CORNELL COMPANIES, INC. 401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
1. DESCRIPTION OF THE PLAN
General
The Cornell Companies, Inc. 401(k) Profit Sharing Plan (the Plan) was established on January 1, 1993, and is a defined contribution plan in which generally all employees of Cornell Companies, Inc., and its subsidiaries (the Company), are eligible to participate. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The following description of the Plan provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions.
Plan Administration and Trustee
The Company is the Plan’s administrator and trustee. The board of directors of the Company appoints an individual to be responsible for the administration of the Plan. Effective October 11, 2002, the Company appointed Reliance Trust Company as the Plan’s asset custodian and DailyAccess Corporation as the Plan’s record keeper.
Eligibility and Contributions
Effective September 1, 2000, all employees except leased employees are eligible to participate in the Plan with no service requirements and can enroll in the Plan immediately. Prior to September 1, 2000, all employees, except leased employees, who had completed one year of service were eligible to participate in the Plan and could enroll in the Plan quarterly.
Employees may elect to contribute from 1 percent to 20 percent of their compensation, as defined, up to the maximum allowed under Internal Revenue Service (IRS) guidelines. The Company makes matching contributions equal to 50 percent of the participants’ elective deferrals for the Plan year up to 6 percent of the participant’s eligible compensation. Participant rollover contributions from other qualified plans are allowed under the Plan.
Participant Accounts and Investment Options
Each participating employee’s share of the net assets of the Plan is segregated in an individual account. Participants exercise control over the types of investments made on their behalf, provided that such investments shall be invested only in investment funds designated by the Plan sponsor. Each participant may elect to invest his/her contribution and the Company’s contributions made on the participant’s behalf in any one or more of the investment funds. Participants can direct the investment on their individual accounts among seventeen mutual funds and a Cornell Unitized Stock Fund. Investment income or loss is allocated daily to a participant’s account in the same ratio as the participant’s investment in each fund bears to the total of all participants’ investments in each fund.
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Vesting
All participant contributions are 100 percent vested and nonforfeitable at all times. Participants become vested in the Company’s contributions to the Plan as follows:
| | Hired Before 9/1/00 | | Hired After 8/31/00 | |
Years of Service | | Vested Percent | | Vested Percent | |
| | | | | |
1 | | 0 | % | 0 | % |
2 | | 20 | % | 0 | % |
3 | | 100 | % | 100 | % |
Loans
A participant may borrow from the Plan up to the lesser of $50,000 or 50 percent of the participant’s vested account balance with a minimum loan requirement of $1,000. The loans are collateralized by the participant’s vested account balance. Interest is charged at the current commercial lending rate and is credited to the participant’s account. The participant is entitled to no more than one loan concurrently.
Payment of Benefits
Benefits are payable to a participant upon separation from service, total and permanent disability, reaching age 59 ½, retirement or death in accordance with the aforementioned vesting schedule. In addition, hardship distributions are permitted if certain Plan provisions are met. Distributions are made in the form of lump-sum payments. No other optional form of payment is available.
Effective September 1, 2000, an early retirement option was added to the Plan. Upon completion of five years of service and attained age 55, a participant may elect to retire from the Company and begin receiving benefits.
Also, a participant who has attained the normal retirement age and who has not separated from service may receive a distribution of his or her vested account balance.
Forfeitures
Forfeitures of any Company contributions are to be used either to reduce the Company’s contributions to the Plan or to pay the expenses of the Plan. As of December 31, 2006 and 2005, $155,369 and $120,934, respectively, of forfeitures are included in net assets available for benefits. In 2006, $87,513 of forfeitures were utilized by the Company to pay the expenses of the Plan and reduce Company contributions.
Plan Termination
The Company currently intends to continue the Plan for the benefit of its employees but reserves the right to discontinue contributions and/or terminate the Plan, subject to the provisions of ERISA. In the event of a complete termination of the Plan, the affected participants shall be fully vested in all amounts allocated to their accounts, and such amounts shall be nonforfeitable.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Plan are prepared on the accrual basis of accounting. Benefit payments are recorded when paid.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires the Plan’s management to use estimates and assumptions that affect the accompanying financial statements and disclosures. Actual results could differ from those estimates.
Valuation of Investments
Investments in mutual funds (inclusive of the Cornell Unitized Stock Fund) are stated at fair value based on published market prices. The Company common stock is valued at its quoted market price. Participant loans are valued at cost which approximates fair value. Purchases and sales are recorded on a trade-date basis. Realized gains (losses) on the sale of mutual funds and common stock and unrealized appreciation (depreciation) in fair value of mutual funds and common stock are shown as net appreciation (depreciation) in fair value of investments in the statement of changes in net assets available for plan benefits. Interest income is recorded as earned and dividends are recorded on the ex-dividend date.
Financial Accounting Standards Board Staff Position (FSP) AAG INV-1 and the American Institute of Certified Public Accountants Statement of Position (SOP) 94-4-1 requires that plans holding stable value investments as defined in the pronouncement present those investments at contract value, rather than fair value. The Plan does not hold any investments that meet this definition of stable value investments.
Expenses
Administrative and other expenses of the Plan are generally paid from Plan forfeitures. Plan related expenses paid directly by the Company in 2006 were not significant.
3. RISKS AND UNCERTAINTIES
The Plan provides for investment in mutual funds and Company common stock. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility risk. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term.
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4. INVESTMENTS
Individual investments that exceed 5 percent of net assets available for benefits at December 31, 2006 and 2005 are as follows:
2006 -
AIM Real Estate Fund | | $ | 1,257,138 | |
AIM Cash Reserve Fund | | 7,566,087 | |
AIM Constellation Fund | | 1,502,981 | |
Goldman Sachs Small Cap Value Fund | | 2,126,012 | |
Janus Advisor International Growth | | 3,038,539 | |
Oppenheimer Main St. Growth and Income – N Shares | | 1,772,170 | |
Cornell Unitized Stock Fund | | 1,232,874 | |
Participant Loans | | 1,307,646 | |
2005 -
AIM Cash Reserve Fund | | $ | 6,593,128 | |
AIM Constellation Fund | | 1,554,718 | |
Goldman Sachs Small Cap Value Fund | | 2,185,522 | |
Janus Advisor International Growth | | 1,887,537 | |
Oppenheimer Main St. Growth and Income – N Shares | | 1,643,984 | |
Cornell Unitized Stock Fund | | 1,286,696 | |
Participant Loans | | 1,129,928 | |
5. FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted the Cornell Companies, Inc. 401(k) Profit Sharing Plan (the Plan). The Plan received a favorable determination letter on March 8, 1994. The Plan has since been amended; however, the Company believes that the Plan is being operated in compliance with the applicable requirements of the Internal Revenue Code of 1986, as amended. Therefore, the Company believes that the Plan was qualified and the related trust was tax-exempt as of December 31, 2006 and 2005.
6. CORRECTIVE DISTRIBUTIONS PAYABLE
The Plan is subject to certain compliance requirements of non-discrimination rules under ERISA and IRS guidelines. For the Plan years ended December 31, 2006 and 2005, the Plan failed certain of these non-discrimination tests due to lower levels of contribution participation by non-highly compensated eligible Plan participants. The Plan has recorded corrective distributions payable of $50,000 and $63,950 at December 31, 2006 and 2005, respectively, in the statement of net assets available for benefits to reflect the appropriate refund of a portion of the contributions made by highly compensated participants in order to comply with non-discrimination requirements. As a result of the corrective distribution, employer matching contributions attributable to refunds are forfeited to the Plan’s Trust.
7. PARTY-IN-INTEREST TRANSACTIONS
Participants may invest in the common stock of the Company through the Cornell Unitized Stock Fund. The Company is the sponsor of the Plan and, therefore, these transactions qualify as party-in-interest transactions. Loans to participants also qualify as party-in-interest transactions. Certain administrative expenses of the Plan are paid by the Company. The Company also provides certain administrative services to the Plan without compensation. These transactions are permitted under provisions of ERISA.
Employee contributions of $19,786, matching employer contributions of $7,608 and loan payments of $2,410 related to 2006 were not remitted to the Plan’s trust on a timely basis. These are prohibited non-exempt party-in-interest transactions. The Plan is undertaking steps to correct these matters and to bring the Plan into compliance with the related regulations. These amounts, along with an estimated $3,782 in earnings that would have accrued to the benefit of these participants’ account are expected to be funded into the Plan’s trust in July 2007, and have been included in contributions receivable at December 31, 2006 in the accompanying Statement of Net Assets Available for Benefits.
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8. PLAN TRANSFER
On December 4, 2006, the Plan received a transfer of $480,004 into the Plan’s trust relating to the merger of the Correctional Systems, Inc. 401(k) Plan and its participants’ balances into the Plan.
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CORNELL COMPANIES, INC. 401(k) PROFIT SHARING PLAN
SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)
AS OF DECEMBER 31, 2006
| | Number of | | | | Current | |
Identity of Issue/Description of Asset | | Shares/Units | | Cost | | Value | |
| | | | | | | |
AIM Basic Balanced Fund | | 74,763 | | (a) | | $ | 991,359 | |
AIM Capital Development Fund | | 27,646 | | (a) | | 509,242 | |
AIM Cash Reserve Fund | | 7,566,087 | | (a) | | 7,566,087 | |
AIM Constellation Fund | | 57,322 | | (a) | | 1,502,981 | |
AIM Basic Value Fund | | 9,276 | | (a) | | 339,505 | |
AIM High Yield Fund | | 19,327 | | (a) | | 87,358 | |
AIM Income Fund | | 16,682 | | (a) | | 104,093 | |
AIM Real Estate Fund | | 37,381 | | (a) | | 1,257,138 | |
AIM Small Cap Growth Fund | | 16,271 | | (a) | | 475,595 | |
Cash | | 30,680 | | (a) | | 30,680 | |
Cornell Unitized Stock Fund* | | 45,530 | | (a) | | 1,232,874 | |
Goldman Sachs Midcap Value | | 21,975 | | (a) | | 848,889 | |
Goldman Sachs Small Cap Value Fund | | 48,198 | | (a) | | 2,126,013 | |
Delaware Foundation Balanced Fund | | 30,016 | | (a) | | 316,070 | |
Delaware Foundation Growth Fund | | 33,091 | | (a) | | 348,519 | |
Delaware Foundation Income Fund | | 22,357 | | (a) | | 208,813 | |
Janus Advisor International Growth | | 55,897 | | (a) | | 3,038,539 | |
Oppenheimer Main St. G & I – N Shares | | 44,150 | | (a) | | 1,772,170 | |
Wells Fargo Total Return Bond Fund | | 41,899 | | (a) | | 514,943 | |
Participant Loans* (interest rates ranging from 5.00% to 11.50%) | | | | (a) | | 1,307,646 | |
|
| | | | | | $ | 24,578,514 | |
* Indicates party-in-interest.
(a) cost omitted for participant-directed investments.
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CORNELL COMPANIES, INC. 401(k) PROFIT SHARING PLAN
SCHEDULE H, LINE 4a – SCHEDULE OF NON-EXEMPT TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 2006
| | | | | | | | Estimated |
Identity of | | Relationship | | | | Current value | | Additional |
Party involved | | to Plan | | Description of transaction | | at transaction date | | Earnings |
| | | | | | | | |
Cornell Companies, Inc. | | Plan Sponsor | | Employee contributions from 171 employees totaling $13,889.80, matching employer contributions totaling $5,197.57 and loan payments totaling $1,505.56 for the period ending October 6, 2006 were not remitted to the Trustee until July 2007 along with related additional earnings | | $ | 20,592.93 | | $ | 2,716.29 |
| | | | | | | | |
Cornell Companies, Inc. | | Plan Sponsor | | Employee contributions from 62 employees totaling $3,521.73, matching employer contributions totaling $1,333.36 and loan payments totaling $194.44 for the period ending October 13, 2006 were not remitted to the Trustee until July 2007 along with related additional earnings | | $ | 5,049.53 | | $ | 650.19 |
| | | | | | | | |
Cornell Companies, Inc. | | Plan Sponsor | | Employee contributions from 51 employees totaling $1,690.86, matching employer contributions totaling $758.72 and loan payments totaling $447.85 for the period ending December 18, 2006 were not remitted to the Trustee until July 2007 along with related additional earnings | | $ | 2,897.43 | | $ | 287.29 |
| | | | | | | | |
Cornell Companies, Inc. | | Plan Sponsor | | Employee contributions from 4 employees totaling $683.63, matching employer contributions totaling $317.93 and loan payments totaling $262.38 for the periods ending November 24 and December 29, 2006 were not remitted to the Trustee until July 2007 along with related additional earnings | | $ | 1,263.94 | | $ | 128.16 |
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SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Administrator has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.
| | CORNELL COMPANIES, INC. |
| | 401(k) PROFIT SHARING PLAN |
| | | |
| | | |
Date: | July 16, 2007 | By: | | /s/ PATRICK N. PERRIN | |
| | | Patrick N. Perrin |
| | | Sr. V.P., Chief Administrative Officer and
Plan Coordinator |
| | | for Cornell Companies, Inc. |
| | | | | |
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INDEX TO EXHIBITS
Exhibit
Number | | |
| | |
23.1 | | Consent of Independent Registered Public Accounting Firm – LJ Mosby, P.C. |
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