger Sub in
connection with the proposed merger in February 2007. Such costs for legal
and external professional and consulting fees are reflected in general and
administrative expenses for the year ended December 31, 2007.
14.
DISCONTINUED OPERATIONS
We classify
as discontinued operations those components of our business that we hold for
sale or that have been disposed and have cash flows that are clearly
distinguishable operationally and for financial reporting purposes from the
rest of our operations. For those components, we have no significant continuing
involvement after completion of disposal and their operations are eliminated
from our ongoing operations. During the year ended December 31, 2005, we
classified certain components as discontinued operations as the result of a
management decision to close certain facilities. Notifications were made to the
required contracting entities regarding the termination of the related
programs. At December 31, 2008 and 2007, we did not have any significant
net property and equipment balances pertaining to these former operations.
There were no revenues generated by these discontinued operations in the years
ended December 31, 2008, 2007 and 2006.
15. SEGMENT
DISCLOSURE
Our three operating divisions are our reportable
segments. The Adult Secure Services segment consists of the operations of
secure adult incarceration facilities. The Abraxas Youth and Family Services
segment consists of providing residential
72
Table of Contents
treatment
and educational programs and non-residential community-based programs to
juveniles between the ages of 10 and 18 who have either been adjudicated or
suffer from behavioral problems. The Adult Community-Based Services segment
consists of providing pre-release and halfway house programs for adult
offenders who are either on probation or serving the last three to six-months
of their sentences on parole and preparing for re-entry into society at large
as well as community-based treatment and education programs as an alternative
to incarceration. All of our customers and long-lived assets are located in the
United States of America. The accounting policies of our reportable segments
are the same as those described in the summary of significant accounting
policies in Note 2 to the consolidated financial statements. Intangible assets
are not included in each segments reportable assets, and the amortization of
intangible assets is not included in the determination of a segments operating
income. We evaluate performance based on income or loss from operations before
general and administrative expenses, incentive bonuses, amortization of
intangibles, interest and income taxes. Corporate and other assets are
comprised primarily of cash, investment securities available for sale, accounts
receivable, debt service fund, deposits, property and equipment, deferred
taxes, deferred costs and other assets. Corporate and other expense from
operations primarily consists of depreciation and amortization on the corporate
office facilities and equipment and specific general and administrative charges
pertaining to corporate personnel (including the $1.85 million legal settlement
received in the third quarter of 2007) and is presented separately as such
charges cannot be readily identified for allocation to a particular segment.
The only significant non-cash items reported in the
respective segments income from operations is depreciation and amortization
(excluding intangibles) and impairment of long-lived assets (in thousands).
73
Table of Contents
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
209,283
|
|
$
|
183,199
|
|
$
|
178,795
|
|
Abraxas youth and family services
|
|
107,278
|
|
109,297
|
|
115,765
|
|
Adult community-based services
|
|
70,163
|
|
68,108
|
|
66,295
|
|
Total revenue
|
|
$
|
386,724
|
|
$
|
360,604
|
|
$
|
360,855
|
|
|
|
|
|
|
|
|
|
Pre-opening and start-up expenses:
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
|
|
$
|
|
|
$
|
2,657
|
|
Abraxas youth and family services
|
|
|
|
¾
|
|
¾
|
|
Adult community-based services
|
|
|
|
¾
|
|
¾
|
|
Total pre-opening and start-up expenses
|
|
$
|
|
|
$
|
|
|
$
|
2,657
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
10,504
|
|
$
|
8,570
|
|
$
|
8,008
|
|
Abraxas youth and family services
|
|
2,866
|
|
2,736
|
|
3,118
|
|
Adult community-based services
|
|
1,535
|
|
1,525
|
|
1,892
|
|
Amortization of intangibles
|
|
2,200
|
|
2,407
|
|
2,243
|
|
Corporate and other
|
|
838
|
|
748
|
|
1,024
|
|
Total depreciation and amortization
|
|
$
|
17,943
|
|
$
|
15,986
|
|
$
|
16,285
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
63,170
|
|
$
|
44,096
|
|
$
|
44,849
|
|
Abraxas youth and family services
|
|
8,829
|
|
13,069
|
|
12,574
|
|
Adult community-based services
|
|
19,191
|
|
16,511
|
|
12,362
|
|
Subtotal
|
|
91,190
|
|
73,676
|
|
69,785
|
|
General and administrative expenses
|
|
(25,954
|
)
|
(25,499
|
)
|
(21,720
|
)
|
Amortization of intangibles
|
|
(2,200
|
)
|
(2,406
|
)
|
(2,243
|
)
|
Corporate and other
|
|
(839
|
)
|
(762
|
)
|
(1,024
|
)
|
Total income from operations
|
|
$
|
62,197
|
|
$
|
45,009
|
|
$
|
44,798
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations, net of tax:
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Abraxas youth and family services
|
|
|
|
¾
|
|
(706
|
)
|
Adult community-based services
|
|
|
|
¾
|
|
(1
|
)
|
Total loss on discontinued operations, net of tax
|
|
$
|
|
|
$
|
|
|
$
|
(707
|
)
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
76,703
|
|
$
|
48,538
|
|
$
|
9,811
|
|
Abraxas youth and family services
|
|
1,808
|
|
1,351
|
|
1,182
|
|
Adult community-based services
|
|
956
|
|
310
|
|
749
|
|
Corporate and other
|
|
448
|
|
691
|
|
575
|
|
Total capital expenditures
|
|
$
|
79,915
|
|
$
|
50,890
|
|
$
|
12,317
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Adult secure services
|
|
$
|
358,406
|
|
$
|
290,930
|
|
$
|
233,670
|
|
Abraxas youth and family services
|
|
105,991
|
|
109,478
|
|
100,366
|
|
Adult community-based services
|
|
60,170
|
|
63,008
|
|
63,105
|
|
Intangible assets, net
|
|
15,628
|
|
17,875
|
|
19,265
|
|
Corporate and other
|
|
96,726
|
|
81,496
|
|
107,127
|
|
Total assets
|
|
$
|
636,921
|
|
$
|
562,287
|
|
$
|
523,533
|
|
74
Table of Contents
16. GUARANTOR DISCLOSURES
We
completed an offering of $112.0 million of Senior Notes in June 2004. The
Senior Notes are guaranteed by each of our subsidiaries (Guarantor
Subsidiaries). MCF does not guarantee the Senior Notes (Non-Guarantor
Subsidiary). These guarantees are joint and several obligations of the
Guarantor Subsidiaries. The following condensed consolidating financial
information presents the financial condition, results of operations and cash
flows of the Guarantor Subsidiaries and the Non-Guarantor Subsidiary, together
with the consolidating adjustments necessary to present our results on a
consolidated basis.
Condensed Consolidating Balance Sheet as of December 31, 2008 (in
thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,291
|
|
$
|
265
|
|
$
|
57
|
|
$
|
|
|
$
|
14,613
|
|
Accounts receivable
|
|
2,045
|
|
66,921
|
|
422
|
|
|
|
69,388
|
|
Restricted assets
|
|
|
|
3,432
|
|
27,938
|
|
|
|
31,370
|
|
Prepaids and other
|
|
13,875
|
|
1,644
|
|
|
|
|
|
15,519
|
|
Total current assets
|
|
30,211
|
|
72,262
|
|
28,417
|
|
|
|
130,890
|
|
Property and equipment, net
|
|
101
|
|
312,446
|
|
141,975
|
|
(4,168
|
)
|
450,354
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Debt service reserve fund
|
|
|
|
|
|
23,750
|
|
|
|
23,750
|
|
Deferred costs and other
|
|
60,322
|
|
23,267
|
|
5,367
|
|
(57,029
|
)
|
31,927
|
|
Investment in subsidiaries
|
|
73,197
|
|
1,856
|
|
|
|
(75,053
|
)
|
|
|
Total assets
|
|
$
|
163,831
|
|
409,831
|
|
$
|
199,509
|
|
(136,250
|
)
|
$
|
636,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
48,373
|
|
$
|
15,515
|
|
$
|
4,883
|
|
$
|
322
|
|
$
|
69,093
|
|
Current portion of long-term
debt
|
|
|
|
12
|
|
12,400
|
|
|
|
12,412
|
|
Total current liabilities
|
|
48,373
|
|
15,527
|
|
17,283
|
|
322
|
|
81,505
|
|
Long-term debt, net of current
portion
|
|
186,356
|
|
14
|
|
121,700
|
|
|
|
308,070
|
|
Deferred tax liabilities
|
|
16,246
|
|
94
|
|
|
|
1,151
|
|
17,491
|
|
Other long-term liabilities
|
|
5,851
|
|
113
|
|
56,733
|
|
(61,009
|
)
|
1,688
|
|
Intercompany
|
|
(320,717
|
)
|
320,722
|
|
|
|
(5
|
)
|
|
|
Total liabilities
|
|
(63,891
|
)
|
336,470
|
|
195,716
|
|
(59,541
|
)
|
408,754
|
|
Minority interest
|
|
|
|
|
|
|
|
445
|
|
445
|
|
Stockholders equity
|
|
227,722
|
|
73,361
|
|
3,793
|
|
(77,154
|
)
|
227,722
|
|
Total liabilities and
stockholders equity
|
|
$
|
163,831
|
|
$
|
409,831
|
|
$
|
199,509
|
|
$
|
(136,250
|
)
|
$
|
636,921
|
|
75
Table
of Contents
Condensed Consolidating Balance Sheet as of December 31, 2007 (in
thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,565
|
|
$
|
408
|
|
$
|
55
|
|
$
|
|
|
$
|
3,028
|
|
Investment securities
|
|
250
|
|
¾
|
|
¾
|
|
¾
|
|
250
|
|
Accounts receivable
|
|
1,814
|
|
70,495
|
|
679
|
|
¾
|
|
72,988
|
|
Restricted assets
|
|
¾
|
|
2,486
|
|
25,629
|
|
(592
|
)
|
27,523
|
|
Prepaids and other
|
|
11,362
|
|
1,519
|
|
¾
|
|
¾
|
|
12,881
|
|
Total current assets
|
|
15,991
|
|
74,908
|
|
26,363
|
|
(592
|
)
|
116,670
|
|
Property and equipment, net
|
|
270
|
|
242,297
|
|
146,197
|
|
(4,812
|
)
|
383,952
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Debt service reserve fund
|
|
¾
|
|
¾
|
|
23,638
|
|
¾
|
|
23,638
|
|
Deferred costs and other
|
|
56,500
|
|
24,460
|
|
6,035
|
|
(48,968
|
)
|
38,027
|
|
Investment in subsidiaries
|
|
41,445
|
|
1,856
|
|
¾
|
|
(43,301
|
)
|
¾
|
|
Total assets
|
|
$
|
114,206
|
|
$
|
343,521
|
|
$
|
202,233
|
|
$
|
(97,673
|
)
|
$
|
562,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
37,751
|
|
$
|
15,463
|
|
$
|
5,186
|
|
$
|
(898
|
)
|
$
|
57,502
|
|
Current portion of long-term
debt
|
|
¾
|
|
11
|
|
11,400
|
|
¾
|
|
11,411
|
|
Total current liabilities
|
|
37,751
|
|
15,474
|
|
16,586
|
|
(898
|
)
|
68,913
|
|
Long-term debt, net of current
portion
|
|
141,172
|
|
26
|
|
134,100
|
|
¾
|
|
275,298
|
|
Deferred tax liabilities
|
|
12,387
|
|
94
|
|
¾
|
|
745
|
|
13,226
|
|
Other long-term liabilities
|
|
6,705
|
|
162
|
|
49,702
|
|
(52,168
|
)
|
4,401
|
|
Intercompany
|
|
(284,258
|
)
|
284,263
|
|
¾
|
|
(5
|
)
|
¾
|
|
Total liabilities
|
|
(86,243
|
)
|
300,019
|
|
200,388
|
|
(52,326
|
)
|
361,838
|
|
Stockholders equity
|
|
200,449
|
|
43,502
|
|
1,845
|
|
(45,347
|
)
|
200,449
|
|
Total liabilities and
stockholders equity
|
|
$
|
114,206
|
|
$
|
343,521
|
|
$
|
202,233
|
|
$
|
(97,673
|
)
|
$
|
562,287
|
|
76
Table of
Contents
Condensed Consolidating Statement of Operations for the year ended December 31,
2008 (in thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
18,008
|
|
$
|
439,083
|
|
$
|
18,008
|
|
$
|
(88,375
|
)
|
$
|
386,724
|
|
Operating expenses
|
|
16,136
|
|
352,355
|
|
174
|
|
(88,035
|
)
|
280,630
|
|
Depreciation and amortization
|
|
|
|
14,364
|
|
4,222
|
|
(643
|
)
|
17,943
|
|
General and administrative
expenses
|
|
25,879
|
|
|
|
75
|
|
|
|
25,954
|
|
Income (loss) from operations
|
|
(24,007
|
)
|
72,364
|
|
13,537
|
|
303
|
|
62,197
|
|
Overhead allocations
|
|
(37,349
|
)
|
37,349
|
|
|
|
|
|
|
|
Interest, net
|
|
8,000
|
|
5,093
|
|
10,997
|
|
(132
|
)
|
23,958
|
|
Equity earnings in subsidiaries
|
|
31,233
|
|
|
|
|
|
(31,233
|
)
|
|
|
Income before provision for
income taxes
|
|
36,575
|
|
29,922
|
|
2,540
|
|
(30,798
|
)
|
38,239
|
|
Provision for income taxes
|
|
14,384
|
|
|
|
|
|
1,219
|
|
15,603
|
|
Minority interest in
consolidated special purpose entity
|
|
|
|
|
|
|
|
445
|
|
445
|
|
Net income
|
|
$
|
22,191
|
|
$
|
29,922
|
|
$
|
2,540
|
|
$
|
(32,462
|
)
|
$
|
22,191
|
|
77
Table of
Contents
Condensed Consolidating Statement of Operations for the year ended December 31,
2007
(in thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
18,008
|
|
$
|
406,673
|
|
$
|
18,008
|
|
$
|
(82,085
|
)
|
$
|
360,604
|
|
Operating expenses
|
|
19,843
|
|
335,879
|
|
87
|
|
(81,699
|
)
|
274,110
|
|
Pre-opening and start-up
expenses
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
Depreciation and amortization
|
|
183
|
|
12,199
|
|
4,222
|
|
(618
|
)
|
15,986
|
|
General and administrative expenses
|
|
25,424
|
|
¾
|
|
75
|
|
¾
|
|
25,499
|
|
Income (loss) from operations
|
|
(27,442
|
)
|
58,595
|
|
13,624
|
|
232
|
|
45,009
|
|
Overhead allocations
|
|
(41,236
|
)
|
41,236
|
|
¾
|
|
¾
|
|
¾
|
|
Interest, net
|
|
6,972
|
|
5,094
|
|
11,889
|
|
309
|
|
24,264
|
|
Equity earnings in subsidiaries
|
|
13,244
|
|
¾
|
|
¾
|
|
(13,244
|
)
|
0
|
|
Income before provision
for income taxes
|
|
20,066
|
|
12,265
|
|
1,735
|
|
(13,321
|
)
|
20,745
|
|
Provision for income taxes
|
|
8,156
|
|
¾
|
|
¾
|
|
679
|
|
8,835
|
|
Income from continuing
operations
|
|
11,910
|
|
12,265
|
|
1,735
|
|
(14,000
|
)
|
11,910
|
|
Discontinued operations
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
¾
|
|
Net income
|
|
$
|
11,910
|
|
$
|
12,265
|
|
$
|
1,735
|
|
$
|
(14,000
|
)
|
$
|
11,910
|
|
78
Table of Contents
Condensed Consolidating Statement of Operations for the year ended December 31,
2006 (in thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
18,008
|
|
$
|
408,832
|
|
$
|
18,008
|
|
$
|
(83,993
|
)
|
$
|
360,855
|
|
Operating expenses
|
|
23,498
|
|
335,515
|
|
33
|
|
(83,651
|
)
|
275,395
|
|
Pre-opening and start-up
expenses
|
|
¾
|
|
2,657
|
|
¾
|
|
¾
|
|
2,657
|
|
Depreciation and amortization
|
|
¾
|
|
12,499
|
|
4,222
|
|
(436
|
)
|
16,285
|
|
General and administrative
expenses
|
|
21,617
|
|
¾
|
|
103
|
|
¾
|
|
21,720
|
|
Income (loss) from operations
|
|
(27,107
|
)
|
58,161
|
|
13,650
|
|
94
|
|
44,798
|
|
Overhead allocations
|
|
(40,432
|
)
|
40,432
|
|
¾
|
|
¾
|
|
¾
|
|
Interest, net
|
|
6,653
|
|
5,085
|
|
13,522
|
|
(2,190
|
)
|
23,070
|
|
Equity earnings in subsidiaries
|
|
13,360
|
|
¾
|
|
¾
|
|
(13,360
|
)
|
¾
|
|
Income before provision for
income taxes
|
|
20,032
|
|
12,644
|
|
128
|
|
(11,076
|
)
|
21,728
|
|
Provision for income taxes
|
|
8,159
|
|
¾
|
|
¾
|
|
989
|
|
9,148
|
|
Income from continuing
operations
|
|
11,873
|
|
12,644
|
|
128
|
|
(12,065
|
)
|
12,580
|
|
Discontinued operations, net of
income tax benefit of $381
|
|
¾
|
|
(707
|
)
|
¾
|
|
¾
|
|
(707
|
)
|
Net income
|
|
$
|
11,873
|
|
$
|
11,937
|
|
$
|
128
|
|
$
|
(12,065
|
)
|
$
|
11,873
|
|
79
Table of
Contents
Condensed Consolidating
Statement of Cash Flows for the year ended December 31, 2008 (in
thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
$
|
(34,261
|
)
|
$
|
78,937
|
|
$
|
14,303
|
|
$
|
58,979
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
¾
|
|
(79,915
|
)
|
¾
|
|
(79,915
|
)
|
Sales of investment securities
|
|
250
|
|
¾
|
|
¾
|
|
250
|
|
Payments to restricted debt
payment account, net
|
|
¾
|
|
¾
|
|
(2,901
|
)
|
(2,901
|
)
|
Proceeds from sale of fixed
assets
|
|
¾
|
|
846
|
|
¾
|
|
846
|
|
Net cash provided by (used in)
investing activities
|
|
250
|
|
(79,069
|
)
|
(2,901
|
)
|
(81,720
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
Payments of MCF bonds
|
|
¾
|
|
¾
|
|
(11,400
|
)
|
(11,400
|
)
|
Proceeds from line of credit
|
|
49,000
|
|
¾
|
|
¾
|
|
49,000
|
|
Payments on line of credit
|
|
(4,000
|
)
|
¾
|
|
¾
|
|
(4,000
|
)
|
Payments on capital lease
obligations
|
|
¾
|
|
(11
|
)
|
¾
|
|
(11
|
)
|
Proceeds from exercise of stock
options
|
|
737
|
|
¾
|
|
¾
|
|
737
|
|
Net cash (used in) provided by
financing activities
|
|
45,737
|
|
(11
|
)
|
(11,400
|
)
|
34,326
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
11,726
|
|
(143
|
)
|
2
|
|
11,585
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
period
|
|
2,565
|
|
408
|
|
55
|
|
3,028
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
14,291
|
|
$
|
265
|
|
$
|
57
|
|
$
|
14,613
|
|
80
Table of
Contents
Condensed Consolidating Statement of Cash Flows for
the year ended December 31, 2007 (in thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
(59,489
|
)
|
$
|
74,169
|
|
$
|
12,564
|
|
$
|
27,244
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
¾
|
|
(50,890
|
)
|
¾
|
|
(50,890
|
)
|
Purchase of investment
securities
|
|
(241,425
|
)
|
¾
|
|
¾
|
|
(241,425
|
)
|
Sales of investment securities
|
|
253,100
|
|
¾
|
|
¾
|
|
253,100
|
|
Facility acquisitions
|
|
¾
|
|
(18,554
|
)
|
¾
|
|
(18,554
|
)
|
Site acquisition
|
|
¾
|
|
(5,053
|
)
|
¾
|
|
(5,053
|
)
|
Payments to
restricted debt payment account, net
|
|
¾
|
|
¾
|
|
(2,084
|
)
|
(2,084
|
)
|
Proceeds from sale of fixed
assets
|
|
¾
|
|
375
|
|
¾
|
|
375
|
|
Net cash provided by (used in)
investing activities
|
|
11,675
|
|
(74,122
|
)
|
(2,084
|
)
|
(64,531
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
30,000
|
|
¾
|
|
¾
|
|
30,000
|
|
Payments on MCF Bonds
|
|
¾
|
|
¾
|
|
(10,500
|
)
|
(10,500
|
)
|
Payments for debt issuance and
other financing costs
|
|
(845
|
)
|
¾
|
|
¾
|
|
(845
|
)
|
Payments on capital lease
obligations
|
|
¾
|
|
(10
|
)
|
¾
|
|
(10
|
)
|
Proceeds from exercise of stock
options and warrants
|
|
2,786
|
|
¾
|
|
¾
|
|
2,786
|
|
Tax benefit of stock option
exercises
|
|
355
|
|
¾
|
|
¾
|
|
355
|
|
Net cash provided by (used in)
financing activities
|
|
32,296
|
|
(10
|
)
|
(10,500
|
)
|
21,786
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
(15,518
|
)
|
37
|
|
(20
|
)
|
(15,501
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period
|
|
18,083
|
|
371
|
|
75
|
|
18,529
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
2,565
|
|
$
|
408
|
|
$
|
55
|
|
$
|
3,028
|
|
81
Table of Contents
Condensed Consolidating Statement of Cash Flows for the year ended December 31,
2006 (in thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
7,859
|
|
$
|
8,693
|
|
$
|
13,112
|
|
$
|
29,664
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
¾
|
|
(12,317
|
)
|
¾
|
|
(12,317
|
)
|
Purchases of investment
securities
|
|
(427,600
|
)
|
¾
|
|
¾
|
|
(427,600
|
)
|
Sales of investment securities
|
|
422,925
|
|
¾
|
|
¾
|
|
422,925
|
|
Payments to restricted debt
payment account, net
|
|
¾
|
|
¾
|
|
(3,367
|
)
|
(3,367
|
)
|
Proceeds from sale of fixed
assets
|
|
¾
|
|
2,892
|
|
¾
|
|
2,892
|
|
Net cash used in investing
activities
|
|
(4,675
|
)
|
(9,425
|
)
|
(3,367
|
)
|
(17,467
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
Payments of MCF bonds
|
|
¾
|
|
¾
|
|
(9,700
|
)
|
(9,700
|
)
|
Tax benefit of stock option
exercises
|
|
224
|
|
¾
|
|
¾
|
|
224
|
|
Payments on capital lease
obligations
|
|
¾
|
|
(11
|
)
|
¾
|
|
(11
|
)
|
Proceeds from exercise of stock
options
|
|
2,096
|
|
¾
|
|
¾
|
|
2,096
|
|
Net cash (used in) provided by
financing activities
|
|
2,320
|
|
(11
|
)
|
(9,700
|
)
|
(7,391
|
)
|
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
5,504
|
|
(743
|
)
|
45
|
|
4,806
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
period
|
|
12,579
|
|
1,114
|
|
30
|
|
13,723
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
18,083
|
|
$
|
371
|
|
$
|
75
|
|
$
|
18,529
|
|
82
Table of Contents
17. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
(in
thousands, except per share data)
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
Year
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
95,392
|
|
$
|
94,646
|
|
$
|
95,187
|
|
$
|
101,499
|
|
$
|
386,724
|
|
Income from operations
|
|
14,490
|
|
14,914
|
|
14,037
|
|
18,756
|
|
62,197
|
|
Net income
|
|
4,634
|
|
5,345
|
|
4,828
|
|
7,384
|
|
22,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.32
|
|
$
|
.37
|
|
$
|
.34
|
|
$
|
.52
|
|
$
|
1.55
|
|
Diluted
|
|
$
|
.32
|
|
$
|
.36
|
|
$
|
.33
|
|
$
|
.50
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
89,644
|
|
$
|
91,494
|
|
$
|
87,327
|
|
$
|
92,139
|
|
$
|
360,604
|
|
Income from operations
|
|
7,835
|
|
12,047
|
|
10,537
|
|
14,590
|
|
45,009
|
|
Net income
|
|
664
|
|
3,446
|
|
2,416
|
|
5,384
|
|
11,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.05
|
|
$
|
.24
|
|
$
|
.17
|
|
$
|
.38
|
|
$
|
.84
|
|
Diluted (a)
|
|
$
|
.05
|
|
$
|
.24
|
|
$
|
.17
|
|
$
|
.37
|
|
$
|
.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
41,697
|
|
$
|
35,444
|
|
$
|
38,988
|
|
$
|
48,395
|
|
$
|
48,395
|
|
Total assets
|
|
578,530
|
|
602,787
|
|
628,107
|
|
636,921
|
|
636,921
|
|
Long-term debt, net of current portion
|
|
280,341
|
|
292,884
|
|
306,027
|
|
308,070
|
|
308,070
|
|
Stockholders equity
|
|
206,877
|
|
212,711
|
|
219,179
|
|
227,722
|
|
227,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
75,749
|
|
$
|
59,080
|
|
$
|
22,827
|
|
$
|
47,757
|
|
$
|
47,757
|
|
Total assets
|
|
516,541
|
|
535,039
|
|
537,028
|
|
562,287
|
|
562,287
|
|
Long-term debt, net of current portion
|
|
256,085
|
|
254,463
|
|
245,083
|
|
275,298
|
|
275,298
|
|
Stockholders equity
|
|
183,913
|
|
189,122
|
|
193,792
|
|
200,449
|
|
200,449
|
|
(a)
|
|
The sum of quarters may not equal
yearly amount as each quarter represents a discrete period and also due to rounding.
|
83
Table of
Contents
ITEM 9
|
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure
controls and procedures designed to provide reasonable assurance that
information disclosed in our annual and periodic reports is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules and forms. In addition, we
designed these disclosure controls and procedures to ensure that this
information is accumulated and communicated to management, including the chief
executive officer (CEO) and chief financial officer (CFO), to allow timely
decisions regarding required disclosures. SEC rules require that we
disclose the conclusions of our CEO and CFO about the effectiveness of our
disclosure controls and procedures.
We do not expect that our disclosure
controls and procedures will prevent all errors or fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. In
addition, the design of disclosure controls and procedures must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitation in a
cost-effective control system, misstatements due to error or fraud could occur
and not be detected.
Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, and as required by paragraph (b) of
Rules 13a-15 and 15d-15 of the Exchange Act, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) as of the end of the period required by this report. Based on
that evaluation, our principal executive officer and principal financial
officer have concluded that these controls and procedures are effective at a
reasonable assurance level as of that date.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In connection with the
evaluation as required by paragraph (d) of Rules 13a-15 and 15d-15 of
the Exchange Act, we have not identified any change in internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during our fiscal quarter
ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Cornell
is responsible for establishing and maintaining adequate internal control over
financial reporting for Cornell. Cornells
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
Cornells internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company;
and, (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Companys
assets that could have a material effect on the financial statements.
Due to its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
We have assessed the
effectiveness of our internal control over financial reporting as of December 31,
2008. To make this assessment we used
the criteria for effective internal control over financial reporting described
in
Internal Control Integrated Framework
,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our
84
Table
of Contents
assessment, we have
concluded that, as of December 31, 2008, the Companys internal control
over financial reporting was effective.
Our managements
assessment of the effectiveness of the Companys internal control over
financial reporting as of December 31, 2008 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as stated in their report which appears herein.
REPORT
OF THE REGISTERED PUBLIC ACCOUNTING FIRM
See Financial Statements
and Supplementary Data Report of Independent Registered Public Accounting
Firm in Item 8 of this report.
ITEM 9B.
|
OTHER INFORMATION
|
None.
PART III
Items 10, 11, 12, 13 and
14 of Part III have been omitted from this report because we will file
with the Securities and Exchange Commission, not later than 120 days after the
close of our fiscal year, a definitive proxy statement or a Form 10-K/A. The information required by Items 10, 11, 12,
13 and 14 of this report, which will appear in the definitive proxy statement
and/or the Form 10-K/A, is incorporated by reference into Part III of
this report.
PART IV
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a)
Financial Statements, Schedules and Exhibits
1.
|
Financial statements
|
|
Report of Independent
Registered Public Accounting Firm
|
|
Consolidated Balance
Sheets - December 31, 2008 and 2007
|
|
Consolidated Statements of
Operations and Comprehensive Income/(Loss) for the years ended
December 31, 2008, 2007 and 2006
|
|
Consolidated Statements of
Stockholders Equity for the years ended December 31, 2008, 2007 and
2006
|
|
Consolidated Statements of
Cash Flows for the years ended December 31, 2008, 2007 and 2006
|
|
Notes to consolidated
financial statements
|
|
|
2.
|
Financial statement schedules
|
|
All schedules are omitted
because they are not applicable or because the required information is
included in the financial statements or notes thereto.
|
|
|
3.
|
Exhibits
|
Exhibit
No.
|
|
Description
|
3.1
|
|
Restated Certificate of Incorporation of Cornell Companies, Inc.
(incorporated
by reference to Exhibit 3.1 to the Companys
Annual Report on
Form 10-K for the year ended December 31, 1996 filed on
March 31, 1997
).
|
|
|
|
3.2
|
|
Second Amended and Restated Bylaws of Cornell Companies, Inc.
(incorporated
by reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K
filed on December 13, 2007
).
|
|
|
|
3.3
|
|
Certificate of Amendment of Restated Certificate of Incorporation of
Cornell Companies, Inc.
(incorporated by reference
to Exhibit 4.2 to the Companys
Registration Statement on
Form S-8 (Reg. No. 333-42444) filed on July 28, 2000).
|
|
|
|
4.1
|
|
Form of Certificate representing Common Stock
(incorporated
by reference to Exhibit 4.1 to the Companys
Registration Statement on
Amendment 1 to Form S-1 (Reg. No. 333-08243) filed on
August 26, 1996).
|
85
Table of Contents
4.6
|
|
Indenture dated as of June 24, 2004 between Cornell
Companies, Inc., the guarantors named therein and JPMorgan Chase Bank,
as trustee
(incorporated by reference to Exhibit 4.1 to
the Companys Current Report on
Form 8-K filed on
June 25, 2004).
|
|
|
|
4.7
|
|
Form of 10 3/4% Senior Note due 2012
(included in
Exhibit 4.6
).
|
|
|
|
4.8
|
|
Registration
Rights Agreement dated March 31, 1994, as amended, among Cornell
Corrections, Inc. and the stockholders listed on the signature
pages thereto (incorporated by reference to Exhibit 4.2 to the
Companys Registration Statement on Form S-1 (Reg. No. 333- 08243),
filed on July 17, 1996, as amended).
|
|
|
|
4.9
|
|
Registration Rights Agreement, dated October 14, 1999 among
Cornell Companies, Inc. and the investors party thereto (incorporated by
reference to Exhibit 4.7 to the Companys Registration Statement on
Form S-3 (Reg. No. 333-91211) filed on November 18, 1999).
|
|
|
|
10.1*
|
|
Cornell Corrections, Inc. Amended and Restated 1996 Stock Option
Plan
(incorporated by reference to Exhibit B to the Companys
Schedule 14A
filed on March 9, 1998).
|
|
|
|
10.2*
|
|
Form of Indemnification Agreement between Cornell
Companies, Inc. and each of its directors and executive officers
(incorporated
by reference to Exhibit 10.3 to the Companys
Registration
Statement on Amendment 1 to Form S-1 (Reg. No. 333-08243) filed on
August 26, 1996).
|
|
|
|
10.3*
|
|
Cornell Corrections, Inc. Employee Stock Purchase Plan
(incorporated
by reference to Exhibit 4.7 to the Companys
Registration Statement on
Form S-8 (Reg. No. 333-80187) filed on June 8, 1999).
|
|
|
|
10.4*
|
|
Cornell Corrections, Inc. Deferred Compensation Plan
(incorporated
by reference to Exhibit 4.8 to the Companys
Registration Statement on
Form S-8 (Reg. No. 333-80187) filed on June 8, 1999).
|
|
|
|
10.5*
|
|
Cornell Companies, Inc. 2000 Director Stock Plan
(incorporated
by reference to Exhibit 4.9 to the Companys
Registration Statement on
Form S-8 (Reg. No. 333-42444) filed on July 28, 2000).
|
|
|
|
10.6*
|
|
Cornell Companies, Inc. Deferred Bonus Plan
(incorporated
by reference to Exhibit 10.44a to the Companys
Annual Report
on Form 10-K for the year ended December 31, 2002 filed on
March 31, 2003
)
.
|
|
|
|
10.7
|
|
Premises Transfer Agreement, dated August 14, 2001, among Cornell
Companies, Inc., Cornell Corrections of Georgia, L.P., Cornell Corrections
of Oklahoma, Inc., Cornell Corrections of Texas, Inc., WBP
Leasing, Inc., and Municipal Corrections Finance, L.P.
(incorporated
by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on August 28, 2001).
|
|
|
|
10.8
|
|
Master Lease Agreement (with addenda), dated August 14, 2001,
between Municipal Corrections Finance, L.P. and Cornell Companies, Inc.
(incorporated
by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K
filed on August 28, 2001).
|
|
|
|
10.9
|
|
Master Lease Agreement dated December 3, 1998 between Atlantic
Financial Group, Ltd. and WBP Leasing, Inc. and certain other
subsidiaries of Cornell Corrections, Inc.
(incorporated by reference
to Exhibit 10.3 to the Companys
Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001 filed on
October 30, 2001
).
|
|
|
|
10.10
|
|
Amended and
Restated Credit Agreement dated October 10, 2007 among Cornell
Companies, Inc., its subsidiaries, JPMorgan Chase Bank N.A., as
Administrative Agent, Bank of America, N.A., as Syndication Agent and the
Lenders party thereto
(incorporated by reference to Exhibit
10.1
to the Companys Current
Report on
Form 8-K filed on
October 12, 2007
)
.
|
|
|
|
10.11*
|
|
Amended and Restated Employment Agreement, dated August 2, 2007,
between Cornell Companies, Inc. and James E. Hyman
(incorporated
by reference to Exhibit
10.1
to the Companys Current
Report on
Form 8-K filed on
August 6, 2007)
.
|
|
|
|
10.12*
|
|
Restricted Stock Agreement, dated March 14, 2005, between Cornell
Companies, Inc. and James E. Hyman
(incorporated by reference
to Exhibit
10.2
to the Companys Current Report on
Form 8-K filed on
March 15,
2005)
.
|
86
Table of Contents
10.13*
|
|
Employment/Separation Agreement, dated March 9, 2005, between
Cornell Companies, Inc. and John R. Nieser
(incorporated by reference
to Exhibit
10.3
to the Companys Current Report on
Form 8-K filed on
March 15,
2005)
.
|
|
|
|
10.14*
|
|
Amendment to Employment/Separation Agreement dated March 14, 2007
by and between Cornell Companies, Inc. and John R. Nieser
(incorporated
by reference to Exhibit
10.2
to the Companys Current
Report on
Form 8-K filed on
March 15, 2007).
|
|
|
|
10.15*
|
|
Form of Severance Agreement
(incorporated by reference
to Exhibit 10.40 to the Companys
Annual Report on
Form 10-K for the year ended December 31, 1999 filed on
March 30, 2000
)
.
|
|
|
|
|
|
Amendment to Severance Agreement dated March 14, 2007 by and
between Cornell Companies, Inc. and Patrick N. Perrin
(incorporated
by reference to Exhibit
10.4
to the Companys Current
Report on
Form 8-K filed on
March 15, 2007).
|
|
|
|
10.16*
|
|
Employment Agreement dated March 19, 2007 between Cornell
Companies, Inc. and William E. Turcotte (incorporated by reference to
Exhibit 10.16 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2007 filed on March 14, 2008).
|
|
|
|
10.17*
|
|
Cornell Companies, Inc. 2006 Equity Incentive Plan
(incorporated
by reference to Appendix A to the Companys Schedule 14A filed on
May 10, 2006)
.
|
|
|
|
10.18*
|
|
Form of Cornell Companies, Inc. Restricted Stock Award
Performance Based (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on March 12, 2008).
|
|
|
|
10.19*
|
|
Form of Cornell Companies, Inc. Restricted Stock Award
Time Based (incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed on March 12, 2008).
|
|
|
|
21.1
|
|
List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2008
filed on March 6, 2009).
|
|
|
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
|
24.1
|
|
Power of Attorney (incorporated by reference to the signature page to
the Companys Annual Report on Form 10-K for the year ended December 31, 2008
filed on March 6, 2009).
|
|
|
|
31.1
|
|
Section 302 Certification of Chief Executive Officer.
|
|
|
|
31.2
|
|
Section 302 Certification of Chief Financial Officer.
|
|
|
|
32.1
|
|
Section 906 Certification of Chief Executive Officer.
|
|
|
|
32.2
|
|
Section 906 Certification of Chief Financial Officer.
|
|
|
|
99.1
|
|
Letter Agreement, dated September 5, 2001, as amended, between
Cornell Companies, Inc. and Lehman Brothers, Inc.
(incorporated
by reference to Exhibit 99.2 to the Companys
Annual Report
on Form 10-K for the year ended December 31, 2001 filed on
April 16, 2002
).
|
|
|
|
* Management
compensatory plan or contract.
Filed
herewith
87
Table of
Contents
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 2 to the Annual Report
on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
CORNELL COMPANIES, INC.
|
|
|
|
Dated:
|
August 14, 2009
|
By:
|
/s/ James E. Hyman
|
|
|
|
James E. Hyman
|
|
|
|
Chief Executive Officer, President and
|
|
|
|
Chairman of the Board
|
|
|
|
|
|
|
By:
|
/s/ John R. Nieser
|
|
|
|
Chief Financial Officer, Senior Vice President and Treasurer
|
88
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