SECURITIES AND EXCHANGE COMMISSION
Amendment No. 2
Wackenhut Corrections Corporation
Florida | 1520 | 65-0043078 | ||
(State or other jurisdiction of
incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
621 NW 53rd Street, Suite 700 Boca Raton, Florida 33487 (561) 893-0101 |
John J. Bulfin, Esq. 621 NW 53rd Street, Suite 700 Boca Raton, Florida 33487 (561) 893-0101 |
|
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices) |
(Name, address, including zip code, and telephone number, including area code, of agent for service) |
Copy to:
Stephen K. Roddenberry, Esq.
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
The Registrant hereby amends this Registration Statement on such dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this
prospectus is not complete and may be changed. We may not
exchange these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to exchange these securities and is
not soliciting an offer to exchange these securities in any
state where the offer or sale is not permitted. |
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 2003
Prospectus
Wackenhut Corrections Corporation
Offer to Exchange up to
for
$150,000,000 of 8 1/4% Senior Notes due 2013
Terms of the Exchange Offer
| We are offering to exchange $150,000,000 of our outstanding 8 1/4% Senior Notes due 2013, referred to as the old notes, for new notes with substantially identical terms that have been registered under the Securities Act. We will receive no proceeds from the exchange offer. | |
| We will exchange all old notes that you validly tender and do not validly withdraw before the exchange offer expires for an equal principal amount of new notes. | |
| The exchange offer will expire at 5:00 p.m., New York City time, 21 business days after commencement of the offer unless extended. | |
| Tenders of old notes may be withdrawn at any time prior to the expiration of the exchange offer. | |
| Each exchange of old notes for new notes will not be a taxable event for U.S. federal income tax purposes. |
Old 8 1/4% Senior Notes
On July 9, 2003, we issued and sold $150,000,000 of 8 1/4% Senior Notes due 2013. If you tender your old notes in the exchange offer, interest will cease to accrue before your new notes are issued. If you do not tender in the exchange offer, your old notes will continue to be subject to the same terms and restrictions except that we will not be required to register your old notes under the Securities Act.
Terms of the New 8 1/4% Senior Notes Offered in the Exchange Offer
Maturity
| The new notes will mature on July 15, 2013. |
Interest
| Interest on the new notes is payable on January 15 and July 15 of each year, beginning January 15, 2004. | |
| Interest will accrue from July 9, 2003. |
Ranking
| The new notes will be |
| our senior, unsecured obligations; | |
| senior in right of payment to all of our existing and future subordinated indebtedness; | |
| equal in right of payment with all of our existing and future unsecured, unsubordinated indebtedness; and | |
| effectively junior to any of our secured indebtedness, to the extent of the value of the assets securing the indebtedness, including indebtedness under our amended senior credit facility, and to the liabilities of our subsidiaries, including their trade payables. As of September 29, 2003, we had total secured indebtedness outstanding of approximately $120.0 million and our subsidiaries had total liabilities of approximately $58.6 million. Therefore, the new notes would have been effectively junior to a total amount of approximately $178.6 million as of that date. | |
See Risk Factors on page 14 for a discussion of factors you should consider before participating in the exchange offer.
These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is November 10, 2003.
This prospectus is part of a registration statement we filed with the Securities and Exchange Commission (the Commission). In making your investment decision, you should rely only on the information contained in this prospectus and in the accompanying letter of transmittal. We have not authorized anyone to provide you with any other information. If you receive any unauthorized information, you must not rely on it. We are not making an offer to sell these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.
Each broker-dealer registered as such under the Securities Exchange Act of 1934 that receives new notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the new notes. The letter of transmittal that accompanies this prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where the old notes were acquired by the broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of up to 180 days after the effective date of the registration statement of which this prospectus is a part, we will make this prospectus available to any broker-dealer for use in connection with any resale of new notes received by a broker-dealer for its own account. See Plan of Distribution.
i
TABLE OF CONTENTS
Page | ||||
PROSPECTUS SUMMARY
|
1 | |||
RISK FACTORS
|
14 | |||
FORWARD-LOOKING STATEMENTS
|
29 | |||
USE OF PROCEEDS
|
30 | |||
CAPITALIZATION
|
31 | |||
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
|
32 | |||
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
|
39 | |||
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
41 | |||
BUSINESS
|
56 | |||
MANAGEMENT
|
71 | |||
EXECUTIVE COMPENSATION
|
74 | |||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
|
79 | |||
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
|
81 | |||
DESCRIPTION OF AMENDED SENIOR CREDIT FACILITY
|
82 | |||
DESCRIPTION OF NEW NOTES
|
84 | |||
EXCHANGE OFFER
|
120 | |||
MATERIAL U.S. FEDERAL INCOME TAX
CONSIDERATIONS
|
129 | |||
PLAN OF DISTRIBUTION
|
135 | |||
LEGAL MATTERS
|
137 | |||
EXPERTS
|
137 | |||
WHERE YOU CAN FIND MORE INFORMATION
|
137 |
ii
PROSPECTUS SUMMARY
The following is a summary of the material information appearing elsewhere in this prospectus. This summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information contained elsewhere in this prospectus. You should carefully read this entire prospectus, including the financial statements and related notes and the risk factors set forth under Risk Factors, before making an investment decision with respect to the Notes. As used in this prospectus, the terms we, us, our and the Company refer to Wackenhut Corrections Corporation, its consolidated subsidiaries and its unconsolidated affiliates, unless otherwise expressly stated or the context otherwise requires.
As used in this prospectus and unless the context indicates otherwise, Notes refers, collectively, to (a) our 8 1/4% Senior Notes due 2013, also referred to as the old notes, and (b) our 8 1/4% Senior Exchange Notes due 2013, also referred to as the new notes.
Our Company
We are a leading provider of government-outsourced services specializing in the management of correctional, detention and mental health facilities. We believe that we are the second largest operator of privatized correctional and detention facilities in the world, with operations located in the United States, Australia, New Zealand and South Africa. We believe that we have a leading share of the privatized correctional and detention facilities management services market for the states of California, Florida and Texas, the three U.S. states with the largest inmate populations. As of September 29, 2003, we operated a total of 47 correctional, detention and mental health facilities and had over 36,000 beds under management or for which we had been awarded contracts. We maintained an average facility occupancy rate of over 97% and 99% for the fiscal year ended December 29, 2002 and the twenty-six weeks ended June 29, 2003, respectively. For the fiscal year ended December 29, 2002, we had consolidated revenues of $568.6 million and consolidated operating income of $27.9 million.
Our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities. We also develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency. Through these management and development services, we believe that we achieve significant cost savings in comparison to public sector costs, providing substantial privatization benefits to our government customers.
Under our correctional facility management services contracts, most of our government customers pay us on a per inmate per diem basis, with some of these contracts providing for minimum guaranteed payments regardless of actual occupancy levels. Certain of our contracts also provide for fixed fee payments. Generally, our management services contracts have rate adjustments for increased costs due to inflation. Our contract renewal rate over the last five years is 94%, the average length of our current customer relationships is six years, and 30 of our 47 current contracts are with government entities to whom we have been providing services for five years or more.
Our mental health facilities management services primarily involve the provision of acute mental health and related administrative services to mentally ill patients that have been placed under public sector supervision and care. At these mental health facilities, we employ psychiatrists, physicians, nurses, counselors, social workers and other trained personnel to deliver active psychiatric treatment which is designed to diagnose, treat and rehabilitate patients for community reintegration. Since 1998, we have operated what we believe is the only fully privatized state mental health facility in the U.S. at South Florida State Hospital. In
1
Competitive Strengths
We believe that we benefit from the following competitive strengths:
| our position as a global provider of privatized correctional and detention services with a strong industry reputation, 47 facilities under management and operations in the United States, Australia, New Zealand and South Africa; | |
| our regional operating structure which we believe allows us to more closely supervise and support our correctional and detention facilities and deliver more responsive customer service; | |
| our long-term relationships with federal and state government customers which we believe lead to higher contract renewal rates and provide us with a stable and predictable source of revenue and cash flow; | |
| our expertise in the design, construction and financing of high quality correctional, detention and mental health facilities which we believe helps us to retain existing customers and develop new ones; and | |
| our experienced, proven senior management team lead by our top three senior executives, which have over 45 years of combined industry experience, have worked together at our company for more than 12 years and have established a track record of growth and profitability. |
Business Strategy
Our primary business strategies are to:
| provide federal, state and local government agencies with high quality, essential services at a lower cost than they themselves could achieve; | |
| maintain a disciplined operating approach by, among other things: |
| managing our business on a contract by contract basis to maximize operating margins; | |
| avoiding the operation of certain juvenile and female correctional facilities which we believe may be prone to operational difficulties that may result in increased litigation, higher personnel costs and reduced profitability; | |
| not engaging in speculative facility development by building facilities only when we have a corresponding management contract award in place; | |
| refraining from doing business in certain international markets with a history of economic and political instability; |
| leverage our long-term relationships with government agencies to continue to grow our correctional, detention and mental health facilities management business and to become a preferred provider of complementary government-outsourced services; and | |
| use our position as a global provider of privatized correctional services to further penetrate international markets in which we currently operate and expand into new international markets which we deem attractive. |
2
Industry Overview
We believe that governmental agencies in the U.S. spent more than $50.0 billion on correctional and detention facilities and services in 2002. As of June 30, 2002, the total U.S. prison population exceeded 2.0 million for the first time, with only 6.1% of the federal and state population being outsourced to the private sector. We believe that the U.S. market is poised for both overall growth and increased privatization as a result of increasing incarceration rates, a growing 18 to 24 year-old at-risk male population, facility overcrowdings, governmental budgetary constraints and the desire by the public sector to provide higher quality services and performance accountability.
Increasing Prison Populations
According to the Bureau of Justice Statistics, the average annual growth rate of the prison population in the U.S. between December 1995 and June 2002 was 3.8%, with the growth rate declining slightly between June 2001 and June 2002 to 2.8%. The incarceration rate between June 2001 and June 2002 increased by 1.5%, after growing by 1.0% between December 2000 and December 2001. We believe that further growth could come from stricter sentencing guidelines and the projected growth of the 18 to 24 year-old at-risk male population, which is expected to increase by 6.5% from 2000 to 2005.
Overcrowding Pressure
As of December 31, 2001, 22 states and the federal prison system were operating between 1% and 37% above their capacity, with the federal prison system operating at 31% above capacity. Additionally, the Federal Bureau of Prisons projects that during fiscal year 2003, the federal governments prison population will reach 166,000 inmates, 35% above its projected capacity.
Budgetary Constraints
We believe that full or partial outsourcing of correctional and detention services will become a more compelling option for public officials due to increasing budgetary constraints at both the federal level and in many states. We believe that states that outsource a significant percentage of their inmate populations reduce the overall growth in their correctional spending.
Quality Improvements and Performance Accountability
We believe that private correctional and detention facilities provide superior operational quality as compared to government-operated facilities. Most correctional and detention services contracts include economic incentives for private operators to deliver high quality service, provide for continuous monitoring by government representatives and require accreditation by independent organizations such as the ACA for compliance with contract terms and industry standards. We believe these contractual incentives establish a high degree of accountability for private operators.
The Transactions
On July 9, 2003, we completed the following transactions, which we refer to as the Transactions.
Share Repurchase. We purchased all 12.0 million shares of our common stock owned by Group 4 Falck A/S, our majority shareholder, for $132.0 million in cash. Immediately following the share repurchase, we had 9,289,252 million shares of common stock issued and outstanding.
3
Amendment of Senior Credit Facility. We amended our existing $175.0 million senior credit facility. The amended $150.0 million senior credit facility consists of a $50.0 million, five-year revolving credit facility, with a $40.0 million sublimit for letters of credit, and a $100.0 million, six-year term loan. See Description of Amended Senior Credit Facility for more information.
Notes Offering. We offered $150.0 million aggregate principal amount of the old notes.
The following table sets forth the sources and uses of funds for the Transactions (in millions).
Sources | Uses | |||||||||
Cash on hand
|
$ | 15.7 |
Share repurchase
|
$ | 132.0 | |||||
Borrowings under our amended senior credit
facility
|
100.0 |
Refinancing of former senior credit facility
|
124.7 | |||||||
Offering of old notes
|
150.0 |
Fees and expenses of the Transactions
|
9.0 | |||||||
$ | 265.7 | $ | 265.7 | |||||||
The Sale of Our Joint Venture Interest in Premier Custodial Group Limited
On July 2, 2003, we sold our one-half interest in Premier Custodial Group Limited, our United Kingdom joint venture, which we refer to as PCG, to Serco Investments Limited, our joint venture partner, which we refer to as Serco, for approximately $80.0 million (on a pretax basis). For the twenty-six weeks ended June 29, 2003, PCG accounted for 3,573 of our beds under management, seven of our facilities under management and, for the twenty-six weeks ended June 29, 2003 and the fiscal year ended December 29, 2002, respectively, $1.7 million and $6.5 million of our equity in earnings of affiliates. In addition, for the fiscal year ended December 29, 2002, we received $1.6 million of dividends from equity affiliates through our interest in PCG. Under the terms of the indenture governing the Notes, we have an obligation to use the proceeds from the sale of our interest in PCG to reinvest in certain permitted businesses or assets, to repay indebtedness outstanding under the amended senior credit facility or to make an offer to repurchase the Notes.
We are incorporated under the laws of the State of Florida. Our principal executive offices are located at 621 NW 53rd Street, Suite 700, Boca Raton, Florida 33487. Our telephone number is (561) 893-0101.
We currently file periodic and other reports with the Commission. Information filed with the Commission is available on the Commissions web site at http://www.sec.gov. See Where You Can Find More Information.
4
The Exchange Offer
On July 9, 2003, we completed a private offering of the old notes. We entered into a registration rights agreement with the initial purchasers in the offering in which we agreed to deliver to you this prospectus and to use our best efforts to cause this registration statement to become effective under the Securities Act within 180 days after the date we issued the old notes.
Exchange Offer | We are offering to exchange new senior notes for our old senior notes. | |
Expiration Date | The exchange offer will expire at 5:00 p.m. New York City time, 21 business days after the commencement of the offer, unless we decide to extend it. | |
Condition to the Exchange Offer |
The registration rights agreement does not require us to accept old notes for exchange if the exchange offer or the making of any exchange by a holder of the old notes would violate any applicable law or interpretation of the staff of the Securities and Exchange Commission. A minimum aggregate principal amount of old notes being tendered is not a condition to the exchange offer. | |
Procedures for Tendering Old Notes | To participate in the exchange offer, you must complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, and transmit it together with all other documents required in the letter of transmittal, including the old notes that you wish to exchange, to The Bank of New York, as exchange agent, at the address indicated on the cover page of the letter of transmittal. In the alternative, you can tender your old notes by following the procedures for book-entry transfer described in this prospectus. | |
If your old notes are held through The Depository Trust Company and you wish to participate in the exchange offer, you may do so through the automated tender offer program of The Depository Trust Company. If you tender under this program, you will agree to be bound by the letter of transmittal that we are providing with this prospectus as though you had signed the letter of transmittal. | ||
If a broker, dealer, commercial bank, trust company or other nominee is the registered holder of your old notes, we urge you to contact that person promptly to tender your old notes in the exchange offer. | ||
For more information on tendering your old notes, please refer to the sections in this prospectus entitled Exchange Offer Terms of the Exchange Offer, Procedures for Tendering and Book-Entry Transfer. |
5
Guaranteed Delivery Procedures | If you wish to tender your old notes and you cannot get your required documents to the exchange agent on time, you may tender your old notes according to the guaranteed delivery procedures described in Exchange Offer Guaranteed Delivery Procedures. | |
Withdrawal of Tenders | You may withdraw your tender of old notes under the exchange offer at any time prior to the expiration date. To withdraw, you must have delivered a written or facsimile transmission notice of withdrawal to the exchange agent at its address indicated on the cover page of the letter of transmittal before 5:00 p.m. New York City time on the expiration date of the exchange offer. | |
Acceptance of Old Notes and Delivery of New Notes | If you fulfill all conditions required for proper acceptance of old notes, we will accept any and all old notes that you properly tender in the exchange offer on or before 5:00 p.m. New York City time on the expiration date. We will return any old notes that we do not accept for exchange to you without expense promptly after the expiration date. We will deliver the new notes promptly after the expiration date and acceptance of the old notes for exchange. Please refer to the section in this prospectus entitled Exchange Offer Terms of the Exchange Offer. | |
Fees and Expenses | We will bear all expenses related to the exchange offer. Please refer to the section in this prospectus entitled Exchange Offer Fees and Expenses. | |
Use of Proceeds | We will not receive any proceeds from the issuance of the new notes. We are making this exchange offer solely to satisfy our obligations under our registration rights agreement. | |
Appraisal Rights | Holders of old notes will not have dissenters rights or appraisal rights in connection with the exchange offer. | |
Resale of New Notes | Based on an interpretation by the Commission set forth in no-action letters issued to third parties, we believe that you may resell or otherwise transfer new notes issued in the exchange offer in exchange for old notes without restrictions under the federal securities laws if: | |
you are not our affiliate; | ||
you acquire the new notes in the ordinary course of your business; and | ||
you do not intend to participate in a distribution of the new notes. | ||
If you tender in the exchange offer with the intention of participating in any manner in a distribution of the new notes, you |
6
cannot rely on such interpretations by the staff of the Commission; and | ||
must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. | ||
Only broker-dealers that acquired the old notes as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives new notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must deliver a prospectus in connection with any resale of the new notes. | ||
Consequences of Failure to Exchange Old Notes | If you do not exchange your old notes in the exchange offer, you will no longer be able to require us to register the old notes under the Securities Act of 1933, except in the limited circumstances provided under our registration rights agreement. In addition, you will not be able to resell, offer to resell or otherwise transfer the old notes unless we have registered the old notes under the Securities Act of 1933, or unless you resell, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act of 1933. | |
U.S. Federal Income Tax Considerations | The exchange of the new notes for the old notes in the exchange offer should not be taxable events for U.S. federal income tax purposes. Please read Material U.S. Federal Income Tax Considerations. | |
Exchange Agent | We have appointed The Bank of New York as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent addressed as follows: 101 Barclay Street, 8W, New York, New York 10286. Eligible institutions may make requests by facsimile at (212) 815-5704. |
Terms of New 8 1/4% Senior Notes due 2013
The new notes will be identical to the old notes of the same issue except that the new notes are registered under the Securities Act of 1933 and will not have the transfer restrictions or registration rights applicable to the old notes. The new notes will evidence the same indebtedness as the old notes, and the same indenture will govern the new notes and the old notes.
For more information concerning the new notes, please refer to the section of this document entitled Description of New Notes.
7
Issuer | Wackenhut Corrections Corporation (WCC) | |
Notes offered | $150,000,000 principal amount of 8 1/4% Senior Notes due 2013. | |
Maturity | July 15, 2013. | |
Interest rate | 8 1/4% per year (calculated using a 360-day year). | |
Interest payment dates | Each January 15 and July 15, beginning on January 15, 2004. Interest will accrue from the issue date of the Notes. | |
Ranking | The Notes will be general, unsecured, senior obligations of WCC. Accordingly they will rank: | |
senior to any of our future subordinated indebtedness; | ||
equal in right of payment with all of our existing and future unsecured, unsubordinated indebtedness; and | ||
effectively junior to any of our secured indebtedness, to the extent of the value of the assets securing the indebtedness, including indebtedness under our amended senior credit facility, and to the liabilities of our subsidiaries, including their trade payables. | ||
As of September 29, 2003, we had total secured indebtedness outstanding of approximately $120.0 million and our subsidiaries had total liabilities of approximately $58.6 million. Therefore, the new notes would have been effectively junior to a total amount of $178.6 million as of that date. | ||
The indenture governing the Notes allows us to incur an unlimited amount of additional indebtedness and to secure indebtedness, including any indebtedness incurred under credit facilities, provided that we meet the fixed charge coverage ratio test set forth in the indenture. See the covenant described under Description of New Notes Certain Covenants Incurrence of Indebtedness and Issuance of Preferred Stock. | ||
Optional redemption | After July 15, 2008, we may redeem some or all of the Notes at the redemption prices listed in the Description of New Notes section under the sub-heading Optional Redemption, plus accrued and unpaid interest, and liquidated damages, if any, to the redemption date. | |
At any time on or prior to July 15, 2006, we can choose to redeem up to 35% of the Notes with money that we raise in one or more equity offerings, as long as: | ||
we pay 108.250% of the principal amount of the Notes, plus accrued and unpaid interest, and liquidated damages, if any, to the redemption date; | ||
we redeem the Notes within 90 days of completing the equity offering; and |
8
at least 65% of the aggregate principal amount of Notes originally issued remains outstanding after such redemption. | ||
Change of control offer | If a change of control of our company occurs, we must, subject to certain conditions, give holders the opportunity to sell their Notes to us at 101% of their principal amount, plus accrued and unpaid interest, and liquidated damages, if any, to the date of purchase. | |
We might not be able to pay the required price for Notes presented to us at the time of a change of control because: | ||
we might not have enough funds at the time; or | ||
the terms of our amended senior credit facility may prevent us from purchasing the Notes. | ||
Asset sale proceeds | If we or certain of our subsidiaries engage in asset sales, we generally must either invest the net proceeds from such sales in our business within a period of time, prepay indebtedness under our amended senior credit facility or make an offer to purchase a principal amount of the Notes equal to the excess net proceeds. The purchase price of the Notes will be 100% of their principal amount plus accrued and unpaid interest, and liquidated damages, if any, to the date of purchase. | |
Certain indenture provisions | The indenture governing the Notes contains covenants that, among other things, limit our and our restricted subsidiaries ability to: | |
incur additional indebtedness; | ||
pay dividends or distributions on our capital stock or repurchase our capital stock or prepay subordinated indebtedness; | ||
issue preferred stock of subsidiaries; | ||
make certain types of investments; | ||
guarantee other indebtedness; | ||
create liens on our assets; | ||
enter into sale and leaseback transactions; | ||
enter into transactions with affiliates; | ||
create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us; | ||
merge or consolidate with another company; and | ||
transfer and sell assets. | ||
These covenants are subject to a number of important limitations and exceptions. See Description of New Notes. |
9
Risk factors | Investing in the Notes involves risks. See Risk Factors beginning on page 14 of this prospectus for a description of the material risks you should consider before investing in the Notes. | |
Transfer Restrictions; Absence of a Public Market for the Notes | The new notes generally will be freely transferable, but will also be new securities for which there will not initially be a market. There can be no assurance that any market for the new notes will develop. There will be no public market for any old notes not tendered in this exchange offer. |
10
Summary Historical Financial and Other Data
The following summarizes certain of our consolidated historical financial and operating data. The consolidated statement of operations data and other financial data for the fiscal years ended December 31, 2000, December 30, 2001 and December 29, 2002 and the consolidated balance sheet data as of December 29, 2002 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data and other financial data for the twenty-six week periods ended June 30, 2002 and June 29, 2003 and the consolidated balance sheet data as of June 29, 2003 were derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited statement of operations data, balance sheet data and other financial data on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the data for such periods. The results for the twenty-six weeks ended and as of June 29, 2003 are not necessarily indicative of results for the full year.
The information contained in this summary should be read in conjunction with the Unaudited Pro Forma Condensed Consolidated Financial Statements, Selected Consolidated Financial and Other Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto appearing elsewhere in this prospectus. All amounts are presented in thousands except operational data.
Fiscal year ended | Twenty-six weeks ended | ||||||||||||||||||||
December 31, | December 30, | December 29, | June 30, | June 29, | |||||||||||||||||
2000 | 2001 | 2002 | 2002 | 2003 | |||||||||||||||||
Statement of operations data:
|
|||||||||||||||||||||
Revenues
|
$ | 535,557 | $ | 562,073 | $ | 568,612 | $ | 281,374 | $ | 298,461 | |||||||||||
Operating expenses
|
486,884 | 503,547 | 496,497 | 246,648 | 252,840 | ||||||||||||||||
General and administrative
|
21,122 | 24,423 | 32,146 | 16,401 | 19,050 | ||||||||||||||||
Depreciation and amortization
|
8,639 | 9,919 | 12,093 | 4,924 | 6,919 | ||||||||||||||||
Operating income
|
18,912 | 24,184 | 27,876 | 13,401 | 19,652 | ||||||||||||||||
Interest and other income
|
6,745 | 4,278 | 4,794 | 2,116 | 2,544 | ||||||||||||||||
Interest expense
|
(4,801 | ) | (3,597 | ) | (3,737 | ) | (1,674 | ) | (6,091 | ) | |||||||||||
Income before income taxes and equity in earnings
of affiliates
|
20,856 | 24,865 | 28,933 | 13,843 | 16,105 | ||||||||||||||||
Provision for income taxes
|
8,352 | 9,706 | 12,652 | 6,475 | 6,692 | ||||||||||||||||
Income before equity in earnings of affiliates
|
12,504 | 15,159 | 16,281 | 7,368 | 9,413 | ||||||||||||||||
Equity in earnings of affiliates
|
4,490 | 4,220 | 5,220 | 3,220 | 2,058 | ||||||||||||||||
Net income
|
$ | 16,994 | $ | 19,379 | $ | 21,501 | $ | 10,588 | $ | 11,471 | |||||||||||
As of | As of | |||||||
December 29, | June 29, | |||||||
2002 | 2003 | |||||||
Balance sheet data:
|
||||||||
Cash and cash equivalents
|
$ | 35,240 | $ | 58,955 | ||||
Total assets
|
402,658 | 434,279 | ||||||
Total long-term debt, including current portion(1)
|
125,000 | 124,688 | ||||||
Common stock
|
212 | 213 | ||||||
Shareholders equity
|
152,642 | 169,293 |
11
Fiscal year ended | Twenty-six weeks ended | |||||||||||||||||||
December 31, | December 30, | December 29, | June 30, | June 29, | ||||||||||||||||
2000 | 2001 | 2002 | 2002 | 2003 | ||||||||||||||||
Other financial data:
|
||||||||||||||||||||
Cash flow from (used in) operating activities
|
$ | 25,906 | $ | 29,479 | $ | 22,243 | $ | 2,628 | $ | 22,234 | ||||||||||
Cash flow from (used in) investing activities
|
(20,946 | ) | (3,897 | ) | (159,252 | ) | (1,776 | ) | (4,019 | ) | ||||||||||
Cash flow from (used in) financing activities
|
(9,921 | ) | (11,150 | ) | 129,245 | 897 | 2,215 | |||||||||||||
EBITDA(2)
|
32,682 | 38,323 | 45,189 | 21,545 | 28,629 | |||||||||||||||
Ratio of earnings to fixed charges(3)
|
1.85 | x | 1.99 | x | 2.29 | x | 1.66 | x | 1.72 | x | ||||||||||
Operational data:
|
||||||||||||||||||||
Facilities in operation(4)(6)
|
51 | 59 | 59 | |||||||||||||||||
Compensated resident days(5)
|
10,572,093 | 11,068,912 | 10,850,003 | 5,436,616 | 5,542,365 | |||||||||||||||
Revenue producing beds(6)
|
31,218 | 33,925 | 35,428 | 33,812 | 37,544 | |||||||||||||||
Average occupancy
|
97.7 | % | 96.5 | % | 97.4 | % | 97.0 | % | 99.1 | % |
(1) | Our presentation of total long-term debt, including current portion, excludes non recourse debt. We had $31.4 and $39.7 million of non-recourse debt outstanding as of December 29, 2002 and June 29, 2003, respectively. | |
(2) | We define EBITDA as earnings before interest expense, net, income taxes and depreciation and amortization. However, other companies may calculate EBITDA differently than we do. EBITDA is not a measure of performance under generally accepted accounting principles, or GAAP, and it should not be considered as an alternative to cash flow from operating activities as a measure of liquidity or as an alternative to net income as an indicator of our operating performance, or any other measure of performance derived in accordance with GAAP. EBITDA is presented because management believes that EBITDA it is a useful measure of our liquidity, as it provides investors, security analysts, lenders and other interested third parties with an additional basis to evaluate our ability to incur and service debt and to fund capital expenditures. In evaluating EBITDA for any given period, we believe that investors should consider, among other things, the amount by which EBITDA exceeds interests costs, how EBITDA compares to principal repayments on debt and how EBITDA compares to capital expenditures. The components of EBITDA such as revenues and operating expenses, and the variability of such components over time, should also be considered. This data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. A reconciliation of EBITDA to cash flow from operating activities computed in accordance with GAAP is as follows: | |
Fiscal year ended | Twenty-six weeks ended | |||||||||||||||||||
December 31, | December 30, | December 29, | June 30, | June 29, | ||||||||||||||||
2000 | 2001 | 2002 | 2002 | 2003 | ||||||||||||||||
Net cash provided by operating activities
|
$ | 25,906 | $ | 29,479 | $ | 22,243 | $ | 2,628 | $ | 22,234 | ||||||||||
Depreciation and amortization
|
(8,639 | ) | (9,919 | ) | (12,093 | ) | (4,924 | ) | (6,919 | ) | ||||||||||
Decrease(increase) in deferred tax asset
|
1,952 | 670 | 711 | (76 | ) | 2,203 | ||||||||||||||
Tax benefit related to employee stock options
|
| (315 | ) | (1,081 | ) | (1,060 | ) | (113 | ) | |||||||||||
Gain on sale of loans receivable
|
641 | | | | | |||||||||||||||
Equity in earnings of affiliates
|
4,490 | 4,220 | 5,220 | 3,220 | 2,058 | |||||||||||||||
Amortization of deferred revenue
|
2,488 | 3,192 | 2,673 | 1,378 | 952 | |||||||||||||||
Net change in other non current assets and
liabilities
|
3,325 | (3,867 | ) | (9,252 | ) | (7,873 | ) | (1,525 | ) | |||||||||||
Net change in working capital requirements
|
(13,169 | ) | (4,081 | ) | 13,080 | 17,295 | (7,419 | ) | ||||||||||||
Net income
|
16,994 | 19,379 | 21,501 | 10,588 | 11,471 | |||||||||||||||
Provision for income tax
|
8,352 | 9,706 | 12,652 | 6,475 | 6,692 | |||||||||||||||
Interest income/expense, net
|
(1,303 | ) | (681 | ) | (1,057 | ) | (442 | ) | 3,547 | |||||||||||
Depreciation and amortization
|
8,639 | 9,919 | 12,093 | 4,924 | 6,919 | |||||||||||||||
EBITDA
|
$ | 32,682 | $ | 38,323 | $ | 45,189 | $ | 21,545 | $ | 28,629 | ||||||||||
Our calculation of EBITDA includes the following expenses:
Fiscal year ended | Twenty-six weeks ended | |||||||||||||||||||
December 31, | December 30, | December 29, | June 30, | June 29, | ||||||||||||||||
2000 | 2001 | 2002 | 2002 | 2003 | ||||||||||||||||
Payments under our former operating lease facility
|
$ | 5,354 | $ | 7,880 | $ | 5,110 | $ | 2,544 | $ | | ||||||||||
Change in control costs
|
| | 1,890 | | 1,531 |
Payments under our former operating lease facility relate to our use of four properties previously subject to lease agreements under that operating lease facility. The operating lease facility was terminated in December 2002 when we purchased the four properties and therefore, we no longer incur lease expense for those four properties. |
12
Change in control costs represent certain compensation related expenses triggered under executive employment agreements by the acquisition of The Wackenhut Corporation, our former parent company, which we refer to as TWC, by Group 4 Falck. These costs will continue to be incurred through May 2004. |
(3) | Ratio of earnings to fixed charges is calculated by dividing income before income taxes and equity in earnings of affiliates plus fixed charges by fixed charges. Fixed charges consist of interest expense (including the interest element of rental expense) and amortization of deferred financing fees. | |
(4) | Facilities in operation includes a court escort services contract and a home detention monitoring contract, each in the United Kingdom for all periods. | |
(5) | Compensated resident days are calculated as follows: for per diem rate facilities, the number of beds occupied by residents on a daily basis during the period; and for fixed rate facilities, the design capacity of the facility multiplied by the number of days the facility was in operation during the fiscal year. Amounts exclude compensated resident days for our United Kingdom and South Africa facilities. | |
(6) | The sale of our interest in PCG on July 2, 2003 resulted in a reduction of 10 facilities operated by PCG, including those discussed in footnote 4 above, and 3,919 of our beds under management. |
13
RISK FACTORS
You should carefully consider the risk factors set forth below, as well as the other information contained in this prospectus, before deciding whether to invest in the Notes.
Risks Related to Our High Level of Indebtedness
Our significant level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt service obligations. |
We have a significant amount of indebtedness. Our total consolidated long-term indebtedness as of September 29, 2003 was $270.0 million, excluding non recourse debt of $38.9 million. In addition, as of September 29, 2003, we had $25.5 million outstanding in letters of credit under the revolving loan portion of our former senior credit facility. As a result, as of that date, we would have had the ability to borrow an additional approximately $4.5 million under the revolving loan portion of our amended senior credit facility, subject to our satisfying the relevant borrowing conditions under those facilities with respect to the incurrence of additional indebtedness.
Our substantial indebtedness could have important consequences to you. For example, it could:
| make it more difficult to satisfy our obligations with respect to the Notes; | |
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes; | |
| limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; | |
| increase our vulnerability to adverse economic and industry conditions; | |
| place us at a competitive disadvantage compared to competitors that may be less leveraged; and | |
| limit our ability to borrow additional funds or refinance existing indebtedness on favorable terms. |
If we are unable to meet our debt service obligations, we may need to reduce capital expenditures, restructure or refinance our indebtedness, including the Notes, obtain additional equity financing or sell assets. We may be unable to restructure or refinance our indebtedness, obtain additional equity financing or sell assets on satisfactory terms or at all. In addition, our ability to incur additional indebtedness will be restricted by the terms of our amended senior credit facility and the indenture governing the Notes.
Despite current indebtedness levels, we may still incur more indebtedness. This could further exacerbate the risks described above. |
The terms of the indenture governing the Notes and our amended senior credit facility restrict our ability to incur but do not prohibit us from incurring significant additional indebtedness in the future. In addition, we may refinance all or a portion of our indebtedness, including borrowings under our amended senior credit facility, and incur more indebtedness as a result. If new indebtedness is added to our and our subsidiaries current debt levels, the related risks that we and they now face could intensify. As of September 29, 2003, we would have had the ability to borrow an additional approximately $4.5 million under the revolving loan portion of our amended senior credit facility.
14
The indenture governing the Notes and our amended senior credit facility impose significant operating and financial restrictions which may adversely affect our ability to operate our business. |
The indenture governing the Notes and our amended senior credit facility impose significant operating and financial restrictions on us and certain of our subsidiaries, which we refer to as restricted subsidiaries. These restrictions limit our ability to, among other things:
| incur additional indebtedness; | |
| pay dividends and or distributions on our capital stock or repurchase our capital stock, purchase, redeem or retire our capital stock, prepay subordinated indebtedness and make investments; | |
| issue preferred stock of subsidiaries; | |
| make certain types of investments; | |
| guarantee other indebtedness; | |
| create liens on our assets; | |
| transfer and sell assets; | |
| create or permit restrictions on the ability of our restricted subsidiaries to make dividends or make other distributions to us; | |
| enter into sale/leaseback transactions; | |
| enter into transactions with affiliates; and | |
| merge or consolidate with another company or sell all or substantially all of our assets. |
These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. In addition, our amended senior credit facility will require us to maintain specified financial ratios and satisfy certain financial covenants, including maintaining maximum senior and total leverage ratios, a minimum fixed charge coverage ratio, a minimum net worth and a limit on the amount of our annual capital expenditures. Some of these financial ratios become more restrictive over the life of the amended senior credit facility. We may be required to take action to reduce our indebtedness or to act in a manner contrary to our business objectives to meet these ratios and satisfy these covenants. Our failure to comply with any of the covenants under our amended senior credit facility and the indenture governing the Notes could cause an event of default under such documents and result in an acceleration of all of our outstanding indebtedness. If all of our outstanding indebtedness were to be accelerated, we likely would not be able to simultaneously satisfy all of our obligations under such indebtedness, which would materially adversely affect our ability to make payments under the Notes.
Servicing our indebtedness will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. |
Our ability to make payments on our indebtedness, including the Notes, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
Our business may not be able to generate sufficient cash flow from operations or future borrowings may not be available to us under our amended senior credit facility or otherwise in an amount sufficient to enable us to pay our indebtedness, including the Notes, or new debt securities, or to fund our other liquidity needs. We may need to refinance all or a portion of our
15
Because portions of our indebtedness have floating interest rates, a general increase in interest rates will adversely affect cash flows. |
Our amended senior credit facility bears interest at a variable rate. To the extent our exposure to increases in interest rates is not eliminated through interest rate protection agreements, such increases will adversely affect our cash flows. We do not currently have any interest rate protection agreements in place to protect against interest rate fluctuations related to the amended senior credit facility. Our estimated total annual interest expense based on borrowings outstanding as of September 29, 2003 is approximately $22.1 million, $5.0 million of which is interest expense attributable to borrowings of $120.0 million currently outstanding under the amended senior credit facility. As a result, for every one percent increase in the interest rate applicable to the amended senior credit facility, our total annual interest expense will increase by $1.2 million.
In addition, effective September 18, 2003, we entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. The agreements, which have payment and expiration dates that coincide with the payment and expiration terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, we receive a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while we make a variable interest rate payment to the same counterparties equal to the six-month London Interbank Offered Rate plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. As a result, for every one percent increase in the interest rate applicable to the swap agreements, our total annual interest expense will increase by $0.5 million.
We will depend on distributions from our subsidiaries to make payments on our indebtedness, including the Notes. These distributions may not be made. |
We generate a substantial portion of our revenues from distributions on the equity interests we hold in our subsidiaries. Therefore, our ability to meet our payment obligations on our indebtedness, including the Notes, is substantially dependent on the earnings of our subsidiaries and the payment of funds to us by our subsidiaries as dividends, loans, advances or other payments. Our subsidiaries are separate and distinct legal entities and are not obligated to make funds available for payment of the Notes or our other indebtedness in the form of loans, distributions or otherwise. Our subsidiaries ability to make any such loans, distributions or other payments to us will depend on their earnings, business results, the terms of their existing and any future indebtedness, tax considerations and legal restrictions. If our subsidiaries do not make such payments to us, our ability to pay amounts due under the Notes will be materially adversely affected. For the fiscal year ended December 29, 2002 and the twenty-six weeks ended June 29, 2003, our subsidiaries accounted for 26.9% and 23.0% of our consolidated revenues, respectively, and, as of December 29, 2002 and June 29, 2003, our subsidiaries accounted for 21.6% and 23.1% of our consolidated total assets, respectively.
Risks Related to the Notes
The Notes are effectively subordinated to our senior secured indebtedness, which could impair our ability to pay amounts due under the Notes. |
The Notes are unsecured and therefore are effectively subordinated to our secured indebtedness, including the amended senior credit facility, to the extent of the value of the assets securing such indebtedness. As of September 29, 2003, borrowings under our amended senior credit facility were approximately $120.0 million. In addition, the indenture governing the Notes allows us to incur an unlimited amount of additional indebtedness and to secure indebtedness, including any
16
Our subsidiaries have not guaranteed the Notes and therefore the Notes will be effectively subordinated in right of payment to any and all indebtedness and other liabilities, including trade payables, of our subsidiaries. |
None of our subsidiaries are obligors or guarantors of the Notes. Therefore, the claims of creditors of such subsidiaries, including the claims of trade creditors of such subsidiaries, the claims of preferred shareholders of such subsidiaries (if any) and, with respect to certain of our domestic subsidiaries that have guaranteed our obligations under the amended senior credit facility, the claims of lenders under the amended senior credit facility, generally will have priority with respect to the assets and earnings of such subsidiaries over the claims of our creditors. As a result, the Notes are effectively subordinated to all existing and future liabilities of our subsidiaries and your right to receive payment under the Notes will be structurally junior to all of such liabilities. In the event of a bankruptcy, liquidation, winding up, reorganization or similar proceeding involving a subsidiary, our right to receive assets of that subsidiary and your consequent right to participate in a distribution of those assets to satisfy our obligations under the Notes may be materially adversely affected. As of September 29, 2003, our subsidiaries had total indebtedness of $38.9 million, and approximately $19.7 million of other liabilities, including trade payables but excluding intercompany obligations, liabilities under guarantees of our obligations, and other obligations not reflected in our consolidated financial statements.
We may not be able to repurchase the Notes in the event of a change of control because the terms of our indebtedness or lack of funds may prevent us from doing so. |
Upon a change of control, each holder of the Notes will have the right to require us to repurchase their Notes at 101% of their principal amount, plus accrued and unpaid interest, and, liquidated damages, if any, to the date of repurchase. The terms of our amended senior credit facility limit our ability to repurchase the Notes in the event of a change of control. Any future agreement governing any of our indebtedness may contain similar restrictions and provisions. Accordingly, it is possible that restrictions in our amended senior credit facility or other indebtedness that may be incurred in the future will not allow the required repurchase of Notes upon a change of control. Even if such repurchase is permitted by the terms of our then existing indebtedness, we may not have sufficient funds available to satisfy our repurchase obligations.
The Notes may not be enforceable because of fraudulent conveyance laws. |
The Notes may be subject to review under U.S. federal bankruptcy law or relevant state fraudulent conveyance laws if a bankruptcy case or lawsuit is commenced by or on behalf of our unpaid creditors. Generally, under these laws, if in such a case or lawsuit a court were to find that at the time we issued the Notes:
| we issued the Notes with the intent of hindering, delaying or defrauding current or future creditors; or | |
| we received less than reasonably equivalent value of fair consideration for issuing the Notes and we: |
| were insolvent or were rendered insolvent by reason of the issuance of the Notes; | |
| were engaged, or were about to engage, in a business or transaction for which our remaining assets constituted unreasonably small capital to carry on our business; or |
17
| intended to incur, or believed that we would incur indebtedness beyond our ability to pay such indebtedness as it matured (as all of the foregoing terms are defined in or interpreted under the relevant fraudulent transfer or conveyance statutes); |
then the court could void the Notes or subordinate the amounts owing under the Notes to our presently existing or future indebtedness or take other actions detrimental to you.
The measure of insolvency for purposes of the foregoing considerations will vary depending upon the law of the jurisdiction that is being applied in any such proceeding. Generally, a company would be considered insolvent if, at the time it incurred indebtedness:
| it could not pay its debt or contingent liabilities as they become due; | |
| the sum of its debts (including contingent liabilities) is greater than its assets, at fair valuation; or | |
| the present fair saleable value of its assets is less than the amount required to pay the probable liability on its total existing debts and liabilities (including contingent liabilities) as they become absolute and matured. |
If a Note is voided as a fraudulent conveyance or is found to be unenforceable for any other reason, you will not have a claim against us.
We believe that at the time of the issuance of the old notes, we were not insolvent or rendered insolvent by the issuance of the old notes, and that we were not lacking sufficient capital to run our business effectively or unable to pay obligations on the old notes as they mature or become due. This belief is based upon our analyses of internal cash flow projections and estimated values of our assets and liabilities. However, a court passing on the same questions might not reach the same conclusions.
Your ability to transfer the Notes may be limited by the absence of a trading market. |
There is no established trading market for the Notes, and neither the old notes nor the new notes will be listed on any securities exchange or quoted on any automated dealer quotation system. We expect the new notes to be eligible for trading in the PORTAL Market.
The initial purchasers have indicated to us that they intend to make a market in the old notes and the new notes, but they are not obliged to do so. The initial purchasers may discontinue any market making in the old notes or the new notes at any time in their sole discretion. Accordingly, there is a risk that a liquid market may not develop for any of the old notes or the new notes, that you may not be able to sell your old notes or the new notes at a particular time and that the prices that you receive when you sell may not be favorable. Future trading prices of the old notes or the new notes will depend on many factors, including, our operating performance and financial condition, prevailing interest rates and the market for similar securities. Historically, the market for noninvestment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the old notes and the new notes. Any such disruptions may adversely affect the ability of holders of old notes and new notes to dispose of them for a profit or at all.
There could be negative consequences to you if you do not exchange your old notes for new notes. |
Any old notes tendered and exchanged in the exchange offer will reduce the aggregate principal amount of old notes outstanding. Because we anticipate that most holders will elect to exchange their old notes for new notes due to the absence of most restrictions on the resale of new notes, we anticipate that the liquidity of the market for any old notes remaining outstanding after the exchange offer may be substantially limited. As a result of making the exchange offer, we will have fulfilled our obligations under the registration rights agreement relating to the old notes.
18
Any old notes that are not exchanged for new notes will remain restricted securities under the Securities Act. Accordingly, the old notes may be resold only:
| to us or one of our subsidiaries; | |
| to a qualified institutional buyer: | |
| to an institutional accredited investor; | |
| to a party outside the United States under Regulation S under the Securities Act; | |
| under an exemption from registration provided by Rule 144 under the Securities Act; or | |
| under an effective registration statement. |
Risks Related to Our Business and Industry
Our results of operations are dependent on revenues generated by our prisons and detention facilities, which are subject to the following risks associated with the corrections and detention industry. |
We are subject to the termination or non-renewal of our government contracts, which could adversely affect our results of operations and liquidity, including our ability to secure new facility management contracts from other government customers. Governmental agencies typically may terminate a facility contract at any time without cause or use the possibility of termination to negotiate a lower fee for per diem rates. They also generally have the right to renew facility contracts at their option. Notwithstanding any contractual renewal option, as of July 1, 2003, 17 of our facility management contracts were scheduled to expire on or before December 29, 2003. These contracts represented 27.4% and 28.3%, respectively, of our consolidated revenues for the twenty-six weeks ended June 29, 2003 and for the fiscal year ended December 29, 2002. See Business Facilities and Facility Management Contracts. Some of these contracts may not be renewed by the corresponding governmental agency. In addition, these and any other contracting agencies may determine not to exercise renewal options with respect to any of our contracts in the future. In the event any of our management contracts are terminated or are not renewed on favorable terms or otherwise, we may not be able to obtain additional replacement contracts. The non-renewal or termination of any of our contracts with governmental agencies could materially adversely affect our financial condition, results of operations and liquidity, including our ability to secure new facility management contracts from other government customers.
In Australia, the Department of Immigration, Multicultural and Indigenous Affairs, which we refer to as DIMIA, recently entered into a contract with a division of Group 4 Falck for the management and operation of Australias immigration centers, services which we have provided since 1997 through our Australian subsidiary. We are currently in the process of transitioning the management and operation of the DIMIA centers to the division of Group 4 Falck and expect that the transition will be fully completed by February 23, 2004, when our contract with DIMIA is scheduled to expire. Once the division of Group 4 Falck begins to fully operate the DIMIA centers, we will no longer recognize any further revenue from the DIMIA contract. For the twenty-six weeks ended June 29, 2003, the contract with DIMIA represented approximately 9.6% of our consolidated revenues. We do not have any lease obligations related to our contract with DIMIA. During the thirteen weeks ended September 29, 2003, we incurred increased costs of approximately $3.0 million related to the transitioning of the DIMIA contract to the division of Group 4 Falck, primarily related to liability insurance expenses. We may incur additional costs related to the transition in the future.
19
We will continue to be responsible for certain real property payments even if our underlying facility management contracts terminate, which could adversely affect our profitability. Eleven of our facilities are leased from Correctional Properties Trust, an independent, publicly-traded REIT which we refer to as CPV. These leases have an initial ten-year term with varying renewal periods at our option, and a total average remaining initial term of 5.7 years. The facility management contracts underlying these leases generally have a term ranging from one to five years, however, they are terminable by the governmental entity at will. In the event that a facility management contract is terminated or expires and is not renewed prior to the expiration of the corresponding lease term for the facility, we will continue to be liable for the related lease payments to CPV. Our average annual obligations and aggregate total remaining obligations for lease payments under the eleven CPV leases are approximately $23.5 million and $124.3 million, respectively. Because these lease payments would not be offset by revenue from an active facility management contract, they could represent a material ongoing loss. If we are unable to find a replacement management contract or an alternative use for the facility, the loss could continue until the expiration of the lease term then in effect, which could adversely affect our profitability.
For example, during 2000, our management contract at the 276-bed Jena Juvenile Justice Center in Jena, Louisiana was discontinued by the mutual agreement of the parties. Despite the discontinuation of the management contract, we remain responsible for payments on our underlying lease of the inactive facility. We incurred an operating charge of $1.1 million during the year ended December 29, 2002, related to our lease of the inactive facility that represented the expected costs to be incurred under the lease until a sublease or alternative use could be initiated. We are continuing our efforts to find a sublease or alternative correctional use for the facility. However, parties that we previously believed might sublease the facility prior to early 2004 have recently either indicated that they do not have an immediate need for the facility or did not enter into a binding commitment for a sublease of the facility. As a result, our management has determined that it is unlikely that we will sublease the facility or find an alternative correctional use for the facility prior to the expiration of the current provision for anticipated loss in early 2004 and we have incurred an additional provision for operating loss of approximately $5.0 million during the thirteen weeks ended September 29, 2003. This additional operating charge both covers our anticipated losses under the lease for the facility until a sublease is in place and provides an estimated discount to sublease the facility to prospective sublessees. If we are unable to sublease or find an alternative correctional use for the facility prior to January 2006, an additional operating charge will be required. The remaining obligation on the Jena lease through the contractual term of 2009, exclusive of the reserve for losses through early 2006, is approximately $7.0 million.
In addition, we own four properties on which we operate correctional and detention facilities. Our purchase of these properties was financed through borrowings under our former senior credit facility which have now been incorporated into our amended senior credit facility. In the event that an underlying facility management contract for one or more of these properties terminates, we would still be responsible for servicing the indebtedness incurred to purchase those properties.
Our growth depends on our ability to secure contracts to develop and manage new correctional and detention facilities, the demand for which is outside our control. Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional and detention facilities, because contracts to manage existing public facilities have not to date typically been offered to private operators. Public sector demand for new facilities may decrease and our potential for growth will depend on a number of factors we cannot control, including overall economic conditions, crime rates and sentencing patterns in jurisdictions in which we operate, governmental and public acceptance of the concept of privatization and the number of facilities available for privatization. For example, in the first six months of 2002, the number of prisoners in privately operated facilities decreased by 6.1%. A continuation of this trend could have a material adverse effect on our financial condition or results of operations.
20
The demand for our facilities and services could be adversely affected by the relaxation of criminal enforcement efforts, leniency in conviction and sentencing practices, or through the decriminalization of certain activities that are currently proscribed by criminal laws. For instance, any changes with respect to the criminalization of drugs and controlled substances or a loosening of immigration laws could affect the number of persons arrested, convicted, sentenced and incarcerated, thereby potentially reducing demand for correctional facilities to house them. Similarly, reductions in crime rates could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities.
We may not be able to secure financing and desirable locations for new facilities, which could adversely affect our results of operations and future growth. In certain cases, the development and construction of facilities by us is subject to obtaining construction financing. Such financing may be obtained through a variety of means, including without limitation, the sale of tax-exempt or taxable bonds or other obligations or direct governmental appropriations. The sale of tax-exempt or taxable bonds or other obligations may be adversely affected by changes in applicable tax laws or adverse changes in the market for tax-exempt or taxable bonds or other obligations.
Moreover, certain jurisdictions, including California where we have a significant amount of operations, recently have required successful bidders to make a significant capital investment in connection with the financing of a particular project, a trend that will require us to have sufficient capital resources to compete effectively for facility management contacts. We may not be able to obtain these capital resources when needed. Additionally, our success in obtaining new awards and contracts may depend, in part, upon our ability to locate land that can be leased or acquired under favorable terms. Otherwise desirable locations may be in or near populated areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site. Our inability to secure financing and desirable locations for new facilities could adversely affect our results of operations and future growth.
We depend on a limited number of governmental customers for a significant portion of our revenues. The loss of, or a significant decrease in business from, these customers could seriously harm our financial condition and results of operations. We currently derive, and expect to continue to derive, a significant portion of our revenues from a limited number of governmental agencies. The loss of, or a significant decrease in, business from the Bureau of Prisons, the U.S. Immigration and Naturalization Service now known as the Bureau of Immigration and Customs Enforcement, which we refer to as the INS, or the U.S. Marshals Service or various state agencies could seriously harm our financial condition and results of operations. The three federal governmental agencies with correctional and detention responsibilities, the Bureau of Prisons, INS and the Marshals Service, accounted for approximately 18.8% of our total consolidated revenues for the twenty-six weeks ended June 29, 2003, with the Bureau of Prisons accounting for approximately 10.6% of our total consolidated revenues for such period, the Marshals Service accounting for approximately 4.6% of our total consolidated revenues for such period and the INS accounting for approximately 3.6% of our total consolidated revenues for such period. We expect to continue to depend upon these federal agencies and a relatively small group of other governmental customers for a significant percentage of our revenues.
A decrease in occupancy levels could cause a decrease in revenue and profitability. While a substantial portion of our cost structure is generally fixed, a significant portion of our revenues are generated under facility management contracts which provide for per diem payments based upon daily occupancy. We are dependent upon the government agencies with which we have contracts to provide inmates for our managed facilities. We cannot control occupancy levels at our managed facilities. Under a per diem rate structure, a decrease in our occupancy rates could cause a decrease in revenue and profitability. When combined with relatively fixed costs for operating each facility, regardless of the occupancy level, a decrease in occupancy levels could have a material adverse effect on our profitability.
21
Competition for inmates may adversely affect the profitability of our business. We compete with government entities and other private operators on the basis of cost, quality and range of services offered, experience in managing facilities, and reputation of management and personnel. Barriers to entering the market for the management of correctional and detention facilities may not be sufficient to limit additional competition in our industry. In addition, our government customers may assume the management of a facility currently managed by us upon the termination of the corresponding management contract or, if such customers have capacity at the facilities which they operate, they may take inmates currently housed in our facilities and transfer them to government-operated facilities. Since we are paid on a per diem basis with no minimum guaranteed occupancy under most of our contracts, the loss of such inmates and resulting decrease in occupancy would cause a decrease in both our revenues and our profitability.
We are dependent on government appropriations, which may not be made on a timely basis or at all. Our cash flow is subject to the receipt of sufficient funding of and timely payment by contracting governmental entities. If the contracting governmental agency does not receive sufficient appropriations to cover its contractual obligations, it may terminate our contract or delay or reduce payment to us. Any delays in payment, or the termination of a contract, could have a material adverse effect on our cash flow and financial condition, which may make it difficult to satisfy our payment obligations on our indebtedness, including the Notes, in a timely manner. In addition, as a result of, among other things, recent economic developments, federal, state and local governments have encountered, and may continue to encounter, unusual budgetary constraints. As a result, a number of state and local governments are under pressure to control additional spending or reduce current levels of spending. Accordingly, we may be requested in the future to reduce our existing per diem contract rates or forego prospective increases to those rates. In addition, it may become more difficult to renew our existing contracts on favorable terms or at all.
Public resistance to privatization of correctional and detention facilities could result in our inability to obtain new contracts or the loss of existing contracts, which could have a material adverse effect on our business, financial condition and results of operations. The management and operation of correctional and detention facilities by private entities has not achieved complete acceptance by either governments or the public. Some governmental agencies have limitations on their ability to delegate their traditional management responsibilities for correctional and detention facilities to private companies and additional legislative changes or prohibitions could occur that further increase these limitations. In addition, the movement toward privatization of correctional and detention facilities has encountered resistance from groups, such as labor unions, that believe that correctional and detention facilities should only be operated by governmental agencies. Changes in dominant political parties could also result in significant changes to previously established views of privatization. Increased public resistance to the privatization of correctional and detention facilities in any of the markets in which we operate, as a result of these or other factors, could have a material adverse effect on our business, financial condition and results of operations.
Adverse publicity may negatively impact our ability to retain existing contracts and obtain new contracts. Our business is subject to public scrutiny. Any negative publicity about an escape, riot or other disturbance or perceived poor conditions at a privately managed facility may result in publicity adverse to us and the private corrections industry in general. Any of these occurrences or continued trends may make it more difficult for us to renew existing contracts or to obtain new contracts or could result in the termination of an existing contract or the closure of one of our facilities, which could have a material adverse effect on our business.
We may incur significant start-up and operating costs on new contracts before receiving related revenues, which may impact our cash flows and not be recouped. When we are awarded a contract to manage a facility, we may incur significant start-up and operating expenses, including the cost of constructing the facility, purchasing equipment and staffing the facility, before we
22
Failure to comply with extensive government regulation and unique contractual requirements could have an material adverse effect on our business, financial condition or results of operations. The industry in which we operate is subject to extensive federal, state and local regulations, including educational, environmental, health care and safety regulations, which are administered by many regulatory authorities. Some of the regulations are unique to the corrections industry, and the combination of regulations affects all areas of our operations. Facility management contracts typically include reporting requirements, supervision and on-site monitoring by representatives of the contracting governmental agencies. Corrections officers and juvenile care workers are customarily required to meet certain training standards and, in some instances, facility personnel are required to be licensed and are subject to background investigations. Certain jurisdictions also require us to award subcontracts on a competitive basis or to subcontract with businesses owned by members of minority groups. We may not always successfully comply with these and other regulations to which we are subject, and failure to comply can result in material penalties or the non-renewal or termination of facility management contracts. In addition, changes in existing regulations could require us to substantially modify the manner in which we conduct our business and, therefore, could have a material adverse effect on us.
In addition, private prison managers are increasingly subject to government legislation and regulation attempting to restrict the ability of private prison managers to house certain types of inmates, such as inmates from other jurisdictions or inmates at medium or higher security levels. Legislation has been enacted in several states, and has previously been proposed in the United States House of Representatives, containing such restrictions. Although we do not believe that existing legislation will have a material adverse effect on us, future legislation may have such an effect on us.
Government agencies may investigate and audit our contracts and, if any improprieties are found, we may be required to refund revenues we have received, to forego anticipated revenues and we may be subject to penalties and sanctions, including prohibitions on our bidding in response to Requests for Proposals, or RFPs, from governmental agencies to manage correctional facilities. Governmental agencies we contract with have the authority to audit and investigate our contracts with them. As part of that process, government agencies may review our performance of the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. For contracts that actually or effectively provide for certain reimbursement of expenses, if an agency determines that we have improperly allocated costs to a specific contract, we may not be reimbursed for those costs, and we could be required to refund the amount of any such costs that have been reimbursed. If a government audit asserts improper or illegal activities by us, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with certain governmental entities. Any adverse determination could adversely impact our ability to bid in response to RFPs in one or more jurisdictions.
We may face community opposition to facility location, which may adversely affect our ability to obtain new contracts. Our success in obtaining new awards and contracts sometimes depends, in part, upon our ability to locate land that can be leased or acquired, on economically favorable terms, by us or other entities working with us in conjunction with our proposal to construct 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. When we select the intended project site, we attempt to conduct business in communities where
23
Our business operations expose us to various liabilities for which we may not have adequate insurance. The nature of our business exposes us to various types of third-party legal claims, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, personnel or prisoners, including damages arising from a prisoners escape or from a disturbance or riot at a facility. In addition, our management contracts generally require us to indemnify the governmental agency against any damages to which the governmental agency may be subject in connection with such claims or litigation. We maintain insurance coverage for these types of claims, except for claims relating to employment matters and medical malpractice claims relating to our mental health facilities, for which we carry no insurance. Accordingly, any losses relating to employment matters or medical malpractice claims relating to our mental health facilities could have a material adverse effect on our business, financial condition or results of operations.
Claims for which we are insured that have an occurrence date of October 1, 2002 or earlier are handled by TWC and are fully insured up to an aggregate limit of between $25.0 million and $50.0 million, depending on the nature of the claim. With respect to claims for which we are insured that have an occurrence date of October 2, 2002 or later, we have a $1.0 million deductible and are insured up to an aggregate limit of between $5.0 million and $50.0 million, depending on the nature of the claim.
In addition, since the events of September 11, 2001, and due to concerns over corporate governance and recent corporate accounting scandals, liability and other types of insurance have become more difficult and costly to obtain. Unanticipated additional insurance costs could adversely impact our results of operations and cash flows, and the failure to obtain or maintain any necessary insurance coverage could have a material adverse effect on our business, financial condition or results of operations.
We are defending a wage and hour lawsuit filed in California state court by ten current and former employees. The employees are seeking certification of a class which would encompass all our current and former California correctional officers in certain selected posts. Discovery is underway and the court has yet to hear the plaintiffs certification motion. We are unable to estimate the potential loss exposure due to the current procedural posture of the lawsuit. While the plaintiffs in this case have not quantified their claim of damages and the outcome of the matters discussed above cannot be predicted with certainty, based on information known to date, our management believes that the ultimate resolution of these matters, if settled unfavorably to us, could have a material adverse effect on our financial position, operating results and cash flows. We are uninsured for any damages or costs we may incur as a result of this lawsuit, including the expenses of defending the lawsuit. We are vigorously defending our rights in this action.
We may not be able to obtain or maintain the insurance levels required by our government contracts. Our government contracts require us to obtain and maintain specified insurance levels. The occurrence of any events specific to our company or to our industry, or a general rise in insurance rates, could substantially increase our costs of obtaining or maintaining the levels of insurance required under our government contracts. If we are unable to obtain or maintain the required insurance levels, our ability to win new government contracts, renew government
24
Our international operations expose us to risks which could materially adversely affect our financial condition and results of operations. We face risks associated with our operations outside the U.S. These risks include, among others, political and economic instability, exchange rate fluctuations, taxes, duties and the laws or regulations in those foreign jurisdictions in which we operate. In the event that we experience any difficulties arising from our operations in foreign markets, our business, financial condition and results of operations may be materially adversely affected. For the twenty-six weeks ended June 29, 2003 and the fiscal year ended December 29, 2002, respectively, our international operations accounted for approximately 21.0% and 20.6% of our consolidated revenues.
We conduct certain of our operations through joint ventures, which may lead to disagreements with our joint venture partners and adversely affect our interest in the joint ventures. |
We conduct substantially all of our operations in South Africa through joint ventures with third parties and may enter into additional joint ventures in the future. Joint venture agreements generally provide that the joint venture partners will equally share voting control on all significant matters to come before the joint venture. Our joint venture partners may have interests that are different from ours which may result in conflicting views as to the conduct of the business of the joint venture. In the event that we have a disagreement with a joint venture partner as to the resolution of a particular issue to come before the joint venture, or as to the management or conduct of the business of the joint venture in general, we may not be able to resolve such disagreement in our favor and such disagreement could have a material adverse effect on our interest in the joint venture or the business of the joint venture in general.
We are dependent upon our senior management and our ability to attract and retain sufficient qualified personnel. |
We are dependent upon the continued service of each member of our senior management team, including George C. Zoley, our Chairman and Chief Executive Officer, Wayne H. Calabrese, our Vice Chairman and President, and John G. ORourke, our Chief Financial Officer. The unexpected loss of any of these individuals could materially adversely affect our business, financial condition or results of operations. We do not maintain key-man life insurance to protect against the loss of any of these individuals.
In addition, the services we provide are labor-intensive. When we are awarded a facility management contract or open a new facility, we must hire operating management, correctional officers and other personnel. The success of our business requires that we attract, develop and retain these personnel. Our inability to hire sufficient qualified personnel on a timely basis or the loss of significant numbers of personnel at existing facilities could have a material effect on our business, financial condition or results of operations.
Our profitability may be materially adversely affected by inflation. |
Many of our facility management contracts provide for fixed management fees or fees that increase by only small amounts during their terms. While a substantial portion of our cost structure is generally fixed, if, due to inflation or other causes, our operating expenses, such as costs relating to personnel, utilities, insurance, medical and food, increase at rates faster than increases, if any, in our facility management fees, then our profitability could be materially adversely affected.
25
Various risks associated with the ownership of real estate may increase costs, expose us to uninsured losses and adversely affect our financial condition and results of operations. |
Our ownership of correctional and detention facilities subjects us to risks typically associated with investments in real estate. Investments in real estate, and in particular, correctional and detention facilities, are relatively illiquid and, therefore, our ability to divest ourselves of one or more of our facilities promptly in response to changed conditions is limited. Investments in correctional and detention facilities, in particular, subject us to risks involving potential exposure to environmental liability and uninsured loss. Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. In addition, although we maintain insurance for many types of losses, there are certain types of losses, such as losses from earthquakes, riots and acts of terrorism, which may be either uninsurable or for which it may not be economically feasible to obtain insurance coverage, in light of the substantial costs associated with such insurance. As a result, we could lose both our capital invested in, and anticipated profits from, one or more of the facilities we own. Further, it is possible to experience losses that may exceed the limits of insurance coverage.
Risks related to facility construction and development activities may increase our costs related to such activities. |
When we are engaged to perform construction and design services for a facility, we typically act as the primary contractor and subcontract with other companies who act as the general contractors. As primary contractor, we are subject to the various risks associated with construction (including, without limitation, shortages of labor and materials, work stoppages, labor disputes and weather interference) which could cause construction delays. In addition, we are 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, even though we require general contractors to post construction bonds and insurance. Under such contracts, we are ultimately liable for all late delivery penalties and cost overruns.
The rising cost and increasing difficulty of obtaining adequate levels of surety credit on favorable terms could adversely affect our operating results. |
We are often required to post bid or performance bonds issued by a surety company as a condition to bidding on or being awarded a facility management contract. Availability and pricing of these surety commitments is subject to general market and industry conditions, among other factors. Recent events in the economy have caused the surety market to become unsettled, causing many reinsurers and sureties to reevaluate their commitment levels and required returns. As a result, surety bond premiums generally are increasing. If we are unable to effectively pass along the higher surety costs to our customers, any increase in surety costs could adversely affect our operating results. In addition, we may not continue to have access to surety credit or be able to secure bonds economically, without additional collateral, or at the levels required for any potential facility development or contract bids. If we are unable to obtain adequate levels of surety credit on favorable terms, we would have to rely upon letters of credit under our amended senior credit facility, which would entail higher costs even if such borrowing capacity was available when desired, and our ability to bid for or obtain new contracts could be impaired.
We may not be able to successfully transition key services previously provided by our former parent company, which may adversely affect our financial results. |
We have historically been reliant upon TWC for various services including payroll, tax, data processing, internal auditing, treasury, cash management, insurance, information technology and human resource services. During 2002, we transitioned all of these services in-house with the exception of information technology support services, which TWC has agreed to provide through
26
Our former independent public accountant, Arthur Andersen LLP, has been found guilty of federal obstruction of justice charges and you are unlikely to be able to exercise effective remedies against such firm in any legal action. |
Although we have dismissed Arthur Andersen as our independent public accountants and engaged Ernst & Young, LLP, our consolidated financial statements as of December 31, 2000 and December 30, 2001, and for the fiscal years then ended were audited by Arthur Andersen LLP. On March 14, 2002, Arthur Andersen was indicted on federal obstruction of justice charges arising from the federal governments investigation of Enron Corporation. On June 15, 2002, a jury returned with a guilty verdict against Arthur Andersen following a trial. In light of the jury verdict and the underlying events, on August 31, 2002 Arthur Andersen ceased practicing before the Commission. However, we are including herein the consolidated financial statements audited by Arthur Andersen as of and for the fiscal years ended December 31, 2000 and December 30, 2001.
Arthur Andersen has not performed any procedures in connection with this exchange offer. In addition, Arthur Andersen has not consented to the inclusion of their report in this prospectus, and we have dispensed with the requirement to file their consent in reliance on Rule 437a under the Securities Act. Because Arthur Andersen has not consented to the inclusion of their report in this prospectus, you may not be able to recover against Arthur Andersen under Section 11 of the Securities Act for any untrue statement of a material fact contained in the financial statements audited by Arthur Andersen or any omissions to state a material fact required to be stated in those financial statements.
Moreover, as a public company, we are required to file with the Commission periodic financial statements audited or reviewed by an independent public accountant. The Commission has said that it will continue accepting financial statements audited by Arthur Andersen on an interim basis so long as a reasonable effort is made to have Arthur Andersen reissue its reports and to obtain a manually signed accountants report from Arthur Andersen. Arthur Andersen has informed us that it is no longer able to reissue its audit reports because both the partner and the audit manager who were assigned to our account have left the firm. In addition, Arthur Andersen is unable to perform procedures to assure the continued accuracy of its report on our audited financial statements included in this prospectus. Arthur Andersen will also be unable to perform such procedures or to provide other information or documents that would customarily be received by us in connection with financings or other transactions, including consents and comfort letters. As a result, we may encounter delays, additional expense and other difficulties in future financings. Any resulting delay in accessing or inability to access the public capital markets could have a material adverse effect on our business, financial condition or results of operations.
In addition, Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144) addresses financial accounting and reporting for the impairment or disposal of long-lived assets and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS 144 broadens the scope of defining discontinued operations. Under the provisions of SFAS 144, the identification and classification of a facility as held for sale or the termination of any of our material facility management contracts, by expiration or otherwise, would result in the classification of the operating results of such facility as a discontinued operation, so long as the financial results can be clearly identified, and so long as we do not have any significant continuing involvement in the operations of the component after the disposal or termination transaction. In
27
28
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this prospectus, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, anticipate, intend, plan, believe, seek, estimate or continue or the negative of such words or variations of such words and similar expressions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements and we can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements, or cautionary statements, include, but are not limited to:
| our ability to timely build and/or open facilities as planned, profitably manage such facilities and successfully integrate such facilities into our operations without substantial additional costs; | |
| the instability of foreign exchange rates, exposing us to currency risks in Australia, New Zealand and South Africa, or other countries in which we may choose to conduct our business; | |
| an increase in labor rates beyond that which was budgeted; | |
| our ability to expand our correctional and mental health services; | |
| our ability to win management contracts for which we have submitted proposals and to retain existing management contracts; | |
| our ability to raise new project development capital given the often short-term nature of the customers commitment to use newly developed facilities; | |
| our ability to find a customer for our Jena, Louisiana Facility and/or to sub-lease or coordinate the sale of the facility with its owner, Correctional Properties Trust, which we refer to as CPV; | |
| our ability to accurately project the size and growth of the domestic and international privatized corrections industry; | |
| our ability to estimate the governments level of utilization of privatization; | |
| our ability to obtain future financing at competitive rates; | |
| our exposure to general liability and workers compensation insurance costs; | |
| our ability to maintain occupancy rates at our facilities; | |
| our ability to manage health related insurance costs and medical malpractice liability claims; | |
| the ability of our government customers to secure budgetary appropriations to fund their payment obligations to us; | |
| our ability to effectively internalize functions and services previously provided by The Wackenhut Corporation, our former parent company; and | |
| those factors disclosed under Risk Factors and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. |
We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this prospectus.
29
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the registration rights agreement. We will not receive any cash proceeds from the issuance of the new notes in the exchange offer. In consideration for issuing the new notes as contemplated by this prospectus, we will receive old notes in a like principal amount. The form and terms of the new notes are identical in all respects to the form and terms of the old notes, except the new notes do not include certain transfer restrictions. Old notes surrendered in exchange for the new notes will be retired and cancelled and will not be reissued. Accordingly, the issuance of the new notes will not result in any change in our outstanding indebtedness.
30
CAPITALIZATION
The following table sets forth our unaudited consolidated cash and cash equivalents and capitalization as of June 29, 2003 (1) on an actual basis and (2) on a pro forma basis as if the Transactions and the sale of our interest in PCG had occurred on that date. See Summary Historical and Pro Forma Financial and Other Data, Use of Proceeds, Unaudited Pro Forma Condensed Consolidated Financial Statements and Selected Consolidated Financial and Other Data.
As of June 29, 2003 | |||||||||
Actual | Pro Forma | ||||||||
(in thousands) | |||||||||
Cash and cash equivalents
|
$ | 58,955 | $ | 95,701 | |||||
Long-term debt, including current portion
|
|||||||||
Former senior term loan
|
124,688 | | |||||||
Amended senior term loan
|
| 100,000 | |||||||
Offering of the old notes
|
| 150,000 | |||||||
124,688 | 250,000 | ||||||||
Non recourse debt(1)
|
39,684 | 39,684 | |||||||
Shareholders equity
|
169,293 | 82,585 | |||||||
Total capitalization
|
$ | 333,645 | $ | 372,269 | |||||
(1) | Our wholly-owned Australian subsidiary financed the development of a facility with long-term debt obligations which are non recourse to us. Any obligations or liabilities of the subsidiary relating to this long-term debt are matched by a corresponding commitment from the government of the State of Victoria. |
31
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
The following unaudited pro forma condensed consolidated financial statements are based on our historical consolidated financial statements included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial statements give effect to (1) the Transactions and (2) the sale of our interest in PCG, assuming a price for the sale of our interest in PCG of $80.7 million, on a pretax basis.
The unaudited pro forma condensed consolidated balance sheet has been prepared as if the Transactions and the sale of our interest in PCG occurred on June 29, 2003, and the pro forma condensed consolidated statements of operations have been prepared as if the Transactions and the sale of our interest in PCG occurred on December 31, 2001 for the fiscal year ended December 29, 2002, and for the twenty-six weeks ended June 29, 2003.
The unaudited pro forma condensed consolidated financial statements are based upon a number of assumptions and estimates, are subject to uncertainties, are presented for informational purposes only and do not purport to be indicative of the actual results of operations or financial condition that would have occurred had the transactions described above in fact occurred on the dates indicated, nor do they purport to be indicative of the results of operations or financial condition that we may achieve in the future. In the opinion of our management, all adjustments necessary to present fairly such unaudited pro forma condensed consolidated financial statements have been made.
The unaudited pro forma condensed consolidated financial statements should be read in conjunction with our historical consolidated financial statements and the notes thereto included elsewhere in this prospectus and the information contained under the captions Managements Discussion and Analysis of Financial Condition and Results of Operations, Use of Proceeds, Capitalization, and Selected Consolidated Financial and Other Data.
32
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
Adjustments | ||||||||||||||||||
for the sale | ||||||||||||||||||
Adjustments | of our | |||||||||||||||||
for the | interest in | |||||||||||||||||
Actual | Transactions | PCG | Pro Forma | |||||||||||||||
Assets | ||||||||||||||||||
Current assets
|
||||||||||||||||||
Cash and cash equivalents
|
$ | 58,955 | $ | (15,688 | )(A) | $ | 52,434 | (G) | $ | 95,701 | ||||||||
Accounts receivable
|
88,095 | | | 88,095 | ||||||||||||||
Deferred income tax asset
|
8,426 | | | 8,426 | ||||||||||||||
Other
|
7,598 | 7,048 | (B) | 14,646 | ||||||||||||||
Total current assets
|
163,074 | (8,640 | ) | 52,434 | 206,868 | |||||||||||||
Property and equipment, net
|
205,119 | | | 205,119 | ||||||||||||||
Investments in and advances to affiliates
|
21,349 | | (14,746 | )(H) | 6,603 | |||||||||||||
Deferred income tax asset
|
1,058 | | 9,556 | (I) | 10,614 | |||||||||||||
Direct finance lease receivable
|
39,164 | | | 39,164 | ||||||||||||||
Other non current assets
|
4,515 | | | 4,515 | ||||||||||||||
$ | 434,279 | $ | (8,640 | ) | $ | 47,244 | $ | 472,883 | ||||||||||
Liabilities and Shareholders Equity | ||||||||||||||||||
Current liabilities
|
||||||||||||||||||
Accounts payable
|
$ | 15,296 | $ | | $ | | $ | 15,296 | ||||||||||
Accrued payroll and related taxes
|
16,074 | | | 16,074 | ||||||||||||||
Accrued expenses
|
44,649 | | | 44,649 | ||||||||||||||
Current portion of deferred revenue
|
1,811 | | | 1,811 | ||||||||||||||
Current portion of long-term debt and non
recourse debt
|
1,770 | (250 | )(C) | | 1,520 | |||||||||||||
Total current liabilities
|
79,600 | (250 | ) | | 79,350 | |||||||||||||
Deferred revenue
|
7,316 | | | 7,136 | ||||||||||||||
Other
|
15,648 | | | 15,648 | ||||||||||||||
Long-term debt
|
||||||||||||||||||
Senior secured credit facility
|
123,438 | (24,438 | )(C) | | 99,000 | |||||||||||||
Senior unsecured notes
|
| 150,000 | (D) | | 150,000 | |||||||||||||
Nonrecourse debt
|
39,164 | | | 39,164 | ||||||||||||||
Shareholders equity
|
||||||||||||||||||
Preferred stock
|
| | | | ||||||||||||||
Common stock
|
213 | | | 213 | ||||||||||||||
Additional paid-in capital
|
63,815 | | | 63,815 | ||||||||||||||
Treasury stock
|
| (132,000 | )(E) | (132,000 | ) | |||||||||||||
Retained earnings
|
122,808 | (1,952 | )(F) | 33,946 | (J) | 154,802 | ||||||||||||
Accumulated other comprehensive loss
|
(17,543 | ) | | 13,298 | (K) | (4,245 | ) | |||||||||||
Total shareholders equity
|
169,293 | (133,952 | ) | 47,244 | 82,585 | |||||||||||||
$ | 434,279 | $ | (8,640 | ) | $ | 47,244 | $ | 472,883 | ||||||||||
33
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(A) Reflects the use of $15,688 of our cash which was combined with the net proceeds from the offering of the Notes and borrowings under the amended senior credit facility to effect the repurchase of 12,000 shares of our common stock from Group 4 Falck, refinance $125,000 of borrowings under our former senior credit facility and pay related fees and expenses.
(B) Reflects (1) the estimated $6,000 for fees and expenses related to the issuance of $150,000 aggregate principal amount of the Notes, (2) the estimated $3,000 of fees and expenses related to our amended senior credit facility and (3) a writeoff of $1,952 of unamortized loan issuance costs relating to our former senior credit facility. The fees related to the offering of the Notes will be capitalized and amortized over the term of the Notes. The fees related to the amended senior credit facility will be amortized over six years.
(C) Reflects a reduction of borrowings related to the refinancing of our former senior credit facility upon entering into the amended senior credit facility.
(D) Reflects the issuance of $150,000 aggregate principal amount of the Notes.
(E) Reflects the repurchase of 12,000 shares of our common stock for $132,000 from Group 4 Falck.
(F) Reflects a charge to the statement of operations to reduce the unamortized loan issuance costs related to our former senior credit facility.
(G) Reflects the after tax proceeds from the sale of our interest in PCG, calculated as follows:
Proceeds from sale of our interest in PCG
|
$ | 80,668 | ||
Estimated tax from gain on the sale of our
interest in PCG
|
(28,234 | ) | ||
$ | 52,434 | |||
(H) Reflects the elimination of our net investment in PCG as a result of the sale.
(I) Reflects the elimination of a deferred tax liability provided for undistributed income in PCG.
(J) Reflects the gain on the sale of our interest in PCG as follows:
Proceeds from the sale of our interest in PCG
|
$ | 80,668 | ||
Investment in PCG
|
(14,746 | ) | ||
Elimination of Deferred Tax Liability
|
9,556 | |||
Recognition of unrealized loss on PCGs
derivative instruments
|
(13,298 | ) | ||
Estimated tax from gain on the sale of our
interest in PCG
|
(28,234 | ) | ||
$ | 34,946 | |||
(K) Reflects the recognition of the unrealized loss on PCGs derivative instruments as a result of the sale of our interest in PCG.
34
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
Adjustments | |||||||||||||||||
for the sale | |||||||||||||||||
Adjustments | of our | ||||||||||||||||
for the | interest in | ||||||||||||||||
Actual | Transactions | PCG | Pro Forma | ||||||||||||||
Revenues
|
$ | 298,461 | $ | | $ | | $ | 298,461 | |||||||||
Operating expense
|
252,840 | | | 252,840 | |||||||||||||
Depreciation and amortization
|
6,919 | | | 6,919 | |||||||||||||
General and administrative expense
|
19,050 | | | 19,050 | |||||||||||||
Operating income
|
19,652 | | | 19,652 | |||||||||||||
Interest income
|
2,544 | | | 2,544 | |||||||||||||
Interest expense
|
(6,091 | ) | (5,088 | )(A) | | (11,179 | ) | ||||||||||
Income before income taxes and equity in earnings
of affiliates
|
16,105 | (5,088 | ) | | 11,018 | ||||||||||||
Provision for income taxes
|
6,692 | (1,984 | )(B) | | 4,708 | ||||||||||||
Income before equity in earnings of affiliates
|
9,413 | (3,104 | ) | | 6,310 | ||||||||||||
Equity in earnings of affiliates
|
2,058 | | (1,743 | )(D) | 315 | ||||||||||||
Net income
|
$ | 11,471 | $ | (3,104 | ) | $ | (1,743 | ) | $ | 6,625 | |||||||
Earnings per share
|
|||||||||||||||||
Basic
|
$ | 0.54 | $ | 0.72 | |||||||||||||
Diluted
|
$ | 0.54 | $ | 0.71 | |||||||||||||
Basic weighted average shares outstanding
|
21,260 | (12,000 | )(C) | 9,260 | |||||||||||||
Diluted weighted average shares outstanding
|
21,368 | (12,000 | )(C) | 9,368 | |||||||||||||
35
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
(A) Reflects the net adjustment to interest expense related to the following: (1) additional interest expense associated with the issuance of $150,000 aggregate principal amount of the Notes at an interest rate of 8.25%, (2) interest expense related to $100,000 of borrowings under our amended senior credit facility, assuming an interest rate of 4.20%, (3) elimination of interest expense related to the refinancing of $125,000 of borrowings under our former senior credit facility at an interest rate of 6.0%, (4) amortization of loan issuance costs associated with the amended senior credit facility and (5) amortization of loan issuance costs associated with the offering of the old notes.
Interest on the Notes
|
$ | 6,188 | ||
Interest on the amended senior credit facility
|
2,100 | |||
Reduction in interest on the former senior credit
facility
|
(3,750 | ) | ||
Amortization of debt issuance costs on the
amended senior credit facility
|
250 | |||
Amortization of debt issuance costs on the Notes
|
300 | |||
$ | 5,088 | |||
For each .25% change in the interest rate on the amended senior credit facility, annual interest expense on the amended senior credit facility would change by $250.
In addition, upon completion of the Transactions, we wrote-off unamortized loan issuance costs of approximately $2.0 million related to our former senior credit facility.
(B) Reflects the tax effects of the adjustments presented in this pro forma statement of operations, at an effective tax rate of approximately 39%.
(C) Reflects the repurchase of 12,000 shares of our common stock from Group 4 Falck.
(D) Reflects the reversal of the equity in earnings of PCG as a result of the sale of our interest in PCG. The gain on the sale of our interest in PCG has not been reflected in the unaudited pro forma condensed consolidated statements of operations.
36
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
Adjustments | |||||||||||||||||
for the sale | |||||||||||||||||
Adjustments | of our | ||||||||||||||||
for the | interest in | ||||||||||||||||
Actual | Transactions | PCG | Pro Forma | ||||||||||||||
Revenues
|
$ | 568,612 | $ | | $ | | $ | 568,612 | |||||||||
Operating expense
|
496,497 | | | 496,497 | |||||||||||||
Depreciation and amortization
|
12,093 | | | 12,093 | |||||||||||||
General and administrative expense
|
32,146 | | | 32,146 | |||||||||||||
Operating income
|
27,876 | | | 27,876 | |||||||||||||
Interest income
|
4,794 | | | 4,794 | |||||||||||||
Interest expense
|
(3,737 | ) | (17,285 | )(A) | | (21,022 | ) | ||||||||||
Income before income taxes and equity in earnings
of affiliates
|
28,933 | (17,285 | ) | | 11,648 | ||||||||||||
Provision for income taxes
|
12,652 | (6,814 | )(B) | | 5,838 | ||||||||||||
Income before equity in earnings of affiliates
|
16,281 | (10,471 | ) | | 5,810 | ||||||||||||
Equity in earnings of affiliates
|
5,220 | | (6,461 | )(D) | (1,241 | ) | |||||||||||
Net income
|
$ | 21,501 | $ | (10,471 | ) | $ | (6,461 | ) | $ | 4,569 | |||||||
Earnings per share
|
|||||||||||||||||
Basic
|
$ | 1.02 | $ | 0.50 | |||||||||||||
Diluted
|
$ | 1.01 | $ | 0.49 | |||||||||||||
Basic weighted average shares outstanding
|
21,148 | (12,000 | )(C) | 9,148 | |||||||||||||
Diluted weighted average shares outstanding
|
21,364 | (12,000 | )(C) | 9,364 | |||||||||||||
37
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
(A) Reflects the net adjustment to interest expense related to the following (1) additional interest expense associated with the issuance of $150,000 aggregate principal amount of the Notes at an interest rate of 8.25%, (2) interest expense related to $100,000 of borrowings under our amended senior credit facility assuming an interest rate of 4.20%, (3) elimination of interest expense related to the refinancing of $125,000 of borrowings under our former senior credit facility at an interest rate of 6.0%, (4) amortization of loan issuance costs associated with the amended senior credit facility and (5) amortization of loan issuance costs associated with the offering of the old notes.
Interest on the Notes
|
$ | 12,375 | ||
Interest on the amended senior credit facility
|
4,200 | |||
Reduction in interest on the former senior credit
facility
|
(390 | ) | ||
Amortization of debt issuance costs on the
amended senior credit facility
|
500 | |||
Amortization of debt issuance costs on the Notes
|
600 | |||
$ | 17,285 | |||
For each .25% change in the interest rate on the amended senior credit facility, annual interest expense on the amended senior credit facility would change by $250.
In addition, upon completion of the Transactions, we wrote-off unamortized loan issuance costs of approximately $2.0 million related to our former senior credit facility.
(B) Reflects the tax effects of the adjustments presented in this pro forma statement of operations, at an effective tax rate of approximately 39%.
(C) Reflects the repurchase of 12,000 shares of our common stock from Group 4 Falck.
(D) Reflects the reversal of the equity in earnings of PCG as a result of the sale of our interest in PCG. The gain on the sale of our interest in PCG has not been reflected in the unaudited pro forma condensed consolidated statements of operations.
38
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents our selected consolidated historical financial and other data, which you should read in conjunction with Use of Proceeds, Unaudited Pro Forma Condensed Consolidated Financial Statements, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes included elsewhere in this prospectus. The selected consolidated statement of operations data for each of the fiscal years in the three-year period ended December 29, 2002 and the balance sheet data as of December 30, 2001 and December 29, 2002 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for and the balance sheet data as of each of the fiscal years ended January 3, 1999 and January 2, 2000 and the balance sheet data as of December 31, 2000 have been derived from our audited consolidated financial statements which are not included in this prospectus. The selected condensed consolidated statement of operations data for each of the twenty-six weeks ended June 30, 2002 and June 29, 2003 and the balance sheet data as of June 29, 2003 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. All amounts are presented in thousands, except per share data and ratio data.
Twenty-six weeks | |||||||||||||||||||||||||||||
Fiscal year ended | ended | ||||||||||||||||||||||||||||
January 3, | January 2, | December 31, | December 30, | December 29, | June 30, | June 29, | |||||||||||||||||||||||
1999 | 2000 | 2000 | 2001 | 2002 | 2002 | 2003 | |||||||||||||||||||||||
Statement of operations data:
|
|||||||||||||||||||||||||||||
Revenues
|
$ | 312,759 | $ | 438,484 | $ | 535,557 | $ | 562,073 | $ | 568,612 | $ | 281,374 | $ | 298,461 | |||||||||||||||
Operating expenses
|
271,840 | 389,325 | 486,884 | 503,547 | 496,497 | 246,648 | 252,840 | ||||||||||||||||||||||
General and administrative
|
14,851 | 17,763 | 21,122 | 24,423 | 32,146 | 16,401 | 19,050 | ||||||||||||||||||||||
Depreciation and amortization
|
3,567 | 5,355 | 8,639 | 9,919 | 12,093 | 4,924 | 6,919 | ||||||||||||||||||||||
Operating income
|
22,501 | 26,041 | 18,912 | 24,184 | 27,876 | 13,401 | 19,652 | ||||||||||||||||||||||
Interest and other income
|
2,452 | 6,166 | 6,745 | 4,278 | 4,794 | 2,116 | 2,544 | ||||||||||||||||||||||
Interest expense
|
(42 | ) | (1,104 | ) | (4,801 | ) | (3,597 | ) | (3,737 | ) | (1,674 | ) | (6,091 | ) | |||||||||||||||
Income before income taxes and equity in earnings
of affiliates
|
24,911 | 31,103 | 20,856 | 24,865 | 28,933 | 13,843 | 16,105 | ||||||||||||||||||||||
Provision for income taxes
|
10,164 | 12,472 | 8,352 | 9,706 | 12,652 | 6,475 | 6,692 | ||||||||||||||||||||||
Income before equity in earnings of affiliates
|
14,747 | 18,631 | 12,504 | 15,159 | 16,281 | 7,368 | 9,413 | ||||||||||||||||||||||
Equity in earnings of affiliates
|
2,081 | 3,309 | 4,490 | 4,220 | 5,220 | 3,220 | 2,058 | ||||||||||||||||||||||
Income before cumulative effect of change in
accounting for start-up costs
|
16,828 | 21,940 | 16,994 | 19,379 | 21,501 | 10,588 | 11,471 | ||||||||||||||||||||||
Cumulative effect of change in accounting for
start-up costs, net of tax
|
(11,528 | ) | | | | | | | |||||||||||||||||||||
Net income
|
$ | 5,300 | $ | 21,940 | $ | 16,994 | $ | 19,379 | $ | 21,501 | $ | 10,588 | $ | 11,471 | |||||||||||||||
Basic earnings per share:
|
|||||||||||||||||||||||||||||
Income before cumulative effect of change in
accounting for start-up costs
|
$ | 0.76 | $ | 1.01 | $ | 0.81 | $ | 0.92 | $ | 1.02 | $ | 0.50 | $ | 0.54 | |||||||||||||||
Cumulative effect of change in accounting for
start-up costs
|
(0.52 | ) | | | | | | | |||||||||||||||||||||
Net income
|
$ | 0.24 | $ | 1.01 | $ | 0.81 | $ | 0.92 | $ | 1.02 | $ | 0.50 | $ | 0.54 | |||||||||||||||
39
Twenty-six weeks | |||||||||||||||||||||||||||||
Fiscal year ended | ended | ||||||||||||||||||||||||||||
January 3, | January 2, | December 31, | December 30, | December 29, | June 30, | June 29, | |||||||||||||||||||||||
1999 | 2000 | 2000 | 2001 | 2002 | 2002 | 2003 | |||||||||||||||||||||||
Diluted earnings per share:
|
|||||||||||||||||||||||||||||
Income before cumulative effect of change in
accounting for start-up costs
|
$ | 0.74 | $ | 1.00 | $ | 0.80 | $ | 0.91 | $ | 1.01 | $ | 0.50 | $ | 0.54 | |||||||||||||||
Cumulative effect of change in accounting for
start-up costs
|
(0.51 | ) | | | | | | | |||||||||||||||||||||
Net income
|
$ | 0.23 | $ | 1.00 | $ | 0.80 | $ | 0.91 | $ | 1.01 | $ | 0.50 | $ | 0.54 | |||||||||||||||
Weighted average shares outstanding:
|
|||||||||||||||||||||||||||||
Basic
|
22,119 | 21,652 | 21,110 | 21,028 | 21,148 | 21,052 | 21,260 | ||||||||||||||||||||||
Diluted
|
22,683 | 22,015 | 21,251 | 21,261 | 21,364 | 21,314 | 21,368 | ||||||||||||||||||||||
Other financial data:
|
|||||||||||||||||||||||||||||
Ratio of earnings to fixed charges(1)
|
4.67 | x | 2.77 | x | 1.85 | x | 1.99 | x | 2.29 | x | 1.66 | x | 1.72 | x |
As of | ||||||||||||||||||||||||
January 3, | January 2, | December 31, | December 30, | December 29, | As of | |||||||||||||||||||
1999 | 2000 | 2000 | 2001 | 2002 | June 29, 2003 | |||||||||||||||||||
Balance sheet data:
|
||||||||||||||||||||||||
Working capital
|
$ | 66,319 | $ | 79,377 | $ | 56,001 | $ | 67,887 | $ | 64,589 | $ | 83,474 | ||||||||||||
Total assets
|
148,008 | 204,425 | 223,571 | 242,023 | 402,658 | 434,279 | ||||||||||||||||||
Long-term debt, including current portion
(excluding non recourse debt)
|
213 | 15,000 | 10,000 | | 125,000 | 124,688 | ||||||||||||||||||
Non-recourse debt
|
33,317 | 35,655 | 28,859 | 25,839 | 31,386 | 39,664 | ||||||||||||||||||
Common stock
|
223 | 215 | 210 | 210 | 212 | 213 | ||||||||||||||||||
Shareholders equity
|
102,940 | 118,684 | 127,164 | 130,361 | 152,642 | 169,293 |
(1) | Ratio of earnings to fixed charges is calculated by dividing income before income taxes and equity in earnings of affiliates plus fixed charges by fixed charges. Fixed charges consist of interest expense (including the interest element of rental expense) and amortization of deferred financing fees. |
40
MANAGEMENTS DISCUSSION AND ANALYSIS OF
The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of numerous factors including, but not limited to, those described under Risk Factors beginning on page 14 of this prospectus. The discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this prospectus.
Overview
We are a leading provider of government-outsourced services specializing in the management of correctional, detention and state mental health facilities. Our services primarily involve the outsourced management of correctional and detention facilities for federal agencies and state and local governments. We manage all aspects of a prisons operations, including security, food services, work programs, educational programs and health services. In addition to management services, we have the internal capability to design and develop new correctional facilities. We believe our expertise in operating correctional facilities combined with our capabilities to design and develop facilities strategically position us to win new contracts. Our service offerings also include the management of a state and a private mental health hospital.
The Transactions
We used the net proceeds of the offering of the old notes, borrowings under our amended senior credit facility and cash on hand to complete the share repurchase described below and to refinance outstanding borrowings under our former senior credit facility. We believe that the Transactions will enhance our ability to execute our business objectives in the future.
On April 30, 2003, we entered into a share purchase agreement with Group 4 Falck A/S, our majority shareholder, to repurchase all 12.0 million shares of our common stock held by Group 4 Falck for $132.0 million in cash. Group 4 Falck obtained these shares when it acquired our former parent company, TWC, in 2002. We completed the share repurchase on July 9, 2003 and, following the repurchase, we have approximately 9.2 million shares of common stock issued and outstanding. We believe that the removal of a controlling shareholder will provide us with increased independence and flexibility to pursue new opportunities to expand our business both domestically and abroad.
Sale of our Joint Venture Interest in PCG
On July 2, 2003, we sold our 50% interest in Premier Custodial Group Limited, our joint venture in the United Kingdom, to Serco Investments Limited, our joint venture partner, for approximately $80.7 million (on a pretax basis). Under the terms of the indenture governing the Notes, we have an obligation to use the proceeds from the sale of our interest in PCG to reinvest in certain permitted businesses or assets, to repay indebtedness outstanding under the amended senior credit facility or to make an offer to repurchase a portion of the Notes.
Results of Re-bids on Management Contracts in Texas
As a result of a re-bidding process in Texas on several state management contracts which are due to expire in early 2004, we were recently awarded management contracts by the Texas Department of Criminal Justice for the continued operation of two facilities which we currently operatethe Cleveland Correctional Center facility and the Lockhart Secure Work Program Facility. We were also awarded the management contract to operate a new facility, the Sanders Estes
41
Other Recent Developments
Our results of operations have been impacted by a number of factors in recent years. In the fiscal years ended December 31, 2000 and December 30, 2001, we experienced a significant increase in our costs for comprehensive general liability, automobile liability and workers compensation insurance. These increases were primarily the result of historical adverse claims experience and a hardened sellers insurance market. In the fourth quarter of 2002, we established a new insurance program, which we believe will result in lower overall insurance costs. See Business Insurance.
New facility openings and the expiration of contracts also affect our results of operations. We opened two new facilities in the fiscal year ended December 31, 2000 and two new facilities in the fiscal year ended December 30, 2001. These openings were offset by the expiration or termination of contracts for one facility in each of fiscal years 2000, 2001 and 2002. Most recently, in the first quarter of fiscal year 2003, we began a new contract for the management of a domestic facility.
We believe governmental agencies will increasingly outsource correctional and detention facility management services to the private sector. Factors which we believe will contribute to an increase in the use of privatization include a growing at-risk population of 18 to 24 year-old males, facility overcrowdings and governmental budgetary constraints.
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that our management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition |
In accordance with Commission Staff Accounting Bulletin No. 101 and related interpretations, facility management revenues are recognized as services are provided under facility management contracts with approved government appropriations based on a net rate per day per inmate or on a fixed monthly rate. Project development and design revenues are recognized as earned on a percentage of completion basis measured by the percentage of costs incurred to date as compared to estimated total cost for each contract. This method is used because our management considers costs incurred to date to be the best available measure of progress on these contracts. Provisions for estimated losses on uncompleted contracts and changes to cost estimates are made in the period in which we determine that such losses and changes are probable. Contract costs include all direct material and labor costs and those indirect costs related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined.
42
We extend credit to the government agencies contracted with and other parties in the normal course of business as a result of billing and receiving payment for services thirty to sixty days in arrears. Further, we regularly review outstanding receivables, and provide estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, we make judgments regarding our customers ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required.
Property and Equipment |
As of June 29, 2003, we had approximately $205.1 million in long-lived property and equipment. Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful life. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. We perform ongoing evaluations of the estimated useful lives of our property and equipment for depreciation purposes. The estimated useful life is determined and continually evaluated based on the period over which services are expected to be rendered by the asset. Maintenance and repair items are expensed as incurred.
We review for impairment of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Our management has reviewed our long-lived assets and determined that there are no events requiring impairment loss recognition. Events that would trigger an impairment assessment include deterioration of profits for a business segment that has long-lived assets, or when other changes occur which might impair recovery of long-lived assets.
Income Taxes |
Deferred tax assets and liabilities are recognized as the difference between the book basis and tax basis of its net assets. In providing for deferred taxes, we consider current tax regulations, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required.
Reserves for Insurance Losses |
Casualty insurance related to workers compensation, general liability and automobile insurance coverage is provided through an independent insurer. The insurance program consists of primary and excess insurance coverage. The primary general liability coverage has a $5.0 million limit per occurrence with a $20.0 million general aggregate limit and a $1.0 million deductible. The primary automobile coverage has a $5.0 million limit per occurrence with a $1.0 million deductible and the primary workers compensation insurance limits are based on state statutes and contain a $1.0 million deductible. The excess coverage has a $50.0 million limit per occurrence and in the aggregate. We believe such limits are adequate to insure against the various liability risks of our business. We are self-insured for employment related claims and for medical malpractice claims relating to services provided at Atlantic Shores Hospital and South Florida State Hospital.
Because our insurance policy is a high deductible policy, losses are recorded as reported and a provision is made to cover losses incurred but not reported. Loss reserves are undiscounted and are computed based on independent actuarial studies.
43
Commitments and Contingencies
Lease Obligations at the Jena Juvenile Justice Center |
During 2000, our management contract at the 276-bed Jena Juvenile Justice Center in Jena, Louisiana was discontinued by the mutual agreement of the parties. Despite the discontinuation of the management contract, we remain responsible for payments on our underlying lease of the inactive facility. We incurred an operating charge of $1.1 million during the year ended December 29, 2002, related to our lease of the inactive facility that represented the expected costs to be incurred under the lease until a sublease or alternative use could be initiated. We are continuing our efforts to find a sublease or alternative correctional use for the facility. However, parties that we previously believed might sublease the facility prior to early 2004 have recently either indicated that they do not have an immediate need for the facility or did not enter into a binding commitment for a sublease of the facility. As a result, our management has determined that it is unlikely that we will sublease the facility or find an alternative correctional use for the facility prior to the expiration of the current provision for anticipated loss in early 2004 and we have incurred an additional provision for operating loss of approximately $5.0 million during the thirteen weeks ended September 29, 2003. This additional operating charge both covers our anticipated losses under the lease for the facility until a sublease is in place and provides an estimated discount to sublease the facility to prospective sublessees. If we are unable to sublease or find an alternative correctional use for the facility prior to January 2006, an additional operating charge will be required. The remaining obligation on the Jena lease through the contractual term of 2009, exclusive of the reserve for losses through early 2006, is approximately $7.0 million.
Loss of Contract with the Australia Department of Immigration, Multicultural and Indigenous Affairs |
In Australia, the Department of Immigration, Multicultural and Indigenous Affairs, which we refer to as DIMIA, recently entered into a contract with a division of Group 4 Falck for the management and operation of Australias immigration centers, services which we have provided since 1997 through our Australian subsidiary. We are currently in the process of transitioning the management and operation of the DIMIA centers to the division of Group 4 Falck and expect that the transition will be fully completed by February 23, 2004, when our contract with DIMIA is scheduled to expire. Once the division of Group 4 Falck begins to fully operate the DIMIA centers, we will no longer recognize any further revenue from the DIMIA contract. For the twenty-six weeks ended June 29, 2003, the contract with DIMIA represented approximately 9.6% of our consolidated revenues. We do not have any lease obligations related to our contract with DIMIA. During the thirteen weeks ended September 29, 2003, we incurred increased costs of approximately $3.0 million related to the transitioning of the DIMIA contract to the division of Group 4 Falck, primarily related to liability insurance expenses. We may incur additional costs related to the transition in the future.
Pending Wage and Hour Litigation |
We are defending a wage and hour lawsuit filed in California state court by ten current and former employees. The employees are seeking certification of a class, which would encompass all of our current and former California employees. Discovery is underway and the court has yet to hear the plaintiffs certification motion. We are unable to estimate the potential loss exposure due to the current procedural posture of the lawsuit. While the plaintiffs in this case have not quantified their claim of damages and the outcome of the litigation cannot be predicted with certainty, based on information known to date, we believe that the ultimate resolution of these matters, if settled unfavorably to us, could have a material adverse effect on our financial position, operating results and cash flows. We are uninsured for any damages or costs we may incur as a result of this lawsuit, including the expenses of defending the lawsuit. We are vigorously defending our rights in this action.
44
Potential Losses Relating to McFarland facility |
Our contract with the California Department of Corrections for the management of the 224-bed McFarland Community Corrections Center was recently extended through December 31, 2003. Management believes that a contract extension will be entered into for any services which we may provide after December 31, 2003. However, there can be no assurance that a contract extension will be finalized. If the contract is not extended, we may not be reimbursed for any of our fees related to the operation of the McFarland facility after December 31, 2003. During the twenty-six weeks ended June 29, 2003, the contract for the McFarland facility represented less than 1% of our consolidated revenues. In addition, the McFarland facility is currently in the fifth year of a ten-year non-cancelable operating lease with Correctional Properties Trust, referred to as CPV. In the event that we are unable to extend the McFarland contract beyond December 31, 2003 or find an alternative use for the McFarland facility, we may be required to record an operating charge related to a portion of the future lease costs with CPV in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The remaining lease obligation is approximately $5.0 million through April 28, 2008.
Results of Operations
Twenty-six weeks ended June 29, 2003 compared with twenty-six weeks ended June 30, 2002 |
Revenues increased by 6.1% to $298.5 million in the twenty-six weeks ended June 29, 2003 from $281.4 million in the twenty-six weeks ended June 30, 2002. The strengthening of the Australian dollar compared to the same period in 2002 resulted in approximately an $8.3 million increase in revenues. Revenues also increased approximately $5.3 million as a result of the opening of the Lawrenceville Correctional Facility at the end of the first quarter 2003. Additionally, revenues increased approximately $9.9 million dollars due to contractual adjustments for inflation, slightly higher occupancy rates and improved terms negotiated into a number of contracts. This increase was partially reduced by approximately $6.4 million in the twenty-six weeks ended June 29, 2003 compared to the twenty-six weeks ended June 30, 2002 due to the closure of the Bayamon Correctional Facility and South Bay Sexually Violent Predators Unit as well as a reduction in compensated resident days at the Coke County Correctional Facility.
The number of compensated resident days in domestic facilities increased to 4,743,635 in the twenty-six weeks ended June 29, 2003 from 4,568,862 in the twenty-six weeks ended June 30, 2002. The average facility occupancy in domestic facilities was 99.2% of capacity in the twenty-six weeks ended June 29, 2003 compared to 97.8% in the twenty-six weeks ended June 30, 2002. Compensated resident days in Australian facilities decreased to 798,730 from 867,754 for the comparable periods primarily due to lower population levels at the immigration and detention centers.
Operating expenses increased by 2.5% to $252.8 million in the twenty-six weeks ended June 29, 2003 compared to $246.7 million in the twenty-six weeks ended June 30, 2002. As a percentage of revenue, operating expenses decreased to 84.7% in the twenty-six weeks ended June 29, 2003 from 87.7% in the comparable period in 2002. The increase in operating expenses primarily reflects approximately $7.8 million as a result of the stronger Australian dollar and operating expenses related to the opening of the Lawrenceville Correctional Facility offset by lower workers compensation and general liability insurance expense of approximately $4.0 million and lower lease expense of approximately $2.6 million as a result of purchasing previously leased properties. The interest cost associated with purchasing the properties is included in interest expense.
Depreciation and amortization increased by 40.5% to $6.9 million in the twenty-six weeks ended June 29, 2003 compared to $4.9 million in the twenty-six weeks ended June 30, 2002. As a percentage of revenue, depreciation and amortization increased to 2.3% in the twenty-six weeks
45
General and administrative expenses increased 16.2% to $19.1 million in the twenty-six weeks ended June 29, 2003 from $16.4 million in the twenty-six weeks ended June 30, 2002. As a percentage of revenue, general and administrative expenses increased to 6.4% in the twenty-six weeks ended June 29, 2003 from 5.8% in the twenty-six weeks ended June 30, 2002. The increase primarily relates to approximately $2.7 million of increased professional fees related to the share repurchase from Group 4 Falck, higher corporate legal fees, increased fees to external auditors and other professional fees.
Operating income increased by 46.6% to $19.7 million in the twenty-six weeks ended June 29, 2003 from $13.4 million in the twenty-six weeks ended June 30, 2002. As a percentage of revenue, operating income increased to 6.6% in the twenty-six weeks ended June 29, 2003 from 4.8% in the twenty-six weeks ended June 30, 2002 due to the factors impacting contribution from operations and general and administrative expenses.
Interest income was $2.5 million during the twenty-six weeks ended June 29, 2003 compared to $2.1 million in the twenty-six weeks ended June 30, 2002 resulting from an increase in invested cash balances.
Interest expense was $6.1 million during the twenty-six weeks ended June 29, 2003 compared to $1.7 million in the twenty-six weeks ended June 30, 2002. This increase is attributable to the debt incurred to finance the purchase of previously leased facilities for approximately $155.0 million in December 2002. Previously, these properties were leased and the lease costs of approximately $2.6 million for the twenty-six weeks ended June 30, 2002 were included in operating expenses in the Companys Condensed Consolidated Statements of Income.
Income before income taxes and equity in earnings of affiliates increased to $16.1 million in the twenty-six weeks ended June 29, 2003 as compared to $13.8 million in the twenty-six weeks ended June 30, 2002 due to the factors described above.
Provision for income taxes increased to $6.7 million in the twenty-six weeks ended June 29, 2003 as compared to $6.5 million in the twenty-six weeks ended June 30, 2002 due to higher taxable income offset by a lower effective tax rate.
Equity in earnings of affiliates, net of income tax provision, decreased to $2.1 million in the twenty-six weeks ended June 29, 2003 as compared to $3.2 million in the twenty-six weeks ended June 30, 2002 due to performance issues at the Ashfield facility in the United Kingdom.
Net income increased to $11.5 million in the twenty-six weeks ended June 29, 2003 from $10.6 million in the twenty-six weeks ended June 30, 2002 as a result of the factors described above.
Fiscal year ended December 29, 2002 compared with fiscal year ended December 30, 2001 |
Revenues increased $6.5 million, or 1.2% to $568.6 million in the fiscal year ended December 29, 2002 from $562.1 million in the fiscal year ended December 30, 2001. The increase in revenues is the result of new facility openings and increases in per diem rates offset by lower construction revenue and the closure of a number of facilities. Specifically, revenue increased approximately $27.4 million in the fiscal year ended December 29, 2002 compared to the fiscal year ended December 30, 2001 due to increased compensated resident days at a number of domestic facilities, including, but not limited to, the facilities opened in the fiscal year ended December 30, 2001, Val Verde Correctional Facility, Del Rio, Texas and the Rivers Correctional Institution, Winton, North Carolina and an overall increase in per diem rates. Revenues decreased by approximately $9.4 million in the fiscal year ended December 29, 2002 compared to the fiscal year ended December 30, 2001 due to the decline in construction revenue. Offsetting the increase, revenue was
46
The number of compensated resident days in domestic facilities remained constant at 9.2 million for the fiscal year ended December 29, 2002 and the fiscal year ended December 30, 2001. Average facility occupancy in domestic facilities increased to 98.5% in the fiscal year ended December 29, 2002 from 97% in the fiscal year ended December 30, 2001. Compensated resident days in Australian facilities decreased to 1.7 million in the fiscal year ended December 29, 2002 from 1.9 million in the fiscal year ended December 30, 2001 primarily due to lower population levels at the immigration and detention centers. Average facility occupancy in Australian facilities decreased to 91.4% in the fiscal year ended December 29, 2002 from 94.3% in the fiscal year ended December 30, 2001, based on a reduction of detainees at our immigration and detention facilities.
Operating expenses decreased by 1.4% to $496.5 million in the fiscal year ended December 29, 2002 compared to $503.5 million in the fiscal year ended December 30, 2001. As a percentage of revenues, operating expenses decreased to 87.3% in the fiscal year ended December 29, 2002 from 89.6% in the fiscal year ended December 30, 2001. This decrease primarily reflects the absence of $3.5 million in start-up costs related to the opening of the Val Verde, Texas and Winton, North Carolina facilities in the fiscal year ended December 30, 2001, as well as approximately $9.2 million due to the completion of construction activities in the fiscal year ended December 30, 2001, and approximately $11.3 million due to the expiration of the contracts with the Arkansas Board of Correction and Community Punishment and Bayamon Correctional Facility and a decrease in expenses related to our operating lease facility, which was refinanced on December 12, 2002. Also during the fiscal year ended December 29, 2002, our allowance for doubtful accounts decreased approximately $0.9 million as a result of charge-offs related to uncollectible accounts for receivables at our psychiatric hospital. During the year ended December 29, 2002, we recognized approximately $1.4 million in expense for uninsured legal claims, approximately $0.6 million for reserves related to certain contractual obligations and approximately $0.4 million related to performance penalties under certain of our operating contracts. During the fiscal year ended December 30, 2001, we recognized approximately $0.3 million for uninsured legal claims, approximately $0.1 million for reserves related to certain contractual obligations and approximately $0.3 million related to performance penalties under certain of our operating contracts which had been provided for in the year ended December 31, 2000. Additionally, there are a number of secondary factors contributing to operating expenses in the fiscal year ended December 29, 2002 as compared to the fiscal year ended December 30, 2001 which include the following: lease expense for payments made to CPV, of $21.3 million offset by $1.8 million in amortization of the deferred revenue from the sale of properties to CPV.
During fiscal year 2000, our management contract at the 276-bed Jena Juvenile Justice Center in Jena, Louisiana was terminated by the mutual agreement of the parties. We incurred operating charges of $1.1 million, $3.0 million and $3.8 million during fiscal years 2002, 2001 and 2000, respectively, related to our lease of the inactive facility that represented the expected costs to be incurred under the lease during those periods. We are actively pursuing various sublease alternatives with several agencies of the federal and state government. We are continuing our efforts to find an alternative correctional use or sublease for the Jena facility and we believe that we will be successful prior to early fiscal year 2004. We have reserved for the lease payments through early fiscal year 2004 and our management believes the reserve balance currently established for anticipated future losses under the lease with CPV is sufficient to cover costs under the lease until a sublease is in place or an alternative future use is established. If we are unable to sublease or find an alternative correctional use for the Jena facility by that time, an additional operating charge will be required. As of December 30, 2002, the remaining obligation on the Jena
47
Depreciation and amortization increased by 21.9% to $12.1 million in the fiscal year ended December 29, 2002 from $9.9 million in the fiscal year ended December 30, 2001 due to the newly operational facilities in the fiscal year ended December 29, 2002, the addition of the four facilities as a result of the refinancing of the our operating lease facility and incremental depreciation due to assets acquired in our development of the internal support structure previously provided by TWC. As a percentage of revenues, depreciation and amortization increased to 2.1% from 1.8% in the fiscal year ended December 30, 2001.
General and administrative expenses increased 31.6% to $32.1 million in the fiscal year ended December 29, 2002 from $24.4 million in the fiscal year ended December 30, 2001. As a percentage of revenue, general and administrative expenses increased to 5.7% in the fiscal year ended December 29, 2002 from 4.3% in the fiscal year ended December 30, 2001. The increase was primarily driven by $1.9 million of payments under employment agreements with certain key executives triggered by the change in control from the sale of TWC as well as $0.6 million of expense due to an acceleration of the retirement age under the senior executive deferred compensation plans, also a result of the sale of TWC. Other factors impacting the increase were increased legal and professional fees of approximately $2.0 million, higher insurance costs of approximately $1.2 million and higher travel costs of approximately $0.4 million.
Related party transactions have in the past occurred in the normal course of business between us and TWC. Such transactions have included the purchase of goods and services and corporate costs for information technology support, office space and interest expense. Total related party transaction costs with TWC, excluding casualty insurance, were approximately $3.1 million in the fiscal year ended December 29, 2002 as compared to $3.2 million in the fiscal year ended December 30, 2001. Casualty insurance related to workers compensation, general liability and automobile insurance coverage is provided through an independent insurer. Prior to October 2, 2002, the first $1.0 million of coverage was reinsured by an insurance subsidiary of TWC. We paid TWC a fee for the transfer of the deductible exposure. We paid casualty insurance premiums related to this program of approximately $18.0 million for coverage through the end of the third quarter for the fiscal year ended December 29, 2002 as compared to approximately $22.0 million for coverage during the full fiscal year ended December 30, 2001. Effective October 2, 2002, we established a new insurance program with a $1.0 million deductible per occurrence for covered claims with an independent insurer. Prior to the establishment of the new high deductible policy, we had not recognized any expense related to self-insurance. We recognized approximately $3.0 million of self-insurance expense for estimated losses related to the high deductible policy during the fourth quarter of the fiscal year ended December 29, 2002 related to this new program.
Since January 1, 2003, the only services TWC has provided for us have been information technology support services. We also lease office space from TWC under a non-cancelable operating lease that expires February 11, 2011. On April 14, 2003, we relocated our corporate headquarters to Boca Raton, Florida under a ten-year lease for new office space. Upon the completion of the share repurchase with Group 4 Falck, the lease with TWC for our former corporate headquarters will terminate and we will have no further obligations under that lease. In addition, upon the closing of the share repurchase, an agreement between us and Group 4 Falck, whereby Group 4 Falck agreed to reimburse us for up to 10% of the fair market value of our interest in PCG under certain circumstances, will also be terminated.
Operating income increased by 15.3% to $27.9 million in the fiscal year ended December 29, 2002 from $24.2 million in the fiscal year ended December 30, 2001. As a percentage of revenue, operating income increased to 4.9% in the fiscal year ended December 29, 2002 from 4.3% in the fiscal year ended December 30, 2001 due to the factors impacting contribution from operations described above.
48
Interest income increased 12.1% to $4.8 million in the fiscal year ended December 29, 2002 from $4.3 million in the fiscal year ended December 30, 2001. This increase is primarily due to higher average invested cash balances.
Interest expense increased slightly to $3.7 million in the fiscal year ended December 29, 2002 from $3.6 million in the fiscal year ended December 30, 2001 reflecting higher effective interest rates as a result of the refinancing completed on December 12, 2002.
Income before income taxes and equity in earnings of affiliates, increased to $28.9 million in the fiscal year ended December 29, 2002 from $24.9 million in the fiscal year ended December 30, 2001 due to the factors described previously.
Provision for income taxes increased to $12.7 million in 2002 from $9.7 million in 2001 due to the increase in income before income taxes and a higher effective tax rate. The higher effective tax rate reflects an increase in the tax provision to provide for higher additional taxes due to the disallowance of certain expenses resulting from the sale of TWC.
Equity in earnings of affiliates, net of income tax provision, increased 23.7% to $5.2 million in the fiscal year ended December 29, 2002 from $4.2 million in the fiscal year ended December 30, 2001. The fiscal year ended December 30, 2001 reflects start-up costs associated with the opening of the 800-bed Dovegate prison in the United Kingdom, in July 2001, and the opening of the 150-bed Dungavel House Immigration Detention Centre in the United Kingdom, in August 2001. The fiscal year ended December 29, 2002 reflects the full activation of these facilities offset by start-up costs and phase-in losses related to the 3,024-bed South African prison, which opened in February 2002. Additionally, performance issues at the Ashfield Facility negatively impacted the fiscal year ended December 29, 2002 results. See Managements Discussion and Analysis of Financial Condition and Results of Operations.
Net income increased 10.9% to $21.5 million in the fiscal year ended December 29, 2002 from $19.4 million in the fiscal year ended December 30, 2001 as a result of the factors described above.
Fiscal year ended December 30, 2001 compared with fiscal year ended December 31, 2000 |
Revenues increased $26.5 million, or 5.0% to $562.1 million in the fiscal year ended December 30, 2001 from $535.6 million in the fiscal year ended December 31, 2000. The increase in revenues is the result of new facility openings offset by lower construction revenue, closure of two facilities and lower compensated resident days at the DIMIA facilities in Australia due to a decrease in immigration detentions in Australia as a result of a change in Australian immigration law. Specifically, revenue increased approximately $52.5 million in the fiscal year ended December 30, 2001 compared to the fiscal year ended December 31, 2000 due to increased compensated resident days resulting from the opening of two facilities in the fiscal year ended December 31, 2000, (Auckland Central Remand Prison, Auckland, New Zealand in July 2000 and the Western Region Detention Facility at San Diego, San Diego, California in July 2000) and the opening of two facilities in the fiscal year ended December 30, 2001 (Val Verde Correctional Facility, Del Rio, Texas in January 2001 and the Rivers Correctional Institution, Winton, North Carolina in March 2001). Revenues decreased by approximately $27.3 million in the fiscal year ended December 30, 2001 compared to the fiscal year ended December 31, 2000 due to less construction activity as a result of substantial completion of construction projects in the fiscal year ended December 31, 2000. Revenues also decreased by approximately $10.4 million in the fiscal year ended December 30, 2001 compared to the fiscal year ended December 31, 2000 due to the cessation of operations at the Jena Juvenile Justice Center, the expiration of our contracts with the Arkansas Board of Correction and Community Punishment and a decline in compensated resident days at the DIMIA facilities. The balance of the increase in revenues was attributable to facilities open during all of both periods and increases in per diem rates.
49
The number of compensated resident days in domestic facilities increased to 9.2 million in the fiscal year ended December 30, 2001 from 8.8 million in the fiscal year ended December 31, 2000. Average facility occupancy in domestic facilities was 97% for the fiscal year ended December 30, 2001 and the fiscal year ended December 31, 2000. Compensated resident days in Australian facilities increased to 1.9 million in the fiscal year ended December 30, 2001 from 1.8 million in the fiscal year ended December 31, 2000 primarily due to the opening of the Auckland Central Remand Prison in July 2000. Average facility occupancy in Australian facilities decreased to 94.3% in the fiscal year ended December 30, 2001 from 99.1% in the fiscal year ended December 31, 2000.
In December 2001, we were issued a notice of contract non-renewal by the Administration of Corrections from the Commonwealth of Puerto Rico for the management of the Bayamon Correctional Facility primarily due to a change in government policy in Puerto Rico. The current contract was set to expire March 23, 2002. The contract expired June 23, 2002. The termination of the management contract did not have a significant adverse impact on our results of operations and cash flows.
Operating expenses increased by 3.4% to $503.5 million in the fiscal year ended December 30, 2001 compared to $486.9 million in the fiscal year ended December 31, 2000. As a percentage of revenues, operating expenses decreased to 89.6% in the fiscal year ended December 30, 2001 from 90.9% in the fiscal year ended December 31, 2000. This increase primarily reflects the four facilities that were opened in the fiscal year ended December 30, 2001 and the fiscal year ended December 31, 2000, as described above. Additionally, there are a number of secondary factors contributing to the increase in operating expenses in the fiscal year ended December 30, 2001 as compared to the fiscal year ended December 31, 2000 which include the following: lease expense for payments made to CPV of $20.9 million, excluding the Jena lease payments included in the Jena charge, offset by $1.9 million in amortization of the deferred revenue from the sale of properties to CPV; and expenses related to the construction of a new facility for the government of the Netherlands Antilles. The decrease as a percentage of revenue is the result of improved operations at a number of facilities including: Lea County Correctional Facility (New Mexico), Michigan Youth Correctional Facility (Michigan), and North Texas Intermediate Sanction Facility (Texas). We implemented strategies to improve the operational performance of these facilities and believe their performance has stabilized. However, there can be no assurance that these strategies will continue to be successful. We also terminated underperforming our management services contracts for the Grimes and McPherson Correctional Facilities on June 30, 2001. Additionally, during the fiscal year ended December 30, 2001 we renegotiated our management contract for the George W. Hill Correctional Facility.
During the fiscal year ended December 30, 2001, we recognized approximately $0.3 million for uninsured legal claims, approximately $0.1 million for reserves related to certain contractual obligations and approximately $0.3 million related to performance penalties under certain of our operating contracts which had been provided for in the year ended December 31, 2000. During the fiscal year ended December 31, 2000, we recognized approximately $0.4 million for uninsured legal claims, approximately $0.1 million for certain contractual obligations and approximately $0.5 million related to performance penalties under certain of our operating contracts.
We previously purchased comprehensive general liability, automobile liability and workers compensation with a $1.0 million deductible per occurrence. The deductible portion of our risk was re-insured by TWCs wholly-owned captive re-insurance company. We paid TWC a fee for the transfer of the deductible exposure. Our insurance costs increased significantly during the third and fourth quarter of the fiscal year ended December 30, 2001 due to a hardened sellers insurance market, which was exacerbated by the events of September 11, 2001 and historical adverse claims experience. We paid premiums related to this program of approximately $22.0 million in the fiscal year ended December 30, 2001, as compared to approximately $13.6 million in the fiscal year ended December 31, 2000. In addition to the casualty insurance program with TWC, related party transactions have in the past occurred in the normal course of business between us and TWC.
50
In the fiscal year ended December 30, 2001, we reported an operating charge of $3.0 million ($1.8 million after tax, or $0.09 per share), related to the Jena, Louisiana facility which represents the expected losses to be incurred on the lease through December 2002 as our management believed a sale of the facility would be finalized by that date or an alternative use would have been be found. At December 30, 2001, our total remaining obligation under the lease agreement was approximately $14.0 million. This compares with a charge of $3.8 million in the fiscal year ended December 31, 2000 ($2.3 million after tax, or $0.11 per share). At that time we estimated the facility would remain inactive through the fiscal year ended December 30, 2001.
Depreciation and amortization increased by 14.8% to $9.9 million in the fiscal year ended December 30, 2001 from $8.6 million in 2000 due to the new facilities added in 2001 and a full year of depreciation on the San Diego facility added in the fiscal year ended December 31, 2000. As a percentage of revenues, depreciation and amortization increased to 1.8% from 1.6% in the fiscal year ended December 31, 2000.
General and administrative expenses increased 15.6% to $24.4 million in the fiscal year ended December 30, 2001 from $21.1 million in the fiscal year ended December 31, 2000. The increase reflects costs related to additional personnel and infrastructure as well as increased salary costs and higher travel costs. As a percentage of revenue, general and administrative expenses increased to 4.3% in the fiscal year ended December 30, 2001 from 3.9% in the fiscal year ended December 31, 2000.
Operating income increased by 27.9% to $24.2 million in the fiscal year ended December 30, 2001 from $18.9 million in the fiscal year ended December 31, 2000. As a percentage of revenue, operating income increased to 4.3% in the fiscal year ended December 30, 2001 from 3.5% in the fiscal year ended December 31, 2000 due to the factors impacting contribution from operations.
Interest income decreased 29.9% to $4.3 million in the fiscal year ended December 30, 2001 from $6.1 million in the fiscal year ended December 31, 2000. This decrease is primarily due to lower average invested cash balances, lower interest rates and the sale of a portion of our loans to overseas affiliates in the fiscal year ended December 31, 2000.
Interest expense decreased 25.1% to $3.6 million in the fiscal year ended December 30, 2001 from $4.8 million in the fiscal year ended December 31, 2000. This decrease is due to decreased interest rates and paying down $10.0 million in long-term debt during the fiscal year ended December 30, 2001.
Other income in the fiscal year ended December 31, 2000 of $0.6 million represents a gain from the sale of a portion of our loans to overseas affiliates. There was no such activity in the fiscal year ended December 30, 2001.
Income before income taxes and equity in earnings of affiliates, increased to $24.9 million in the fiscal year ended December 30, 2001 from $20.9 million in the fiscal year ended December 31, 2000 due to the factors described previously.
Provision for income taxes increased to $9.7 million in the fiscal year ended December 30, 2001 from $8.4 million in the fiscal year ended December 31, 2000 due to the increase in income before income taxes. Our effective tax rate decreased 1% due to lower foreign tax rates.
51
Equity in earnings of affiliates, net of income tax provision, decreased 6.0% to $4.2 million in the fiscal year ended December 30, 2001 from $4.5 million in the fiscal year ended December 31, 2000 due to phase-in costs associated with the 800-bed Dovegate prison in the United Kingdom, which opened in the third quarter of the fiscal year ended December 30, 2001, and start-up costs related to the 3,024-bed South African prison on schedule to open in mid-February, fiscal year 2002.
Net income increased 14.0% to $19.4 million in the fiscal year ended December 30, 2001 from $17 million in the fiscal year ended December 31, 2000 as a result of the factors described above.
Financial Condition
Liquidity and Capital Resources |
Our primary source of liquidity is cash flow from operations and borrowings under the $50.0 million revolving portion of our amended senior credit facility. We expect that ongoing requirements for debt service and capital expenditures will be funded from these sources. As of September 29, 2003, we had $4.5 million available for borrowing under the revolving portion of our amended senior credit facility.
We incurred substantial indebtedness in connection with the Transactions. As of September 29, 2003, we had $270.0 million of consolidated long-term debt outstanding, excluding $38.9 million of non recourse debt and our annual interest expense, including amortization of deferred financing costs, would have been approximately $22.1 million. This annual interest expense is calculated giving effect to the annual interest rate of 8.25% on the Notes and assumes an annual interest rate of 4.2% on borrowings under the term loan portion of our amended senior credit facility. Our significant debt service obligations could, under certain circumstances, have material consequences for you. See Risk Factors Risks Related to Our High Level of Indebtedness.
Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our amended senior credit facility, will be adequate to meet our future liquidity needs over the next twelve months.
Cash and cash equivalents totaled $35.2 million at December 29, 2002, compared to $46.1 million at December 30, 2001. Net working capital totaled $64.6 million at December 29, 2002, compared to $67.9 million at December 30, 2001.
At June 29, 2003, we also had outstanding 11 letters of guarantee totaling approximately $6.4 million under separate international credit facilities. Upon completion of the Transactions, these letters of credit will remain outstanding and will not be rolled over into our amended senior credit facility.
In connection with the financing and management of one of our Australian facilities, our wholly owned Australian subsidiary financed the facilitys development with long-term debt obligations, which are non-recourse to us. We have consolidated our subsidiarys direct finance lease receivable from the state government and related non recourse debt each totaling approximately $39.7 million as of June 29, 2003. We reclassified the amounts reflected in the December 30, 2001 balance sheet to reflect the asset and related non recourse debt of approximately $26.0 million to conform to current year presentation. The term of the non recourse debt is through 2017 and it bears interest at a variable rate quoted by certain Australian banks plus 140 basis points. Any obligations or liabilities of our subsidiary are matched by a similar or corresponding commitment from the government of the State of Victoria. In connection with the non recourse debt, our subsidiary is a party to an interest rate swap agreement to fix the interest rate on the variable rate non recourse debt to 9.7%. Our management has determined the swap to be an effective cash flow hedge. Accordingly, we have recorded the value of the interest rate swap in other comprehensive income, net of applicable income taxes.
52
Cash provided by operating activities in fiscal years 2002, 2001 and 2000 was $22.2 million, $29.5 million and $25.9 million, respectively. Cash provided by operating activities in the twenty-six weeks ended June 29, 2003 was $22.2 million compared to $2.6 million cash provided by operating activities in the twenty-six weeks ended June 30, 2002, primarily reflecting a decrease in accounts receivable and other current assets and an increase in accounts payable and accrued expenses offset by a decrease in accrued payroll and related taxes. The $7.3 million decrease in cash provided by operating activities from fiscal year 2001 to 2002 primarily reflects increases in accounts receivable and other current assets and decreases in accounts payable and accrued expenses. These were partially offset by higher net income, depreciation expense and an increase in other liabilities. The increase in other liabilities was primarily driven by costs related to employment agreements with certain key executives triggered by the change in control of TWC as well as an acceleration of the retirement age under senior executive deferred compensation plans, also a result of the sale of TWC. The $3.6 million increase in cash provided by operating activities from fiscal year 2000 to 2001 primarily reflects an increase in net income.
Cash used in investing activities in fiscal years 2002, 2001 and 2000 was $159.3 million, $3.9 million and $20.9 million, respectively. Cash used in investing activities increased to $4.0 million for the twenty-six weeks ended June 29, 2003 compared to $1.8 million used in investing activities for the twenty-six weeks ended June 30, 2002. The change is primarily a result of a decrease in repayments of investments in and advances to affiliates offset by slightly higher capital expenditures. The $155.4 million increase in cash used in investing activities from fiscal year 2001 to 2002 is primarily due to the purchase by us in December 2002 of four correctional properties in operation under our prior operating lease facility. We acquired these four properties from the operating lease facility for an aggregate purchase price of approximately $155.0 million. Cash used in investing activities decreased approximately $17.0 million, primarily due to a decrease in capital expenditures due to the completion in fiscal year 2000 of significant leasehold improvements to a facility we lease in San Diego.
Cash provided by financing activities in fiscal years 2002, 2001 and 2000 was $129.2 million, $(11.2) million and $(9.9) million, respectively. Cash provided by financing activities was $2.2 million for the twenty-six weeks ended June 29, 2003 and $0.9 million for the twenty-six weeks ended June 30, 2002, primarily as a result of additional proceeds from non-recourse debt used to fund the expansion of a facility in Australia. The $140.4 million increase in cash provided by financing activities from fiscal year 2001 to 2002 reflects borrowings under our former senior credit facility.
Current cash requirements consist of amounts needed for working capital, capital expenditures and supply purchases and investments in joint ventures. Some of our management contracts require us to make substantial initial expenditures of cash in connection with opening or renovating a facility. Based on current estimates of our capital needs, we anticipate that our capital expenditures will not exceed $12.0 million during the next 12 months. The initial expenditures subsequently are fully or partially recoverable as pass-through costs or are billable as a component of the per diem rates or monthly fixed fees to the contracting agency over the original term of the contract. However, we cannot assure you that any of these expenditures would be recovered.
Our management believes that cash on hand, cash flows from operations and available lines of credit will be adequate to support currently planned business expansion and various obligations incurred in the operation of our business, both on a near and long-term basis.
Our access to capital and ability to compete for future capital-intensive projects will be dependent upon, among other things, our ability to meet certain financial covenants in our amended senior credit facility. A substantial decline in our financial performance as a result of an increase in operational expenses relative to revenue could limit our access to capital.
53
Table of Contractual Obligations
The following is a table of certain of our contractual obligations, as of June 29, 2003, which require us to make payments over the periods presented. The table does not reflect the additional $ 20.0 million in long-term indebtedness that we incurred after June 29, 2003.
Payments due by period | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Contractual Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
Long-Term Debt Obligations
|
$ | 250,000 | $ | 1,250 | $ | 20,625 | $ | 78,125 | $ | 150,000 | ||||||||||
Operating Lease Obligations
|
168,528 | 29,678 | 88,138 | 39,299 | 11,413 | |||||||||||||||
Non-Recourse Debt
|
39,684 | 520 | 3,936 | 4,908 | 30,320 | |||||||||||||||
Other Long-Term Liabilities
|
12,530 | 2,817 | | | 9,713 | |||||||||||||||
Total
|
$ | 470,742 | $ | 34,265 | $ | 112,699 | $ | 122,332 | $ | 201,446 |
Inflation |
Our management believes that inflation, in general, did not have a material effect on our results of operations during fiscal 2002 and 2001. However, in fiscal 2000, we experienced increased wage pressures due to tight labor markets in certain key geographic areas. In addition, we were negatively impacted by significant increases in utilities costs in fiscal 2000, particularly in the western United States. While some of our contracts include provisions for inflationary indexing, inflation could have a substantial adverse effect on our results of operations in the future to the extent that wages and salaries, which represent our largest expense, increase at a faster rate than the per diem or fixed rates we receive for our management services.
Market Risk |
Effective September 18, 2003, we entered into interest rate swap agreements in the aggregate notional amount of $50.0 million. The agreements, which have payment and expiration dates that coincide with the payment and expiration terms of the Notes, effectively convert $50.0 million of the Notes into variable rate obligations. Under the agreements, we receive a fixed interest rate payment from the financial counterparties to the agreements equal to 8.25% per year calculated on the notional $50.0 million amount, while we make a variable interest rate payment to the same counterparties equal to the six-month London Interbank Offered Rate plus a fixed margin of 3.45%, also calculated on the notional $50.0 million amount. As a result, for every one percent increase in the interest rate applicable to the swap agreements, our total annual interest expense will increase by $0.5 million.
We have designated the $50.0 million swap as a fair value hedge and there is no expected ineffectiveness related to the swap. Changes in the fair value of the interest rate swap will be recorded in earnings along with related designated changes in the value of the Notes.
We are also exposed to changes in interest rates with respect to our amended senior credit facility. Monthly payments under the amended senior credit facility are indexed to a variable interest rate. Based on borrowings outstanding under the amended senior credit facility of $120.0 million as of September 15, 2003, for every one percent increase in the interest rate applicable to the amended senior credit facility, our total annual interest expense will increase by $1.2 million.
We entered into certain interest rate swap agreements fixing the interest rate on our Australian non-recourse debt to 9.7%. The difference between the floating rate and the swap rate on these instruments is recognized in interest expense within the respective entity. Because the interest rates with respect to these instruments are fixed, a hypothetical 100 basis point change in the current interest rate would not have a material impact on our financial statements.
54
Additionally, we invest our cash in a variety of short-term financial instruments. These instruments generally consist of highly liquid investments with original maturities at the date of purchase of three months or less. While these instruments are subject to interest rate risk, a hypothetical 100 basis point increase or decrease in market interest rates would not have a material impact on our financial statements.
As a result of our international operations, we are also exposed to fluctuations in foreign currency exchange rates between the U.S. dollar and the Australian dollar, British pound and South African rand currency exchange rates.
55
BUSINESS
Our Company
We are a leading provider of government-outsourced services specializing in the management of correctional, detention and mental health facilities. We believe that we are the second largest operator of privatized correctional and detention facilities in the world, with operations located in the United States, Australia, New Zealand and South Africa. We believe that we have a leading share of the privatized correctional and detention facilities management services market for the states of California, Florida and Texas, the three U.S. states with the largest inmate populations. As of September 15, 2003, we operated a total of 47 correctional, detention and mental health facilities and had over 36,000 beds under management or for which we had been awarded contracts. We maintained an average facility occupancy rate of over 97% and 99% for the fiscal year ended December 29, 2002 and the twenty-six weeks ended June 29, 2003, respectively. For the fiscal year ended December 29, 2002, we had consolidated revenues of $568.6 million and consolidated operating income of $27.9 million.
Our correctional and detention management services involve the provision of security, administrative, rehabilitation, education, health and food services, primarily at adult male correctional and detention facilities. We also develop new facilities based on contract awards, using our project development expertise and experience to design, construct and finance what we believe are state-of-the-art facilities that maximize security and efficiency. Through these management and development services, we believe that we achieve significant cost savings in comparison to public sector costs, providing substantial privatization benefits to our government customers.
Under our correctional facility management services contracts, most of our government customers pay us on a per inmate per diem basis, with some of these contracts providing for minimum guaranteed payments regardless of actual occupancy levels. Certain of our contracts also provide for fixed fee payments. Generally, our management services contracts have rate adjustments for increased costs due to inflation. Our contract renewal rate over the last five years is 94%, the average length of our current customer relationships is six years, and 30 of our 47 current contracts are with government entities to whom we have been providing services for five years or more.
Our mental health facilities management services primarily involve the provision of acute mental health and related administrative services to mentally ill patients that have been placed under public sector supervision and care. At these mental health facilities, we employ psychiatrists, physicians, nurses, counselors, social workers and other trained personnel to deliver active psychiatric treatment which is designed to diagnose, treat and rehabilitate patients for community reintegration. Since 1998, we have operated what we believe is the only fully privatized state mental health facility in the U.S. at South Florida State Hospital. In December 2000, we completed the design and construction of a new 325-bed facility that replaced the original facility. We are paid a fixed monthly fee for the provision of services at this facility.
Competitive Strengths
Experienced Industry Leader
We are a global provider of privatized correctional and detention services with operations in the United States, Australia, New Zealand and South Africa. We operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers and mental health facilities. Since our founding in 1984, we believe that we have established a strong reputation among federal, state, and local authorities as a highly effective operator of secure, well-managed facilities. We believe that our long operating history and reputation have earned us credibility with both
56
Regional Operating Structure
We operate three regional U.S. offices and two international offices that provide administrative oversight and support to our correctional and detention facilities and allow us to maintain close relationships with our clients and suppliers. Each of our three regional U.S. offices is responsible for the facilities located within a defined geographic area. The regional offices perform regular internal audits of the facilities in order to ensure continuing compliance with the underlying contracts, applicable accreditation standards, governmental regulations and our internal policies and procedures. We believe that our regional operating structure differentiates us from our competitors and allows us to deliver highly responsive customer service. We also believe that our regional operating structure facilitates our integration into the local communities in which we operate and provides us with the ability to market our services more effectively.
Long Term Relationships with High-Quality Government Customers
We have developed long term relationships with our government customers and have been successful at retaining our facility management contracts. We have provided correctional and detention management services to the United States Federal Government for 17 years, the State of California for 14 years, the State of Texas for 14 years, various Australian state government entities for 11 years and the State of Florida for 8 years. These five customers accounted for approximately 62.4% and 74.6% of our consolidated revenues for the fiscal year ended December 29, 2002 and the twenty-six weeks ended June 29, 2003, respectively. Our strong operating track record has enabled us to achieve a high renewal rate for contracts. Over the past five years, 48 out of 51 of our contracts have been renewed, a renewal rate of 94%, and during the 17 years we have been in business, we have lost only one contract to a private competitor. Our government customers typically satisfy their payment obligations to us through budgetary appropriations. We believe this provides us with a stable and predictable source of revenue and cash flow.
Full-Service Facility Developer
We believe that our ability to provide comprehensive facility development and design services enables us to retain existing customers seeking to update their facilities and to attract new customers by demonstrating the benefits of privatization. We have developed an expertise in the design, construction and financing of high quality correctional, detention and mental health facilities. Since 1987, we have designed, developed or renovated 38 correctional, detention and mental health facilities. We have provided or facilitated the financing of these facilities through a variety of means, including, public-private financing initiatives, third party sale-leasebacks, self-financings and tax-exempt, non-recourse local or municipal bonds. We believe that our in-house team of architects provides us with the capability to produce secure and cost-effective design solutions that reduce personnel needs and facility operating expenses.
Experienced, Proven Senior Management Team
Our top three senior executives have over 45 years of combined industry experience, have worked together at our company for more than 12 years and have established a track record of growth and profitability. Under their leadership, our annual consolidated revenues have grown from $40.0 million in 1991 to $568.6 million in 2002. Our Chief Executive Officer, George C. Zoley, was one of the pioneers of the industry, having developed and opened what we believe was one of the first privatized detention facilities in the U.S. in 1986. In addition to senior management, our operational and facility level management has significant operational expertise. Our wardens have an average of 24 years of correctional and detention industry experience. We believe that the long, accomplished tenure of our management team helps to distinguish us from our competitors in the privatized corrections industry.
57
Business Strategy
Provide High Quality, Essential Services at Lower Costs
Our objective is to provide federal, state and local governmental agencies with high quality, essential services at a lower cost than they themselves could achieve. We generally provide all of the critical services associated with operating our facilities, including security, food services, rehabilitation programs, education and on-site health care. We believe this enables us to ensure high quality and control costs. Our 22 domestic correctional and detention facilities that have been rated by the American Correctional Association, or the ACA, have achieved a median accreditation score of 99.5%. Accreditation by the ACA serves as a measure of our ongoing compliance with accepted national industry standards of design and operation and we believe it helps to provide protection against frivolous inmate litigation. We have developed standard operating procedures for our facilities that are designed to maximize efficiency and control our expenses.
Maintain Disciplined Operating Approach
We manage our business on a contract by contract basis in order to maximize our operating margins. We typically refrain from pursuing contracts that we do not believe will yield attractive profit margins in relation to the associated operational risks. For example, we have avoided operating certain juvenile and female correctional facilities which we believe may be prone to increased operational difficulties that may result in increased litigation, higher personnel costs and reduced profitability. Generally, we do not engage in speculative development and do not build facilities without having a corresponding management contract award in place. In addition, we have elected not to enter certain international markets with a history of economic and political instability. We believe that our strategy of emphasizing lower risk, higher profit opportunities helps us to consistently deliver strong operational performance, lower our costs and increase our overall profitability.
Expand Into Complementary Government-Outsourced Services
We intend to capitalize on our long term relationships with government agencies to continue to grow our correctional, detention and mental health facilities management services and to become a preferred provider of complementary government-outsourced services. We believe that government outsourcing of currently internalized functions will increase largely as a result of the public sectors desire to maintain quality service levels amid governmental budgetary constraints. Based on our expansion into the mental health services sector, we believe that we are well positioned to continue to deliver higher quality services at lower costs in new areas of privatization.
Pursue International Growth Opportunities
As a global international provider of privatized correctional services, we are able to capitalize on opportunities to operate existing or new facilities on behalf of foreign governments. We currently have operations in Australia, New Zealand and South Africa. We intend to further penetrate these markets and to expand into new international markets which we deem attractive. We believe that we are one of the few companies worldwide that has the operational expertise, track record and resources to compete for the management of large-scale, privatized correctional facilities.
Industry Overview
We believe that governmental agencies in the U.S. spent more than $50.0 billion on correctional and detention facilities and services in 2002. As of June 30, 2002, the total U.S. prison population exceeded 2.0 million for the first time, with only 6.1% of the federal and state population being outsourced to the private sector. We believe that the U.S. market is poised for both overall growth and increased privatization as a result of increasing incarceration rates, a
58
Increasing Prison Populations
According to the Bureau of Justice Statistics, the average annual growth rate of the prison population in the U.S. between December 1995 and June 2002 was 3.8%, with the growth rate declining slightly between June 2001 and June 2002 to 2.8%. The incarceration rate between June 2001 and June 2002 increased by 1.5%, after growing by 1.0% between December 2000 and December 2001. We believe that further growth could come from stricter sentencing guidelines and the projected growth of the 18 to 24 year-old at-risk male population, which is expected to increase by 6.5% from 2000 to 2005.
Overcrowding Pressure
As of December 31, 2001, 22 states and the federal prison system were operating between 1% and 37% above their capacity, with the federal prison system operating at 31% above capacity. Additionally, the Federal Bureau of Prisons projects that during fiscal year 2003, the federal governments prison population will reach 166,000 inmates, 35% above its projected capacity.
Budgetary Constraints
We believe that full or partial outsourcing of correctional and detention services will become a more compelling option for public officials due to increasing budgetary constraints at both the federal level and in many states. We believe that states that outsource a significant percentage of their inmate populations reduce the overall growth in their correctional spending.
Quality Improvements and Performance Accountability
We believe that private correctional and detention facilities provide superior operational quality as compared to government-operated operational facilities. Most correctional and detention services contracts include economic incentives for private operators to deliver high quality service, provide for continuous monitoring by government representatives and require accreditation by independent organizations such as the ACA for compliance with contract terms and industry standards. We believe these contractual incentives establish a high degree of accountability for private operators.
Facilities
The following table summarizes certain information with respect to facilities that we (or a subsidiary or joint venture of ours) operated under a management contract or had an award to manage as of July 31, 2003.
Scheduled | ||||||||||||||||||||||||
Facility Name | Design | Expiration | Renewal | |||||||||||||||||||||
Location | Company Role | Capacity | Facility Type | Security Level | of Current Term | Option | ||||||||||||||||||
Correctional Facilities | ||||||||||||||||||||||||
Federal Government Contracts: | ||||||||||||||||||||||||
Aurora INS Processing Center, Aurora, Colorado(5) | Design/ Construction/ Management | 340 | DHS Detention Facility | Minimum/ Medium | March 2004 | (4)six month | ||||||||||||||||||
Queens Private Correctional Facility, Queens, New York(5) | Design/ Construction/ Management | 200 | DHS Detention Facility | Minimum/ Medium | April 2004 | (3)one year | ||||||||||||||||||
Rivers Correctional Institution, Winton North Carolina(1) | Design/ Construction/ Management | 1,200 | Federal Prison | Low/ Minimum | March 2004 | (7)one year | ||||||||||||||||||
Taft Correctional Institution Taft, California | Management | 2,048 | Federal Prison | Low/ Minimum | August 2003 | (4)one year |
59
Scheduled | ||||||||||||||||||||||||
Facility Name | Design | Expiration | Renewal | |||||||||||||||||||||
Location | Company Role | Capacity | Facility Type | Security Level | of Current Term | Option | ||||||||||||||||||
State Government Contracts: | ||||||||||||||||||||||||
Allen Correctional Center Kinder, Louisiana | Management | 1,538 | State Prison | Medium/ Maximum | December 2003 | (1)two year | ||||||||||||||||||
Bridgeport Correctional Center Bridgeport, Texas | Construction/ Management | 520 | Pre-Release Center | Minimum | August 2003 | (2)one year | ||||||||||||||||||
Central Texas Parole Violator Facility San Antonio, Texas(11) | Renovation/ Management | 623 | State Parole Violator Facility | All levels | August 2003 | | ||||||||||||||||||
U.S. Marshal and DHS Detention Facility (County Lease) | January 2005 | (2)one year | ||||||||||||||||||||||
Central Valley Community Correctional Facility McFarland California(5) | Design/ Construction/ Management | 550 | State Community Correctional Facility | Medium | December 2007 | | ||||||||||||||||||
Cleveland Correctional Center Cleveland, Texas(12) | Management | 520 | State Prison | Medium | September 2003 | | ||||||||||||||||||
Coke County Juvenile Justice Facility Coke County, Texas | Design/ Construction/ Management | 200 | Juvenile Offender Facility | Medium/ Maximum | March 2004 | | ||||||||||||||||||
Desert View Modified Community Correctional Facility Adelanto California(5) | Design/ Construction/ Management | 568 | State Community Correctional Facility | Medium | December 2007 | | ||||||||||||||||||
East Mississippi Correctional Facility Meridian, Mississippi | Design/ Construction/ Management | 750 | State Prison | Mental Health | April 2004 | (1)two year | ||||||||||||||||||
Golden State Community Correctional Facility McFarland, California(5) | Design/ Construction/ Management | 550 | State Community Correctional Facility | Medium | December 2007 | | ||||||||||||||||||
Guadalupe County Correctional Facility Santa Rosa, New Mexico(1)(8) | Design/ Construction/ Management | 600 | State Prison | Medium | January 2004 | (5)one year | ||||||||||||||||||
John R. Lindsey Correctional Facility Jack County, Texas(12) | Design/ Construction/ Management | 1,031 | State Jail Facility | Minimum/ Medium | August 2003 | | ||||||||||||||||||
Karnes County Correctional Center Karnes City, Texas(5) | Management | 579 | County Jail | All levels | January 2028 | | ||||||||||||||||||
Kyle Correctional Facility (New Vision) Kyle, Texas(2) | Construction/ Management/ Chemical Dependency Treatment | 520 | State Prison/ In-Prison Chemical Dependency Treatment Center | Minimum | August 2003 | (2)one year | ||||||||||||||||||
Lawrenceville Correctional Facility Lawrenceville, Virginia | Management | 1,536 | State Jail Facility | Medium | March 2008 | | ||||||||||||||||||
Lawton Correctional Facility Lawton, Oklahoma(5)(13) | Design/ Construction/ Management | 1,800 | State Prison | Medium | July 2003 | |||||||||||||||||||
Lea County Correctional Facility Hobbs, New Mexico(5) | Design/ Construction/ Management | 1,264 | State Prison & County Jail |
All levels | December 2003 | (5)one year | ||||||||||||||||||
Lockhart Secure Work Program Facility Lockhart, Texas(12) | Design/ Construction/ Management | 500 | Work Program Facility | Minimum | August 2003 | | ||||||||||||||||||
Marshall County Correctional Facility Holly Springs Mississippi | Design/ Construction/ Management | 1,000 | State Prison | Medium | August 2003 | Two year base (3)one year | ||||||||||||||||||
McFarland Community Correctional Facility McFarland, California(5)(14) | Construction/ Management | 224 | State Community Correctional Facility | Minimum | July 2003 | | ||||||||||||||||||
Michigan Youth Correctional Facility Baldwin, Michigan(1) | Design/ Construction/ Management | 480 | State Prison | Maximum | July 2003 | Unlimited four year | ||||||||||||||||||
Moore Haven Correctional Facility Moore Haven, Florida | Design/ Construction/ Management | 750 | State Prison | Medium | July 2004 | Unlimited two year |
60
Scheduled | ||||||||||||||||||||||||
Facility Name | Design | Expiration | Renewal | |||||||||||||||||||||
Location | Company Role | Capacity | Facility Type | Security Level | of Current Term | Option | ||||||||||||||||||
North Texas Intermediate Sanction Facility Fort Worth, Texas(11) | Renovation/ Management | 400 | Intermediate Sanction Facility | Minimum | August 2003 | | ||||||||||||||||||
South Bay Correctional Facility South Bay, Florida(10) | Design/ Construction/ Management | 1,318 | State Prison | Medium/ Close Custody | July 2003 | Unlimited two year | ||||||||||||||||||
Willacy County Unit Raymondville, Texas(12) | Design/ Construction/ Management | 1,000 | State Jail Facility | Minimum | August 2003 | | ||||||||||||||||||
Local Government Contracts: | ||||||||||||||||||||||||
Broward County Work Release Center Broward County, Florida(5) | Design/ Construction/ Management | 300 | Community Work Release Center DHS Female Detention Facility |
Non-secure | September 2003 | (1)one year | ||||||||||||||||||
George W. Hill Correctional Facility Thornton, Pennsylvania | Design/ Construction/ Management | 1,812 | County Jail | All levels | August 2003 | Unlimited two year | ||||||||||||||||||
Val Verde Correctional Facility Del Rio Texas(1)(9) | Design/ Construction/ Management | 848 | Local Detention Facility/ County Jail | All levels | January 2021 | Unlimited five year | ||||||||||||||||||
Western Region Detention Facility at San Diego, California | Renovation/ Management | 616 | Local Detention Facility | Maximum | July 2003 | (2)one year | ||||||||||||||||||
International Contracts: | ||||||||||||||||||||||||
Arthur Gorrie Correctional Centre Wacol, Australia | Management | 710 | Reception and Remand Centre | All levels | December 2007 | | ||||||||||||||||||
Auckland Central Remand Prison Auckland, New Zealand | Management | 383 | National Prison | Medium | May 2004 | | ||||||||||||||||||
DIMIA | Management | 1,200 | Immigration Detention | All levels | December 2003 | | ||||||||||||||||||
One Contract | ||||||||||||||||||||||||
Baxter Immigration Detention Baxter, Australia(6) | ||||||||||||||||||||||||
Maribyrnong Immigration Melbourne, Australia | ||||||||||||||||||||||||
Perth Immigration Perth, Australia | ||||||||||||||||||||||||
Port Hedland Immigration Hedland, Australia | ||||||||||||||||||||||||
Villawood Immigration Detention Sydney, Australia | ||||||||||||||||||||||||
Fulham Correctional Centre Victoria, Australia | Design/ Consultation/ Management Expansion Beds | 793 68 |
State Prison | Minimum/ Medium | July 2005 | (4)three year | ||||||||||||||||||
Junee Correctional Centre Junee, Australia | Construction/ Management | 750 | State Prison | Minimum/ Medium | January 2006 | | ||||||||||||||||||
Kutama-Sinthumule Maximum Security Prison Northern Province, Republic of South Africa | Design/ Construction/ Management | 3,024 | National Prison | Maximum | July 2024 | | ||||||||||||||||||
Melbourne Custody Centre, Melbourne, Australia | Management | 80 | City Jail | All levels | March 2004 | | ||||||||||||||||||
New Brunswick Youth Centre(3) New Brunswick, Canada | Design/ Construction/ Management | N/ A | Province Juvenile Facility | All levels | October 2022 | | ||||||||||||||||||
Pacific Shores Healthcare Victoria, Australia(7) | Management | N/ A | Health Care Services | N/ A | December 2003 | | ||||||||||||||||||
South Florida State Hospital Pembroke Pines, Florida | Design/ Construction/ Management | 325 | State Psychiatric Hospital | N/ A | July 2003 | (2)five year | ||||||||||||||||||
Atlantic Shores Hospital Fort Lauderdale, Florida(4) | Management | 72 | Private Psychiatric Hospital | N/ A | N/ A | N/ A |
(1) | We own these facilities. |
61
(2) | We operate a chemical dependency treatment center located in this facility under a separate contract. This contract is for a three-year term expiring August 31, 2003. We have received notice that this contract will be extended until August 2004. |
(3) | We hold a contract for maintenance only of this facility. |
(4) | We purchased this facility and provide services on an individual patient basis; therefore, there are no contracts with government agencies subject to terms and/or renewals. |
(5) | We lease these facilities from CPV. In April 1998, we sold three facilities owned by us and the rights to acquire four other facilities to CPV which CPV subsequently exercised. CPV purchased an eighth facility directly from a government entity. In October 1998, we sold the completed portion of a ninth facility to CPV. During Fiscal 1999, CPV acquired a 600-bed expansion of the ninth facility and the right to acquire a tenth facility which it subsequently exercised. During Fiscal 2000, CPV purchased an eleventh facility that we had the right to acquire. The facilities were then leased to us under operating leases. There were no purchase and sale transactions between us and CPV in 2001 or 2002. See Business Properties. |
(6) | This facility represents additional services under the current detention services contractual agreement with the Department of Immigration, Multicultural and Indigenous Affairs, and is subject to a six-week termination clause depending on client needs. |
(7) | We provide comprehensive healthcare services to 11 government-operated prisons under this contract. |
(8) | We have a five-year contract with five one-year options to operate the facility on behalf of the county. The county, in turn, has a one-year contract, subject to annual renewal, with the state to house state prisoners at the facility. |
(9) | We have a twenty-year contract with one five-year option to operate the facility on behalf of the county. The county, in turn, has a one-year contract, subject to annual renewal, with the US Marshal Service to house federal prisoners at the facility. |
(10) | The Commission on Privatized Corrections has formally voted to extend this contract for one year to July 2004. |
(11) | We have received notice that this contract will be extended until February 2004. |
(12) | We have received notice that this contract will be extended until December 2003. |
(13) | The State Criminal Justice Board has formally voted to extend this contract for five years (one year base plus four one-year renewal periods). |
(14) | We have received notice that this contract will be extended until either January 2004 or July 2004. |
Facility Overview
We offer services that go beyond simply housing offenders in a safe and secure manner. We offer a wide array of in-facility rehabilitative and educational programs. Inmates at most of our facilities can also receive basic education through academic programs designed to improve inmates literacy levels and to offer the opportunity to acquire General Education Development certificates. Most of our managed facilities also offer vocational training for in-demand occupations to inmates who lack marketable job skills. In addition, most of our managed facilities offer life skills/transition planning programs that provide inmates job search training and employment skills, anger management skills, health education, financial responsibility training, parenting skills and other skills associated with becoming productive citizens. For example, at the Lockhart Work Program Facility, located in Lockhart, Texas, we, as part of our job training program, recruited firms from private industry to employ inmates at the facility. Inmates who participate in such programs receive job skills training and are paid at least the minimum wage. The inmates earnings are used to compensate victims, defray the inmates housing costs and support their dependents. We intend to expand this program to our correctional facilities in South Bay and Moore Haven, Florida. We
62
We operate each facility in accordance with our company-wide policies and procedures and with the standards and guidelines required under the relevant contract. For many facilities, the standards and guidelines include those established by the American Correctional Association. The American Correctional Association, an independent organization of corrections professionals, establishes correctional facility standards and guidelines that are generally acknowledged as a benchmark by governmental agencies responsible for correctional facilities. Many of our contracts for facilities in the United States require us to seek and maintain American Correctional Association accreditation of the facility. We have sought and received American Correctional Association accreditation for all such facilities. We have also achieved and maintained certification by the Joint Commission on Accreditation for Health Care Organizations, or JCAHCO, for both of our mental health facilities.
Facility Management Contracts
Other than listed in the following table, no other single customer accounted for 10% or more of our total revenues for Fiscal 2002, 2001, and 2000.
Customer | 2002 | 2001 | 2000 | |||||||||
Various agencies of the U.S. Federal Government
|
19 | % | 18 | % | 11 | % | ||||||
Various agencies of the State of Texas
|
17 | % | 16 | % | 15 | % | ||||||
Various agencies of the State of Florida
|
14 | % | 14 | % | 19 | % | ||||||
Department of Immigration, Multicultural and
Indigenous Affairs (Australia)
|
10 | % | 11 | % | 11 | % |
Except for our contracts for the Taft Correctional Institution, George W. Hill Correctional Facility, Rivers Correctional Institution, South Florida State Hospital, and the facilities in Australia, New Zealand and South Africa, all of which provide for fixed monthly rates, our facility management contracts provide that we are compensated at an inmate or patient per diem rate based upon actual or guaranteed occupancy levels. Such compensation is invoiced in accordance with applicable laws and paid on a monthly basis. All of our contracts are subject to either annual or bi-annual legislative appropriations. A failure by a governmental agency to receive appropriations could result in termination of the contract by such agency or a reduction of the management fee payable to us. No assurance can be given that the governmental agencies with which we contract will continue to receive appropriations in all cases.
The following table sets forth the number of scheduled renewals of our contracts in each of the next five years:
Year | Number of Contracts | |||
2003
|
27 | * | ||
2004
|
19 | |||
2005
|
10 | |||
2006
|
11 | |||
2007
|
8 |
* | As of June 29, 2003, twenty four of these contracts had been renewed or extended for new terms ranging from 3 months to five years, subject to the right of the contracting governmental entities to terminate the contracts prior to their scheduled expiration date in accordance with the terms of the contracts. |
63
Refer to the table in Business Facilities for detail of the renewal options for these contracts. Our management believes that we will be successful in renewing our contracts upon their expiration but we can provide no assurance that we will in fact be able to do so. Except as described below, to date, all renewal options under our management contracts have been exercised. However, in connection with the exercise of the renewal option, either the contracting government agency or us typically has requested changes or adjustments to the contract terms.
In Australia, the Department of Immigration, Multicultural and Indigenous Affairs (DIMIA) announced its intention to enter into contract negotiations with a competitor of our Australian subsidiary for the management and operation of Australias immigration centers. DIMIA has further stated that if it is unable to reach agreement with the announced preferred bidder, it will enter into negotiations with our subsidiary.
Our contracts typically allow a contracting governmental agency to terminate a contract with or without cause by giving us written notice ranging from 30 to 180 days. Since 1999, two contracts have been terminated by the mutual agreement of the parties prior to the end of the contract term. Most recently, on June 30, 2000, the cooperative agreement for the management of the Jena Juvenile Justice Center between us and the LaSalle Hospital District No. 1 was terminated by the mutual agreement of the parties.
In addition, in connection with our management of such facilities, we are required to comply with all applicable local, state and federal laws and related rules and regulations. Our contracts typically require us to maintain certain levels of insurance coverage for general liability, workers compensation, vehicle liability, and property loss or damage. If we do not maintain the required categories and levels of coverage, the contracting governmental agency may be permitted to terminate the contract. Presently, we are insured under a liability insurance program which includes comprehensive general liability, automobile liability and workers compensation coverage. We are self-insured for employment claims and for medical malpractice claims at Atlantic Shores Hospital and South Florida State Hospital. There can be no assurance that we will be able to obtain or maintain insurance levels as required by our contracts. See Business Insurance. In addition, we are required under our contracts to indemnify the contracting governmental agency for all claims and costs arising out of our management of facilities and in some instances we are required to maintain performance bonds relating to the construction and development of facilities.
Facility Design, Construction and Finance
We offer governmental agencies consultation and management services relating to the design and construction of new correctional and detention facilities and the redesign and renovation of older facilities. As of December 29, 2002, we had provided service for the design and construction of 32 facilities and for the redesign and renovation of six facilities. See table in Business Facilities.
Contracts to design and construct or to redesign and renovate facilities may be financed in a variety of ways. Governmental agencies may finance the construction of such facilities through the following: (i) a 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 levy 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 appropriations. We may also act as a source of financing or as a facilitator with respect to any financing. In these cases, the construction of such facilities may be financed through various methods including, but not limited to, the following: (i) funds from equity offerings of our stock; (ii) cash flows from operations; (iii) borrowing from banks or other institutions (which may or may not be subject to government guarantees in the event of contract termination); or (iv) lease arrangements with third parties.
64
If the project is financed using direct governmental appropriations, with proceeds of the sale of bonds or other obligations issued prior to the award of the project or by us directly, then financing is in place when the contract relating to the construction or renovation project 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. Generally, substantial expenditures for construction will not be made on such a project until the tax-exempt bonds or other obligations are sold; and, if such bonds or obligations are not sold, construction and, therefore, management of the facility may either be delayed until alternative financing is procured or the development of the project will be entirely suspended. If the project is self-financed by us, then financing is in place prior to the commencement of construction.
When we are awarded a facility management contract, appropriations for the first annual or bi-annual period of the contracts term have generally already been approved, and the contract is subject to governmental appropriations for subsequent annual or bi-annual periods.
Under our construction and design management contracts, we generally agree to be responsible for overall project development and completion. We typically act as the primary developer on construction contracts for facilities and subcontracts with national general contractors. Where possible, we subcontract with construction companies with which we have previously worked. We make use of an in-house staff of architects and operational experts from various corrections disciplines (e.g. security, medical service, food service, inmate programs and facility maintenance) as part of the team that participates from conceptual design through final construction of the project. This staff coordinates all aspects of the development with subcontractors and provide site-specific services. It has been our experience that it typically takes 9 to 24 months to construct a facility after the contract is executed and financing approved.
When designing a facility, our architects seek to utilize, with appropriate modifications, prototype designs we have used in developing prior projects. We believe that the use of these designs allows us to reduce cost overruns and construction delays and to reduce the number of officers required to provide security at a facility, thus controlling costs both to construct and to manage the facility. Security is maintained because our facility designs increase the area under direct surveillance by correctional officers and make use of additional electronic surveillance.
We may also propose that governmental agencies consider various financing structures for construction finance.
Marketing and Business Proposals
Currently, we view governmental agencies responsible for state and federal correctional facilities in the United States and governmental agencies responsible for correctional facilities in Australia, New Zealand and South Africa as our primary potential customers. Our secondary customers include local agencies in the U.S. and other foreign governmental agencies.
Governmental agencies responsible for correctional and detention facilities generally procure goods and services through requests for proposals. A typical request for proposals requires bidders to provide detailed information, including, but not limited to, descriptions of the following: the services 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).
If the project meets our profile for new projects, we then will submit a written response to the request for proposals. We estimate that we typically spend between $50,000 and $150,000 when responding to a request for proposals. We have engaged and intend in the future to engage independent consultants to assist us in developing privatization opportunities and in responding to
65
There are several critical events in the marketing process, including the issuance of a request for proposals by a governmental agency, submission of a response to the request for proposals by us, the award of a contract by a governmental agency and the commencement of construction or management of a facility. Our experience has been that a period of approximately five to ten weeks is generally required from the issuance of a request for proposals to the submission of our response to the request for proposals; that between one and four months elapse between the submission of our response and the agencys award for a contract; and that between one and four months elapse between the award of a contract and the commencement of construction or management of the facility. If the facility for which an award has been made must be constructed, our experience is that construction usually takes between 9 and 24 months, depending on the size and complexity of the project; therefore, management of a newly constructed facility typically commences between 10 and 28 months after the governmental agencys award.
Insurance
Casualty insurance related to workers compensation, general liability and automobile insurance coverage is provided through an independent insurer. Prior to October 2, 2002, the first $1.0 million of coverage was reinsured by an insurance subsidiary of TWC. Effective October 2, 2002, we established a new insurance program with a $1.0 million deductible per occurrence with an independent insurer. The insurance program consists of primary and excess insurance coverage. The primary general liability coverage has a $5.0 million limit per occurrence with a $20.0 million general aggregate limit and a $1.0 million deductible. The primary automobile coverage has a $5.0 million limit per occurrence with a $1.0 million deductible and the primary workers compensation limits are based on state statutes and contain a $1.0 million deductible. The excess coverage has a $50.0 million limit per occurrence and in the aggregate. Although we believe such limits are adequate to insure against the various liability risks of our business, we cannot assure you that they will be. We are self-insured for employment claims and for medical malpractice claims at Atlantic Shores Hospital and South Florida State Hospital. There can be no assurance that we will be able to obtain or maintain insurance levels as required by our contracts.
Employees and Employee Training
At June 29, 2003, we had 11,885 full-time employees. Of such full-time employees, 83 were employed at our headquarters and 11,802 were employed at facilities and regional offices. We employ management, administrative and clerical, security, educational services, health services and general maintenance personnel. In the U.S., our correctional officer employees at George W. Hill Correctional Facility (Pennsylvania), Queens Private Correctional Facility (New York), Michigan Youth Correctional Facility (Michigan) and Desert View Modified Community Correctional Facility (California) are members of unions. In addition, our correctional officer employees at Auckland Central Remand Prison (New Zealand) and the majority of our employees in our Australian operations are covered by union agreements. Other than the contracts described above, we have no other union contracts or collective bargaining agreements. We believe our relations with our employees are good.
Under the laws applicable to most of our operations, and internal company policies, our correctional officers are required to complete a minimum amount of training. At least 160 hours of pre-service training by us is required under most U.S. state laws before an employee is allowed to work in a position that will bring him or her in contact with inmates. In addition to a minimum of 160 hours of pre-service training, most states require 40 or 80 hours of on-the-job training. Florida law requires that correction officers receive 520 hours of training and Michigan law requires that correctional officers receive 640 hours of training. Our training programs meet or exceed all applicable requirements.
66
Our training program begins with approximately 40 hours of instruction regarding our policies, operational procedures and management philosophy. Training continues with an additional 120 hours of instruction covering legal issues, rights of inmates, techniques of communication and supervision, interpersonal skills and job training relating to the particular position to be held. Each of our employees who has contact with inmates receives a minimum of 40 hours of additional training each year, and each manager receives at least 24 hours of training each year.
At least 240 and 160 hours of training are required for our employees in Australia and South Africa, respectively, before such employees are allowed to work in positions that will bring them into contact with inmates. Our employees in Australia and South Africa receive a minimum of 40 hours of additional training each year.
Competition
We compete primarily on the basis of the quality and range of services offered, our experience (both domestically and internationally) in the design, construction and management of privatized correctional and detention facilities, our reputation and our pricing. We compete with a number of companies, including, but not limited to: Corrections Corporation of America; Correctional Services Corporation; Cornell Companies, Inc.; and Management and Training Corporation. Some of our competitors are larger and have more resources than we do. We also compete in some markets with small local companies that may have a better knowledge of the local conditions and may be better able to gain political and public acceptance. In addition, in some markets, we may compete with governmental agencies that are responsible for correctional facilities. Upon the completion of the share repurchase, the non-compete agreement we had with Group 4 Falck which prevented Group 4 Falck from competing with us in the U.S. was terminated and Group 4 Falck and its affiliates became free to compete with us in the U.S.
Non-U.S. Operations
Although most of our operations are within the United States, our international operations make a significant contribution to our results of operations. Our wholly-owned subsidiaries provide correctional and detention facilities management in Australia and New Zealand.
A summary of U.S. and Australia operations is presented below (in thousands):
Fiscal year ended | Twenty-six weeks ended | |||||||||||||||||||||
December 31, | December 30, | December 29, | June 30, | June 29, | ||||||||||||||||||
2000 | 2001 | 2002 | 2002 | 2003 | ||||||||||||||||||
Revenues
|
||||||||||||||||||||||
U.S. operations
|
$ | 426,510 | $ | 454,053 | $ | 451,465 | $ | 225,313 | $ | 235,828 | ||||||||||||
Australia operations
|
109,047 | 108,020 | 117,147 | 56,061 | 62,633 | |||||||||||||||||
Total revenues
|
$ | 535,557 | $ | 562,073 | $ | 568,612 | $ | 281,374 | $ | 298,461 | ||||||||||||
Operating Income
|
||||||||||||||||||||||
U.S. operations
|
$ | 9,620 | $ | 19,559 | $ | 26,066 | $ | 12,919 | $ | 18,386 | ||||||||||||
Australia operations
|
9,292 | 4,625 | 1,810 | 482 | 1,266 | |||||||||||||||||
Total operating income
|
$ | 18,912 | $ | 24,184 | $ | 27,876 | $ | 13,401 | $ | 19,652 | ||||||||||||
67
As of | As of | ||||||||||||||||
December 31, | December 30, | December 29, | June 29, | ||||||||||||||
2000 | 2001 | 2002 | 2003 | ||||||||||||||
Long-Lived Assets | |||||||||||||||||
Domestic operations
|
$ | 48,274 | $ | 47,639 | $ | 200,258 | $ | 199,052 | |||||||||
International operations
|
6,346 | 6,119 | 6,208 | 6,067 | |||||||||||||
Total long-lived assets
|
$ | 54,620 | $ | 53,758 | $ | 206,466 | $ | 205,119 | |||||||||
Our affiliates (50% owned), South African Custodial Services, Pty. Ltd. and South African Management, Pty. Ltd., provide correctional and detention facilities management in South Africa. The following table summarizes certain financial information pertaining to these South Africa unconsolidated foreign affiliates, on a combined basis, for and as of the fiscal years ended December 31, 2000, December 30, 2001 and December 29, 2002, respectively and the twenty-six weeks ended June 30, 2002 and June 29, 2003, respectively (in thousands).
Twenty-Six Weeks | ||||||||||||||||||||
Fiscal Year Ended | Ended | |||||||||||||||||||
December 31, | December 30, | December 29, | June 30, | June 29, | ||||||||||||||||
2000 | 2001 | 2002 | 2002 | 2003 | ||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||
Revenues
|
$ | | $ | | $ | 15,928 | $ | 4,328 | $ | 17,445 | ||||||||||
Operating income (loss)
|
| (1,749 | ) | 1,016 | (2,307 | ) | 5,126 | |||||||||||||
Net income (loss)
|
| (1,441 | ) | (2,481 | ) | 2,071 | 630 |
As of | As of | |||||||||||||||||||
December 31, | December 30, | December 29, | June 30, | June 29, | ||||||||||||||||
2000 | 2001 | 2002 | 2002 | 2003 | ||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Current assets
|
$ | 6,561 | $ | 5,112 | $ | 6,426 | $ | 3,493 | $ | 10,955 | ||||||||||
Noncurrent assets
|
14,357 | 31,924 | 47,125 | 41,146 | 55,475 | |||||||||||||||
Current liabilities
|
32 | 913 | 1,808 | 1,676 | 4,330 | |||||||||||||||
Noncurrent liabilities
|
13,969 | 32,746 | 52,170 | 42,381 | 62,107 | |||||||||||||||
Shareholders (deficit) equity
|
6,917 | 3,377 | (427 | ) | 582 | (7 | ) |
For financial information pertaining to our former United Kingdom unconsolidated foreign affiliate, PCG, see the consolidated financial statements of PCG included elsewhere in this prospectus. We recently sold our interest in PCG.
Business Regulations and Legal Considerations
Certain states, such as Florida and Texas, deem correctional officers to be peace officers and require our personnel to be licensed and subject to background investigation. State law also typically requires correctional officers to meet certain training standards.
In addition, many government agencies are required to enter into a competitive bidding procedure before awarding contracts for products or services. The laws of certain jurisdictions may also require us to award subcontracts on a competitive basis or to subcontract with businesses owned by women or members of minority groups.
The failure to comply with any applicable laws, rules or regulations or the loss of any required license could have a material adverse effect on our business, financial condition and results of operations. Furthermore, our current and future operations may be subject to additional regulations as a result of, among other factors, new statutes 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 our business, financial condition and results of operations.
68
Properties
Formerly, we leased our corporate headquarters office space in Palm Beach Gardens, Florida, from TWC. Our obligations under this lease were terminated 10 days after the completion of the share repurchase from Group 4 Falck. In April 2003, we relocated our corporate offices and our eastern regional offices to Boca Raton, Florida, under a new 10-year lease. In addition, we lease office space for our central regional offices in New Braunfels, Texas; and for our western regional offices in Carlsbad, California We also lease office space for our Australian operations in Sydney, Australia, and through our overseas affiliates, in Sandton, South Africa.
On April 28, 1998, CPV acquired eight correctional and detention facilities that we operated. We previously had three common members with CPV on each of our respective boards of directors. Effective September 9, 2002, we decided with CPV to no longer have common members serving on our respective boards of directors. CPV also was granted the fifteen-year right to acquire and lease back future correctional and detention facilities developed or acquired by us. During fiscal 1998 and 1999, CPV acquired two additional facilities for $94.1 million. In fiscal 2000, CPV purchased an eleventh facility that we had the right to acquire for $15.3 million. We recognized no net proceeds from the sale. There have been no purchase and sale transactions between us and CPV since the beginning of 2001.
We lease the following facilities from CPV under 10-year operating leases: (i) Aurora INS Processing Center; (ii) Broward County Work Release Center; (iii) Central Valley Community Correctional Facility; (iv) Desert View Community Correctional Facility; (v) Golden State Community Correctional Facility; (vi) Jena Juvenile Justice Center; (vii) Karnes County Correctional Center; (viii) Lawton Correctional Facility; (ix) Lea County Correctional Facility; (x) McFarland Community Correctional Facility and (xi) Queens Private Correctional Facility. As the lease agreements are subject to contractual lease increases, we record operating lease expense for these leases on a straight-line basis over the term of the leases.
We also lease the following facilities that we manage: (i) Central Texas Parole Violator Facility; (ii) Coke County Juvenile Justice Facility; (iii) North Texas Intermediate Sanction Facility; and (iv) Western Region Detention Facility at San Diego.
We own a 72-bed private psychiatric hospital in Fort Lauderdale, Florida, which we purchased and improved in 1997.
Additionally, we own the following properties: (i) Guadalupe County Correctional Facility; (ii) Michigan Youth Correctional Facility; (iii) Rivers Correctional Institution; and (iv) Val Verde Correctional Facility.
Legal Proceedings
We are defending a wage and hour lawsuit filed in California state court by ten current and former employees. The employees are seeking certification of a class which would encompass all our current and former California correctional officers in certain selected posts. Discovery is underway and the court has yet to hear the plaintiffs certification motion. We are unable to estimate the potential loss exposure due to the current procedural posture of the lawsuit. While the plaintiffs in this case have not quantified their claim of damages and the outcome of the matters discussed above cannot be predicted with certainty, based on information known to date, our management believes that the ultimate resolution of these matters, if settled unfavorably to us, could have a material adverse effect on our financial position, operating results and cash flows. We are uninsured for any damages or costs we may incur as a result of this lawsuit, including the expenses of defending the lawsuit. We are vigorously defending our rights in this action.
69
The nature of our business exposes us to various types of claims or litigation against us, including, but not limited to, civil rights claims relating to conditions of confinement and/or mistreatment, sexual misconduct claims brought by prisoners or detainees, medical malpractice claims, claims relating to employment matters (including, but not limited to, employment discrimination claims, union grievances and wage and hour claims), property loss claims, environmental claims, automobile liability claims, contractual claims and claims for personal injury or other damages resulting from contact with our facilities, programs, personnel or prisoners, including damages arising from a prisoners escape or from a disturbance or riot at a facility. Except for such routine litigation incidental to our business, and the matter set forth above, there are no pending material legal proceedings to which we or any of our subsidiaries is a party or to which any of their property is subject.
70
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names, ages and a brief account of the business experience of each of our directors, executive officers and certain other key personnel.
Name | Age | Position | ||||
George C. Zoley
|
53 | Chairman of the Board and Chief Executive Officer | ||||
Wayne H. Calabrese
|
52 | Vice Chairman, President & Chief Operating Officer | ||||
John G. ORourke
|
52 | Senior Vice President Finance and Chief Financial Officer | ||||
Carol M. Brown
|
49 | Senior Vice President, North American and International Health Services | ||||
John J. Bulfin
|
50 | Senior Vice President, General Counsel and Corporate Secretary | ||||
John M. Hurley
|
55 | Senior Vice President, North American Operations | ||||
Donald H. Keens
|
59 | Senior Vice President, International Services | ||||
David N.T. Watson
|
37 | Vice President Finance and Treasurer | ||||
Brian R. Evans
|
35 | Vice President Accounting and Chief Accounting Officer | ||||
Norman A. Carlson
|
69 | Director | ||||
Benjamin R. Civiletti
|
67 | Director | ||||
G. Fred DiBona, Jr.
|
52 | Director | ||||
Anne N. Foreman
|
55 | Director | ||||
Richard H. Glanton
|
56 | Director |
George C. Zoley is Chairman of our Board of Directors and our Chief Executive Officer. He has served as our Chairman of the Board since May 2002, as our Chief Executive Officer since April 1994 and as a Director since we were incorporated in 1988. He served as Vice Chairman from January 1997 to May of 2002. From 1988 to 1997, Mr. Zoley served as our President. Mr. Zoley established us as a division of TWC in 1984 and continues to be a major factor in our development of the privatized correctional and detention facility business. Mr. Zoley has a Masters Degree in Public Administration from Florida Atlantic University and a Doctorate Degree in Public Administration from Nova Southeastern University. On January 15, 2003, Mr. Zoley was named Chairman of the Board of Trustees of Florida Atlantic University.
Wayne H. Calabrese is our Vice Chairman, President and Chief Operating Officer. He has served as our Vice Chairman since May 2002, as our President since January 1997, as our Chief Operating Officer since 1996 and as a Director since April 1998. He served as Executive Vice President from 1994 to 1996, and has served as President of our subsidiary, WCC Development, Inc., since March 1997. He joined us as Vice President, Business Development in 1989 and from 1991 to 1994, served as Chief Executive Officer of Australasian Correctional Management, Pty Ltd., our subsidiary based in Sydney, Australia. Prior to joining us, Mr. Calabrese was a partner in the Akron, Ohio law firm of Calabrese, Dobbins and Kepple. He received his B.S. from the University of Akron and a Juris Doctor from the University of Akron Law School.
John G. ORourke has been our Senior Vice President, Finance and Chief Financial Officer since April 1994. From 1991 to 1994, he served as Director and Vice President, Business Management. Prior to joining us, Mr. ORourke spent twenty years as an Officer in the United States Air Force in a broad range of operational and acquisition assignments. His last position was Chief of the Strategic Bomber Division under the Office of the Secretary of the Air Force, where he was
71
Carol M. Brown has been our Senior Vice President, North American and International Health Services since August 1990, and has been President of our healthcare subsidiary, Atlantic Shores Healthcare, Inc., since April 1997. She has over 25 years of healthcare management experience in acute care hospitals, managed care, government contracts, correctional health care and mental health services. Ms. Brown is a registered nurse and specialist in correctional health care management. From 1988 until joining us, Ms. Brown was a consultant for medical case management and workers compensation in south Florida for Health and Rehabilitation Management, Inc. She received her BSN from Florida International University.
John J. Bulfin has been our Senior Vice President, General Counsel and Corporate Secretary since March 1, 2000. Prior to joining us, Mr. Bulfin was a founding partner of the law firm Wiederhold, Moses, Bulfin & Rubin. Mr. Bulfin is a member of the American Bar Association, the Florida Bar Association, the Palm Beach County Bar Association, the Association of Trial Lawyers of America, the American Board of Trial Advocates, the Florida Defense Lawyers Association and the American Corporate Counsel Association. He served on the Florida Bar Grievance Committee for the Fifteenth Judicial Circuit from 1995 through 1998 and he served as Chairman of the Committee in 1998. Mr. Bulfin earned his law degree from Loyola University (Chicago) and his Bachelors degree from Regis College.
John M. Hurley has been our Senior Vice President, North American Operations since January 1, 2000, and has been with us since 1998, when he became the Facility Administrator (warden) of our 1,318-bed correctional facility in South Bay, Florida. Mr. Hurley completed twenty-five years of distinguished service in the Federal Bureau of Prisons (BOP) prior to joining us. While with the BOP, he served as the warden of several major correctional institutions, including a maximum security penitentiary, and earlier, at the BOPs largest correctional facility. He has a B.A. in Sociology from the University of Iowa, and a Certificate in Public Administration from the University of Southern California.
Donald H. Keens has been our Senior Vice President, International Services since January 1, 2000 and has been with us since 1994. Prior to the appointment to his present position, he served as the Managing Director of our subsidiary, Australasian Correctional Management, Pty Ltd., and from 1994 to 1997, he served as Managing Director of our United Kingdom joint venture, Premier Prison Services, Ltd. Mr. Keens followed a law enforcement career in Zimbabwe from 1962 to 1980, with the final rank of police superintendent, and was Director and General Manager for a prison and court services company in the United Kingdom from 1980 to 1993. He is qualified as a Professional Member SA of the Institute of Management Services (PMS), and a Senior Member of the Institute of Organization and Methods (SIOM).
David N.T. Watson has been our Vice President, Finance since July 1999 and our Treasurer since May 2003. He was also Assistant Secretary from 2000 to 2002 and Chief Accounting Officer from 1994 to 2003. From 1989 until joining us, Mr. Watson was with the Miami office of Arthur Andersen, LLP where his most recent position was Manager, in the Audit and Business Advisory Services Group. Mr. Watson has a B.A. in Economics from the University of Virginia and an M.B.A. from Rutgers, the State University of New Jersey. Mr. Watson is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants.
Brian R. Evans has been Vice President of Accounting since October 2002 and Chief Accounting Officer since May 2003. Mr. Evans joined us in October 2000 as Corporate Controller. From 1994 until joining us, Mr. Evans was with the West Palm Beach office of Arthur Andersen, LLP where his most recent position was Manager in the Audit and Business Advisory Services Group. From 1990 to 1994, Mr. Evans served in the U.S. Navy as an officer in the Supply Corps. Mr. Evans has a B.S. in Accounting from the University of Notre Dame and is a member of the American Institute of Certified Public Accountants.
72
Norman A. Carlson been a Director since 1994, and previously he served as a Director of TWC. Mr. Carlson retired from the Department of Justice in 1987 after serving as the Director of the BOP for 17 years. During his 30-year career with the BOP, Mr. Carlson worked at the United States Penitentiary, Leavenworth, Kansas, and at the Federal Correctional Institution, Ashland, Kentucky. Mr. Carlson was President of the American Correctional Association from 1978 to 1980, and is a Fellow in the National Academy of Public Administration. From 1987 until 1998, Mr. Carlson was Adjunct Professor in the department of sociology at the University of Minnesota in Minneapolis.
Benjamin R. Civiletti has been a Director since 1994. He has been Chairman of the law firm Venable, Baetjer and Howard since 1993, and was the Managing Partner of the firm from 1987 to 1993. From 1979 to 1980, Mr. Civiletti served as the Attorney General of the United States. He is a former Chairman of the Board of the Greater Baltimore Medical Center, the Founding Chairman of the Maryland Legal Services Corporation, a Director of Bethlehem Steel Corporation, a Director of MBNA Corporation and MBNA International, and a former Director of TWC. Mr. Civiletti is a Fellow of the American Bar Foundation, the American Law Institute and the American College of Trial Lawyers.
G. Fred DiBona, Jr. has been a Director since 2002. He is President and Chief Executive Officer of Independence Blue Cross (IBC), a health insurance corporation with 4.5 million members and more than 8,400 employees. He also serves as Chairman, President and Chief Executive Officer of Keystone Health Plan East, a wholly owned subsidiary of IBC, and AmeriHealth, Inc., an IBC subsidiary health insurance company which operates in several states throughout the country with nearly half a million members. Mr. DiBona also serves on the Boards of Directors of Exelon Energy Company, Tasty Baking Company and Philadelphia Suburban Corporation. He is a graduate of Davis and Elkins College and Delaware School of Law.
Anne N. Foreman has been a Director since 2002. She served as Under Secretary of the United States Air Force from September 1989 until January 1993. Prior to her appointment as Under Secretary, Ms. Foreman was General Counsel of the Department of the Air Force and a member of the Departments Intelligence Oversight Board. Ms. Foreman also served in the White House as Associate Director of Presidential Personnel for National Security from 1985 to 1987. Ms. Foreman earned a bachelors degree, magna cum laude, in history and French, and a masters in history from the University of Southern California in Los Angeles. She holds her juris doctor from American University in Washington D.C. and was awarded an honorary doctorate of law from Troy State University in Troy, Alabama. Ms. Foreman is a member of the Board of Directors of Ultra Electronics Defense, Inc., Advanced Programming Concepts, Inc., and Trust Services, Inc. Ms. Foreman also served on the Board of Directors of TWC for nine years.
Richard H. Glanton has been a Director since 1998. He is currently Senior Vice President, Corporate Development, at Exelon Corporation. From 1987 through April 2003, Mr. Glanton served as a partner in the Corporate & Securities Group finance group at the law firm of Reed Smith, LLP in Philadelphia, Pennsylvania. Mr. Glanton is Chairman of Philadelphia Television Network and is also a member of the Boards of Directors of Philadelphia Suburban Corporation and Philadelphia Suburban Water Corporation. He received his bachelors degree in English from West Georgia College (renamed State University of West Georgia) in Carrollton, Georgia and his juris doctor from the University of Virginia School of Law in Charlottesville, Virginia.
73
EXECUTIVE COMPENSATION
The following table shows salary paid and bonuses accrued by us during the fiscal year ended December 29, 2002, and each of the two preceding fiscal years, to and on behalf of our Chief Executive Officer, each of our four most highly compensated executive officers other than our Chief Executive Officer, and George R. Wackenhut, the former Chairman of our Board of Directors, which we refer to as the Named Executive Officers, for services in all capacities while they were our employees. In addition, the table shows other long-term compensation awarded to the Named Executive Officers for the indicated years.
Summary Compensation Table
Annual Compensation | Long-Term Compensation | ||||||||||||||||||||||||
Other | Securities | ||||||||||||||||||||||||
Annual | Underlying | All Other | |||||||||||||||||||||||
Salary | Bonus | Compensation | Options/ | Compensation | |||||||||||||||||||||
Name and Principal Position | Year | ($) | ($)(1) | ($) | SARs(#) | ($)(2) | |||||||||||||||||||
George R. Wackenhut
|
2002 | 153,365 | | | | | |||||||||||||||||||
Former Chairman of
|
2001 | 375,000 | 243,000 | | | | |||||||||||||||||||
the Board(3)
|
2000 | 375,000 | 98,559 | | | | |||||||||||||||||||
George C. Zoley
|
2002 | 632,500 | 414,000 | | 75,000 | 888,522 | |||||||||||||||||||
Chairman of the
|
2001 | 575,000 | 373,500 | | 70,000 | | |||||||||||||||||||
Board and Chief
|
2000 | 575,000 | | | 70,000 | | |||||||||||||||||||
Executive Officer
|
|||||||||||||||||||||||||
Wayne H. Calabrese
|
2002 | 448,000 | 251,500 | | 50,000 | 595,510 | |||||||||||||||||||
Vice Chairman,
|
2001 | 400,000 | 233,500 | | 50,000 | | |||||||||||||||||||
President and Chief
|
2000 | 375,000 | 42,500 | | 50,000 | | |||||||||||||||||||
Operating Officer | |||||||||||||||||||||||||
John G. ORourke
|
2002 | 255,200 | 119,500 | | 30,000 | 405,919 | |||||||||||||||||||
Senior Vice
|
2001 | 232,000 | 108,000 | | 25,000 | | |||||||||||||||||||
President Finance
|
2000 | 216,000 | 40,550 | | 30,000 | | |||||||||||||||||||
and Chief Financial Officer | |||||||||||||||||||||||||
Carol M. Brown
|
2002 | 252,625 | 118,000 | | 30,000 | | |||||||||||||||||||
Senior Vice
|
2001 | 235,000 | 109,500 | | 25,000 | | |||||||||||||||||||
President Health
|
2000 | 218,500 | 41,019 | | 30,000 | | |||||||||||||||||||
Services
|
|||||||||||||||||||||||||
Donald H. Keens
|
2002 | 231,125 | 100,500 | | 30,000 | | |||||||||||||||||||
Senior Vice
|
2001 | 215,000 | 100,500 | | 10,000 | | |||||||||||||||||||
President
|
2000 | 200,000 | 56,319 | | 10,000 | | |||||||||||||||||||
International Services |
(1) | Includes amounts paid pursuant to our senior incentive plan. |
(2) | Represents change of control payments pursuant to executive employment agreements in connection with the May 2002 merger between TWC and Group 4 Falck. |
(3) | Mr. Wackenhut served as Chairman of our Board of Directors until May 2002. |
74
Option Grants in Last Fiscal Year
Individual Grants | ||||||||||||||||||||||||
Potential Realizable | ||||||||||||||||||||||||
Number | Value at Assumed | |||||||||||||||||||||||
of | % of Total | Annual Rates of Stock | ||||||||||||||||||||||
Securities | Options | Price Appreciation | ||||||||||||||||||||||
Underlying | Granted to | Exercise or | for Option Term(1) | |||||||||||||||||||||
Options | Employees in | Base Price | Expiration | |||||||||||||||||||||
Granted(#) | Fiscal Year | ($/Share) | Date | 5%($) | 10%($) | |||||||||||||||||||
Name(1)
|
||||||||||||||||||||||||
George R. Wackenhut
|
| | | | | | ||||||||||||||||||
George C. Zoley
|
75,000 | 23 | % | 15.40 | 2/07/12 | 726,373 | 1,840,773 | |||||||||||||||||
Wayne H. Calabrese
|
50,000 | 16 | % | 15.40 | 2/07/12 | 484,249 | 1,227,182 | |||||||||||||||||
John G. ORourke
|
30,000 | 9 | % | 15.40 | 2/07/12 | 290,549 | 736,309 | |||||||||||||||||
Carol M. Brown
|
30,000 | 9 | % | 15.40 | 2/07/12 | 290,549 | 736,309 | |||||||||||||||||
Donald H. Keens
|
30,000 | 9 | % | 15.40 | 2/07/12 | 290,549 | 736,309 |
(1) | The full option term was used in the 5% and 10% annual growth projections for the price of the underlying stock. |
The following table sets forth certain information with respect to stock options exercised during the fiscal year ended December 29, 2002 and stock options held by each of our Named Executive Officers as of December 29, 2002. The closing price of our common stock on the last trading day of the fiscal year ended December 29, 2002 was $11.21 per share.
Aggregated Option Grants Exercised in Last Fiscal Year
Number of | ||||||||||||||||
Securities | Value of | |||||||||||||||
Underlying | Unexercised | |||||||||||||||
Unexercised | In-the-Money | |||||||||||||||
Shares | Options at Fiscal | Options at Fiscal | ||||||||||||||
Acquired | Year-End(#) | Year-End($) | ||||||||||||||
on | Value | |||||||||||||||
Exercise | Realized | Exercisable(E) | Exercisable(E) | |||||||||||||
Name | (#) | ($) | Unexercisable(U) | Unexercisable(U) | ||||||||||||
George R. Wackenhut
|
32,864 | (1) | 450,984 | | | |||||||||||
74,666 | (2) | 834,019 | | | ||||||||||||
George C. Zoley
|
| | 70,000E | (2) | ||||||||||||
248,000E | (3) | 327,775E | (3) | |||||||||||||
Wayne H. Calabrese
|
| | 110,000E | (2) | 244,700E | (2) | ||||||||||
125,000E | (3) | 138,625E | (3) | |||||||||||||
John G. ORourke
|
| | 55,000E | (2) | 159,650E | (2) | ||||||||||
75,000E | (3) | 83,175E | (3) | |||||||||||||
Carol M. Brown
|
| | 54,774E | (2) | 157,964E | (2) | ||||||||||
75,000E | (3) | 83,175E | (3) | |||||||||||||
Donald H. Keens
|
12,000 | (2) | 37,500 | 40,000E | (3) | 22,550E | (3) | |||||||||
10,000 | (3) | 62,175 |
(1) | Options under our 1994 Stock Option Plan |
(2) | Options under our 1994 Second Stock Option Plan |
(3) | Options under our 1999 Stock Option Plan |
Executive Employment Agreements and Retirement Agreements
On March 7, 2002, we entered into executive employment agreements and retirement agreements with George C. Zoley, Wayne H. Calabrese and John G. ORourke. The executive employment agreements provide that Messrs. Zoley, Calabrese and ORourke will receive a base
75
The executive employment agreements provided that when a change in control occurred the executives were entitled to the following: (1) a two-year rolling employment contract including the terms and conditions described above; (2) change in control payments equal to three times the sum of the executives annual salary as of the first day of the first month following a change in control and the annual bonus payment paid to the executive for fiscal year 2001, but payable in 24 equal consecutive monthly payments during an initial two-year employment term, and charged against us as earned; (3) all of our interest in any automobile used by the executive and the payment of the balance of any outstanding loan or lease on such automobile; and (4) an acceleration of the executives retirement age from age 60 to age 55 and, upon reaching such accelerated retirement age, payment of the present value of all payments due under the executive retirement agreements (as described in the executive retirement agreements).
The merger between TWC and Group 4 Falck constituted a change in control under the terms of the executive employment agreements and the executive retirement agreements. Pursuant to the terms of the executive employment agreements, once a change in control occurs, no other event will be deemed to be a change in control under the agreements.
Either the executive or us may terminate the executive employment agreement for any reason. Upon the termination of the executive employment agreements for any reason other than by the resignation of the executive without good reason (as defined in the executive employment agreements), the executive will be entitled to receive the following: (1) six months annual base salary and target level incentive bonus plus the remainder of any unpaid change in control payment; (2) the continuation of his employee benefits for a period of three years, or alternately, at the executives election, a cash payment equal to the present value of our cost of providing such benefits; and (3) the dollar value of the sum of vacation time had he remained employed and accrued vacation time. Upon the termination of the executive employment agreement by the resignation of the executive without good reason, the executive will be entitled to only the amount of salary, bonus, employee benefits or change in control payment that is due through the effective date of the resignation.
The executive employment agreements and the executive retirement agreements include a non-competition agreement for a period of two (2) years after the termination of the executives employment. The executive employment agreements and the executive retirement agreements provide that if any payment to the executive thereunder would be subject to federal excise taxes imposed on certain employment payments, we will make an additional payment to the executive to cover any such tax payable by the executive together with the taxes on such gross-up payment.
On December 20, 2002, the Compensation Committee of our board of directors approved an amendment to the retirement agreements. The board unanimously approved the amendment on January 17, 2003. The amended executive retirement agreements require the executive to actually retire from employment with us prior to receiving any retirement benefits under the agreements. The method of calculating the retirement benefits was amended as follows: Upon the later of (i) the date the executive actually retires from employment with us, or (ii) the executives 55th birthday, we will pay to the executive an amount of money equal to the amount set forth in the following table which corresponds to the executives age on the date he retires. The amounts set forth below are net of all applicable federal, state, local and other taxes. We are required to pay a
76
Executive Retirement Agreement Benefits Table
Executive Retirement Benefit
Retirement Age | George C. Zoley | Wayne H. Calabrese | John G. ORourke | |||||||||||
55 | $ | 2,917,000 | $ | 2,333,000 | $ | 1,750,000 |
Senior Officer Retirement Plan Benefits Table
The following table sets forth the estimated annual benefits under our Senior Officer Retirement Plan for executives other than Mr. Zoley, Mr. Calabrese and Mr. ORourke payable to a senior officer upon retirement at age 65 and reflects an offset for social security benefits.
Years of Service | ||||||||||||||||||||||||
Remuneration | ||||||||||||||||||||||||
Assumed Average Annual Salary for | (Estimated Annual Retirement Benefits | |||||||||||||||||||||||
Five-Year | For Years of Credited Service Shown Below) | |||||||||||||||||||||||
Period Preceding | ||||||||||||||||||||||||
Retirement | 10 | 15 | 20 | 25 | 30 | 35 | ||||||||||||||||||
$125,000
|
$ | 0 | $ | 3,862 | $ | 9,502 | $ | 14,090 | $ | 6,177 | $ | 0 | ||||||||||||
150,000
|
1,835 | 10,612 | 18,502 | 25,340 | 17,427 | 8,029 | ||||||||||||||||||
175,000
|
6,335 | 17,362 | 27,502 | 36,590 | 28,677 | 19,279 | ||||||||||||||||||
200,000
|
10,835 | 24,112 | 36,502 | 47,840 | 39,927 | 30,529 | ||||||||||||||||||
225,000
|
15,335 | 30,862 | 45,502 | 59,090 | 51,177 | 41,779 | ||||||||||||||||||
250,000
|
19,835 | 37,612 | 54,502 | 70,340 | 62,427 | 53,029 | ||||||||||||||||||
300,000
|
28,835 | 51,112 | 72,502 | 92,840 | 84,927 | 75,529 | ||||||||||||||||||
400,000
|
46,835 | 78,112 | 108,502 | 137,840 | 129,927 | 120,529 | ||||||||||||||||||
450,000
|
55,835 | 91,612 | 126,502 | 160,340 | 152,427 | 143,029 | ||||||||||||||||||
500,000
|
64,835 | 105,112 | 144,502 | 182,840 | 174,927 | 165,529 |
Our Senior Officer Retirement Plan is a defined benefit plan and, subject to certain maximum and minimum provisions, bases pension benefits on a percentage of the employees final average annual salary, not including bonus (earned during the employees last five (5) years of credited service) times the employees years of credited service. Benefits under our Senior Officer Retirement Plan are offset by social security benefits. Generally, a participant will vest in his or her benefits upon the completion of 10 years of service. The amount of benefit increases for each full year beyond 10 years of service except that there are no further increases after 25 years of service.
Corporation Incentive Plan
In March 1995, we adopted the Wackenhut Corrections Corporation Senior Officer Incentive Plan for certain of our senior officers including all of the Named Executive Officers. Participants in the Senior Officer Incentive Corporation Incentive Plan are assigned a target incentive award, stated as a percentage of the participants base salary depending upon the participants position with us. The target incentive awards for 2002 for our Chief Executive Officer, President and Senior Vice Presidents were 35%, 30%, and 25% respectively, of base salary. Our compensation
77
78
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of our common stock that were beneficially owned as of September 29, 2003 by each director, by each Named Executive Officer, by all directors and executive officers as a group, and by each person or group who was known by us to beneficially own more than 5% of our outstanding common stock. Except as set forth below, no other person or entity is known by us to beneficially own more than 5% of our outstanding common stock.
Amount & | |||||||||
Name and Address | Nature | ||||||||
of Beneficial | of Beneficial | Percent of | |||||||
Owners(1) | Ownership(2)(3) | Class | |||||||
Directors
|
|||||||||
Wayne H. Calabrese
|
245,110 | 2.56 | % | ||||||
Norman A. Carlson
|
13,000 | * | |||||||
Benjamin R. Civiletti
|
16,000 | * | |||||||
G. Fred DiBona, Jr.
|
4,000 | * | |||||||
Anne N. Foreman
|
4,000 | * | |||||||
Richard H. Glanton
|
10,000 | * | |||||||
George C. Zoley
|
393,818 | 4.05 | % | ||||||
Named Executive Officers
|
|||||||||
Carol M. Brown
|
135,840 | 1.44 | % | ||||||
Donald H. Keens
|
46,066 | * | |||||||
John G. ORourke
|
136,066 | * | |||||||
All Directors and Executive Officers as a
Group
|
1,111,032 | 10.64 | % | ||||||
Other
|
|||||||||
Strong Capital Management(4)
|
1,131,450 | 12.13 | % | ||||||
Royce & Associates, LLC(5)
|
858,300 | 9.20 | % | ||||||
Fidelity Management & Research(6)
|
752,200 | 8.06 | % | ||||||
Barclays Global Investors(7)
|
674,900 | 7.23 | % | ||||||
Morgan Stanley Investment Management(8)
|
614,100 | 6.58 | % | ||||||
Heartland Advisors(9)
|
561,000 | 6.01 | % | ||||||
High Rock Capital LLC(10)
|
470,700 | 5.05 | % |
* | Beneficially owns less than 1% of our common stock. |
(1) | Unless stated otherwise, the address of the beneficial owners is 621 NW 53rd Street, Suite 700, Boca Raton, Florida 33487. |
(2) | Information concerning beneficial ownership was furnished by the persons named in the table or derived from documents filed with the Commission. Each person named in the table has sole voting and investment power with respect to the shares beneficially owned. |
(3) | Includes 1,110,032 shares of common stock underlying stock options held by the directors and executive officers that are immediately exercisable or exercisable within 60 days. The number of shares of common stock underlying stock options held by the directors and executive officers are as follows: Mr. Calabrese 245,110; Mr. Carlson 12,000; Mr. Civiletti 16,000; Mr. DiBona, Jr. 4,000; Ms. Foreman 4,000; Mr. Glanton 10,000; Mr. Zoley 393,818; Ms. Brown 135,840; Mr. Keens 46,066; Mr. ORourke 136,066; other executive officers 107,132. |
(4) | The principal business address of Strong Capital Management is 100 Heritage Reserve, Menomonee Falls, Wisconsin 53051. |
(5) | The principal business address of Royce & Associates, LLC is 1414 Avenue of the Americas, New York, New York 10019. |
(6) | The principal business address of Fidelity Management & Research is 82 Devonshire Street, Boston, Massachusetts 02109. |
(7) | The principal business address of Barclays Global Investors is 45 Fremont Street, San Francisco, California 94105. |
79
(8) | The principal business address of Morgan Stanley Investment Management is 1221 Avenue of the Americas, New York, New York 10020. |
(9) | The principal business address of Heartland Advisors is 789 N. Water Street, Milwaukee, Wisconsin 53202. |
(10) | The principal business address of High Rock Capital LLC is 28 State Street, 18th Floor, Boston, Massachusetts 02109-1775. |
80
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We from time to time use the services of the law firm of Venable, Baetjer and Howard, of which Benjamin R. Civiletti, a director of ours, is a partner, and the law firm of Reed Smith LLP, of which Richard H. Glanton, a director of ours, was a partner. The amounts paid for these services in fiscal year 2002 were not material.
George C. Zoley, our Chairman of the Board and CEO, also serves as a director of several of our affiliates, including Wackenhut Corrections Corporation Australia Pty Limited, Australasian Correctional Services Pty Limited, Australasian Correctional Management Pty Limited, Canadian Correctional Management Inc., WCC RE Holdings LLC, and Atlantic Shores Healthcare, Inc.
Prior to his resignation from our board of directors on May 8, 2002, George R. Wackenhut was our Chairman of the Board and was Chairman of the Board of TWC and, together with his wife, Ruth J. Wackenhut, through trusts over which they had sole dispositive and voting power, controlled approximately 50.05% of the issued and outstanding voting common stock of TWC. Prior to May 8, 2002, TWC owned all of the outstanding shares of Tuhnekcaw, Inc., a Delaware corporation that in turn owned approximately 57.20% of the issued and outstanding shares of our common stock.
Prior to his resignation from our board of directors on May 8, 2002, Richard R. Wackenhut was a member of our board of directors and also served as CEO, President and Vice Chairman of the Board of TWC. He is the son of George R. and Ruth J. Wackenhut.
Prior to his resignation from our board of directors on May 8, 2002, Philip L. Maslowe was a member of our board of directors and also served as Executive Vice President and Chief Financial Officer of TWC.
Related party transactions have in the past occurred in the normal course of business between us and TWC. Such transactions have included the purchase of goods and services and corporate costs for information technology support, office space and interest expense. Total related party transaction costs with TWC, excluding casualty insurance, were approximately $3.1 million in the fiscal year ended December 29, 2002 as compared to $3.2 million in the fiscal year ended December 30, 2001. Casualty insurance related to workers compensation, general liability and automobile insurance coverage is provided through an independent insurer. Prior to October 2, 2002, the first $1.0 million of coverage was reinsured by an insurance subsidiary of TWC. We paid TWC a fee for the transfer of the deductible exposure. We paid casualty insurance premiums related to this program of approximately $18.0 million in the fiscal year ended December 29, 2002 as compared to approximately $22.0 million in the fiscal year ended December 30, 2001. Effective October 2, 2002, we established a new insurance program with a $1.0 million deductible per occurrence for covered claims with an independent insurer.
Since January 1, 2003, the only services TWC has provided for us have been information technology support services. In addition, 10 days following the closing of the share repurchase, an agreement between us and Group 4 Falck, whereby Group 4 Falck agreed to reimburse us for up to 10% of the fair market value of our interest in PCG under certain circumstances, was terminated.
81
DESCRIPTION OF AMENDED SENIOR CREDIT FACILITY
Simultaneously with the offering of the old notes, we entered into an amended and restated credit facility, with BNP Paribas as administrator agent (the amended senior credit facility).
The amended senior credit facility consists of a $50.0 million, five-year revolving loan (the revolving credit facility) and a $100.0 million, six-year term loan (term loan facility). The revolving credit facility contains a $40.0 million limit for the issuance of standby letters of credit.
Voluntary prepayments and commitment reductions of our loans are permitted in whole or in part, subject to minimum prepayment or reduction requirements. Such voluntary prepayments and commitment reductions may be made without premium or penalty.
All of the obligations under our amended senior credit facility are unconditionally guaranteed by each of our existing material domestic subsidiaries. The amended senior credit facility and the related guarantees are secured by substantially all of our present and future tangible and intangible assets and all present and future tangible and intangible assets of each guarantor, including but not limited to (i) a first-priority pledge of all of the outstanding capital stock owned by us and each guarantor and (ii) perfected first-priority security interests in all of our present and future tangible and intangible assets and the present and future tangible and intangible assets of each guarantor.
Indebtedness under the revolving portion of our amended senior credit facility bears interest at our option at the base rate plus a spread, or at the London inter-bank offered rate (LIBOR) plus a spread, depending upon a leverage-based pricing grid leverage ratio, as defined in the amended senior credit facility. Initially, revolving credit facility borrowings bear interest at LIBOR plus a spread. The term loan facility bears interest at our option at the base rate plus a spread, or at LIBOR plus a spread. If an event of default occurs under our amended senior credit facility (i) all LIBOR rate loans bear interest at the rate which is 2.0% in excess of the rate then applicable to LIBOR rate loans until the end of the applicable interest period and thereafter at a rate which is 2.0% in excess of the rate then applicable to base rate loans and (ii) all base rate loans bear interest at a rate which is 2.0% in excess of the rate then applicable to base rate loans.
The amended senior credit facility contains financial covenants which require us to maintain the following ratios, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period: a total leverage ratio equal to or less than 3.50 to 1.00 through March 27, 2004, which reduces thereafter in 0.25 increments to 2.50 to 1.00 on July 2, 2006 and thereafter; a senior secured leverage ratio equal to or less than 1.75 to 1.00 through September 25, 2004, which reduces thereafter to 1.50 to 1.00; and a fixed charge coverage ratio equal to or greater than 1.10 to 1.00. In addition, the amended senior credit facility prohibits us from making capital expenditures greater than $10.0 million in the aggregate during any fiscal year, provided that to the extent that our capital expenditures during any fiscal year are less than the $10.0 million limit, such amount will be added to the maximum amount of capital expenditures that we can make in the following year.
The amended senior credit facility also requires us to maintain a minimum net worth, as computed at the end of each fiscal quarter for the immediately preceding four quarter-period, equal to $140.0 million, plus the amount of the gain from the sale of our interest in PCG, which is estimated to be approximately $34.1 million, minus the $132.0 million we used to complete the share repurchase from Group 4 Falck, plus 50% of our consolidated net income earned during each fiscal quarter ending after the date of the amended senior credit facility, plus 50% of the aggregate increases in our consolidated shareholders equity that are attributable to the issuance and sale of equity interests by us or any of our restricted subsidiaries (excluding intercompany issuances). WCC believes that is it currently in compliance with the financial covenants in the amended senior credit facility.
82
The amended senior credit facility agreement contains certain customary representations and warranties, and certain customary covenants that restrict our ability to, among other things (i) create, incur or assume any indebtedness, (ii) incur liens, (iii) make loans and investments, (iv) engage in mergers, acquisitions and asset sales, (v) sell our assets, (vi) make certain restricted payments, including declaring any cash dividends or redeem or repurchase capital stock, except as otherwise permitted, (vii) issue, sell or otherwise dispose of our capital stock, (viii) transact with affiliates, (ix) make changes to our accounting treatment, (x) amend or modify the terms of any subordinated indebtedness (including the Notes), (xi) enter into debt agreements that contain negative pledges on our assets or covenants more restrictive than contained in our senior credit facility, (xii) alter the business we conduct, and (xiii) materially impair our lenders security interests in the collateral for our loans. Our amended senior credit facility agreement also requires us to comply with certain specified financial and affirmative covenants, including maintaining maximum senior and total leverage ratios, a minimum fixed charge coverage ratio, a minimum net worth and a limit on the amount of our annual capital expenditures.
Events of default under our amended senior credit facility agreement include, but are not limited to, (i) our failure to pay principal or interest when due, (ii) our material breach of any representations or warranty, (iii) covenant defaults, (iv) bankruptcy, (v) cross default to certain other indebtedness, (vi) unsatisfied final judgments over a threshold to be determined, (vii) material environmental claims which are asserted against us, and (viii) a change of control.
We pay the administrative agent certain syndication and administration fees, reimburse certain expenses, and provide certain indemnities to the lenders and the administrative agent, in each case, which are customary for credit facilities of this type.
83
DESCRIPTION OF NEW NOTES
General
You can find the definitions of certain terms used in this description under the subheading Certain Definitions. In this description, references to we, us, our, and the Company refer to Wackenhut Corrections Corporation and not to any of its subsidiaries and references to the Notes refer to the old notes, the new notes and any additional notes issued in accordance with the terms of the indenture.
The old notes were, and the new notes will be, issued under an indenture dated as of July 9, 2003, between us and The Bank of New York, a New York state-chartered banking organization, as trustee. The terms of the Notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended, which we refer to as the Trust Indenture Act.
The following description is a summary of the material provisions of the indenture. It does not restate the indenture in its entirety. The description is qualified in its entirety by reference to all of the provisions of the indenture, including the definitions of various terms in the indenture. Where reference is made to particular provisions of the indenture or to defined terms not defined in this prospectus, the provisions or defined terms are incorporated by reference into this prospectus. We urge you to read the indenture because it, and not this description, defines your rights as a holder of the Notes. A copy of the indenture is available from us at Wackenhut Corrections Corporation, One Park Place, 621 NW 53rd Street, Suite 700, Boca Raton, Florida, 33487, Attn: Chief Financial Officer. Certain defined terms used in this description but not defined below under Certain Definitions have the meanings assigned to them in the indenture or the registration rights agreement.
The new notes will be identical to old notes of the same issue, except that the new notes are registered under the Securities Act of 1933. The new notes will evidence the same debt as old notes of the same issue, and the same indenture will govern the new notes and the old notes.
If the exchange offer contemplated by this prospectus is consummated, Holders of old notes who do not exchange those notes for new notes in the exchange offer will vote together with Holders of new notes for all relevant purposes under the indenture covering the Notes. In that regard, the indenture requires that certain actions by the Holders thereunder (including acceleration following an Event of Default) must be taken, and certain rights must be exercised, by specified minimum percentages of the aggregate principal amount of the outstanding securities issued under the indenture. In determining whether Holders of the requisite percentage in principal amount have given any notice, consent or waiver or taken any other action permitted under the indenture, any old notes that remain outstanding after the exchange offer will be aggregated with the new notes, and the Holders of such old notes and the new notes will vote together as a single series for all such purposes. Accordingly, all references herein to specified percentages in aggregate principal amount of the Notes outstanding shall be deemed to mean, at any time after the exchange offer is consummated, such percentages in aggregate principal amount of the old notes and the new notes then outstanding.
The registered Holder of a Note will be treated as the owner of it for all purposes. Only registered Holders will have rights under the indenture.
84
The Notes
The Notes are:
| our general, unsecured obligations; | |
| equal in right of payment with all of our existing and future unsecured, unsubordinated indebtedness; | |
| effectively junior to our secured indebtedness, to the extent of the assets securing such indebtedness, and to the liabilities, including trade payables, of our subsidiaries; and | |
| senior in right of payment to any of our future subordinated indebtedness. |
All of our Subsidiaries as of the date of the indenture are Restricted Subsidiaries, but none have Guaranteed the Notes. See the covenant described under the subheading Certain Covenants Additional Note Guarantees. However, under the circumstances described below under the subheading Certain Covenants Designation of Restricted and Unrestricted Subsidiaries, we are permitted to designate certain of our Subsidiaries, as Unrestricted Subsidiaries. Unrestricted Subsidiaries are not subject to the restrictive covenants in the indenture and will not guarantee the Notes.
Principal, Maturity and Interest
The Notes are unlimited in aggregate principal amount, with $150.0 million aggregate principal amount outstanding, and will mature on July 15, 2013. We may issue additional Notes from time to time, subject to the covenant described below under the subheading Certain Covenants Incurrence of Indebtedness and Issuance of Preferred Stock. The Notes and any additional Notes subsequently issued under the indenture will be treated as a single class for all purposes under the indenture, including, without limitation, redemption of Notes, offers to purchase Notes and the percentage of Notes required to consent to waivers of provisions of, and amendments to, the indenture. We will issue Notes only in denominations of $1,000 and integral multiples of $1,000.
Interest on the Notes accrues at the rate of 8 1/4% per annum and is payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2004. We will make each interest payment to the Holders of record on the close of business on the immediately preceding January 1 and July 1. Interest on the Notes accrue from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.
Methods of Receiving Payments on the Notes
If a Holder has given wire transfer instructions to us, we will pay all principal, interest and premium and Liquidated Damages, if any, on that Holders Notes in accordance with those instructions. All other payments on the Notes will be made at the office or agency of the paying agent and registrar within the City and State of New York unless we elect to make interest payments by check mailed to the Holders at their address set forth in the register of Holders.
Paying Agent and Registrar for the Notes
The trustee is initially acting as paying agent and registrar for the Notes. We may change the paying agent or registrar without prior notice to the Holders of the Notes, and we or any of our Subsidiaries may act as paying agent or registrar.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the indenture. The registrar and the trustee may require a Holder to furnish appropriate endorsements and transfer documents in connection with a transfer of Notes. Holders will be required to pay all taxes due on transfer. We
85
Ranking
The Notes are our unsecured, senior obligations and the Indebtedness evidenced by the Notes ranks equal in right of payment to all of our other existing and future unsecured senior obligations and senior in right of payment to all of our future obligations expressly subordinated in right of payment to the Notes. The Notes, however, are effectively subordinated to our secured indebtedness with respect to the assets securing such obligations, including Indebtedness under the Credit Agreement, which is secured by liens on substantially all of the assets of the Company, WCC RE Holdings LLC and Atlantic Shores Healthcare, Inc., including real property. We conduct some of our business through our Subsidiaries and joint ventures. The Notes are effectively subordinated to all existing and future liabilities of our Subsidiaries and joint ventures, including trade payables.
As of March 30, 2003, on a pro forma basis, after giving effect to the Transactions, we would have had consolidated long-term indebtedness of $250.0 million, excluding $34.5 million of non-recourse debt and including $100.0 million of indebtedness under our Credit Agreement. In addition, as of July 31, 2003, we had $25.5 million outstanding in letters of credit under the revolving loan portion of our former senior credit facility. As a result, as of that date, we would have had the ability to borrow an additional approximately $24.5 million under the revolving loan portion of our amended senior credit facility, subject to our satisfying the relevant borrowing conditions under those facilities with respect to the incurrence of additional indebtedness.
Certain of our Subsidiaries have Guaranteed our Indebtedness under our Credit Agreement. These Subsidiaries accounted for 6.6% and 6.3% of our consolidated revenues and 7.9% and 4.1% of our consolidated net income for the thirteen weeks ended March 30, 2003 and the fiscal year ended December 29, 2002, respectively, and 3.1% of our consolidated assets at March 30, 2003.
Optional Redemption
At any time on or prior to July 15, 2006, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of outstanding Notes issued under the indenture at a redemption price of 108.250% of their principal amount, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net cash proceeds of one or more Equity Offerings; provided, that: (1) at least 65% of the aggregate principal amount of Notes issued under the indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by us and our Subsidiaries); and (2) the redemption occurs within 90 days of the date of the closing of such Equity Offering.
Except pursuant to the preceding paragraph, the Notes are not redeemable at our option on or prior to July 15, 2008.
After July 15, 2008, we may, at our option, redeem all or a part of the Notes upon not less than 30 nor more than 60 days notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest and Liquidated Damages, if any, on the Notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on July 15 of the years indicated below:
Year | Percentage | |||
2008
|
104.125% | |||
2009
|
102.750% | |||
2010
|
101.375% | |||
2011 and thereafter
|
100.000% |
86
For a description of the procedures applicable to a redemption of all or part of the Notes pursuant to the provisions of the indenture described in this section, see Selection and Notice.
Mandatory Redemption
We are not required to make mandatory redemption or sinking fund payments with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of Notes will have the right to require us to repurchase all or any part (equal to $1,000 or an integral multiple of $1,000) of that Holders Notes pursuant to a Change of Control Offer on the terms set forth in the indenture. In the Change of Control Offer, we will offer a Change of Control Payment in cash equal to 101% of the aggregate principal amount of Notes repurchased, plus accrued and unpaid interest and Liquidated Damages, if any, on the Notes repurchased, to the date of purchase. Within 30 days following any Change of Control, we will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the Change of Control Payment Date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the indenture and described in such notice. We will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control provisions of the indenture, we will comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under the Change of Control provisions of the indenture by virtue of such conflict.
On the Change of Control Payment Date, we will, to the extent lawful:
(1) accept for payment all Notes or portions of Notes properly tendered pursuant to the Change of Control Offer; | |
(2) deposit with the paying agent an amount equal to the Change of Control Payment in respect of all Notes or portions of Notes properly tendered; and | |
(3) deliver or cause to be delivered to the trustee the Notes properly accepted together with an Officers Certificate stating the aggregate principal amount of Notes or portions of Notes being purchased by us. |
The paying agent will promptly deliver to each Holder of Notes properly tendered the Change of Control Payment for such Notes, and the trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any; provided that each new Note will be in a principal amount of $1,000 or an integral multiple of $1,000.
We will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date.
The provisions described above that require us to make a Change of Control Offer following a Change of Control will be applicable whether or not any other provisions of the indenture are applicable. Except as described above with respect to a Change of Control, the indenture does not contain provisions that permit the Holders of the Notes to require that we repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction.
We will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance
87
The definition of Change of Control includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of all or substantially all of the properties or assets of the Company and its Subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase substantially all, there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of Notes to require us to repurchase the Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries taken as a whole to another Person or group may be uncertain.
The Credit Agreement contains, and other indebtedness of the Company may contain, prohibitions on the occurrence of events that would constitute a Change of Control or require that indebtedness be repurchased upon a Change of Control. A Change of Control will constitute an event of default under the Credit Agreement and the terms of the Credit Agreement would prohibit our purchase of the Notes in the event we are required to make a Change of Control Offer. If a Change of Control Offer occurs, there can be no assurance that we will have available funds sufficient to make the Change of Control Payment for all of the Notes that might be delivered by Holders seeking to accept the Change of Control Offer. In the event we are required to purchase outstanding Notes pursuant to a Change of Control Offer, we expect that we would seek third-party financing to the extent we do not have available funds to meet our purchase obligations and any other obligations in respect of our other indebtedness. However, there can be no assurance that we would be able to obtain the necessary financing. See Risk Factors Risks Related to the Notes We may not be able to repurchase the Notes in the event of a change of control because the terms of our indebtedness or lack of funds may prevent us from doing so.
Asset Sales
We will not, and we will not permit any of our Restricted Subsidiaries to, directly or indirectly, consummate an Asset Sale unless:
(1) we (or the Restricted Subsidiary, as the case may be) receive consideration at the time of the Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of; | |
(2) the fair market value, in the case of any Asset Sales or series of related Asset Sales having a fair market value of $5.0 million or more, is determined by our Board of Directors and evidenced by a resolution of our Board of Directors set forth in an Officers Certificate delivered to the trustee; and | |
(3) at least 75% of the consideration received in the Asset Sale by us or such Restricted Subsidiary is in the form of cash. For purposes of this clause (3) only, each of the following will be deemed to be cash: |
(a) any liabilities, as shown on the Companys or such Restricted Subsidiarys most recent balance sheet, of the Company or any Restricted Subsidiary (other than contingent liabilities and Indebtedness (other than Indebtedness secured by the assets sold) that is equal in right of payment with or subordinated to the Notes or any Guarantee) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability; and | |
(b) any securities, Notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such |
88
Restricted Subsidiary into cash or Cash Equivalents within 30 days after the applicable Asset Sale, to the extent of the cash or Cash Equivalents received in that conversion; |
Within 360 days after the receipt of any Net Proceeds from an Asset Sale or from the sale of our interest in Premier Custodial Group Limited to Serco Investments Limited, the Company or the applicable Restricted Subsidiary may apply those Net Proceeds, at its option:
(1) to repay permanently Indebtedness under the Credit Agreement (and with respect to Net Proceeds of a Restricted Subsidiary that is not a Guarantor, Indebtedness of such Restricted Subsidiary) and, if the Indebtedness permanently repaid is revolving credit Indebtedness, to correspondingly reduce commitments with respect thereto; | |
(2) to acquire, or enter into a definitive agreement to acquire, all or substantially all of the assets of, a Permitted Business or a majority of the Voting Stock of a Person employed in a Permitted Business, provided that such Person becomes a Restricted Subsidiary and provided, further, however, in the case of a definitive agreement, that such acquisition closes within 120 days of such 360 day period; | |
(3) to make a capital expenditure in or that is used or useful in a Permitted Business (provided that the completion of (i) construction of new facilities, (ii) expansions to existing facilities and (iii) repair or construction of damaged or destroyed facilities, in each case, which commences within such 360 days may extend for an additional 360 day period if the Net Proceeds to be used for such construction, expansion or repair are committed specifically for such activity within such 360 days); or | |
(4) to acquire other long-term assets that are used or useful in a Permitted Business. |
Pending the final application of any Net Proceeds, the Company may temporarily reduce revolving credit borrowings or otherwise invest the Net Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales (or from the sale of our interest in Premier Custodial Group Limited to Serco Investments Limited) that are not applied or invested as provided in the preceding paragraph will constitute Excess Proceeds. When the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will make an Asset Sale Offer to all Holders of Notes and, at the Companys option, all holders of other Indebtedness that is pari passu with the Notes containing provisions similar to those set forth in the indenture with respect to offers to purchase or redeem with the proceeds of sales of assets, to purchase on a pro rata basis the maximum principal amount of Notes and such other pari passu Indebtedness that may be purchased out of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of the principal amount, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase, and will be payable in cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer, the Company may use those Excess Proceeds for any purpose not otherwise prohibited by the indenture. If the aggregate principal amount of Notes and other pari passu Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds will be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with each repurchase of Notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the Asset Sale provisions of the indenture, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Asset Sale provisions of the indenture by virtue of such conflict.
89
The Credit Agreement contains prohibitions of certain events, including certain types of Asset Sales. The terms of the Credit Agreement would prohibit our purchase of the Notes in the event we were required to make an Asset Sale Offer. The Companys ability to pay cash to the Holders of Notes upon a repurchase may be limited by the Companys then existing financial resources.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, the trustee will select Notes for redemption as follows:
(1) if the Notes are listed on any national securities exchange, in compliance with the requirements of the principal national securities exchange on which the Notes are listed; or | |
(2) if the Notes are not listed on any national securities exchange, on a pro rata basis (based on amounts tendered), by lot or by such method as the trustee deems fair and appropriate. |
No Notes of $1,000 or less can be redeemed in part. Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional.
If any Note is to be redeemed in part only, the notice of redemption that relates to that Note will state the portion of the principal amount of that Note that is to be redeemed. A new Note in principal amount equal to the unredeemed portion of the original Note will be issued in the name of the Holder of Notes upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption.
Certain Covenants
Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on account of the Companys, or any Restricted Subsidiarys, Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any Restricted Subsidiary) or to the direct or indirect holders of the Companys or any Restricted Subsidiarys Equity Interests in their capacity as such (other than dividends or distributions payable (A) in Equity Interests (other than Disqualified Stock) of the Company or (B) to the Company or a Restricted Subsidiary of the Company); | |
(2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company; | |
(3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness that is expressly subordinated to the Notes or any Guarantee, except a payment of interest or principal at the Stated Maturity thereof; or | |
(4) make any Restricted Investment (all such payments and other actions set forth in these clauses (1) through (4) above being collectively referred to as Restricted Payments), |
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence of such Restricted Payment; and |
90
(2) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption Incurrence of Indebtedness and Issuance of Preferred Stock; and | |
(3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date of the indenture (excluding Restricted Payments permitted by clauses (2), (3), (4), and (5) of the next succeeding paragraph), is less than the sum, without duplication, of: |
(a) 50% of the Consolidated Net Income, for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the indenture to the end of the Companys most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus | |
(b) (i) 100% of the aggregate net cash proceeds plus (ii) 70% of the aggregate fair market value of assets (other than Restricted Investments), in each case, received by the Company since the date of the indenture as a contribution to its common equity capital or from the issue or sale of Equity Interests of the Company (other than Disqualified Stock), except to the extent used to make an Investment pursuant to clause (17) or (15) of the definition of Permitted Investments, or from the issue or sale of convertible or exchangeable Disqualified Stock or convertible or exchangeable debt securities of the Company that have been converted into or exchanged for such Equity Interests (other than Equity Interests (or Disqualified Stock or debt securities) sold to a Subsidiary of the Company); plus | |
(c) to the extent that any Restricted Investment that was made after the date of the indenture is sold for cash or otherwise liquidated or repaid for cash, the lesser of (i) the cash return of capital with respect to such Restricted Investment (less the cost of disposition, if any) and (ii) the initial amount of such Restricted Investment; plus | |
(d) to the extent that any Unrestricted Subsidiary of the Company is redesignated as a Restricted Subsidiary after the date of the indenture, the lesser of (i) the fair market value of the Companys Investment in such Subsidiary as of the date of such redesignation or (ii) such fair market value as of the date on which such Subsidiary was originally designated as an Unrestricted Subsidiary, plus the amount of any Investments made in such Subsidiaries subsequent to such designation (and treated as Restricted Payments) by the Company or any Restricted Subsidiary; plus | |
(e) 100% of any other dividends or other distributions received by the Company or a Restricted Subsidiary of the Company since the date of the indenture from an Unrestricted Subsidiary of the Company to the extent that such dividends were not otherwise included in Consolidated Net Income of the Company for such period in an amount not to exceed the amount of Restricted Investments previously made by the Company and its Restricted Subsidiaries in such Unrestricted Subsidiary; plus | |
(f) $5.0 million. |
So long as no Default has occurred and is continuing or would be caused thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration of the dividend, if at the date of declaration the dividend payment would have complied with the provisions of the indenture; |
91
(2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of the Company or any Guarantor or of any Equity Interests of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of, Equity Interests of the Company (other than Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition will be excluded from clause (3)(b) of the preceding paragraph; | |
(3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of the Company or any Guarantor with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; | |
(4) the payment of any dividend by a Restricted Subsidiary of the Company to the holders of its Equity Interests on a pro rata basis; | |
(5) repurchases of Equity Interests of the Company deemed to occur upon the exercise of stock options if such Equity Interests represent a portion of the exercise price thereof; | |
(6) the repurchase, redemption or other acquisition or retirement for value of Equity Interests of the Company or any Restricted Subsidiary of the Company held by any member of the Companys (or any of its Restricted Subsidiaries) management; provided that the aggregate amount expended pursuant to this clause (6) shall not exceed $1.0 million in any twelve-month period; | |
(7) cash payments, in lieu of fractional shares issuable as dividends on Equity Interests of the Company in an amount, when taken together with all other cash payments made pursuant to this clause (7) since the date of the Indenture, not to exceed $500,000. | |
(8) Restricted Payments not otherwise permitted in an amount not to exceed $5.0 million. |
The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Company or such Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant will be determined by the Board of Directors of the Company whose resolution with respect thereto will be delivered to the trustee. Except with respect to a Restricted Payment permitted by clauses (1) through (8) above, the Board of Directors determination must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if the fair market value exceeds $10.0 million. Not later than the date on which such Restricted Payment was made, the Company will deliver to the trustee an Officers Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Restricted Payments covenant were computed, together with a copy of any fairness opinion or appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, incur) any Indebtedness (including Acquired Debt), and the Company will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any Disqualified Stock or preferred stock; provided, however, that the Company may incur Indebtedness (including Acquired Debt) or issue Disqualified Stock, and any Guarantor may incur Indebtedness or issue Disqualified Stock (and WCC RE Holdings LLC and Atlantic Shores Healthcare, Inc. may guarantee Indebtedness of the Company under the Credit Agreement) and any Foreign Subsidiary may incur Indebtedness, if the Fixed Charge Coverage Ratio for the Companys most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is
92
So long as no Default shall have occurred and be continuing or would be caused thereby, the first paragraph of this covenant will not prohibit the incurrence of any of the following items of Indebtedness or the issuance of Disqualified Stock, as set forth below (collectively, Permitted Debt):
(1) the incurrence by the Company and any of its Restricted Subsidiaries of Indebtedness under the Credit Agreement in an aggregate principal amount at any one time outstanding under this clause (1) not to exceed $150.0 million, less the aggregate amount of all Net Proceeds of Asset Sales applied by the Company or any Restricted Subsidiary to repay any Indebtedness under the Credit Agreement and, if the Indebtedness repaid is revolving credit Indebtedness, to correspondingly reduce commitments with respect thereto, pursuant to the covenant described under the subheading Repurchase at the Option of Holders Asset Sales; | |
(2) the incurrence by the Company and any of its Restricted Subsidiaries of Existing Indebtedness; | |
(3) the incurrence by the Company of Indebtedness represented by the Notes to be issued on the date of the indenture and any Guarantees thereof by any Guarantor; | |
(4) the incurrence by the Company or any Restricted Subsidiary of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement of property, plant or equipment used in the business of the Company or such Restricted Subsidiary, in an aggregate principal amount, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (4), not to exceed $10.0 million at any time outstanding; | |
(5) the incurrence by the Company or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the indenture to be incurred under the first paragraph of this covenant or clauses (2), (3), (5), or (11) of this paragraph; | |
(6) the incurrence by the Company or any of its Restricted Subsidiaries of intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries; provided, however, that: |
(a) if the Company or any Guarantor is the obligor on such Indebtedness, such Indebtedness must be expressly subordinated to the prior payment in full in cash of all Obligations with respect to the Notes, in the case of the Company, or the Guarantee, in the case of a Guarantor; and | |
(b) (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Company or a Restricted Subsidiary of the Company and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Restricted Subsidiary of the Company; will be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Restricted Subsidiary, as the case may be, that was not permitted by this clause (6); |
(7) the incurrence by the Company or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any Indebtedness that is permitted by the terms of the indenture to be outstanding or for |
93
hedging foreign currency exchange risk, in each case to the extent the Hedging Obligations are incurred in the ordinary course of business and not for any speculative purpose; | |
(8) the guarantee by the Company or any Guarantor of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of this covenant; | |
(9) the accrual of interest, the accretion or amortization of original issue discount, the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms, and the payment of dividends on Disqualified Stock in the form of additional shares of the same class of Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock for purposes of this covenant; provided, in each such case, that the amount thereof is included in Fixed Charges of the Company as accrued; | |
(10) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness, including Indebtedness represented by letters of credit for the account of the Company or any Restricted Subsidiary, incurred in respect of workers compensation claims, self-insurance obligations, performance, proposal, completion, surety and similar bonds and completion guarantees provided by the Company or any of its Restricted Subsidiaries in the ordinary course of business; provided,that the underlying obligation to perform is that of the Company or its Restricted Subsidiaries and not that of the Companys Unrestricted Subsidiaries; provided further, that such underlying obligation is not in respect of borrowed money; | |
(11) the incurrence by the Company or any of the Restricted Subsidiaries of additional Indebtedness in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Permitted Refinancing Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (11), not to exceed $30.0 million; | |
(12) the incurrence by the Company or any of its Restricted Subsidiaries of Indebtedness, including but not limited to Indebtedness represented by letters of credit for the account of the Company or any Restricted Subsidiary, arising from agreements of the Company or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or Equity Interests of the Company or a Restricted Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Equity Interests for the purpose of financing such acquisition; | |
(13) the incurrence by the Company or any Restricted Subsidiary of Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business, provided that such Indebtedness is extinguished within five business days of incurrence; or | |
(14) the issuance of preferred stock of a Restricted Subsidiary to the Company that is pledged to secure the Credit Agreement, provided that any subsequent transfer that results in such preferred stock being held by a Person other than the Company or a Restricted Subsidiary will be deemed to constitute an issuance of preferred stock not permitted by this clause (14). |
The Company will not, and will not permit any Guarantor, to incur any Indebtedness (including Permitted Debt) that is contractually subordinated in right of payment to any other Indebtedness of the Company or such Guarantor unless such Indebtedness is also contractually subordinated in right of payment to the Notes or such Guarantee on substantially identical terms; provided,however, that no Indebtedness of the Company or any Guarantor will be deemed to be contractually subordinated in right of payment to any other Indebtedness of the Company or any Guarantor solely by virtue of being unsecured.
94
For purposes of determining compliance with the provisions in the indenture described in this Incurrence of Indebtedness and Issuance of Preferred Stock covenant, in the event that an item of proposed Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (14) above, or is entitled to be incurred pursuant to the first paragraph of this covenant, the Company will be permitted to classify such item of Indebtedness on the date of its incurrence, or later reclassify all or a portion of such item of Indebtedness, in any manner that complies with this covenant. Indebtedness under the Credit Agreement outstanding on the date on which Notes are first issued and authenticated under the indenture will be deemed to have been incurred on such date in reliance on the exception provided by clause (1) of the definition of Permitted Debt.
Liens
The Company will not and will not permit any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or become effective any Lien of any kind (other than Permitted Liens) upon any of their property or assets, now owned or hereafter acquired, unless all payments due under the indenture and the Notes are secured on an equal and ratable basis with the Obligations so secured until such time as such Obligations are no longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to the Company or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries; | |
(2) make loans or advances to the Company or any of its Restricted Subsidiaries; or | |
(3) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries. |
However, the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and the Credit Facilities as in effect on the date of the indenture and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of those agreements; provided, that, the amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are not materially more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in those agreements on the date of the indenture; | |
(2) the indenture, the Notes and the exchange Notes; | |
(3) applicable law; | |
(4) any instrument governing Indebtedness or Capital Stock of a Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness or Capital Stock was incurred in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; provided, that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the indenture to be incurred; |
95
(5) customary non-assignment provisions of any contract or agreement entered into in the ordinary course of business and customary provisions restricting subletting of any interest in real or personal property contained in any lease or easement agreement of the Company or any Restricted Subsidiary; | |
(6) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on that property of the nature described in clause (3) of the preceding paragraph; | |
(7) any agreement for the sale or other disposition of all or substantially all of the assets or Capital Stock of a Restricted Subsidiary that restricts distributions by that Restricted Subsidiary pending its sale or other disposition of all or substantially all of the assets or Capital Stock of such Restricted Subsidiary; | |
(8) Permitted Refinancing Indebtedness; provided, that, the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness with respect to dividends and other payments are not materially more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; | |
(9) Liens securing Indebtedness otherwise permitted to be incurred under the provisions of the covenant described above under the caption Liens that limit the right of the debtor to dispose of the assets subject to such Liens; | |
(10) provisions with respect to the disposition or distribution of assets or property in joint venture agreements entered into in the ordinary course of business; | |
(11) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; | |
(12) any Indebtedness incurred in compliance with the covenant under the caption Incurrence of Indebtedness and Issuance of Preferred Stock by any Foreign Subsidiary or any Guarantor, or any agreement pursuant to which such Indebtedness is issued, if the encumbrance or restriction applies only to such Foreign Subsidiary or Guarantor and only in the event of a payment default or default with respect to a financial covenant contained in the Indebtedness or agreement and the encumbrance or restriction is not materially more disadvantageous to the Holders of the Notes than is customary in comparable financings (as determined by the Board of Directors of the Company) and the Board of Directors of the Company determines that any such encumbrance or restriction will not materially affect the Companys ability to pay interest or principal on the Notes; or | |
(13) an arrangement or circumstance arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that does not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary. |
Merger, Consolidation or Sale of Assets
The Company shall not, in a single transaction or a series of related transactions, consolidate with or merge with or into any other Person or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any Person or group of affiliated Persons, or permit any of its Restricted Subsidiaries to enter into any such transaction or transactions if such transaction or transactions, in the aggregate, would result in an assignment, conveyance, transfer, lease or disposition of all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries taken as a whole to any other Person or group of affiliated Persons, unless at the time and after giving effect thereto:
(1) either: (a) the Company is the surviving corporation; or (b) the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, |
96
assignment, lease, transfer, conveyance or other disposition has been made is a corporation organized or existing under the laws of the United States, any state of the United States or the District of Columbia; | |
(2) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, lease, transfer, conveyance or other disposition has been made assumes all the obligations of the Company under the Notes, the indenture and the registration rights agreement pursuant to agreements reasonably satisfactory to the trustee; | |
(3) no Default or Event of Default exists; | |
(4) the Company or the other Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, lease, transfer, conveyance or other disposition has been made will, on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if the same had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described under the caption Incurrence of Indebtedness and Issuance of Preferred Stock; and | |
(5) the Company or the other Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, lease, transfer, conveyance or other disposition has been made will have delivered to the trustee, in form and substance reasonably satisfactory to the trustee, an Officers Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, assignment, lease, conveyance, transfer, or other disposition, and if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with the requirements of the indenture and that all conditions precedent therein provided for relating to such transaction have been complied with. | |
Clause (4) of this Merger, Consolidation or Sale of Assets covenant will not apply to: (a) a sale, transfer or other disposition of assets between or among the Company and any of its Wholly Owned Restricted Subsidiaries or (b) any merger or consolidation of a Wholly Owned Restricted Subsidiary into the Company. |
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or amend any contract, agreement, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an Affiliate Transaction), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person; and | |
(2) the Company delivers to the trustee: |
(a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $5.0 million, a resolution of the Board of Directors of the Company set forth in an Officers Certificate certifying that such Affiliate Transaction complies with this covenant and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors of the Company; and |
97
(b) except with respect to leases of facilities entered into in the ordinary course of business with a Wholly Owned Subsidiary, with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, an opinion as to the fairness to the Company of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. |
The following items will not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph:
(1) indemnity agreements and reasonable employment arrangements (including severance and retirement agreements) entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business of the Company or such Restricted Subsidiary, in each case approved by the disinterested members of the Board of Directors of the Company; | |
(2) transactions between or among the Company and/or its Restricted Subsidiaries; | |
(3) payment of reasonable directors fees to Persons who are not otherwise Affiliates of the Company; | |
(4) sales of Equity Interests (other than Disqualified Stock) of the Company; | |
(5) Restricted Payments that are permitted by the provisions of the indenture described above under the caption Restricted Payments; and | |
(6) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of employment arrangements, stock options and stock ownership plans and other reasonable fees, compensation, benefits and indemnities paid or entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business to or with officers, directors or employees of the Company and its Restricted Subsidiaries. |
Additional Note Guarantees
The Company will not permit any of its Restricted Subsidiaries which are not Guarantors (other than Guarantees by WCC RE Holdings LLC and Atlantic Shores Healthcare, Inc. of Indebtedness incurred under the Credit Agreement), directly or indirectly, to Guarantee the payment of any Indebtedness of the Company or any Guarantor unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture providing for the Guarantee of the payment of the Notes by such Restricted Subsidiary, which Guarantee shall be senior to or pari passu with such Subsidiarys Guarantee of such other Indebtedness. The form of the Guarantee will be attached as an exhibit to the Indenture.
A Guarantor may not sell or otherwise dispose of all or substantially all of its assets to, or consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another Person, other than the Company or another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or Event of Default exists; and | |
(2) either: |
(a) the Person acquiring the property in any such sale or disposition or the Person formed by or surviving any such consolidation or merger assumes all the obligations of that Guarantor under the indenture, its Guarantee and the registration rights agreement pursuant to a supplemental indenture satisfactory to the trustee; or |
98
(b) such sale or other disposition complies with the provisions of the indenture described under the subheading Repurchase at the Option of HoldersAsset Sales, including the application of the Net Proceeds therefrom. |
The Guarantee of a Guarantor will be released:
(1) in connection with any sale of all of the Capital Stock of a Guarantor (including by way of merger or consolidation) to a Person that is not (either before or after giving effect to such transaction) a Subsidiary of the Company, if the sale complies with the provisions of the indenture described under the subheading Repurchase at the Option of Holders Asset Sales; | |
(2) if the Company designates any Restricted Subsidiary that is a Guarantor as an Unrestricted Subsidiary in accordance with the applicable provisions of the indenture; or | |
(3) upon Legal Defeasance or Covenant Defeasance of the Notes, as described in Legal Defeasance and Covenant Defeasance. |
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors of the Company may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if that designation would not cause a Default or Event of Default. If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate fair market value of all outstanding Investments owned by the Company and its Restricted Subsidiaries in the Subsidiary properly designated will be deemed to be Investments made as of the time of the designation, subject to the limitations on Restricted Payments. That designation will only be permitted if the Investment would be permitted at that time and if the Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The Board of Directors of the Company may redesignate any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation would not cause a Default; provided, that, such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (1) such Indebtedness is permitted under the covenant described under the caption Incurrence of Indebtedness and Issuance of Preferred Stock, calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation.
Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries to, enter into any Sale and Leaseback Transaction; provided, that, the Company or any Restricted Subsidiary may enter into a Sale and Leaseback Transaction if:
(1) the Company or that Restricted Subsidiary, as applicable, could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such Sale and Leaseback Transaction under the Fixed Charge Coverage Ratio test in the first paragraph of the covenant described above under the caption Incurrence of Indebtedness and Issuance of Preferred Stock and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described above under the caption Liens; | |
(2) the gross cash proceeds of that Sale and Leaseback Transaction are at least equal to the fair market value, as determined in good faith by the Board of Directors of the Company and set forth in an Officers Certificate delivered to the trustee, of the property that is the subject of that Sale and Leaseback Transaction; and |
99
(3) the transfer of assets in that Sale and Leaseback Transaction is permitted by, and the Company applies the proceeds of such transaction in compliance with, the covenant described above under the caption Repurchase at the Option of Holders Asset Sales. |
Limitation on Issuances and Sales of Equity Interests in Restricted Subsidiaries
The Company will not transfer, convey, sell, assign, lease or otherwise dispose of, and will not permit any of its Restricted Subsidiaries to, issue, transfer, convey, sell, assign, lease or otherwise dispose of any Equity Interests in any Restricted Subsidiary of the Company to any Person (other than the Company or a Wholly Owned Restricted Subsidiary of the Company), except:
(1) if, immediately after giving effect to such issuance, transfer, conveyance, sale, assignment, lease or other disposition, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under the covenant described under the caption Restricted Payments if made on the date of such issuance or sale; or | |
(2) sales of common stock of a Restricted Subsidiary by the Company or a Restricted Subsidiary, provided that the Company or such Restricted Subsidiary complies with the covenant described under the subheading, Repurchase at the Option of Holders Asset Sales. |
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses, except to such extent as would not be material to the Company and its Restricted Subsidiaries taken as a whole.
Payments for Consent
The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder of Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the indenture or the Notes unless such consideration is offered to be paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.
Reports
Whether or not required by the Commission, so long as any Notes are outstanding, the Company, upon request, will furnish to the Holders of Notes:
(1) all quarterly and annual financial and other information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a Managements Discussion and Analysis of Financial Condition and Results of Operations and, with respect to the annual information only, a report on the annual financial statements by the Companys certified independent accountants; and | |
(2) all current reports that would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. |
In addition, whether or not required by the Commission, the Company will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the Commission for public availability within the time periods specified in the Commissions rules and regulations (unless the Commission will not accept such a filing) and make such information available to prospective investors upon request. In addition, the Company has agreed that, for so long as any Notes remain
100
If the Company has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph will include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in Managements Discussion and Analysis of Financial Condition and Results of Operations, of the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the Notes; | |
(2) default in payment when due of the principal of, or premium, if any, on the Notes; | |
(3) failure by the Company or any of its Restricted Subsidiaries to comply with the provisions described under the subheadings Repurchase at the Option of Holders Change of Control, Repurchase at the Option of Holders Asset Sales, or Certain Covenants Merger, Consolidation or Sale of Assets; | |
(4) failure by the Company or any Guarantor for 60 consecutive days after notice to comply with any of the other agreements in the indenture; | |
(5) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the indenture, if that default: |
(a) is caused by a failure to make any payment due at final maturity of such Indebtedness (a Payment Default); or | |
(b) results in the acceleration of such Indebtedness prior to its express maturity, |
and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $7.5 million or more; |
(6) failure by the Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $7.5 million, which judgments are not paid, discharged or stayed for a period of 60 days; | |
(7) except as permitted by the indenture, any Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Guarantee; and | |
(8) certain events of bankruptcy or insolvency described in the indenture with respect to the Company or any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary. |
In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Company, or any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all
101
Holders of the Notes may not enforce the indenture or the Notes except as provided in the indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the trustee in its exercise of any trust or power. The trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default if it determines that withholding Notes is in their interest, except a Default or Event of Default relating to the payment of principal or interest or Liquidated Damages.
The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under the indenture except a continuing Default or Event of Default in the payment of interest or Liquidated Damages on, or the principal of, the Notes.
The Company is required to deliver to the trustee annually a written statement regarding compliance with the indenture. Upon becoming aware of any Default or Event of Default, the Company is required to deliver to the trustee a written statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or the Guarantors under the Notes, the indenture, the Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. The waiver may not be effective to waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding Notes and all obligations of the Guarantors discharged with respect to their Guarantees (Legal Defeasance) except for:
(1) the rights of Holders of outstanding Notes to receive payments in respect of the principal of, or interest or premium and Liquidated Damages, if any, on such Notes when such payments are due from the trust referred to below; | |
(2) the Companys obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust; | |
(3) the rights, powers, trusts, duties and immunities of the trustee, and the Companys and the Guarantors obligations in connection therewith; and | |
(4) the Legal Defeasance provisions of the indenture. |
In addition, the Company may, at its option and at any time, elect to have the obligations of the Company and the Guarantors released with respect to certain covenants that are described in the indenture (Covenant Defeasance) and thereafter any omission to comply with those covenants will not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership,
102
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination of cash in U.S. dollars and non-callable Government Securities, in amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, or interest and premium and Liquidated Damages, if any, on the outstanding Notes on the Stated Maturity or on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date and, if the Notes are being defeased to a particular redemption date, the Company must have delivered to the trustee an irrevocable notice of redemption; | |
(2) in the case of Legal Defeasance, the Company shall have delivered to the trustee an Opinion of Counsel reasonably acceptable to the trustee confirming that (a) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of the indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel will confirm that, the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; | |
(3) in the case of Covenant Defeasance, the Company shall have delivered to the trustee an Opinion of Counsel reasonably acceptable to the trustee confirming that the Holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; | |
(4) no Default or Event of Default has occurred and is continuing either (a) on the date of such deposit or (b) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 123rd day after the date of deposit; | |
(5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; | |
(6) the Company must have delivered to the trustee an Officers Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; | |
(7) the Company must have delivered to the trustee an Opinion of Counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the U.S. Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law; and | |
(8) the Company must deliver to the trustee an Officers Certificate and an Opinion of Counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with. |
103
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes), and any existing default or compliance with any provision of the indenture or the Notes may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; | |
(2) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes; | |
(3) reduce the rate of or change the time for payment of interest on any Note; | |
(4) waive a Default or Event of Default in the payment of principal of, or interest or premium, or Liquidated Damages, if any, on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); | |
(5) make any Note payable in currency other than that stated in the Notes; | |
(6) make any change in the provisions of the indenture relating to waivers of past Defaults or the rights of Holders of Notes to receive payments of principal of, or interest or premium or Liquidated Damages, if any, on the Notes; | |
(7) waive a redemption payment with respect to any Note; | |
(8) release any Guarantor from any of its obligations under its Guarantee or the indenture, except in accordance with the terms of the indenture; | |
(9) impair the right to institute suit for the enforcement of any payment on or with respect to the Notes or the Guarantees; | |
(10) amend, change or modify the obligation of the Company to make and consummate an Asset Sale Offer with respect to any Asset Sale in accordance with the covenant described under the subheading Repurchase at the Option of Holders Asset Sales after the obligation to make an Asset Sale Offer has arisen or the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control in accordance with the covenant described under the subheading Repurchase at the Option of Holders Change of Control, after a Change of Control has occurred including, in each case, amending, changing or modifying any definition relating thereto; or | |
(11) make any change in the preceding amendment and waiver provisions. |
Notwithstanding the preceding, without the consent of any Holder of Notes, the Company, the Guarantors, if any, and the trustee may amend or supplement the indenture or the Notes:
(1) to cure any ambiguity, defect or inconsistency; | |
(2) to provide for uncertificated Notes in addition to or in place of certificated Notes; |
104
(3) to provide for the assumption of the Companys or any Guarantors obligations to Holders of Notes in the case of a merger or consolidation or sale of all or substantially all of the Companys or such Guarantors assets; | |
(4) to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights under the indenture of any such Holder; or | |
(5) to comply with requirements of the Commission in order to effect or maintain the qualification of the indenture under the Trust Indenture Act. |
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as to all Notes issued thereunder, when:
(1) either: |
(a) all Notes that have been authenticated, except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has been deposited in trust and thereafter repaid to the Company, have been delivered to the trustee for cancellation; or | |
(b) all Notes that have not been delivered to the trustee for cancellation have become due and payable by reason of the mailing of a notice of redemption or otherwise or will become due and payable within one year, and the Company or any Guarantor has irrevocably deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the Holders, cash in U.S. dollars, non-callable Government Securities, or a combination of cash in U.S. dollars and non-callable Government Securities, in amounts as will be sufficient without consideration of any reinvestment of interest to pay and discharge the entire indebtedness on the Notes not delivered to the trustee for cancellation for principal, premium and Liquidated Damages, if any, and accrued interest to the date of maturity or redemption; |
(2) no Default or Event of Default has occurred and is continuing on the date of the deposit or will occur as a result of the deposit and the deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company or any Guarantor is a party or by which the Company or any Guarantor is bound; | |
(3) the Company or any Guarantor has paid or caused to be paid all sums payable by it under the indenture; and | |
(4) the Company has delivered irrevocable instructions to the trustee under the indenture to apply the deposited money toward the payment of the Notes at maturity or the redemption date, as the case may be. |
In addition, the Company must deliver an Officers Certificate and an Opinion of Counsel to the trustee stating that all conditions precedent to satisfaction and discharge have been satisfied.
Concerning the Trustee
If the trustee becomes a creditor of the Company or any Guarantor, the indenture limits its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest, as described in the Trust Indenture Act, it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign.
105
The Holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indenture provides that in case an Event of Default occurs and is continuing, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any Holder of Notes, unless such Holder has offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference is made to the indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided.
Acquired Debt means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Subsidiary of, such specified Person; and | |
(2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. |
Affiliate of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, control, as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, that, beneficial ownership of 10% or more of the Voting Stock of a Person will be deemed to be control. For purposes of this definition, the terms controlling, controlled by and under common control with have correlative meanings.
Asset Sale means:
(1) the sale, lease, transfer, assignment, conveyance or other disposition of any assets or rights; provided, that, the sale, lease, conveyance, transfer, assignment or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the indenture described above under the subheading Repurchase at the Option of Holders Change of Control and/or the provisions described above under the subheading Certain Covenants Merger, Consolidation or Sale of Assets and not by the provisions of the covenant described under the subheading Repurchase at the Option of HoldersAsset Sales; and | |
(2) the issuance or sale by the Company or any of its Restricted Subsidiaries of Equity Interests of any of the Companys Subsidiaries. |
Notwithstanding the preceding, the following items will not be deemed to be Asset Sales:
(1) any single transaction or series of related transactions that involves the sale of assets or the issuance or sale of Equity Interests of a Restricted Subsidiary having a fair market value of less than $2.0 million; | |
(2) a transfer of assets by the Company to any of its Restricted Subsidiaries or by any Restricted Subsidiary to the Company or any other Restricted Subsidiary; | |
(3) an issuance of Equity Interests by a Restricted Subsidiary to the Company or to another Restricted Subsidiary; |
106
(4) the sale or lease of equipment, inventory, accounts receivable or other assets in the ordinary course of business; | |
(5) the sale or other disposition of cash or Cash Equivalents; and | |
(6) a Restricted Payment or Permitted Investment that is permitted by the covenant described above under the subheading Certain Covenants Restricted Payments. |
Attributable Debt in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP.
Beneficial Owner has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular person (as that term is used in Section 13(d)(3) of the Exchange Act), such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. The terms Beneficially Owns and Beneficially Owned have a corresponding meaning.
Board of Directors means:
(1) with respect to a corporation, the board of directors of the corporation; | |
(2) with respect to a partnership, the board of directors of the general partner of the partnership; and | |
(3) with respect to any other Person, the board or committee of such Person serving a similar function. |
Capital Lease Obligation means, at the time any determination is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP.
Capital Stock means:
(1) in the case of a corporation, corporate stock; | |
(2) in the |