ITEM 1. BUSINESS
As used herein, unless the context otherwise requires, the "Company" means Corrections Corporation of America and its subsidiaries. Unless otherwise indicated, the information herein has been adjusted to give effect to (i) a 2-for-1 split on the Company's common stock, $1.00 par value (the "Common Stock"), effected in the form of a stock dividend declared on October 4, 1995 and (ii) a 2-for-1 split on the Common Stock effected in the form of a stock dividend declared on June 5, 1996.
GENERAL
The Company is the largest developer and manager of privatized correctional and detention facilities worldwide. The Company's facilities are located in 17 states, Washington, D.C., Puerto Rico, Australia and the United Kingdom. As of March 20, 1997, the Company had contracts to manage 59 correctional and detention facilities with an aggregate design capacity of 42,537 beds, of which 47 facilities representing 28,062 beds are in operation. The Company is currently developing 12 facilities and expanding four facilities representing an aggregate of 14,475 beds. The Company expects that all of the beds under development and expansion will be in operation by the third quarter of 1998. The Company owns 13 of the 44 domestic facilities it currently operates and leases the remaining 31 domestic facilities from governmental agencies and non-profit corporations. The three international facilities are owned by CCA and affiliates through merger joint ventures.
The services provided by the Company to governmental agencies include the integrated design, construction and management of new correctional and detention facilities and the redesign, renovation and management of older facilities. In addition to providing the fundamental residential services relating to adult and juvenile inmates, the Company's facilities offer a large variety of rehabilitation and education programs including basic education, life skills and employment training and substance abuse treatment. The Company also provides health care (including medical, dental and psychiatric services), institutional food services, transportation requirements, and work and recreational programs. In addition, through its wholly-owned subsidiary, TransCor America, Inc. ("TransCor"), the Company provides inmate transportation services for numerous governmental agencies. Management of the Company believes that its proven ability to deliver a full range of high quality correctional and detention facility management services on a cost-effective and efficient basis to governmental agencies, provides such agencies with sufficient incentives to choose the Company when awarding new contracts or renewing existing contracts.
In addition to the opening of new facilities, over the last three years, the Company has expanded its service capabilities and broadened its geographic presence in the United States market through a series of strategic acquisitions of prison management companies and individual facilities, as well as the acquisition of TransCor. The Company intends to continue to pursue strategic
acquisitions of prison management companies and facilities when the proposed acquisition enhances stockholder value. (See "Recent Acquisitions".)
In addition to its domestic operations, the Company has obtained and is pursuing construction and management contracts for correctional and detention facilities outside the United States. The Company presently has contracts to operate one facility in the United Kingdom, two facilities in Australia, and also has contracts to provide inmate transportation services in Australia. In June 1994, the Company entered into an international strategic alliance with Sodexho S.A. ("Sodexho"), a French conglomerate, for the purpose of pursuing prison management business outside the United States. In connection with the alliance, Sodexho purchased a significant ownership in the Company and entered into certain agreements with the Company relating to future financings by the Company and corporate governance and control matters. (See "Business Strategy - - Expansion into International Markets"; "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".)
The Company is a Delaware corporation and is the successor to a Tennessee corporation of the same name incorporated in January 1983. The Company's principal executive offices are located at 102 Woodmont Boulevard, Nashville, Tennessee 37205 and its telephone number is (615) 292-3100.
BUSINESS STRATEGY
The Company intends to increase revenues and enhance its position as the largest developer and manager of privatized correctional and detention facilities worldwide through the following business strategies.
Efficient Development and Management of Facilities. The Company will continue to provide low cost, high quality management of its facilities. The Company believes that its quality of personnel, efficient application of financial resources and adherence to proven policies and procedures enable it to design, develop and manage correctional and detention facilities at costs lower than the governmental agencies that are responsible for performing such services. The Company believes that its reputation as an innovative and effective manager of facilities enhances its ability to market its services and capitalize on a larger scope of opportunities with a variety of governmental agencies.
The Company also recognizes the importance of the facility administrator and the facility's management team in the successful financial performance of its facilities. Management believes that the Company's reputation as the leading developer and manager of privatized correctional and detention facilities enables it to attract highly- qualified facility administrators. Each facility management team operates each facility in accordance with a Company-wide policy and procedure regimen, derived from industry standards and designed to ensure the delivery of consistent, high quality services in each of its facilities. The Company seeks to minimize operating expenses by designing its facilities to optimize correctional officer staffing consistent with facility security
requirements. The Company further controls operating expenses through the use of electronic surveillance systems and other technologies.
Development of Domestic Business Opportunities. As a result of the growth in the demand for privatized correctional and detention facilities, the Company is selective in the projects it pursues. The Company pursues projects based on probability of success, geographic location, size, potential profitability, and political and community acceptability. This approach allows the Company to enhance its market share and optimize resource allocation, profitability and financial return. The Company intends to continue its focus on institutions with an emphasis on medium to maximum security that are 500 to 1,000 beds or larger. Management believes that the Company's experience and reputation in managing large secure facilities will enable it to maintain its industry position and capitalize on the trend of governments to privatize larger facilities.
Strategic Acquisitions. The Company believes that its recent acquisitions have significantly enhanced its position as the largest developer and manager of privatized correctional and detention facilities while increasing operating efficiencies. Accordingly, the Company intends to continue to pursue strategic acquisitions of other managers of privatized correctional and detention facilities.
Expanded Scope of Services. The Company intends to continue to implement a wide variety of specialized services that address the unique needs of various segments of the inmate population. Because the facilities operated by the Company differ with respect to security levels, ages, genders and cultures of inmates, the Company focuses on the particular needs of an inmate population and tailors its services based on local conditions and the Company's ability to provide such services on a cost-effective basis. In addition to core residential services, the Company offers rehabilitative and educational services such as counseling, basic education, job skill training and life skills/transition planning services, all of which are aimed at reducing recidivism. Further, because management believes alcohol and drug abuse are directly or indirectly responsible for the majority of criminal offenses in the United States, the Company has created, and offers to its inmates, its LifeLine program, a comprehensive long-term substance abuse treatment program. The Company believes that its success in delivering these specialized services will enable it to address the changing needs of its customers. By offering a broad range of specialized services, the Company seeks to provide a solution to the public's and the government's desire to reduce recidivism and, ultimately, the cost of crime.
Expansion into International Markets. The Company believes that the majority of its new business will come from within the United States. However, the Company and its international strategic partner, Sodexho, believe that interest in private-sector corrections is developing in other nations. While management will not detract from its domestic business to pursue international activities, the Company will participate in selected international projects it finds attractive. The Company also believes that in order to compete effectively in international markets it must enter into alliances with strategic local partners with access to local opportunities and familiarity with local business practices.
In June 1994, the Company entered into an international strategic alliance with Sodexho. Among other business ventures, Sodexho provides contract services to the French prisons and has business operations in 60 countries. Pursuant to the terms of the joint venture agreement between the Company and Sodexho, only the Company will develop and manage prison management business in the United States and its territories. In the rest of the world, the Company and Sodexho will pursue the prison management business opportunities through local joint venture entities to be established generally on a 50/50 basis. In connection with the alliance, in October 1995, the Company sold to Sodexho a 50% interest in CCA Australia Pty., Ltd., an Australian joint venture. In December 1996, the Company sold to Sodexho a 20% interest in its United Kingdom joint venture, UK Detention Services, Ltd. ("UKDS") and granted Sodexho an option to purchase an additional 30% interest in UKDS. Management believes that, with the formation of the Sodexho alliance, the Company is well positioned to participate in international markets.
Cost Reduction Programs. An important component of the Company's strategy is to position itself as a low cost, high quality provider of prison management services in all of its markets. As cost containment pressures increase, the Company will continue to focus on improving operating performance and efficiency through the following key operating initiatives: (i) standardization of supply and service purchasing practices and usage; (ii) improvement of inmate management, resource consumption and reporting procedures; and (iii) improvement in salary and wage expenses by reducing overtime, monitoring staff levels and developing productivity standards. The Company intends to continue to apply these operating cost initiatives throughout its existing facilities and in new facilities.
RECENT ACQUISITIONS
In the last three years, the Company has expanded its service capabilities and broadened its geographic presence in the United States through a series of strategic acquisitions that complement the Company's development activities. In December 1994, the Company acquired TransCor. In April 1995, the Company acquired Concept Incorporated ("Concept"), a prison management company with eight facilities and 4,400 beds under contract at the time of acquisition. In August 1995, the Company acquired Corrections Partners, Inc. ("CPI"), a prison management company with seven facilities and 2,900 beds under contract at the time of acquisition. The Company intends to consider additional strategic acquisitions of prison management and related companies in the future.
MARKET
Throughout the world, there is a growing trend toward privatization of government services and functions, including corrections and detention, as governments of all types face continuing pressure to control costs and improve the quality of services. As a result of increased costs, some governments have been forced to limit public services and to seek more cost-effective means of providing the remaining services. Since correctional and detention facilities are viewed as an essential service, fiscal pressures have caused governments to seek to deliver these services more cost effectively. Further, as a result of the number of crimes committed each year and the corresponding number of arrests, incarceration costs generally grow faster than any other part of a government's budget. In an attempt to address these pressures, governmental agencies responsible for correctional and detention facilities are increasingly privatizing facilities. According to the Private Adult Correctional Facility Census, prepared by Private Corrections Project Center for Studies in Criminology and Law, University of Florida ("1995 Census"), the design capacity of privately managed adult correctional and detention facilities worldwide has increased dramatically since the first privatized facility was opened by the Company in 1984. The majority of this growth has occurred since 1989 as the number of privately managed adult correctional and detention facilities worldwide increased from 26 facilities with a design capacity of 10,973 beds in 1989 to 132 facilities with a design capacity of 85,201 beds in 1996. To date, numerous counties, 22 states, Puerto Rico and the federal government have incorporated the private sector into their criminal justice systems and over 15 states are currently considering privatization. Notwithstanding such growth, less than five percent of all adult prison beds in the United States are privately managed. As of December 31, 1996, the Company was the largest private prison management company, with an estimated United States market share of 52% and a global market share of 48%.
Management believes that the increase in the demand for privatized correctional and detention facilities is also a result, in large part, of the general shortage of beds available in United States correctional and detention facilities. According to reports issued by the United States Department of Justice, Bureau of Justice Statistics ("BJS"), the number of inmates housed in United States federal and state prison facilities increased from 487,593 at December 31, 1985 to 1,078,357 at December 31, 1995, an increase of more than 121%. Local jail populations in the United States increased from 254,986 inmates at December 31, 1985 to 490,442 at December 31, 1994, an increase of 92%. At December 31, 1995, the BJS reported that the federal prison system in the United States was operating at approximately 126% of its rated capacity and the average state prison was operating at approximately 114% of its rated capacity.
Industry reports also indicate that inmates convicted of violent crimes generally serve only one-third of their sentence, with the majority of them being repeat offenders. Accordingly, there is a perceived public demand for, among other things, longer prison sentences, as well as prison terms for juvenile offenders, resulting in even more overcrowding in United States correctional and detention facilities. Finally, numerous courts and other governmental entities in the United States have mandated that additional services offered to inmates be expanded and living conditions be improved. Many governments do not have the readily-available resources to make the changes necessary to meet such mandates.
At December 31, 1996, the Company managed 34 of the 95 privatized United States adult facilities and 22,142 of the 50,628 private United States adult beds. These facilities include (i) Immigration and Naturalization Service ("INS") detention facilities and United States Marshal detention facilities privatized by federal agencies, (ii) state prisons, community corrections facilities, intermediate sanction facilities, pre-release centers, work program facilities and state jail facilities privatized by state agencies, and (iii) city and county jail facilities and transfer facilities privatized by local agencies. There are also numerous privatized juvenile offender facilities of which the Company currently has contracts to operate facilities with an aggregate design capacity of 1,039 beds.
The demand for privately-managed correctional and detention centers is also increasing internationally. Management believes that many countries are faced with the same fiscal pressures as the United States and, as a result, are seeking more cost-effective means of providing prison management services. At December 31, 1996, there were a total of 14 privatized facilities in the United Kingdom and Australia, with an aggregate design capacity of 7,617 beds. The Company, through its joint ventures, had contracts to manage three of these facilities with an aggregate design capacity of 1,229 beds.
For similar economic reasons, the demand for privatized prisoner transport services is also increasing domestically and internationally. The Company believes that an increasing number of governmental agencies will look for more cost-effective means of providing these and other ancillary services.
FACILITIES
The following table summarizes certain information with respect to facilities under management by the Company, or a subsidiary or joint venture of the Company, at March 20, 1997.
----------------------------------- 1United States Marshal's Service.
2United States Bureau of Prisons.
3United States Immigration and Naturalization Service.
----------------------------------- 4The Company and the State of South Carolina have mutually elected not to renew this contract upon expiration (see p. 11).
----------------------------------- 5The Company has elected not to renew the Sante Fe, New Mexico contract upon expiration.
FACILITY MANAGEMENT CONTRACTS
The Company is compensated on the basis of the number of inmates held in each of its facilities. Contracts may vary to provide fixed per diem rates or monthly fixed rates. Of the Company's 44 domestic facilities in operation, 40 of the Company's facility management contracts provide that the Company will be compensated at an inmate per diem rate based upon actual or minimum guaranteed occupancy levels and four of the management contracts are based on monthly fixed rates. In either case, the compensation is invoiced in accordance with applicable law and is paid on a monthly basis. Occupancy rates for a particular facility will be low when first opened or when expansions are first available. However, beyond the start-up period, which typically ranges from 30 to 90 days, the occupancy rate tends to stabilize. For 1996, the average occupancy, based on rated capacity, was 94.1% for all facilities operated by the Company.
In addition, the Company's contracts generally require the Company to operate each facility in accordance with all applicable laws and regulations. The Company is required by its contracts to maintain certain levels of insurance coverage for general liability, workers' compensation, vehicle liability and property loss or damage. The Company is also required to indemnify the contracting agencies for claims and costs arising out of the Company's operations and, in certain cases, to maintain performance bonds.
The Company's facility contracts are short term in nature. Terms of federal contracts generally range from one to five years, and contain multiple renewal options. The terms of local and state contracts may be for longer periods with additional renewal options. Most facility contracts also generally contain clauses which allow the governmental agency to terminate a contract without cause. The Company's facility contracts are generally subject to annual or bi-annual legislative appropriation of funds. A failure by a governmental agency to receive appropriations could result in termination of the contract by such agency or a reduction in the management fee payable to the Company. No assurance can be given that other governmental agencies will not terminate or renew a contract with the Company in the future.
OPERATING PROCEDURES
Pursuant to the terms of its management contracts, the Company is responsible for the overall operation of its facilities, including staff recruitment, general administration of the facilities, security and supervision of the offenders and facility maintenance. The Company also provides a variety of rehabilitative and educational programs at its facilities. Inmates at most facilities managed by the Company may receive basic education through academic programs designed to improve inmate literacy levels and the opportunity to acquire General Education Development ("GED") certificates. The Company also offers vocational training to inmates who lack marketable job skills. In addition, the Company offers life skills transition planning programs that provide inmates job search training and employment skills, health education, financial responsibility training, parenting and other skills associated with becoming productive citizens. At several of its facilities, the Company also offers
counseling, education and/or treatment to inmates with alcohol and drug abuse problems through its LifeLine program.
The Company operates each facility in accordance with Company-wide policies and procedures and the standards and guidelines established by the American Correctional Association ("ACA") Commission on Accreditation. The ACA is an independent organization comprised of professionals in the corrections industry that establishes guidelines of standards by which a correctional institution may gain accreditation. The ACA standards, which the ACA believes safeguard the life, health and safety of offenders and personnel, are the basis of the accreditation process and define policies and procedures for operating programs. The ACA standards, which are the industry's most widely accepted correctional standards, describe specific objectives to be accomplished and cover such areas as administration, personnel and staff training, security, medical and health care, food service, inmate supervision and physical plant requirements. The ACA standards are the most widely accepted correctional standards. The Company has sought and received ACA accreditation for 21 of the facilities it currently manages and intends to apply for ACA accreditation for all of its facilities once they are eligible. The accreditation process is usually completed 18 to 24 months after a facility is opened.
FACILITY DESIGN, CONSTRUCTION AND FINANCE
In addition to its facility management services, the Company also provides consultation to various governmental agencies with respect to the design and construction of new correctional and detention facilities and the redesign and renovation of older facilities. Since its inception in January 1983, the Company has designed and constructed 24 of its 44 domestic operating corrections facilities for various federal, state, and local governmental agencies. The Company manages all of the facilities it has designed and constructed or redesigned and renovated.
Pursuant to the Company's design, build and manage contracts, the Company is responsible for overall project development and completion. Typically, the Company develops the conceptual design for a project, then hires architects, engineers and construction companies to complete the development. When designing a particular facility, the Company utilizes, with appropriate modifications, prototype designs the Company has used in developing other projects. Management of the Company believes that the use of such prototype designs allows it to reduce cost overruns and construction delays. The Company's facilities are designed to maximize staffing efficiencies by increasing the area of vision under surveillance by correctional officers and utilizing additional electronic surveillance systems.
Various methods of construction financing may be used by a contracting governmental agency, including, but not limited to the following: (i) one-time general revenue appropriation by the government agency for the cost of the new facility; (ii) general obligation bonds that are secured by either a limited or unlimited tax levied by the issuing governmental entity; or (iii) lease revenue bonds or certificates of participation secured by an annual lease payment that is subject to annual or
bi-annual legislative appropriation of funds. In certain circumstances, the Company may provide certain credit enhancements for such financings in the form of a (i) letter of credit, (ii) guaranty or (iii) other similar agreements. Generally, when the project is financed using direct governmental appropriations or proceeds from the sale of bonds or other obligations issued prior to the award of the project, or by the Company directly, the financing is in place when the construction or renovation contract is executed. If the project is financed using project-specific tax-exempt bonds or other obligations, the construction contract is generally subject to the sale of such bonds or obligations. In most circumstances, substantial expenditures for construction will not be made on such a project until the tax-exempt bonds or other obligations are sold. If such bonds or obligations are not sold, construction and management of the facility may either be delayed until alternate financing is procured or development of the project will be entirely suspended. When the Company is awarded a facility management contract, appropriations for the first annual or bi-annual period of the contract's term have generally already been approved, and the contract is subject to governmental appropriations for subsequent annual or bi-annual periods. Of the domestic facilities currently managed by the Company, 17 were funded by the government using one of the above-described financing vehicles.
FACILITIES UNDER CONSTRUCTION
The following table presents information concerning facilities that are currently under construction or are being expanded with respect to which the Company has agreements to provide certain management and operation services:
Construction has begun on a 512-bed and a 262-bed expansion to the existing 564-bed Prairie Correctional Facility in Appleton, Minnesota. The Company is financing the expansions and construction is scheduled for completion in the second quarter of 1997. The facility houses inmates for the States of Minnesota, Colorado and Idaho.
Construction has begun on a 960-bed medium security prison in Cushing, Oklahoma. The Cushing Municipal Authority is financing and will own the facility, and construction is scheduled for completion in the second quarter of 1997. It is anticipated that the facility will house State of Oklahoma inmates.
Construction has begun on a 624-bed expansion to the 286-bed Torrance County Detention Facility, which is owned by the Company. The Company is financing the expansion, and construction is scheduled for the fourth quarter of 1997. The facility houses inmates for the State of New Mexico and the USMS.
Construction and renovation have begun on an existing building owned by the Indianapolis - Marion County Building Authority, which will become the 670-bed Marion County Jail Annex. The Authority is financing and will own the facility, however, the Company will fund a portion of the renovation costs. Construction is scheduled for completion in the first quarter of 1998. The facility will house adult male inmates for Marion County.
Construction has begun on a 365-bed expansion to the 335-bed Bent County Correctional Facility. The Company is financing the expansion, and construction is scheduled for completion in the second quarter of 1997. The facility houses State of Colorado inmates.
Construction has begun on a 1,500-bed medium security prison in Lawrenceville, Virginia. The facility will be financed and owned by the Brunswick Industrial Development Authority, and construction is scheduled for completion in the first quarter of 1998. The facility will house inmates for the State of Virginia.
Construction has begun on a 500-bed multi security prison in North Las Vegas, Nevada. The Company will own the facility, and construction is scheduled for completion in the third quarter of 1997. The facility will house female inmates for the State of Nevada.
Construction has begun on a 100-bed maximum security juvenile facility in Okeechobee, Florida. The State of Florida is financing and will own the facility, and construction is scheduled for completion in the third quarter of 1997. The facility will house State of Florida juveniles.
Construction has begun on a 960-bed medium security prison in Sayre, Oklahoma. The Company is financing and will own the facility, and construction is scheduled for completion in the first quarter of 1998. It is anticipated that the facility will house inmates from various states.
Construction has begun on a 752-bed medium security prison in Walsenburg, Colorado. The Company is financing and will own the facility, and construction is scheduled for completion in the fourth quarter of 1997. The facility will house State of Colorado inmates.
Construction has begun on a 1,504-bed medium security prison in Whiteville, Tennessee. The Hardeman County Correctional Facilities Corporation is financing and will own the facility, and construction is scheduled for completion in the second quarter of 1997. The facility will house State of Tennessee inmates.
Construction has begun on a 500-bed medium security prison in Wilkinson County, Mississippi. The Wilkinson County Industrial Development Authority is financing and will own the facility, and construction is scheduled for completion in the first quarter of 1998. The facility will house inmates for the State of Mississippi.
Construction has begun on a 512-bed expansion to the 1,504-bed Northeast Ohio Correctional Center, which is owned by the Company. The Company is financing the expansion, and construction is scheduled for completion in the third quarter of 1997. It is anticipated that the facility will house inmates for the District of Columbia.
ORGANIZATIONAL SYSTEM
The Company has developed a monitoring and evaluation system which, combined with a centralized organizational structure, positions the Company for expansion without requiring substantial additions of management personnel or reduction in quality. The Company devotes considerable resources to assuring compliance with contractual and other requirements and to maintaining the highest level of quality assurance at each facility through a system of formal reporting, corporate oversight, site reviews and inspection by on-site facility administrators.
Under its facilities management contracts, the Company usually provides the contracting governmental agency with the services, personnel and materials necessary for the operation, maintenance and security of the facility and the custody of inmates. The Company offers full logistical support to the facilities it manages, including security, health care services, transportation, building and ground maintenance, education, treatment and counseling services, and institutional food services. Except for certain aspects of health care services, which are generally subcontracted, all of the facilities support services are provided by the Company's personnel.
The Company's business development and project departments are responsible for marketing the Company's service to governmental clients. Marketing responsibilities include identifying new clients, preparing and delivering formal presentations, identifying project construction partners and potential financing sources, developing proposals and interfacing with the Company's customers from contract award through the receipt of inmates.
The operations department, in conjunction with the legal department, supervises compliance of each facility to operational standards of applicable management contracts and of professional and governmental agencies. The operations department also establishes and monitors the policies and procedures of the Company. The department's responsibilities include developing specific policies and procedures manuals, monitoring all management contracts, ensuring compliance with applicable labor and affirmative action standards, training and administering all personnel, purchasing supplies and developing educational, vocational, counseling and life skills inmate programs. The Company provides meals for inmates at the facilities it operates in accordance with regulatory, client and nutritional requirements. These catering responsibilities include hiring and training staff, monitoring food operations, purchasing food and supplies, and maintaining equipment, as well as adhering to all applicable safety and nutritional standards and codes.
The Company's finance department oversees the implementation and development of the billing system for each client and for insuring the prompt, systematic payment of all Company obligations under the individual management contracts. This department also monitors and analyzes budgetary and purchasing procedures, tax reporting requirements and fiscal management policies.
MARKETING
The Company engages in extensive marketing efforts. The Company believes that it is the industry leader in promoting the benefits of privatization of prisons and other correctional and detention facilities. Marketing efforts are conducted and coordinated by the Company's business development department and senior management with the aid, where appropriate, of certain independent consultants.
The Company views governmental agencies responsible for federal, state and local correctional facilities in the United States and governmental agencies responsible for correctional facilities in Puerto Rico, the United Kingdom and Australia as its primary target markets.
The Company generally receives inquiries from or on behalf of governmental agencies that are considering privatization of certain facilities or that have already decided to contract with private enterprise. When it receives such an inquiry, the Company determines whether there is an existing need for the Company's services and whether the legal and political climate in which the inquiring party operates is conducive to serious consideration of privatization. Then an initial cost analysis is conducted to further determine project feasibility.
The Company pursues its domestic business opportunities on two primary courses. In the first course, the Company follows the traditional competitive route where a Request for Proposal ("RFP") or Request for Qualification ("RFQ") is issued by a government agency and a number of companies respond. Management believes that this competitive approach will produce the majority of new contract awards to the Company. The second course involves the development of new facilities in locations where there is a clearly defined, long-term needs for beds, but where a competitive bidding procedure is not required.
Generally, governmental agencies responsible for correctional and detention services procure goods and services through RFPs or RFQs. Most of the Company's activities in the area of securing new business are in the form of responding to RFPs. As part of the Company's process of responding to RFPs, management meets with appropriate personnel from the agency making the request to best determine the agency's distinct needs. If the project fits within the Company's strategy, the Company will then submit a written response to the RFP. A typical RFP requires bidders to provide detailed information, including, but not limited to, the service to be provided by the bidder, its experience and qualifications, and the price at which the bidder is willing to provide the services (which services may include the renovation, improvement or expansion of an existing facility or the planning, design and construction of a new facility). The Company has and intends to in the future, engage independent consultants to assist it in responding to RFPs. Based on the proposals received in response to an RFP, the agency will award a contract to the successful bidder. In addition to issuing formal RFPs, local jurisdictions may issue an RFQ. In the RFQ process, the requesting agency selects a firm believed to be most qualified to provide the requested services and then negotiates the terms of the contract with that firm, including the price at which its services are to be provided.
The marketing process for facility management consists of several critical events. These include issuance of an RFP or RFQ by a governmental agency, submission of a response to the RFP or RFQ by the Company, the award of the contract by a governmental agency and the commencement of construction or management of the facility. The Company's experience has been that a substantial period of time may elapse from the initial inquiry to receipt of a new contract. As the concept of privatization has gained wider acceptance, however, the length of time from inquiry to the award of a contract has shortened. The length of time required to award a contract is also affected, in some cases, by the need to introduce enabling legislation. If the facility for which an award has been made must be constructed, the Company's experience has generally been that management of a newly-constructed facility typically commences between 12 and 24 months after the governmental agency's award.
While the Company focuses primarily on the traditional competitive marketing approach described above, it also pursues the development of new facilities in those areas where a competitive bid process is not required. Management believes this approach, which has proven successful to the Company to date, is effective because of the Company's strong client relationships and reputation for quality corrections management and services.
In addition to marketing its services to federal, state and local authorities, the Company markets its services internationally, primarily, through the international alliance formed with Sodexho. The Company is currently marketing its management services in Australia, Germany, Hungary, Canada, Panama and Mexico.
The marketing efforts of TransCor for inmate transportation services vary from those of the rest of the Company. TransCor's marketing approach generally consists of mass mailings, phone calls and personal visits to hundreds of state and local governmental agencies, as well as attendance at local, state and national trade shows.
BUSINESS PROPOSALS
At March 20, 1997, the Company was pursuing 12 prospects with a total of approximately 11,000 beds for which written responses to RFPs and other solicitations have been submitted. The Company is also pursuing eight prospects with a total of approximately 9,200 beds for which it has not submitted proposals. The domestic projects that the Company is pursuing are located in 16 states, including 12 states in which the Company is not currently operating. The Company is also pursuing other projects for which it has not yet submitted, and may not submit, a response to an RFP. Additionally, the Company is pursuing business in Australia and Great Britain, as well as other foreign facility prospects, through its alliance with Sodexho. No assurance can be given that the Company will receive additional awards with respect to proposals submitted.
When a contract requires construction of a new facility, the Company's success depends, in part, upon its ability to acquire real property for its facilities on desirable terms and at satisfactory locations. Management expects that many such locations will be in or near populous areas and therefore anticipates legal action and other forms of opposition from residents in areas surrounding each proposal site. The Company may incur significant expenses in responding to such opposition and there can be no assurance of success.
MAJOR CUSTOMERS
The Company's customers consist of local, state and federal correctional and detention authorities. The following table sets forth, for the periods indicated, the percentage of the Company's revenues from certain customers of the Company:
No other single customer accounted for 10% or more of the Company's total revenues in the above-referenced fiscal years.
BACKLOG
Most of the Company's contracts provide for the Company to be compensated on a per diem/per capita basis, which fluctuates daily. However, certain contracts guarantee a minimum utilization over the term of such contracts. The Company's backlog, as shown below, reflects only
guaranteed revenues pursuant to the Company's guaranteed contracts over the term of such contracts, using current per diem/per capita rates, and disregarding any renewals of such contracts and adjustments to such rates as a result of inflation. As of December 31, 1996, the Company's backlog, determined as described above, was $309,972,000, of which $106,580,000 is expected to be filled during the year ending December 31, 1997. As of December 31, 1995, the Company's backlog, computed as described above, was $297,431,000.
EMPLOYEES
At December 31, 1996, the Company employed 7,235 full-time employees and 175 part-time employees. Of such full-time employees, 96 were employed at the Company's headquarters and 7,139 were employed at the Company's facilities and its transportation subsidiary. The Company employs personnel in the following areas: clerical and administrative, including facility administrators/wardens, security, food service, medical, transportation and scheduling, maintenance, teachers, counselors and other support services.
Each of the Company's facilities is managed as a separate operational unit by the facility administrator or warden. All facilities follow a standardized code of policies and procedures. The Company has never experienced a strike or work stoppage. Beginning in 1992, six facilities were approached by one particular union to organize the work force. The union was defeated or withdrew in five facilities. In March 1993, the Company reached an agreement with a union to represent 73 correctional officers at the Silverdale facility. This contract was decertified in March 1994. In January 1996, the Company reached an agreement with a union to represent 38 non-security personnel at its Shelby Training Center. In March 1997, the Company assumed management of the Correctional Treatment Facility in Washington D.C., and the Company has agreed to recognize organized labor in representing certain employees at this facility. In the opinion of management, overall employee relations are considered good.
EMPLOYEE TRAINING
Under the laws applicable to the Company's operations, and the Company's internal policy, the Company's corrections officers are required to complete a minimum amount of training prior to independent assignment. In most cases, officers must undergo at least 160 hours of training by the Company before being allowed to work alone in a position that will bring them in contact with inmates or detainees. Additional training is required in certain jurisdictions when necessary to comply with applicable law in order to enable such officers to work in positions that will bring them into contact with inmates or detainees. All non-security staff receive 80 hours of initial training. Accordingly, the Company's training programs meet or exceed all applicable requirements.
The Company's training is comprised of approximately 40 hours of instruction concerning the Company's policies, operational procedures and management philosophy. An additional 120 hours concerning legal issues, rights of inmates and detainees, techniques of communication and
supervision, improvement of interpersonal skills and job training relating to the particular position to be filled are also provided. Employees of facilities taken over by the Company who are offered continued employment undergo at least 40 hours of training by the Company before reporting to work for the Company. Each of the Company's employees who has contact with inmates or detainees receives a minimum of 40 hours of additional training each year, and each facility management employee of the Company receives at least 40 hours of training each year.
TransCor also has training requirements for its employees. Each new employee must undergo 40 hours of training, prior to job performance, including driver training and safety, correctional training and policy and procedures guidelines. Each employee then performs four weeks of on-the-job training with an experienced transportation agent. TransCor maintains continuing training for all employees of 16 to 32 hours per year.
INSURANCE
The Company maintains a $30,000,000 general liability insurance policy for all of its operations. To date, no payments have been made under the Company's general liability insurance policies because of any action brought as a result of the operation of any of its facilities. The Company also maintains insurance in amounts it deems adequate to cover property and casualty risks, workers' compensation and directors and officers liability. There can be no assurance that the aggregate amount and kinds of the Company's insurance are adequate to cover all risks it may incur or that insurance will be available in the future.
Each of the Company's facility management contracts and the statutes of certain states require the maintenance of insurance by the Company. The Company's contracts provide that in the event the Company does not maintain such insurance, the contracting agency may terminate its agreement with the Company. The Company believes it is materially in compliance with respect to these requirements.
LITIGATION
The Company is currently and, from time to time, 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, inmate privileges. In the opinion of management, the outcome of the proceedings to which it is currently a party will not have a material adverse effect upon its operations or financial condition.
RISK FACTORS
Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical in nature are intended to be, and are hereby identified as, "Forward Looking Statements" as defined in the Securities Litigation Reform Act of 1995. The
Company cautions readers that forward looking statements, including without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the Forward Looking Statements, due to several important factors herein identified, among others, and other risk and factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission (the "Commission"):
Revenue and Profit Growth Dependent on Expansion. The Company's growth is dependent upon its ability to obtain contracts to manage new correctional and detention facilities and to retain existing management contracts. The rate of construction of new facilities and the Company's potential for growth will depend on a number of factors, including crime rates and sentencing patterns in the United States and other countries in which the Company operates, governmental and public acceptance of the concept of privatization, the number of facilities available for privatization, and the Company's ability to obtain awards for contracts and to integrate new facilities into its management structure on a profitable basis. In addition, certain jurisdictions have recently required the successful bidder to make a significant capital investment in connection with the financing of a particular project. The Company's ability to secure awards under such circumstances will therefore also depend on the Company having significant capital resources. There can be no assurance that the Company will be able to obtain additional contracts to develop or manage new facilities on favorable terms.
Risks Associated with Acquisitions. The Company intends to grow internally through the opening of additional facilities, as well as through strategic acquisitions. There can be no assurance that the Company will be able to identify, acquire or profitably manage acquired companies or successfully integrate such operations into the Company without substantial costs, delays or other problems. In addition, there can be no assurance that companies acquired in the future will be profitable at the time of their acquisition or will achieve levels of profitability that justify the investment therein. Acquisitions may involve a number of special risks, including adverse short-term effects on the Company's reported operating results, diversion of management's attention, dependence on retaining, hiring and training key personnel, and risks associated with unanticipated problems or legal liabilities, some or all of which could have a material adverse effect on the Company's financial condition and results of operation.
Acceptance of Privatized Correctional and Detention Facilities. Management of correctional and detention facilities by private entities is a relatively new concept and has not achieved complete acceptance by either governments or the public. Some sectors of the federal government and some state and local governments are legally unable to delegate their traditional management responsibilities for correctional and detention facilities to private companies. The operation of correctional and detention facilities by private entities is not widely understood by the public, and the industry has encountered resistance from certain groups, such as labor unions, local sheriff's departments, and groups that believe that correctional and detention facility operations should only
be conducted by governmental agencies. Such resistance may cause a change in public and government acceptance of privatized correctional facilities. In addition, changes in dominant political parties in any of the markets in which the Company operates could result in significant changes to previously established views of privatization in such market.
Opposition to Facility Location and Adverse Publicity. The Company's success in obtaining new awards and contracts may depend, in part, upon its ability to locate land that can be leased or acquired, on favorable terms, by the Company or other entities working with the Company in conjunction with the Company's proposal to develop and/or manage a facility. Some locations may be in or near populous areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site. The Company's business also is subject to public scrutiny. In addition to possible negative publicity about privatization in general, an escape, riot or other disturbance at a Company-managed facility or another privately managed facility may result in publicity adverse to the Company and the industry in which it operates.
Dependence on Governmental Agencies. The Company's cash flow is subject to the receipt of sufficient funding and timely payment by applicable governmental entities. If the appropriate governmental agency does not receive sufficient appropriations to cover its contractual obligations, a contract may be terminated or the management fee may be deferred or reduced. Any delays in payment could have an adverse effect on the Company's cash flow. In addition, the Company is dependent on government agencies supplying Company facilities with a sufficient number of inmates to meet the facilities' design capacities. A failure to do so may have a material adverse effect on the Company's financial condition and results of operation.
Economic Risks Associated with Development Activities. When the Company is engaged to perform construction and design services for a facility, the Company typically acts as the primary contractor and subcontracts with other parties who act as the general contractors. As primary contractor, the Company is subject to the various risks of construction including, without limitation, shortages of labor and materials, work stoppages, labor disputes and weather interference. The Company also is subject to the risk that the general contractor will be unable to complete construction at the budgeted costs or be unable to fund any excess construction costs. Under such contracts, the Company is ultimately liable for all late delivery penalties and cost overruns.
Contract Duration. The Company's facility management contracts typically have terms ranging from one to five years, with one or more renewal options that may be exercised only by the contracting governmental agencies. No assurance can be given that any agency will exercise a renewal option in the future. Additionally, the contracting governmental agency typically may terminate a facility contract without cause by giving the Company written notice (see "Business-Facility Management Contracts").
Potential Legal Liability. The Company's management of correctional and detention facilities exposes it to potential third-party claims or litigation by prisoners or other persons
for personal injury or other damages resulting from contact with Company-managed facilities, programs, personnel or prisoners, including damages arising from a prisoner's escape or from a disturbance or riot at a Company-managed facility. In addition, the Company's management contracts generally require the Company to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. The Company maintains an insurance program that provides coverage for certain liability risks faced by the Company, including personal injury, bodily injury, death or property damage to a third party where the Company is found to be negligent. There can be no assurance, however, that the Company's insurance will be adequate to cover potential third-party claims (see "Business-Insurance").
Regulations. The industry in which the Company operates is subject to national, federal, state and local regulations which are administered by various regulatory authorities. Prospective providers of correctional and detention services must comply with a variety of applicable state and local regulations including education, health care and safety regulations. The Company's contracts typically include extensive reporting requirements and require supervision and on-site monitoring by representatives of contracting governmental agencies. State law also typically requires correctional officers to meet certain training standards. Certain states such as Florida and Texas deem prison guards to be peace officers and require Company personnel to be licensed and may make them subject to background investigation. In addition, many state and local governments are required to enter into a competitive bidding procedure before awarding contracts for products or services. The laws of certain jurisdictions may also require the Company to award subcontracts on a competitive basis or to 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 have a material adverse effect on the Company's financial condition and results of operation. Furthermore, the current and future operations of the Company may be subject to additional regulations as a result of, among other factors, new statues and regulations and changes in the manner in which existing statutes and regulations are or may be interpreted or applied. Any such additional regulations could have a material adverse effect on the Company's financial condition and results of operation.
Competition. The Company competes primarily on the basis of the quality and range of services offered, its experience in managing facilities, the reputation of its personnel and its ability to design, finance and construct new facilities. The business in which the Company engages is one that other entities may easily enter without substantial capital investment or experience in management of correctional or detention facilities. Private sector competitors of the Company include, among others, Wackenhut Corrections Corporation, Correctional Services Corporation, Inc., United States Corrections Corp., Group 4 International Corrections Service and Securicor Group. Some of the Company's international competitors are larger and have greater resources than the Company. The Company also competes in some markets with smaller local companies that may have a better understanding of the local conditions and may be better able to gain political and public acceptance. In addition, the Company competes with governmental agencies that are responsible for correctional facilities.
Dependence on Senior Management. The success of the Company's operations has been and will continue to be highly dependent upon the continued services of its senior management. The loss of one or more of the Company's senior management could have a material adverse effect on the Company's business.
Relationship with Sodexho. Sodexho beneficially owns 16.3% of the Common Stock. Accordingly, Sodexho may have a significant influence over the affairs of the Company. Sodexho has agreed to limit its ownership interest in the Company to 25% (or 30% in certain limited circumstances) through June 23, 1999, subject to earlier termination upon the occurrence of certain events, and has agreed to certain restrictions on the voting of its Common Stock. Sodexho has a preemptive right to purchase additional shares of Common Stock or securities convertible or exchangeable for Common Stock in any issuance of securities by the Company in an amount necessary to enable Sodexho to maintain a percentage ownership in the Company equal to 20% of the Common Stock on a fully diluted basis. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources").
Volatility of Market Price. From time to time, there may be significant volatility in the market price for the Company's Common Stock. The Company believes that the current market price of the Common Stock reflects expectations that the Company will be able to continue to operate its facilities profitably and to develop new facilities at a significant rate and operate them profitably. If the Company is unable to operate its facilities profitably or develop facilities at a pace that reflects the expectations of the market, investors could sell shares of the Common Stock at or after the time that it becomes apparent that such expectations may not be realized, resulting in a decrease in the market price of the Common Stock. In addition to the operating results of the Company, changes in earnings estimated by analysts, changes in general conditions in the economy or the financial markets or other developments affecting the Company or the private corrections industry could cause the market price of the Common Stock to fluctuate substantially. In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operations performance.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive officers of the Company. Ages are as of March 1, 1997.
DOCTOR R. CRANTS, a founder of the Company, was elected Chief Executive Officer and Chairman of the Board of the Company in June 1994. From June 1987 to June 1994, he served as President, Chief Executive Officer and Vice Chairman of the Board of Directors of the Company.
From January 1983 through June 1987, Mr. Crants served as Secretary and Treasurer of the Company. He has served as a director of the Company since 1983. Mr. Crants graduated from the United States Military Academy at West Point in 1966, and received joint Masters in Business Administration and Juris Doctor degrees from the Harvard Business School and Harvard Law School, respectively, in 1974.
THOMAS W. BEASLEY, a founder of the Company, was elected Chairman Emeritus of the Board of Directors of the Company in June 1994. From June 1987 to June 1994, he served as Chairman of the Board. Mr. Beasley served as President of the Company from January 1983 to June 1987. He has served as a director since 1983. Mr. Beasley is also president of Dixon Springs Investments, Inc., a private real estate investment company. From 1974 through 1978, Mr. Beasley served as Chairman of the Tennessee Republican Party, and he continues to be active in Tennessee politics. Mr. Beasley graduated from the United States Military Academy at West Point in 1966 and received a Doctor of Jurisprudence degree from Vanderbilt University School of Law in 1973.
DAVID L. MYERS became President of the Company in June 1994. From December 1986 to June 1994, he served as Vice President, Facility Operations of the Company. From September 1985 to December 1986, he served as Administrator of the Company's Bay County, Florida facility. From 1968 to 1985, Mr. Myers was employed with the Texas Department of Corrections, starting as a corrections officer in 1968 and progressing in 1973 to warden of a maximum security prison. He graduated from Sam Houston State University in 1969.
DARRELL K. MASSENGALE joined the Company in February 1986 and in March 1991 became its Vice President, Finance, Secretary, and Treasurer. In June 1994, he was also elected Chief Financial Officer of the Company. From February 1986 to March 1991, Mr. Massengale served as Controller of the Company. He is a certified public accountant who was employed by the accounting firm of KPMG Peat Marwick from 1982 through 1986. Mr. Massengale graduated from Middle Tennessee State University in 1982 and became a certified public accountant in 1985.
GAY ETHERIDGE VICK, III was elected Vice President and Managing Director of the Company's International Operations in June 1994. From January 1987 to June 1994, he served as Vice President, Project Development for the Company. From April 1984 to December 1986, Mr. Vick served as Vice President, Design and Construction. From April 1983 to April 1984 he served as President of Vick and Harris, Ltd., where he masterplanned correctional and detention facilities. Mr. Vick graduated from Virginia Tech in 1970.
CHARLES A. BLANCHETTE, JR. was elected Vice President, Operations of the Company in November 1996. In 1995, Mr. Blanchette was appointed Director, Facility Start-Up for the Company and in 1996 was named Division Coordinator in the Operations Department. Prior to his move to the corporate office, Mr. Blanchette directed successful start- ups of the Leavenworth Detention Center in 1992 and Central Arizona Detention Center in 1994. From 1987 to 1995, he served as warden for an number of the Company's correctional facilities. Prior to joining the
Company in 1987, Mr. Blanchette worked for 16 years with the Texas Department of Corrections. Mr. Blanchette graduated from Alvin Community College in Texas in 1974 and received specialized training from Texas A&M, the National Institute of Justice and the Federal Bureau of Investigation.
DENNIS E. BRADBY has served as Vice President, Education Services of the Company since June 1991. From April 1986 through June 1991, Mr. Bradby served as the Company's Vice President, Operational Support Systems. From January through April 1986, Mr. Bradby served as the Facility Administrator of the Company's Silverdale Facilities and, from March 1984 through January 1986, as the Facility Administrator of the Company's Houston Immigration Detention Facility. He served as Regional Manager of the Virginia State Department of Corrections from 1977 through March 1984 and as the Assistant Superintendent of that department from 1974 through 1978. Mr. Bradby also served as Assistant Superintendent of the Juvenile Detention Facility in Norfolk, Virginia from 1973 through 1974. Mr. Bradby graduated from Norfolk State University in 1972.
LINDA G. COOPER joined the Company in April 1987 as Senior Legal Counsel. In May 1988 she was elected Assistant Secretary for the Company and in January 1989 became its Vice President, Legal Affairs. From December 1981 to March 1987 she served as Staff Attorney and then Deputy General Counsel for the Kentucky Corrections Cabinet. Ms. Cooper received a Juris Doctor degree from the University of Kentucky in 1979.
SUSAN HART was elected Vice President, Communications in June 1996. From 1993 to 1996, she served as director, communications of the Company. From 1989 to 1993, she served as director of public relations for the American Red Cross Blood Services. Ms. Hart graduated from Auburn University in 1981 with a major in Communications and became an accredited public relations practitioner in 1990.
PEGGY W. LAWRENCE became Vice President, Investor Relations of the Company in June 1995. From June 1989 to June 1995, she served as Vice President, Communications for the Company and from March 1987 to June 1989, she served as the Company's Director of Communications. From January 1985 to March 1987, she served as an account executive for Dye, Van Mol and Lawrence Public Relations. From January 1980 to January 1985, Ms. Lawrence served as Vice President, Research at Morgan Keegan & Co., an investment banking firm. Ms. Lawrence graduated from the University of Tennessee at Knoxville in 1977 and became a Chartered Financial Analyst in 1984.
JOHN D. REES was elected Vice President, Business Relations for the Company in June 1994. From 1969 until 1986 when he joined the Company, Mr. Rees served as warden of the Kentucky State Reformatory. Mr. Rees holds a Master of Science degree from Florida State University and a Bachelor of Arts degree from the University of Kentucky with majors in criminology, correctional administration and sociology.
LINDA A. STALEY was elected Vice President, Project Development for the Company in June 1994. She joined the Company in 1985 as Director, Project Development. Prior to joining the Company, Ms. Staley spent 18 years working for federal governmental agencies, including the Department of Justice and the Immigration and Naturalization Service (INS) in the contracting and procurement field. Ms. Staley attended Wayne State College where she studied business administration.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently operates facilities located in 14 states, Washington, D.C., Puerto Rico, Australia and the United Kingdom. Of the Company's 44 domestic facilities, 13 are owned and 31 are leased as of March 1997.
The location, name and rated capacity of each of the Company's operating facilities at March 20, 1997, grouped by state, are set forth in the following table:
The Company maintains its corporate headquarters in approximately 21,600 square feet of office space at 102 Woodmont Boulevard, Nashville, Tennessee 37205, at a rate comparable for similar space in the area. In addition, the Company also leases approximately 13,000 square feet of office space in Brentwood, Tennessee, at a rate comparable for similar space in the area. The Company's wholly-owned subsidiary, TransCor, leases approximately 15,000 square feet of office space and a maintenance facility comprising approximately 8,000 square feet at 1510 Fort Negley Boulevard, Nashville, Tennessee, at a rate comparable for similar space in the area. In March 1996, the Company acquired approximately 3.25 acres in the Burton Hills Office Park, Nashville, Tennessee and is currently constructing a 75,000 square foot office building. Construction on the office building is scheduled for completion in November 1997, at which time the Company will terminate its current office leases and move the Company's corporate headquarters to the new building.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Information with respect to this Item is incorporated herein by reference to Item 1 - "Business-Litigation".
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "CXC". The following table sets forth the quarterly high and low closing sales prices as reported on the NYSE for the periods indicated. In October 1995, the Company authorized a 2-for-1 stock split on its Common Stock effective October 31, 1995. The stock split was paid in the form of a one-share dividend for every share of Common Stock held by stockholders of record on October 16, 1995. In June 1996, the Company authorized a 2-for-1 stock split on its Common Stock effective July 2, 1996. The stock split was paid in the form of a one-share dividend for every share of Common Stock held by stockholders of record on June 19, 1996. All references herein to the Common Stock are on a post-split basis. The closing stock price for the Company's Common Stock on the New York Stock Exchange was $30.50 on December 31, 1996.
(b) As of March 18, 1997, there were approximately 1,267 holders of record of the Common Stock and 243 holders of record of the Company's warrants to purchase Common Stock.
(c) The Company has not paid any cash dividends to its common stockholders since its inception and does not anticipate paying any cash dividends to its common stockholders in the foreseeable future. The Company intends to retain earnings to provide funds for its operations and growth. Future cash dividend policy will be determined by the Board of Directors based on conditions then existing, including the Company's earnings and financial condition, capital requirements and other relevant factors. In addition, cash dividends may not be paid without the consent of the Company's lenders.
In September 1992, the Company issued a warrant dividend to its holders of Common Stock by distributing one warrant for every five outstanding shares of common stock held on the record date (the "Warrants"). The Warrants expire on September 14, 1997 and are convertible into four shares of Common Stock at an exercise price of $8.50. As of March 18, 1997, an aggregate of 3,268,652 shares of Common Stock currently were issuable upon exercise of the Warrants.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for the five years ended December 31, 1996 are derived from the Company's consolidated financial statements and include financial data reflecting the acquisitions of TransCor in December 1994, Concept in April 1995 and CPI in August 1995, all of which were accounted for as poolings-of-interests. All information contained in the following table should be read in conjunction with the consolidated financial statements and related notes of the Company included herein.
CORRECTIONS CORPORATION OF AMERICA INCOME STATEMENT (In thousands, except per share data) Years Ended December 31,
SALES OF UNREGISTERED SECURITIES
Since December 31, 1995, the Company has issued the following unregistered securities:
(A) On February 29, 1996, the Company sold an aggregate principal amount of $30,000,000 of Convertible Subordinated Notes to PMI Mezzanine Fund, L.P. in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). Such notes bear interest at a rate of 7.5% per annum, mature on February 29, 2002, and the principal and accrued interest thereon are convertible into shares of Common Stock of the Company at a conversion price, as adjusted, of $25.91 per share.
(B) On April 5, 1996, the Company sold an aggregate principal amount of $20,000,000 Convertible Subordinated Notes to Sodexho in a private placement pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act. Such notes bear interest at a rate of 7.5% per annum, mature on April 5, 2002 and the principal and accrued interest thereon are convertible into shares of Common Stock of the Company at a conversion price, as adjusted, of $25.91 per share.
(C) On August 1, 1996, the Company issued and sold an aggregate principal amount of $24,700,000 Corrections Corporation of America Detention Center Revenue Bonds Series 1996 in a private placement pursuant to Rule 506 of Regulation D promulgated under the Securities Act. Such bonds were issued pursuant a Trust Indenture (the "Indenture") between the Company and Liberty Bank and Trust Company of Tulsa, National Association. The bonds and interest thereon are limited obligations of the Company payable solely from revenues and funds pledged under the Indenture and from moneys drawn under an irrevocable letter of credit. The bonds bear interest at a variable rate payable monthly and mature on December 15, 2015.
No underwriters were engaged in connection with the foregoing sales of securities.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company presently has contracts to manage 59 correctional and detention facilities with an aggregate design capacity of 42,537 beds. Of these 59 facilities, 47 are currently in operation and 12 are under development by the Company. The Company, through its United Kingdom joint venture, UKDS, manages one facility in the United Kingdom and, through its Australian joint venture, CC Australia, manages two facilities in Australia. The Company's ownership interest in CC Australia is accounted for under the equity method. Of the 12 facilities under development by the Company, seven are scheduled to commence operations during 1997 (three in the second quarter and four in the third quarter) and five are scheduled to commence operations during 1998. In addition, at March 18, 1997, the Company had outstanding written responses to Request for Proposals and other solicitations for 12 projects with an aggregate design capacity of 11,035 beds.
The following table sets forth the number of facilities under contract or award at the end of the periods shown:
(1) Comprised of facilities in operation and facilities under development for which contracts have been finalized. (2) Compensated mandays for a period ended are calculated, for per diem rate facilities, as the number of beds occupied by residents on a daily basis during the period ended and, for fixed rate facilities, as the design capacity of the facility multiplied by the number of days the facility was in operation during the period.
The Company derives substantially all of its revenues from the management of correctional and detention facilities for national, federal, state and local governmental agencies in the United States and abroad.
Geographic Market Concentration. The Company currently manages facilities in 14 states, Washington, D.C. and Puerto Rico. Management revenues by state, as a percentage of the Company's total revenues for years ended December 31, 1996 and 1995, respectively, are as follows:
To the extent favorable or unfavorable changes in regulations or market conditions occur in these markets, such changes would likely have a corresponding impact on the Company's results of operations.
Revenues for operation of correctional and detention facilities are recognized as the services are provided, based on a net rate per day per inmate ("per diem" rate) or on a fixed monthly rate ("fixed or determined" rate). Of the Company's 44 domestic facilities in operation, 40 are compensated on a per diem basis and four are compensated at fixed monthly rates. The per diem rates or fixed monthly rates vary according to the type of facility and the extent of services provided at the facility. Transportation revenues are based on a per mile charge or a fixed fee per trip.
The Company incurs all facility operating expenses, except for certain debt service and lease payments with respect to certain facilities that the Company does not own or lease. The Company owns 13 of the domestic facilities it currently manages. The Company currently manages 31 domestic facilities that are owned or leased by a governmental agency, construction of which as been financed by the agency through one or more of a variety of methods.
Facility payroll and related taxes constitute the majority of facility operating expenses. Substantially all other operating expenses consist of food, clothing, medical services, utilities, supplies, maintenance, insurance and other general operating expenses. As inmate populations increase following the start-up of a facility, operating expenses generally decrease as a percentage of related revenues. Each facility is fully staffed at the time it is open or taken over by the Company, although it may be operating at a relatively low occupancy rate at such time.
General and administrative costs consist of salaries of officers and other corporate headquarters personnel, legal, accounting and other professional fees (including pooling expenses related to certain acquisitions), travel expenses, executive office rental, and promotional and marketing expenses. The most significant component of these costs relates to the hiring and training of experienced corrections and administrative personnel necessary for the implementation and maintenance of the facility management and transportation contracts.
Operating income for each facility depends upon the relationship between operating costs, the rate at which the Company is compensated per manday, and the occupancy rate. The rates of compensation are fixed by contract and approximately two-thirds of all operating costs are fixed costs. Therefore, operating income will vary from period to period as occupancy rates fluctuate. Operating income will be affected adversely as the Company increases the number of newly-constructed or expanded facilities under management and experiences initial low occupancy rates. After a management contract has been awarded, the Company incurs facility start-up costs that consist principally of initial employee training, travel and other direct expenses incurred in connection with the contract. These costs are capitalized and amortized on a straight-line basis over the shorter of the term of the contract plus renewals, or five years. Depending on the contract, start-up costs are either fully recoverable as pass-through costs or are billable to the contracting agency over the original term of the contract plus renewals. The Company has historically financed start-up costs through available cash, the issuance of various securities, cash from operations and borrowings under the Company's revolving credit facility.
Newly opened facilities are staffed according to contract requirements when the Company begins receiving inmates. Inmates are typically assigned to a newly opened facility on a regulated, structured basis over a one-to-three month period. Until expected occupancy levels are reached, operating losses may be incurred.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of revenues of certain items in the Company's statement of operations and the percentage change from period to period in such items:
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues increased 41% from 1995 to 1996 with increases in both management and transportation services. Management revenues increased 43% in 1996, or $84,171,000. This increase is due to the opening of new facilities and the expansion of existing facilities by the Company in 1995 and 1996. In 1996, the Company opened four new facilities with an aggregate design capacity of 2,501 beds, assumed management of two facilities with an aggregate design capacity of 899 beds and expanded five existing facilities to increase their design capacity by an aggregate of 1,058 beds. Accordingly, 4,458 new beds were brought on line in 1996. Due to the growth in beds, compensated mandays increased 48% in 1996 from 4,799,562 to 7,113,794. Average occupancy remained stable at 94.1% for 1996 as compared to 93.9% for 1995.
Transportation revenues increased $1,101,000 or 12% in 1996 as compared to 1995. The 1996 growth was due to a continued marketing effort that expanded the customer base and resulted in increased compensated mileage.
During the second and fourth quarters of 1996, the Company purchased the remaining two-thirds of UK Detention Services, a United Kingdom joint venture ("UKDS") from its original joint venture partners. After consideration of several strategic alternatives related to UKDS, the Company sold 20% of the entity to Sodexho S.A. ("Sodexho"), a French conglomerate, and recognized an after-tax gain of $515,000. In conjunction with this transaction, Sodexho was also provided the option to purchase an additional 30% of UKDS, which option expires in 1997.
Facility Operating Expenses. Facility operating expenses increased 34.2% to $213,173,000 in 1996 compared to $158,814,000 in 1995. This increase was due to the additional beds on line that increased compensated mandays and the growth in the transportation services. The average management operating cost per manday was $28.82 for 1996 as compared to $31.59 for 1995. The decrease in average cost per manday was due to the Company's ability to realize more economies of scale as additional beds were brought on line. As a percentage of revenues, facility operating expenses decreased to 73% from 77%. This decrease is primarily attributable to the expansion of various facilities that added lower incremental operating expenses and improved economies of scale. Salary and related employee benefits constituted approximately 63% and 58% of facility operating expenses for 1996 and 1995, respectively.
General and Administrative. General and administrative costs decreased 6% in 1996 to $13,428,000 as compared to $14,288,000 in 1995. This decrease is due to the non-recurring pooling expenses associated with acquisitions during fiscal 1995 as well as the Company's ability to reduce duplication in the general and administrative areas by integrating the acquired companies into its systems. Management believes that as the Company continues to grow, general and administrative expenses should increase in volume but continue to decrease as a percentage of revenues.
Depreciation and Amortization. Depreciation and amortization increased 74% to $11,339,000 in 1996 as compared to $6,524,000 in 1995. The 1996 increase is due to the growth in total beds in Company-owned facilities as well as the one- time, non-recurring reserve of $850,000 established for the termination of the Company's contract with South Carolina.
Interest Expenses, Net. Interest expense, net increased 7% in 1996, consisting of a 48% or $2,666,000, increase in interest expense and a 151%, or $2,394,000, increase in interest income. Interest expense increased due primarily to the addition of $50,000,000 in convertible subordinated notes issued in February and April 1996, bearing interest at 7.5%. Interest income increased as a result of the Company investing the net proceeds from an equity offering, which closed in June 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
As discussed in Note 2 to the accompanying consolidated financial statements, in 1994 and 1995, the Company expanded its service capabilities and broadened its geographic presence in the United States through a series of strategic acquisitions that complemented the Company's
development activities (collectively, the "Acquisitions"). In December 1994, the Company acquired TransCor America, Inc. ("TransCor"), a nationwide provider of inmate transportation services. In April 1995, the Company acquired Concept Incorporated ("Concept"), a prison management company with eight facilities and 4,400 beds under contract at the time of acquisition. In August 1995, the Company acquired Corrections Partners, Inc. ("CPI"), a prison management company with seven facilities and 2,900 beds under contract at the time of acquisition. The Company's operating results for 1995 were significantly affected by the Acquisitions. All of these business combinations were accounted for as a pooling-of- interests and, accordingly, the operations of TransCor, Concept and CPI have been combined in the accompanying consolidated financial statements. The discussion herein is based upon the combined operations of the Company, TransCor, Concept and CPI for all periods presented in the accompanying consolidated financial statements.
Revenues. Total revenues increased 36% from 1994 to 1995 with increases in both management and transportation services. Management revenues increased 37% in 1995, or $53,213,000. This increase was due to the opening of new facilities and the expansions of existing facilities in 1994 and 1995 by the Company and the related Acquisitions. In 1995, the Company opened five new facilities with an aggregate design capacity 3,390 beds and assumed management of three facilities with an aggregate design capacity 1,688 beds. The Company also realized the full-year effect of three facilities added in 1994 with an aggregate design capacity 1,560 beds. The third contributing factor to growth was the expansion of 13 existing facilities to increase their design capacity by 1,887 beds. Due to the growth in the number of beds, compensated mandays increased 27% in 1995 from 3,768,095 to 4,799,562. Average occupancy remained stable at 93.9% for 1995 as compared to 93.5% for 1994.
Transportation revenues increased $1,653,000 or 21% in 1995 as compared to 1994. The 1995 growth was due to a continued marketing effort that expanded the customer base and resulted in increased compensated mileage.
During the first quarter of 1995, the Company purchased the remaining 50% of CC Australia from its original joint venture partner. After consideration of several strategic alternatives related to CC Australia, the Company then sold 50% of the entity to Sodexho during the second quarter of 1995. The Company accounted for the 100% ownership period on the equity basis of accounting and recognized an after-tax gain of $783,000 on the sale.
Facility Operating Expenses. Facility operating expenses increased 29% to $158,814,000 in 1995 compared to $123,540,000 in 1994. This increase was due to the additional beds on line that increased compensated mandays and the growth in the transportation services. The average management operating cost per manday was $31.59 for 1995 as compared to $31.16 for 1994. The increase in average cost per manday was due to the significant number of new beds brought on line in 1995. As the five new facilities were opened, the full complement of fixed costs was being incurred prior to full occupancy. As a percentage of revenues, however, facility operating expenses decreased to 77% from 81%. This decrease was primarily attributable to the expansion
of various facilities that added lower incremental operating expenses and improved economies of scale. Salary and related employee benefits constituted approximately 58% and 55% of facility operating expenses for 1995 and 1994, respectively.
General and Administrative. General and administrative costs increased 52% in 1995 to $14,288,000 as compared to $9,413,000 in 1994. Included in 1995 were approximately $950,000 of non-recurring pooling expenses related to the Acquisitions. The Company has also expanded its management staff to manage its significant growth. Additional staff was added to bring new business on line, resulting in cost being incurred prior to revenue being realized. Also, as all transition issues are finalized from the acquired operations and the duplicate services are consolidated, general and administrative costs should decrease as a percentage of revenues.
Depreciation and Amortization. Depreciation and amortization increased $771,000, to $6,524,000 in 1995 as compared to $5,753,000 in 1994. The 1995 increase was due to the growth in total beds in Company-owned facilities.
Interest Expenses, Net. Interest expense, net increased 15% in 1995 due to the assumption of debt related to the Eloy Detention Center in Eloy, Arizona. In July, 1995 the Company acquired the remaining 50% of the investment in a partnership and assumed the assets and debts.
Income Taxes. In 1995, the Company's effective income tax rate increased to 39% as compared to 23% in 1994. This increase in taxes was due to the Company's complete utilization of net operating loss carryforwards, therefore becoming subject to full statutory tax rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive in relation to the development of a correctional facility. The Company's efforts to obtain contracts, construct additional facilities and maintain its day-to-day operations have required the continued acquisition of funds through borrowings and equity offerings. Historically, the Company has financed these activities with cash generated from operating and bank borrowings, the issuance and sale of capital stock, subordinated convertible notes and senior secured debt, taxable and tax-exempt bonds, and by assisting governmental agencies in their issuance of municipal bonds.
The Company's current ratio increased to 1.79 in 1996 as compared to 1.31 in 1995. The increase was due to the increase in accounts receivable that resulted from additional beds on line, as well as an increase in construction receivables for facilities being constructed by the Company. The ratio of long-term debt to total capitalization was 29% at December 31, 1996 compared to 44% at December 31, 1995. In October 1995, the Company declared a two-for-one stock split paid in the form of a one-share dividend for every share of Common Stock held on the record date. In June 1996, the Company declared a second two-for-one stock split paid in the form of a one-share dividend for every share of Common Stock held on the record date. All references to number of shares have been adjusted for both stock splits.
Cash flow from operations for 1996 was approximately $24,390,000 as compared to $17,766,000 in 1995 and $11,637,000 in 1994. The Company has strengthened its cash flow through its expanded business, additional focus on larger, more profitable facilities, its expansion of existing facilities where economies of scale could be realized, and its continuing effort of cost containment.
In 1994, the Company entered into an international strategic alliance with Sodexho for the purpose of pursuing prison management business outside the United States. In connection with this alliance, Sodexho purchased a significant ownership interest in the Company and entered into certain agreements with the Company relating to future financings by the Company and certain corporate governance and control issues. These issues included the grant by the Company to Sodexho of a preemptive right to purchase additional shares of Common Stock in securities convertible into or exchangeable for Common Stock in any amount necessary to enable Sodexho to maintain a percentage ownership in the Company equal to 20% of the Common Stock on a fully diluted basis.
In February 1996, the Company issued $30,000,000 of its convertible subordinated notes to an investor. The proceeds were used to repay the outstanding principal under the Company's working capital credit facility and construction loan. The notes bear interest at 7.5%, payable quarterly, and require the Company to maintain specific ratio requirements relating to net worth, cash flow and debt coverage. The notes are convertible into shares of the Company's Common Stock at a conversion price, as adjusted, of $25.91 per share. In April 1996, due to the triggering of its preemptive right in connection with the issuance of the convertible subordinated notes, Sodexho purchased $20,000,000 of convertible subordinated notes under the same terms and conditions.
In June 1996, the Company completed a public offering of 3,750,000 shares of common stock at a price to the public of $37.50 per share. The proceeds of the offering, after deducting all associated costs, were $131,812,000.
In August 1996, the Company issued $24,700,000 of Revenue Bonds to finance the construction of a 480-bed medium security detention facility located in Taylor, Texas. These bonds are taxable low floaters and are secured by an irrevocable direct pay letter of credit issued by a group of banks.
In September 1996, the Company entered into a new revolving credit facility with a group of banks. The new revolving credit facility replaces the $25,000,000 revolving line of credit which was scheduled to mature in May 1997. The new revolving credit facility provides for general corporate borrowings up to $170,000,000, which includes the issuance of a maximum of $136,000,000 in letters of credit and matures in September 1999. The credit facility is secured by the pledge of stock of the Company's first tier domestic subsidiaries and bears interest, at the election of the Company, at either the agent bank's prime rate or a rate which is .5%, .75% or 1.0% above the applicable 30, 60 or 90-day LIBOR rate, depending on the Company's leverage
ratio. Interest is payable quarterly with respect to prime rate loans and at the expiration of the applicable period with respect to LIBOR rate-based loans. There are no prepayment penalties associated with the credit facility. The credit facility requires the Company, among other things, to maintain specific ratio requirements relating to net worth, leverage and debt service coverage. The facility also limits certain payments and distributions. As of December 31, 1996, there were $4,000,000 in borrowings under the facility. Letters of credit totaling $65,011,369 had been issued, leaving the unused commitment at $100,988,631.
In September 1996, the Company also closed a $2,500,000 credit facility with a bank that provides for the issuance of letters of credit and matures in September 1999. As of December 31, 1996, there were $1,393,274 in letters of credit issued, leaving the unused commitment at $1,106,726.
The Company anticipates making cash investments in connection with future acquisitions and expansions. In addition, the Company plans to use a portion of its cash to finance start-up costs, leasehold improvements and equity investments in facilities, if appropriate in connection with undertaking new contracts. The Company believes that the cash flow from operations, proceeds from the secondary offering and amounts available under its credit facility will be sufficient to meet its capital requirements for the foreseeable future. Furthermore, management believes that additional resources may be available to the Company through a variety of other financing methods.
Statements contained in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations relating to anticipated growth in revenues, anticipated working capital and sources of funding for growth opportunities and construction expenditures, interest costs and income constitute "forward-looking statements." The projections made herein are expressed in good faith and believed by the Company to have a reasonable basis, but there can be no assurance that actual outcomes or results will not differ materially from the expected outcomes or results described herein. Important factors that could cause actual results to differ materially from the forward-looking statements identified in this paragraph are discussed in the section entitled "Business - Risk Factors" and accompany such forward- looking statements.
INFLATION
Many of the Company's facility contracts provide periodic adjustments in the compensation paid to the Company in accordance with changes in the consumer price index during such period. Management does not believe that inflation has had a material adverse effect on the revenues or expenses of the Company.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of." This statement imposes stricter criteria for long-term assets by requiring that such assets be probable of future recovery at each balance sheet date. The Company adopted SFAS 121 effective January 1, 1996. Such adoption did not have a material impact on the results of operations, financial condition or cash flows of the Company.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." This statement requires new disclosures in the notes to the financial statements regarding stock-based compensation plans based on the fair value of equity instruments granted. Companies also may base the recognition of compensation costs for instruments issued under stock-based compensation plans on these fair values. The Company adopted the disclosure requirements of SFAS 123 effective January 1, 1996, but did not change the method of accounting for these plans.
The FASB has approved a statement of financial accounting standards effective for fiscal years ending after December 15, 1997 which establishes standards for computing and presenting earnings per share and also establishes standards with respect to disclosure of information regarding an entity's capital structure. While the Company is required to adopt the provisions of the new standard in the first quarter of 1997, it does not expect the adoption thereof to have a material effect on the Company's results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with the Company's accountants on any matter of accounting principles and practices or financial statement disclosures. Arthur Andersen LLP was selected by the Company's Board of Directors to serve in such capacity during the fiscal year 1996 and has been selected by the Board to serve in such capacity during the fiscal year 1997.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item will appear in, and is incorporated by reference from, the sections entitled "Proposals for Stockholder Action - Proposal 1. Election of Directors" and "Management - Directors and Executive Officers" included in the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which will be filed with the Commission pursuant to Regulation 14A no later than April 30, 1997.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the sections entitled "Executive Compensation," included in the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which will be filed with the Commission pursuant to Regulation 14A no later than April 30, 1997; which information, other than the Compensation Committee Report and Performance Graph required by Items 402(k) and (l) of Regulation S-K, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in, and is incorporated by reference from, the section entitled "Security Ownership of Directors, Officers and Principal Stockholders" included in the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which will be filed with the Commission pursuant to Regulation 14A no later than April 30, 1997.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear in, and is incorporated by reference from, the sections entitled "Certain Relationships and Related Transactions" included
in the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Stockholders, which will be filed with the Commission pursuant to Regulation 14A no later than April 30, 1997.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements. The Financial Statements as set forth under Item 8 of this report on Form 10-K have been filed herewith, beginning on Page of this report.
(2) Financial Statement Schedules. All schedules specified in the accounting regulations of the Securities and Exchange Commission have been omitted because they are either inapplicable or are not required.
(3) The Exhibits are listed in the Index of Exhibits Required by Item 601 of Regulation S-K included herewith.
(b) No reports on Form 8-K were filed during the last quarter of the period covered by this Report.
(c) Certain Exhibits. See Item 14(a)(3) above.
(d) Certain Financial Statements. See Item 14(a) (1) and (2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORRECTIONS CORPORATION OF AMERICA
Date: March 28, 1997 By: /s/ Doctor R. Crants ------------------------- Doctor R. Crants, Chairman of the Board and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints DOCTOR R. CRANTS and DARRELL K. MASSENGALE, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K of Corrections Corporation of America for the fiscal year ended December 31, 1996, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the New York Stock Exchange, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dated indicated.
Date: March 28, 1997 /s/ Doctor R. Crants ---------------------------------------- Doctor R. Crants, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)
Date: March 28, 1997 /s/ Darrell K. Massengale ---------------------------------------- Darrell K. Massengale, Vice President, Finance; Chief Financial Officer; Secretary and Treasurer (Principal Financial and Accounting Officer)
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Corrections Corporation of America and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Corrections Corporation of America and Subsidiaries as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Nashville, Tennessee February 18, 1997
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated statements.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated statements.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
(Continued)
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued)
(Continued)
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued)
(Continued)
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated statements.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued)
The accompanying notes are an integral part of these consolidated statements.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corrections Corporation of America (together with its subsidiaries, referred to as the "company"), a Delaware corporation, operates and manages prisons and other correctional facilities and provides prisoner transportation services for governmental agencies. The company provides a full range of related services to governmental agencies, including managing, financing, designing and constructing new facilities and redesigning and renovating older facilities. The consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries, TransCor America, Inc. ("TransCor"), Concept Incorporated ("Concept"), Corrections Management Affiliates, Inc. ("CMA"), Correctional Services Group, Inc. ("CSG") and CCA International, Inc. CCA International, Inc. has two wholly-owned subsidiaries, CCA France, Inc. and CCA (UK) Limited. CCA (UK) Limited has a majority owned subsidiary, UK Detention Services Limited ("UKDS"). Concept has two wholly-owned subsidiaries, Mineral Wells R.E. Holding Corp. ("Mineral Wells") and United-Concept Inc. ("United-Concept"). Concept, together with Mineral Wells, wholly owns United-Concept Limited Partnership ("UCLP"). CMA, together with CSG, wholly owns Corrections Partners, Inc. ("CPI"). The accompanying consolidated financial statements and note information reflect the accounting for the acquisitions in 1994 and 1995 of TransCor, Concept, CMA and CSG in transactions accounted for under the pooling-of-interests method of accounting and the acquisitions in 1995 and 1996 of United-Concept, UCLP and UKDS accounted for under the purchase method of accounting. All material intercompany transactions and balances have been eliminated.
At December 31, 1996, the company has a 50% interest in Corrections Corporation of Australia PTY LTD ("CC Australia"). CC Australia provides services similar to the company in Australia and surrounding countries. The company accounts for this investment under the equity method. Assets and liabilities are converted from their functional currency into the U.S. dollar utilizing the conversion rate in effect at the balance sheet date. Revenue and expense items are converted using
the weighted average rate during the period. The excess of the company's investment in this unconsolidated subsidiary over the underlying equity is being amortized over twenty-five years.
Deferred project development costs consist of costs that can be directly associated with a specific anticipated contract and, if recovery from that contract is probable, are deferred until the anticipated contract has been awarded. At the time the contract is awarded to the company, the deferred project development costs are either capitalized as part of property and equipment or are transferred to project development costs. Costs of unsuccessful or abandoned contracts are charged to depreciation and amortization expense when their recovery is not considered probable. Internal costs incurred in securing new clients including costs of responding to requests for proposals are expensed as incurred. Facility start-up costs, principally costs of initial employee training, travel and other direct expenses incurred in connection with opening of new facilities, to the extent recoverable under each negotiated contract, are deferred and recorded as other assets. Project development costs and start-up costs are amortized on a straight-line basis over the lesser of the initial term of the contract plus renewals or five years.
Debt issuance costs are amortized on a straight-line basis over the life of the related debt. This amortization is charged to depreciation and amortization expense.
Property and equipment is carried at cost. Betterments, renewals and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance are expensed. Interest is capitalized to the asset to which it relates in connection with the construction of major facilities. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in income. Depreciation is computed by the straight-line method for financial reporting purposes and accelerated methods for tax reporting purposes based upon the estimated useful lives of the related assets.
Investment in direct financing leases represent the portion of the company's management contract with a governmental agency that represents payments on building and equipment leases. The leases are accounted for using the financing method and, accordingly, the minimum lease payments to be received over the term of the leases less unearned income are capitalized as the company's investment in the leases. Unearned income is recognized as income over the term of the leases using the interest method.
Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement generally requires the company to record deferred income taxes for the differences between book and tax bases of its assets and liabilities.
The company maintains contracts with various governmental entities to manage their facilities for fixed per diem rates or monthly fixed rates. The company also maintains contracts with various federal, state and local governmental entities for the housing of inmates in company owned facilities at fixed per diem rates. These contracts usually contain expiration dates with renewal options ranging from annual to multi-year renewals. Most of these contracts have current terms that require renewal every two to five years. The company expects to renew these contracts for periods consistent with the remaining renewal options allowed by the contracts or other reasonable extensions. The company records revenues based on these per diem rates and the number of inmates housed during the revenue period. The company recognizes development revenue on the percentage-of-completion method.
To meet the reporting requirements of SFAS 107, "Disclosures About Fair Value of Financial Instruments," the company calculates the fair value of financial instruments using quoted market prices. At December 31, 1996, there were no material differences in the book values of the company's financial instruments and their related fair values, except for the company s convertible subordinated notes (see Note 8) and the forward contract for convertible subordinated notes (see Note 13), which based on the conversion rate on the underlying equity securities, have an estimated fair market value of approximately $339,000.
For purposes of the statements of cash flows, the company excludes restricted cash from cash and cash equivalents. The company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In March, 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This statement imposes stricter criteria for long-term assets by requiring that such assets be probable of future recovery at each balance sheet date. The company adopted SFAS 121 effective January 1, 1996. The company did not experience a material impact on its results of operations, financial condition or cash flows as a result of adoption.
SFAS No. 128, "Earnings per Share" has been issued effective for fiscal years ending after December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings
per share and also establishes standards with respect to disclosure of information about an entity's capital structure. The company is required to adopt the provisions of SFAS No. 128 in the first quarter of 1997 and does not expect adoption thereof to have a material effect on the company's results of operations.
Certain reclassifications of 1995 and 1994 amounts have been made to conform with the 1996 presentation.
2. MERGERS AND ACQUISITIONS
On August 18, 1995, the company issued 2,800 shares of its common stock for all the outstanding shares of CMA and CSG. CMA and CSG operate and manage prisons and other correctional facilities for governmental agencies.
On April 25, 1995, the company issued 5,450 shares of its common stock for all the outstanding shares of Concept. Concept operates and manages prisons and other correctional facilities for governmental agencies. Of the shares issued, 273 are held in escrow for the resolution of precombination contingencies.
On December 30, 1994, the company issued 5,200 shares of its common stock for all the outstanding shares of TransCor, a prisoner transportation company. Of the shares issued, 520 are held in escrow for the resolution of certain precombination contingencies.
The transactions above were accounted for under the pooling-of-interests method of accounting and the company has previously filed restated financial statements. In the preparation of the consolidated financial statements, the company made certain immaterial adjustments and reclassifications to the historical financial statements of TransCor, Concept, CMA and CSG to be consistent with the accounting policies of the company.
During the second and fourth quarters of 1996, the company purchased the remaining two-thirds of UKDS from its original joint venture partners. After consideration of several strategic alternatives related to UKDS, the company sold 20% of the entity to Sodexho, S.A. ("Sodexho"), a French conglomerate, and recognized an after-tax gain of $515. In conjunction with this transaction, Sodexho was also provided the option to purchase an additional 30% of UKDS. This option expires June 30, 1997.
As discussed in Note 7, the company exercised its option to acquire the remaining 50% of its investment in UCLP during 1995. The acquisition was accounted for under the purchase method of accounting. The purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair market value at the date of the acquisition. The operations of UCLP on a consolidated basis prior to the acquisition are not material to the company's results of operations.
During the first quarter of 1995, the company purchased the remaining 50% of CC Australia from its original joint venture partner. After consideration of several strategic alternatives related to CC Australia, the company sold 50% of the entity to Sodexho during the second quarter of 1995. The company accounted for the 100% ownership period on the equity basis of accounting and recognized an after-tax gain of $783 on the sale.
3. OTHER ASSETS
Other assets consist of the following:
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
Depreciation expense was $7,147, $4,428 and $3,469 for 1996, 1995 and 1994, respectively.
5. NOTES RECEIVABLE
Notes receivable consists of the following:
6. INVESTMENT IN DIRECT FINANCING LEASES
At December 31, 1996, the company's investment in direct financing leases represents building and equipment leases between the company and the State of New Mexico for the New Mexico Women's Correctional Facility. The agreements contain provisions that allow the state to purchase the buildings and equipment for predetermined prices at specific intervals during the contract period.
A schedule of minimum future rentals to be received under the direct financing leases at December 31, 1996, is as follows:
7. INVESTMENT IN UCLP
At December 31, 1994, Concept and its affiliates owned 49.9% of UCLP and Concept owned 50% of the common stock of United-Concept, which owned .2% of UCLP and was the managing general partner of UCLP. In addition, Concept had an option to purchase from its partner in UCLP the other 50% partnership interests in UCLP and the other 50% of the common stock of United-Concept. On July 17, 1995, Concept exercised its option and acquired the remaining interests of UCLP for $5,250.
United-Concept has issued and outstanding one thousand shares of common stock (which Concept owns) and one share of voting preferred stock, which is owned by The First National Bank of Chicago under an indenture agreement related to the financing of the Eloy Facility. Each share of stock, common and preferred, has one vote. The preferred stock does not participate in income distribution by United-Concept and has a ten dollar liquidation value. The by-laws of United- Concept require 100% shareholder approval of significant corporate actions, and also require an independent director. Concept is entitled to 100% of the income of UCLP, but the independent director effectively has veto power over certain actions of United-Concept.
The company's investment in UCLP was accounted for under the equity method from inception through July 17, 1995. Since July 17, 1995, the company is entitled to 100% of the income and has responsibility for all the debt and for satisfying the contractual obligation of UCLP. As a result, the company has included UCLP in the consolidated financial statements.
8. LONG-TERM DEBT
Long-term debt consists of the following:
At December 31, 1996, the company's revolving credit facility provides for borrowings up to $170,000. The facility bears interest at the bank's prime rate or LIBOR plus .50%, .75% or 1.0%, depending on the company's leverage ratio. The facility consists of a working capital line, which includes letters of credit. Letters of credit totaling $65,011 have been issued to support an industrial development bond, a taxable bond and to secure performance bonds. The unused commitment at December 31, 1996, was $100,989. The facility is subject to renewal on September 6, 1999.
At December 31, 1996, the company has a $2,500 letter of credit facility. Letters of credit totaling $1,393 have been issued to secure the company's worker's compensation insurance policy, performance bonds and utility deposits. The unused commitment at December 31, 1996, was $1,107. The facility is subject to renewal on September 6, 1999.
Restricted cash of $3,450 and $569 at December 31, 1996 and 1995, respectively, represents cash held in sinking funds established for the funding of current year principal and interest on certain bonds and current construction obligations.
The company does not maintain any significant formal or informal compensating balance arrangements with financial institutions.
The Convertible Subordinated Notes are convertible into the company's common stock at prices ranging from $1.69 to $25.91 per share. The company may require conversion under certain conditions after the stock has a market value of 150% of the conversion price for a specified period. In 1995, Convertible Subordinated Notes with a face value of $6,700 were converted into 1,774 shares of common stock.
The provisions of the credit facilities, bonds, and notes contain restrictive covenants, the most restrictive of which are limits on the payment of dividends, incurrence of additional indebtedness, investments and mergers. The agreements also require that the company maintain specific ratio requirements relating to cash flow, tangible net worth, interest coverage and earnings. The company was in compliance with the covenants at December 31, 1996.
The company capitalized interest of $502, $717 and $377 in 1996, 1995 and 1994, respectively. Interest expense, net is comprised of the following for each year:
Maturities of long-term debt for the next five years and thereafter are: 1997 - $8,281; 1998 - $16,357; 1999 - $21,007; 2000 - $5,471; 2001 - $0 and thereafter - - $74,700.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The provision for income taxes is comprised of the following components:
Significant components of the company's deferred tax assets and liabilities are as follows:
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income for the years ended December 31, is as follows:
10. EARNINGS PER SHARE
Primary net income per common share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding. Stock warrants and stock options are considered common stock equivalents. The convertible subordinated notes are not common stock equivalents. In computing fully diluted net income per common share, the 8.5% convertible subordinated notes are considered dilutive using the if-converted method. In 1994, the 8.5% convertible subordinated notes were antidilutive. The following table presents information necessary to calculate fully diluted earnings per share for the years ended December 31:
11. STOCKHOLDERS' EQUITY
Preferred Stock -
The company has authorized 1,000 shares of $1 par value preferred stock.
In December 1991, the company sold 50 shares of Series A preferred stock for $5,000. The preferred stock earned dividends at 8.5% and were paid quarterly from January 31, 1993 through June 23, 1994. Each share of the Series A preferred stock was convertible into 56 shares of common stock. In June 1994, the Series A preferred stock was converted at par value into 2,800 shares of common stock. At December 31, 1996, no preferred stock was issued or outstanding.
Stock Offering -
On June 5, 1996, the company completed a secondary public offering of 3,700 new shares of its common stock. The net proceeds of $131,812 were used to develop, acquire and expand correctional and detention facilities.
Stock Split -
On June 5, 1996, the Board of Directors declared a two-for-one stock split of the company's common stock to be effective on July 2, 1996. An amount equal to the par value of the common shares outstanding as of July 2, 1996, was transferred from additional paid-in capital to the common stock account. On October 4, 1995, the Board of Directors declared a two-for-one stock split of the company's common stock to be effective on October 31, 1995. An amount equal to the par value of the common shares outstanding as of October 31, 1995, was transferred from additional paid-in capital to the common stock account. All references to number of shares and to per share data in the consolidated financial statements have been adjusted for these stock splits.
Stock Warrants -
The company has issued stock warrants to certain affiliated and unaffiliated parties for providing certain financing, consulting and brokerage services to the company and to stockholders as a dividend. Stock warrants outstanding at December 31, 1996, are as follows:
Each warrant entitles the warrant holder to four common shares upon exercise. The warrants are exercisable from the date of issuance except for the warrants issued September 4, 1992, which were exercisable beginning April 30, 1993. In 1996, the company extended the expiration date of the warrants issued June 23, 1994, from December 31, 1998, to December 31, 1999.
In 1996, 1,313 warrants were exercised at $8.50 per share. In 1995, 268 warrants were exercised at prices ranging from $7.14 to $8.50 per share. In 1995, the company purchased 60 warrants at the market price of $18 per share from a warrant holder.
Stock Option Plans -
The company has incentive and nonqualified stock option plans under which options may be granted to "key employees" as designated by the Board of Directors. The options are granted with exercise prices that equal market value on the date of grant. The options are exercisable after the later of two years from the date of employment or one year after the date of grant until ten years after the date of the grant.
The company's Board of Directors approved a stock repurchase program for up to an aggregate of 400 shares of the company's stock for the purpose of funding the employee stock options, stock ownership and stock award plans.
Stock option transactions relating to the company's incentive and nonqualified stock option plans are summarized below:
The weighted average fair value of options granted during 1996 and 1995 was $12.28 and $3.21 per option, respectively. The options outstanding at December 31, 1996, have exercise prices between $.96 and $33.13 and a weighted average remaining contractual life of 7 years.
In addition to the plans mentioned above, the company has a nonqualified stock option plan to encourage stock ownership by selected employees of the company. Pursuant to the plan, stock options may be granted to key employees upon authorization by the Board of
Directors. The aggregate number of options that may be granted under the plan is 1,440. As of December 31, 1996, 240 options were outstanding at an option price of $1.35 per share.
During 1995, the company authorized the issuance of 337 shares of common stock to certain key employees as a deferred stock award. The award becomes fully vested ten years from the date of grant based on continuous employment with the company. The company is expensing the $3,670 of awards over the vesting period.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. The company has adopted the disclosure-only provisions of SFAS 123. As a result, no compensation cost has been recognized for the company's stock option plans. Had compensation cost for the stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS 123, the company's net income and net
income per share would have been reduced to the pro forma amounts indicated below for the years ended December 31:
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the pro forma compensation cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Employee Stock Ownership Plan -
The company has an Employee Stock Ownership Plan whereby each employee of the company who is at least 18 years of age is eligible for membership in the plan as of January 1 of their first anniversary year in which they have completed at least one thousand hours of service.
Benefits, which become 40% vested after four years of service and 100% vested after five years of service, are paid on death, retirement or termination. The Board of Directors has discretion in establishing the amount of the company contributions. The company's contributions to the plan may be in the form of common stock, cash or other property. Contributions to the plan amounted to $2,086, $1,366 and $1,059 for the years ended December 31, 1996, 1995 and 1994, respectively.
12. REVENUES AND EXPENSES
Approximately 99% of the company's revenues for the years ended December 31, 1996, 1995 and 1994, relate to amounts earned from federal, state and local governmental management and transportation contracts.
The company had revenues of 21%, 23% and 17% from the federal government and 54%, 49% and 54% from state governments for the years ended December 31, 1996, 1995 and 1994, respectively. One state government had revenues of 16%, 18% and 24% for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, another state government had revenues of 11% for the year ended December 31, 1994.
Accounts receivable include $55,924 and $37,057 due from federal, state and local governments at December 31, 1996 and 1995, respectively. Accounts receivable and accounts payable at December 31, 1996, consist of the following:
Salaries and related benefits represented 63%, 58% and 54% of operating expenses for the years ended December 31, 1996, 1995 and 1994, respectively.
For the year ended December 31, 1996, the company recognized after-tax, development fee income of $1,629 related to a contract to design, construct and equip a detention facility.
13. INTERNATIONAL ALLIANCE
The company has entered into an International Alliance (the "Alliance") with Sodexho to pursue prison management business outside the United States. In conjunction with the Alliance, Sodexho purchased an equity position in the company by acquiring several instruments. In 1994, the company sold Sodexho 2,800 shares of common stock at $3.75 per share and a $7,000 convertible subordinated note bearing interest at 8.5%. Sodexho also received 1,100 warrants at $15.80 per warrant that expire December 1999. Each warrant entitles Sodexho to four common shares upon exercise. In consideration of the placement of the aforementioned securities, the company agreed to pay Sodexho $3,960 over a four-year period ending in 1998. These fees include debt issuance costs and private placement equity fees. These fees have been allocated to the various instruments and are charged to debt issuance costs or equity as the respective financings are completed. Sodexho is subject to a standstill agreement that limits their ownership to 25% in the company and has certain preemptive rights to retain its percentage ownership.
In 1995, Sodexho purchased 1,090 shares of common stock for $7.63 per share pursuant to their contractual preemptive right. Also during 1995, the company and Sodexho entered into a forward contract whereby Sodexho would purchase up to $20,000 of convertible subordinated notes at any time prior to December 1997. The notes will bear interest at LIBOR plus 1.35% and will be convertible into common shares at a conversion price of $6.83 per share.
In 1996, the company sold $20,000 of convertible notes to Sodexho pursuant to their contractual preemptive right. The notes bear interest at 7.5% and are convertible into common shares at a conversion price of $25.91 per share.
14. RELATED PARTY TRANSACTIONS
The company pays legal fees to a law firm of which one of the partners is a stockholder and a member of the Board of Directors of the company. Legal fees, including fees related to the company's mergers and acquisitions, paid to the law firm amounted to $683, $675 and $140 in 1996, 1995 and 1994, respectively.
15. COMMITMENTS AND CONTINGENCIES
The company leases certain facilities, office space and equipment under long-term operating leases expiring through 2001. Rental expense was approximately $2,786, $5,904 and $3,490 for the years ended December 31, 1996, 1995 and 1994, respectively. Minimum rental commitments for noncancelable leases are as follows:
The nature of the company's business results in claims and litigation alleging that the company is liable for damages arising from the conduct of its employees or others. In the opinion of management, there are no pending legal proceedings that would have a material effect on the consolidated financial position or results of operations of the company.
The company has an employment agreement with its chief executive officer through September 30, 1997. The agreement includes a non-compete agreement covering the same period and requires payments during the period if employment is terminated.
Each of the company's management contracts and the statutes of certain states require the maintenance of insurance. The company maintains various insurance policies including employee health, worker s compensation, automobile liability and general liability insurance. These policies are fixed premium policies with various deductible amounts that are self-funded by the company. Reserves are provided for estimated incurred claims within the deductible amounts.
The company guarantees $113 of a bank facility for CC Australia. The company has provided a $1,000 performance bond in connection with UKDS's management contract with the United Kingdom.
The company provides a limited guarantee related to a bond issue on the Eden Detention Center in Eden, Texas. The maximum obligation as of December 31, 1996 was $22,875. In the event the company is required to fund amounts pursuant to this limited guarantee, the company will obtain ownership rights to the facility.
16. EVENT SUBSEQUENT TO DECEMBER 31, 1996 (UNAUDITED)
On January 30, 1997, the company purchased the fixed and movable assets of a correctional treatment facility in Washington, D.C. for $52,000. The company has entered into additional agreements to manage this facility and lease it back to Washington, D.C. over a period of twenty years.
INDEX OF EXHIBITS
Exhibits marked with an * are filed herewith. Exhibits following exhibit number 10(kkkkk) are numbered beginning with 10.100. Other exhibits have previously been filed with the Commission and are incorporated herein by reference. Exhibits marked with a + are compensation plans required to be filed pursuant to Item 601(b)(10) of Regulation S-K.
21. The Company has the following six wholly-owned subsidiaries: CCA International, Inc., Technical and Business Institute of America, Inc., TransCor America, Inc., Concept Incorporated, Correction Management Affiliates, Inc. and Correctional Services Group, Inc.
23.* Consent of Arther Andersen LLP.
24.* Power of Attorney (Included on signature page).
________________________
(1) Incorporated herein by reference to exhibit of same number to Company's Registration Statement on Form S-1, filed August 15, 1986 (Reg. No. 33-8052).
(2) Incorporated herein by reference to exhibit of same number to Amendment No. 1 to the Company's Registration Statement on Form S-1, filed September 19, 1986 (Reg. No. 33-8052).
(3) Incorporated herein by reference to exhibit of same number to Amendment No. 2 to the Company's Registration Statement on Form S-1, filed October 1, 1986 (Reg. No. 33-8052).
(4) Incorporated herein by reference to Exhibit 4(b) to the Company's Registration Statement on Form S-8, filed March 16, 1987 (Reg. No. 33-12503).
(5) Incorporated herein by reference to Exhibit 10(z) to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1986 (File No. 0-15719).
(6) Incorporated herein by reference to Exhibit 10(cc) to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1986 (File No. 0-15719).
(7) Incorporated herein by reference to Exhibit A to the Company's definitive Proxy Statement relating to the 1988 Annual Meeting of Stockholders (File No. 0-15719).
(8) Incorporated herein by reference to Exhibit B to the Company's definitive Proxy Statement relating to the 1988 Annual Meeting of Stockholders (File No. 0-15719).
(9) Incorporated herein by reference to exhibit of same number to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1987 (File No. 0-15719).
(10) Incorporated herein by reference to Exhibit 10(cc) to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1987 (File No. 0-15719).
(11) Incorporated herein by reference to exhibit of the same number to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1988 (File No. 0-15719).
(12) Incorporated herein by reference to exhibit of the same number to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1989 (File No. 0-15719).
(13) Incorporated herein by reference to exhibit of the same number to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1990 (File No. 0-15719).
(14) Incorporated herein by reference to exhibit of the same number to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1991 (File No. 0-15719).
(15) Incorporated herein by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A, filed August 21, 1992 (File No. 0-15719).
(16) Incorporated herein by reference to exhibit of the same number to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1992 (File No. 0-15719).
(17) Incorporated herein by reference to exhibit of the same number to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1993 (File No. 0-15719).
(18) Incorporated herein by reference to Exhibit 2 to the Company's Report on Form 8-K filed June 30, 1994 (File No. 0-15719).
(19) Incorporated herein by reference to Exhibit 2 to the Company's Report on Form 8-K filed June 30, 1994 (File No. 0-15719).
(20) Incorporated herein by reference to Exhibit 1 to the Company's Report on Form 8-K filed June 30, 1994 (File No. 0-15719).
(21) Incorporated herein by reference to Exhibit 2 to the Company's Report on Form 8-K filed June 30, 1994 (File No. 0-15719).
(22) Incorporated herein by reference to Exhibit 3 to the Company's Report on Form 8-K filed June 30, 1994 (File No. 0-15719).
(23) Incorporated herein by reference to Exhibit 3 to the Company's Report on Form 8-K filed January 12, 1995 (File No. 1-13560).
(24) Incorporated herein by reference to exhibit of the same number to the Company's Annual Report on Form 10-K with respect to the fiscal year ended December 31, 1994 (File No. 1-13560).
(25) Incorporated herein by reference to Exhibit 2 to the Company's Report on Form 8-K filed May 10, 1995 (File No. 1-13560).
(26) Incorporated herein by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed July 20, 1995 (Reg. No. 33-61173).
(27) Incorporated herein by reference to Exhibit 1 the Company's Report on Form 8-K filed August 31, 1995 (File No. 1-13560).
(28) Incorporated herein by reference to exhibit of the same number to the Company's Annual Report in Form 10-K with respect to the fiscal year ended December 31, 1995 (File No. 1-13560).