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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-25245
CORRECTIONS CORPORATION OF AMERICA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 62-1763875
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10 BURTON HILLS BLVD., NASHVILLE, TENNESSEE 37215
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
(615) 263-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each class of Common
Stock as of April 30, 2001: Shares of Common Stock, $0.01
par value: 251,654,274 shares outstanding.
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CORRECTIONS CORPORATION OF AMERICA
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets (Unaudited) as of
March 31, 2001 and December 31, 2000 ...................... 3
b) Condensed Consolidated Statements of Operations (Unaudited) for
the three months ended March 31, 2001 and 2000 ............. 4
c) Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2001 and 2000 ......... 5
d) Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) for the three months ended March 31, 2001 ...... 6
e) Notes to Condensed Consolidated Financial Statements .......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 24
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ....................................................... 36
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 38
Item 2. Changes in Securities and Use of Proceeds ..................... 38
Item 3. Defaults Upon Senior Securities ............................... 38
Item 4. Submission of Matters to a Vote of Security Holders ........... 38
Item 5. Other Information ............................................. 38
Item 6. Exhibits and Reports on Form 8-K .............................. 38
SIGNATURES ............................................................ 40
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, December 31,
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents $ 58,901 $ 20,889
Restricted cash 9,031 9,209
Accounts receivable, net of allowance of $1,619 and $1,486, respectively 133,314 132,306
Income tax receivable 2,090 32,662
Prepaid expenses and other current assets 17,609 18,726
Assets held for sale under contract 65,432 24,895
----------- -----------
Total current assets 286,377 238,687
Property and equipment, net 1,602,463 1,615,130
Investment in direct financing lease 23,532 23,808
Assets held for sale 71,850 138,622
Goodwill 110,671 109,006
Other assets 46,255 51,739
----------- -----------
Total assets $ 2,141,148 $ 2,176,992
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 226,317 $ 243,312
Income taxes payable 7,014 8,437
Distributions payable 11,253 9,156
Current portion of long-term debt 384,123 14,594
----------- -----------
Total current liabilities 628,707 275,499
Long-term debt, net of current portion 738,978 1,137,976
Deferred tax liabilities 59,267 56,450
Fair value of interest rate swap agreement 10,364 --
Other liabilities 19,055 19,052
----------- -----------
Total liabilities 1,456,371 1,488,977
----------- -----------
Commitments and contingencies
Preferred stock - $0.01 par value; 50,000 shares authorized:
Series A - 4,300 shares issued and outstanding; stated at liquidation preference
of $25.00 per share 107,500 107,500
Series B - 3,407 and 3,297 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively; stated at liquidation preference
of $24.46 per share 83,334 80,642
Common stock - $0.01 par value; 400,000 shares authorized; 243,886 and 235,395
shares issued and 243,874 and 235,383 shares outstanding at March 31, 2001 and
December 31, 2000, respectively 2,439 2,354
Additional paid-in capital 1,307,666 1,299,390
Deferred compensation (2,491) (2,723)
Retained deficit (809,034) (798,906)
Treasury stock, 12 shares, at cost (242) (242)
Accumulated other comprehensive loss (4,395) --
----------- -----------
Total stockholders' equity 684,777 688,015
----------- -----------
Total liabilities and stockholders' equity $ 2,141,148 $ 2,176,992
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
--------- ---------
REVENUE:
Management and other $ 237,972 $ --
Rental 2,410 11,460
Licensing fees from affiliates -- 2,576
--------- ---------
240,382 14,036
--------- ---------
EXPENSES:
Operating 184,655 --
General and administrative 8,600 2,536
Depreciation and amortization 12,701 12,924
Write-off of amounts under lease arrangements -- 4,000
--------- ---------
205,956 19,460
--------- ---------
OPERATING INCOME (LOSS) 34,426 (5,424)
--------- ---------
OTHER (INCOME) EXPENSE:
Equity (earnings) loss and amortization of deferred gain, net 85 (162)
Interest expense, net 34,069 28,482
Strategic investor fees -- 7
Change in fair value of interest rate swap agreement 5,969 --
Unrealized foreign currency transaction loss 385 --
--------- ---------
40,508 28,327
--------- ---------
LOSS BEFORE INCOME TAXES (6,082) (33,751)
Benefit for income taxes 775 --
--------- ---------
NET LOSS (5,307) (33,751)
Distributions to preferred stockholders (4,821) (2,150)
--------- ---------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (10,128) $ (35,901)
========= =========
BASIC NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
PER COMMON SHARE $ (0.04) $ (0.30)
========= =========
DILUTED NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
PER COMMON SHARE $ (0.04) $ (0.30)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 236,034 118,395
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,307) $(33,751)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 12,701 12,924
Amortization of debt issuance costs 4,627 3,321
Deferred and other non-cash income taxes (775) --
Equity in (earnings) loss and amortization of deferred gain 85 (162)
Write-off of amounts under lease agreement -- 4,000
Unrealized foreign currency transaction loss 385 --
Change in fair value of interest rate swap agreement 5,969 --
Other non-cash items 538 90
Changes in assets and liabilities:
Accounts receivable, prepaid expenses and other assets 101 (3,965)
Receivable from affiliates -- 4,052
Income tax receivable 30,572 --
Accounts payable, accrued expenses and other liabilities (5,636) (11,339)
Payable to Operating Company -- 3,635
Income tax payable (1,423) 441
-------- --------
Net cash provided by (used in) operating activities 41,837 (20,754)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment, net (311) (47,799)
Increase (decrease) in restricted cash 178 (313)
Payments received on investments in affiliates -- 702
Proceeds from sales of assets 25,693 --
Increase in other assets (138) (1,127)
Payments received on direct financing leases and notes
receivable 681 1,223
-------- --------
Net cash provided by (used in) investing activities 26,103 (47,314)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt, net (29,469) (1,520)
Payment of debt issuance costs (351) (2)
Payment of dividends (32) (2,150)
Cash paid for fractional shares (76) --
-------- --------
Net cash used in financing activities (29,928) (3,672)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 38,012 (71,740)
CASH AND CASH EQUIVALENTS, beginning of period 20,889 84,493
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 58,901 $ 12,753
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized of $5,200 in 2000) $ 18,144 $ 20,895
======== ========
Income taxes $ 1,412 $ 522
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED AND AMOUNTS IN THOUSANDS)
ACCUMULATED
OTHER
SERIES A SERIES B ADDITIONAL COMPREHENSIVE
PREFERRED PREFERRED COMMON PAID-IN DEFERRED RETAINED TREASURY INCOME
STOCK STOCK STOCK CAPITAL COMPENSATION DEFICIT STOCK (LOSS) TOTAL
-------- ------- ------ ----------- ------------ --------- ----- ------- ---------
Balance as of
December 31, 2000 $107,500 $80,642 $2,354 $ 1,299,390 $(2,723) $(798,906) $(242) $ -- $ 688,015
-------- ------- ------ ----------- ------- --------- ----- ------- ---------
Comprehensive income (loss):
Net loss -- -- -- -- -- (5,307) -- -- (5,307)
Cumulative effect of
accounting change -- -- -- -- -- -- -- (5,023) (5,023)
Amortization of transition
adjustment -- -- -- -- -- -- -- 628 628
-------- ------- ------ ----------- ------- --------- ----- ------- ---------
Total comprehensive loss -- -- -- -- -- (5,307) -- (4,395) (9,702)
-------- ------- ------ ----------- ------- --------- ----- ------- ---------
Distributions to Preferred
stockholders -- 2,692 -- (76) -- (4,821) -- -- (2,205)
Issuance of common stock
under terms of stockholder
litigation -- -- 84 8,353 -- -- -- -- 8,437
Amortization of deferred
compensation -- -- 1 (1) 232 -- -- -- 232
-------- ------- ------ ----------- ------- --------- ----- ------- ---------
BALANCE AS OF
MARCH 31, 2001 $107,500 $83,334 $2,439 $ 1,307,666 $(2,491) $(809,034) $(242) $(4,395) $ 684,777
======== ======= ====== =========== ======= ========= ===== ======= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
1. ORGANIZATION AND OPERATIONS
Corrections Corporation of America (together with its subsidiaries, the
"Company"), a Maryland corporation formerly known as Prison Realty Trust,
Inc., commenced operations as Prison Realty Corporation on January 1,
1999, following the mergers of each of the former Corrections Corporation
of America, a Tennessee corporation ("Old CCA"), on December 31, 1998 and
CCA Prison Realty Trust, a Maryland real estate investment trust ("Old
Prison Realty"), on January 1, 1999 (such mergers referred to
collectively herein as the "1999 Merger").
Prior to the 1999 Merger, Old Prison Realty had been a publicly traded
entity operating as a real estate investment trust, or REIT, primarily in
the business of owning and leasing prison facilities to private prison
management companies and certain government entities. Prior to the 1999
Merger, Old CCA was a publicly traded entity primarily in the business of
owning, operating and managing prisons on behalf of government entities
and providing prisoner transportation services to such entities. Old CCA
also provided a full range of related services to governmental agencies,
including managing, financing, developing, designing and constructing new
correctional and detention facilities and redesigning and renovating
older facilities. Additionally, Old CCA had been Old Prison Realty's
primary tenant.
Immediately prior to the 1999 Merger, Old CCA sold all of the issued and
outstanding capital stock of certain wholly-owned corporate subsidiaries
of Old CCA, certain management contracts and certain other non-real
estate assets related thereto, to a newly formed entity, Correctional
Management Services Corporation, a privately-held Tennessee corporation
("Operating Company"). Also immediately prior to the 1999 Merger, Old CCA
sold certain management contracts and other assets and liabilities
relating to government owned adult facilities to Prison Management
Services, LLC (which subsequently merged with Prison Management Services,
Inc.) and sold certain management contracts and other assets and
liabilities relating to government owned jails and juvenile facilities to
Juvenile and Jail Facility Management Services, LLC (which subsequently
merged with Juvenile and Jail Facility Management Services, Inc.).
Effective January 1, 1999, the Company elected to qualify as a REIT for
federal income tax purposes commencing with its taxable year ended
December 31, 1999. Following the completion of the 1999 Merger and
through September 30, 2000, the Company specialized in acquiring,
developing, owning and leasing correctional and detention facilities.
Also effective January 1, 1999, the Company entered into lease agreements
and other agreements with Operating Company, whereby Operating Company
would lease the substantial majority of the Company's facilities and
Operating Company would provide certain services to the Company,
including services rendered to the Company in the development of its
correctional and detention facilities. The Company was therefore
dependent on Operating Company for a significant source of its income. As
a result of liquidity issues facing Operating Company and
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the Company, the parties amended certain of the contractual agreements
between the Company and Operating Company during 2000 which, among other
things, resulted in the forgiveness of approximately $190.8 million of
rental payments due to the Company from Operating Company.
From December 31, 1998 until September 1, 2000, the Company owned 100% of
the non-voting common stock of Prison Management Services, Inc. ("PMSI")
and Juvenile and Jail Facility Management Services, Inc. ("JJFMSI"), both
of which were privately-held service companies which managed certain
government-owned prison and jail facilities under the "Corrections
Corporation of America" name (together the "Service Companies"). PMSI
provided adult prison facility management services to government agencies
pursuant to management contracts with state governmental agencies and
authorities in the United States and Puerto Rico. JJFMSI provided
juvenile and jail facility management services to government agencies
pursuant to management contracts with federal, state and local government
agencies and authorities in the United States and Puerto Rico and
provided adult prison facility management services to certain
international authorities in Australia and the United Kingdom. The
Company was entitled to receive 95% of each company's net income, as
defined, as dividends on such shares, while other outside shareholders
and the wardens at the individual facilities owned 100% of the voting
common stock of PMSI and JJFMSI, entitling those voting stockholders to
receive the remaining 5% of each company's net income as dividends on
such shares. During September 2000, wholly-owned subsidiaries of PMSI and
JJFMSI entered into separate transactions with each of PMSI's and
JJFMSI's respective non-management, outside shareholders to reacquire all
of the outstanding voting stock of their non-management, outside
shareholders, representing 85% of the outstanding voting stock of each
entity for cash payments of $8.3 million and $5.1 million, respectively.
During 2000, in order to address its liquidity concerns, the Company
completed a comprehensive restructuring (the "Restructuring"). As part of
the Restructuring, Operating Company was merged with and into a
wholly-owned subsidiary of the Company on October 1, 2000 (the "Operating
Company Merger"). Immediately prior to the Operating Company Merger,
Operating Company leased from New Prison Realty 35 correctional and
detention facilities, with a total design capacity of 37,520 beds. Also
in connection with the Restructuring, the Company amended its charter to,
among other things, remove provisions relating to the Company's operation
and qualification as a REIT for federal income tax purposes commencing
with its 2000 taxable year and change its name to "Corrections
Corporation of America."
On December 1, 2000, in connection with the Restructuring, the Company
completed the acquisitions of PMSI and JJFMSI. Immediately prior to the
acquisition date, PMSI had contracts to manage 11 correctional and
detention facilities with a total design capacity of 13,372 beds, and
JJFMSI had contracts to manage 17 correctional and detention facilities
with a total design capacity of 9,204 beds.
As a result of the acquisition of Operating Company on October 1, 2000
and the acquisitions of PMSI and JJFMSI on December 1, 2000, the Company
now specializes in owning, operating and managing prisons and other
correctional facilities and providing prisoner transportation services
for governmental agencies. In addition to providing the fundamental
residential services relating to inmates, each of the Company's
facilities offers a large variety of rehabilitation and educational
programs, including basic education, life skills and employment
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training and substance abuse treatment. The Company also provides health
care (including medical, dental and psychiatric services), institutional
food services and work and recreational programs.
The Company currently owns or manages 72 correctional and detention
facilities with a total design capacity of approximately 66,000 beds in
22 states, the District of Columbia and Puerto Rico, of which 70
facilities are operating and two are under construction.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim condensed consolidated financial statements have
been prepared by the Company without audit, and in the opinion of
management reflect all normal recurring adjustments necessary for a fair
presentation of results for the unaudited interim periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The results of
operations for the interim period are not necessarily indicative of the
results to be obtained for the full fiscal year. Reference is made to the
audited financial statements of the Company included in the 2000 Form
10-K report with respect to certain significant accounting and financial
reporting policies as well as other pertinent information of the Company.
The condensed consolidated financial statements include the accounts of
the Company on a consolidated basis with its wholly-owned subsidiaries as
of and for each period presented. Management believes the comparison
between the results of operations for the three months ended March 31,
2001 and the results of operations for the three months ended March 31,
2000 are not meaningful because, for the prior year quarter (and through
September 30, 2000), the financial condition, results of operations and
cash flows include real estate activities between the Company and
Operating Company during a period of severe liquidity problems. The
financial condition, results of operations and cash flows of the Company
since October 1, 2000, include the operations of the correctional and
detention facilities previously leased to and managed by Operating
Company. In addition, the Company's financial condition as of and for the
three months ended March 31, 2001 also includes the operations of the
Service Companies (as of the December 1, 2000 acquisition date) on a
consolidated basis. For the period January 1, 2000 through August 31,
2000, the investments in the Service Companies were accounted for and
were presented under the equity method of accounting. For the period from
September 1, 2000 through November 30, 2000, the investments in the
Service Companies were accounted for on a combined basis due to the
repurchase by the wholly-owned subsidiaries of the Service Companies of
the non-management, outside stockholders' equity interest in the Service
Companies during September 2000.
Prior to the Operating Company Merger, the Company had accounted for its
9.5% non-voting interest in Operating Company under the cost method of
accounting. As such, the Company had not recognized any income or loss
related to its stock ownership investment in Operating Company during the
period from January 1, 1999 through September 30, 2000. However, in
connection with the Operating Company Merger, the financial statements of
the Company have been restated to recognize the Company's 9.5% pro-rata
share of Operating Company's losses on a retroactive basis for the period
from January 1, 1999 through September 30, 2000 under
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the equity method of accounting, in accordance with APB 18, "The Equity
Method of Accounting for Investments in Common Stock" ("APB 18").
3. ACQUISITIONS AND DISPOSITIONS
In March 2001, the Company sold its Mountain View Correctional Facility,
a facility located in North Carolina, which was classified as held for
sale under contract as of December 31, 2000, for a sales price of
approximately $24.9 million. The net proceeds were used to pay-down a
like portion of amounts outstanding under the Company's $1.0 billion
senior credit facility (the "Amended Bank Credit Facility").
On April 10, 2001, the Company sold its interest in its facility located
in Salford, England ("Agecroft") for approximately $65.7 million. The net
proceeds from the sale were used to pay-down a like portion of amounts
outstanding under the Amended Bank Credit Facility. Under the terms of
the Amended Bank Credit Facility, the sale of Agecroft (or similar
transaction) was required to be completed on or before April 30, 2001,
the expiration of the applicable grace period under the Amended Bank
Credit Facility.
4. DEBT
AMENDED BANK CREDIT FACILITY
As of March 31, 2001, the Company had approximately $950.9 million
outstanding under the Amended Bank Credit Facility. During the first and
second quarters of 2001, the Company obtained amendments to the Amended
Bank Credit Facility to permit the issuance of indebtedness in partial
satisfaction of its obligations in the stockholder litigation settlement
(as further discussed in Note 6), modify certain financial covenants, and
change the consummation date for securitizing the lease payments (or
other similar transaction) related to the Company's Agecroft facility,
each as further discussed below.
In January 2001, the requisite percentage of the Company's senior lenders
under the Amended Bank Credit Facility consented to the Company's
issuance of a promissory note in partial satisfaction of its requirements
under the definitive settlement agreements relating to the Company's
then-outstanding stockholder litigation (the "January 2001 Consent and
Amendment"), as further discussed in Note 6. The January 2001 Consent and
Amendment also modified certain provisions of the Amended Bank Credit
Facility to permit the issuance of the promissory note.
In March 2001, the Company obtained an amendment to the Amended Bank
Credit Facility which included the following amendments: (i) changed the
date the securitization of lease payments (or other similar transactions)
with respect to the Company's Agecroft facility must be consummated from
February 28, 2001 to March 31, 2001; (ii) modified the calculation of
EBITDA used in calculating the total leverage ratio, to take into effect
any loss of EBITDA that may result from certain asset dispositions, and
(iii) modified the minimum EBITDA covenant to permit a reduction by the
amount of EBITDA that certain asset dispositions had generated.
The securitization of lease payments (or other similar transaction) with
respect to the Company's Agecroft facility did not close by the required
date. However, the covenant
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allowed for a 30-day grace period during which the lenders under the
Amended Bank Credit Facility could not exercise their rights to declare
an event of default. On April 10, 2001, prior to the expiration of the
grace period, the Company consummated the Agecroft transaction through
the sale of all of the issued and outstanding capital stock of Agecroft
Properties, Inc., a wholly-owned subsidiary of the Company, and used the
net proceeds to pay-down the Amended Bank Credit Facility, thereby
fulfilling the Company's covenant requirements with respect to the
Agecroft transaction.
The Amended Bank Credit Facility also contains a covenant requiring the
Company to provide the lenders with audited financial statements within
90 days of the Company's fiscal year-end, subject to an additional
five-day grace period. Due to the Company's attempts to close the
securitization of the Agecroft facility, the Company did not provide the
audited financial statements within the required time period. However, in
April 2001, the Company obtained a waiver from the lenders under the
Amended Bank Credit Facility of this financial reporting requirement.
This waiver also cured the resulting cross-default under the Company's
$40.0 Million Convertible Notes.
The revolving loan portion of the Amended Bank Credit Facility (of which
$377.7 million was outstanding as of March 31, 2001) matures on January
1, 2002, and was therefore classified on the accompanying balance sheet
as a current liability at March 31, 2001. As part of management's plans
to improve the Company's financial position and address the January 1,
2002 maturity of portions of the debt under the Amended Bank Credit
Facility, management has committed to a plan of disposal for certain
long-lived assets. These assets are being actively marketed for sale and
are classified as held for sale in the accompanying balance sheet at
March 31, 2001. Anticipated proceeds from these asset sales are to be
applied as loan repayments. The Company believes that utilizing such
proceeds to pay-down debt will improve its leverage ratios and overall
financial position, improving its ability to refinance or renew maturing
indebtedness, including primarily the Company's revolving loans under
the Amended Bank Credit Facility.
The Amended Bank Credit Facility requires the Company to use commercially
reasonable efforts to complete a "capital raising event" on or before
June 30, 2001. A "capital raising event" is defined in the Amended Bank
Credit Facility as any combination of the following transactions, which
together would result in net cash proceeds to the Company of at least
$100.0 million:
- an offering of the Company's common stock through the
distribution of rights to the Company's existing
stockholders;
- any other offering of the Company's common stock or certain
types of the Company's preferred stock;
- issuances by the Company of unsecured, subordinated
indebtedness providing for in-kind payments of principal
and interest until repayment of the Amended Bank Credit
Facility; or
- certain types of asset sales by the Company, including the
sale-leaseback of the Company's headquarters, but excluding
the securitization of lease payments (or other similar
transaction) with respect to the Agecroft facility.
The Amended Bank Credit Facility also contains limitations upon the use
of proceeds obtained from the completion of such transactions. To date,
the Company has determined that as a
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result of various prevailing market factors, the sale of assets
represents the most effective means by which the Company could satisfy
the covenant. During the first quarter of 2001, the Company completed the
sale of its Mountain View Correctional Facility for approximately $24.9
million and is actively pursuing the sales of additional assets. The
Company is currently evaluating a distribution of rights to purchase
common or preferred stock to the Company's existing stockholders, or an
equity investment in the Company from an outside investor. However, the
Company does not believe that it is commercially reasonable to issue
additional equity or debt securities at this time, other than those
securities for which the Company has already contractually agreed to
issue, including primarily the issuance of shares of the Company's common
stock in connection with the settlement of the Company's stockholder
litigation, as more fully discussed in Note 6. The Company will, however,
continue to assess the commercial reasonableness of issuing additional
securities. While the Company believes it will be able to demonstrate
commercially reasonable efforts regarding the $100.0 million capital
raising event on or before June 30, 2001, there can be no assurance that
the lenders under the Amended Bank Credit Facility will concur with the
Company's position that it has used commercially reasonable efforts in
its satisfaction of this covenant.
Based on the Company's current credit rating, the current interest rate
applicable to the Company's Amended Bank Credit Facility is 2.75% over
the base rate and 4.25% over the London Interbank Offering Rate ("LIBOR")
for revolving loans, and 3.0% over the base rate and 4.5% over LIBOR for
term loans. These rates, however, are subject to (i) an increase of 25
basis points (0.25%) from the current interest rate on July 1, 2001 if
the Company has not prepaid $100.0 million of the outstanding loans under
the Amended Bank Credit Facility, and (ii) an increase of 50 basis points
(0.50%) from the current interest rate on October 1, 2001 if the Company
has not prepaid an aggregate of $200.0 million of the loans under the
Amended Bank Credit Facility. The Company believes it will be able to
satisfy the condition to prepay, prior to July 1, 2001, $100.0 million of
outstanding loans under the Amended Bank Credit Facility through the
application of proceeds from the sale of the Mountain View Correctional
Facility and the completion of the Agecroft transaction, and through the
pay-down of outstanding loans under the Amended Bank Credit Facility with
cash on hand. However, the Company will be required to raise additional
cash in order to satisfy the condition to prepay an additional $100.0
million prior to October 1, 2001, as future cash flows from operations
will not be sufficient to satisfy such condition. There can be no
assurance that the Company will be successful in generating sufficient
cash in order to prepay such amount and satisfy this condition.
The Company believes that it is currently in compliance with the terms of
the debt covenants contained in the Amended Bank Credit Facility.
Further, the Company believes its operating plans and related projections
are achievable and, subject to the foregoing discussion regarding the
capital raising event covenant, and obtainment of lender consent in
connection with the reverse stock split discussed in Note 8, will allow
the Company to remain in compliance with its debt covenants during 2001.
However, there can be no assurance that the cash flow projections will
reflect actual results and there can be no assurance that the Company
will remain in compliance with its debt covenants or that, if the Company
defaults under any of its debt covenants, the Company will be able to
obtain additional waivers or amendments. Further, even if the Company is
successful in selling assets, there can be no assurance that it will be
able to refinance or renew its debt obligations maturing January 1, 2002
on commercially reasonable or any other terms.
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Due to certain cross-default provisions contained in certain of the
Company's debt instruments, if the Company were to be in default under
the Amended Bank Credit Facility and if the lenders under the Amended
Bank Credit Facility elected to exercise their rights to accelerate the
Company's obligations under the Amended Bank Credit Facility, such events
could result in the acceleration of all or a portion of the outstanding
principal amount of the Company's $100.0 million senior notes and the
Company's aggregate $70.0 million convertible subordinated notes, which
would have a material adverse effect on the Company's liquidity and
financial position. Additionally, under the Company's $40.0 million
convertible subordinated notes, even if the lenders under the Amended
Bank Credit Facility did not elect to exercise their acceleration rights,
the holders of the $40.0 million convertible subordinated notes could
require the Company to repurchase such notes. The Company does not have
sufficient working capital to satisfy its debt obligations in the event
of an acceleration of all or a substantial portion of the Company's
outstanding indebtedness.
$40.0 MILLION CONVERTIBLE SUBORDINATED NOTES
During the first and second quarters of 2000, certain existing or
potential events of default arose under the provisions of the note
purchase agreement relating to $40.0 million in convertible subordinated
notes due December 2008 (the "$40 Million Convertible Subordinated
Notes") as a result of the Company's financial condition and a "change of
control" arising from the Company's execution of certain securities
purchase agreements with respect to the restructuring proposed in 1999
and 2000 led by a group of institutional investors consisting of an
affiliate of Fortress Investment Group LLC and affiliates of The
Blackstone Group ("Fortress/Blackstone"), and a similar restructuring
subsequently proposed by Pacific Life Insurance Company.
In order to address the events of default discussed above, on June 30,
2000, the Company and MDP Ventures IV LLC and affiliated purchasers of
the notes (collectively, "MDP") executed a waiver and amendment to the
provisions of the note purchase agreement governing the notes. This
waiver and amendment provided for a waiver of all existing events of
default under the provisions of the note purchase agreement. In addition,
the waiver and amendment to the note purchase agreement amended the
economic terms of the notes to increase the applicable interest rate of
the notes and adjusted the conversion price of the notes to a price equal
to 125% of the average high and low sales price of the Company's common
stock on the New York Stock Exchange ("NYSE") for a period of 20 trading
days immediately following the earlier of (i) October 31, 2000 or (ii)
the closing date of the Operating Company Merger. The waiver and
amendment to the note purchase agreement also provided for the
replacement of financial ratios applicable to the Company. The conversion
price for the notes has been established at $1.19, subject to adjustment
in the future upon the occurrence of certain events, including the
payment of dividends and the issuance of stock at below market prices by
the Company. Under the terms of the waiver and amendment, the
distribution of the Company's Series B Preferred Stock during the fourth
quarter of 2000 did not cause an adjustment to the conversion price of
the notes. In addition, the Company does not believe that the
distribution of shares of the Company's common stock in connection with
the settlement of all outstanding stockholder litigation against the
Company, as further discussed in Note 6, will cause an adjustment to the
conversion price of the notes. MDP, however, has indicated its belief
that such an adjustment is required. The Company and MDP are currently in
discussions concerning this matter. At an adjusted conversion price of
$1.19, the $40.0 Million Convertible Subordinated Notes are convertible
into approximately 33.6 million shares of the Company's common stock. The
price
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and shares will be adjusted in connection with the completion of the
reverse stock split, as discussed in Note 8.
In connection with the waiver and amendment to the note purchase
agreement, the Company issued additional convertible subordinated notes
containing substantially similar terms in the aggregate principal amount
of $1.1 million, which amount represented all interest owed at the
default rate of interest through June 30, 2000. These additional notes
are currently convertible, at an adjusted conversion price of $1.19, into
an additional 0.9 million shares of the Company's common stock. The price
and shares will be adjusted in connection with the completion of the
reverse stock split. After giving consideration to the issuance of these
additional notes, the Company has made all required interest payments
under the $40.0 Million Convertible Subordinated Notes.
The terms of a registration rights agreement with the holders of the
$40.0 Million Convertible Subordinated Notes also require the Company to
use its best efforts to register the shares of the Company's common stock
into which the notes are convertible. Management is taking the necessary
actions to achieve compliance with this covenant.
$30.0 MILLION CONVERTIBLE SUBORDINATED NOTES
At December 31, 2000, the Company was in default under the terms of the
note purchase agreement governing the Company's $30 million convertible
subordinated notes due February 2005 (the "$30.0 Million Convertible
Subordinated Notes"). The default related to the Company's failure to
comply with the total leverage ratio financial covenant. However, in
March 2001, the Company and the holder of the notes, PMI Mezzanine Fund,
L.P., executed a waiver and amendment to the provisions of the note
purchase agreement governing the notes. This waiver and amendment
provided for a waiver of all existing events of default under the
provisions of the note purchase agreement and amended the financial
covenants applicable to the Company.
The conversion price for the notes has been established at $1.07, subject
to adjustment in the future upon the occurrence of certain events,
including the payment of dividends and the issuance of stock at below
market prices by the Company. Under the terms of a waiver and amendment,
the distribution of the Company's Series B Preferred Stock during the
fourth quarter of 2000 did not cause an adjustment to the conversion
price of the notes. However, the distribution of shares of the Company's
common stock in connection with the settlement of all outstanding
stockholder litigation against the Company, as further discussed in Note
6, will cause an adjustment to the conversion price of the notes in an
amount to be determined at the time shares of the Company's common stock
are distributed pursuant to the settlement. However, the ultimate
adjustment to the conversion ratio will depend on the number of shares of
the Company's common stock outstanding on the date of issuance of the
shares pursuant to the stockholder litigation settlement. In addition,
if, as currently contemplated, all of the shares are not issued
simultaneously, multiple adjustments to the conversion ratio will be
required. At an adjusted conversion price of $1.07, the $30.0 Million
Convertible Subordinated Notes are convertible into approximately 28.0
million shares of the Company's common stock. The price and shares will
also be adjusted in connection with the completion of the reverse stock
split, as discussed in Note 8.
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5. EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") basic earnings per share is computed by
dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the year.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. For the
Company, diluted earnings per share is computed by dividing net income
(loss), as adjusted, by the weighted average number of common shares
after considering the additional dilution related to convertible
preferred stock, convertible subordinated notes, options and warrants.
For the three months ended March 31, 2001 and 2000, the Company's stock
options and warrants were convertible into 0.2 million and 26,000 shares,
respectively. For the three months ended March 31, 2001 and 2000, the
Company's convertible subordinated notes were convertible into 62.5
million and 3.0 million shares, respectively. These incremental shares
were excluded from the computation of diluted earnings per share for the
three months ended March 31, 2001 and 2000 as the effect of their
inclusion was anti-dilutive.
The Company has entered into definitive settlement agreements regarding
the settlement of all formerly existing stockholder litigation against
the Company and certain of its existing and former directors and
executive officers (as further discussed in Note 6). In February 2001,
the Company obtained final court approval of the definitive settlement
agreements. Pursuant to terms of the settlement, among other
consideration, the Company will issue to the plaintiffs and their counsel
an aggregate of 46.9 million shares of common stock. As of March 31,
2001, the Company had issued approximately 8.4 million shares under the
terms of the settlement. The issuance of these shares, and the issuance
of the remaining shares under terms of the settlement agreement, which is
currently expected to occur during 2001, increases the denominator used
in the earnings per share calculation, thereby reducing the net income or
loss per common share of the Company.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
During the first quarter of 2001, the Company obtained final court
approval of the settlements of the following outstanding consolidated
federal and state class action and derivative stockholder lawsuits
brought against the Company and certain of its former directors and
executive officers: (i) In re: Prison Realty Securities Litigation; (ii)
In re: Old CCA Securities Litigation; (iii) John Neiger, on behalf of
himself and all others similarly situated v. Doctor Crants, Robert Crants
and Prison Realty Trust, Inc.; (iv) Dasburg, S.A., on behalf of itself
and all others similarly situated v. Corrections Corporation of America,
Doctor R. Crants, Thomas W. Beasley, Charles A. Blanchette, and David L.
Myers; (v) Wanstrath v. Crants, et al.; and (vi) Bernstein v. Prison
Realty Trust, Inc. The final terms of the settlement agreements provide
for the "global" settlement of all such outstanding stockholder
litigation against the Company brought as the result of, among other
things, agreements entered into by the Company and Operating Company in
May 1999 to increase payments made by the Company to Operating Company
under the terms of certain agreements, as well as transactions relating
to the
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restructuring of the Company led by Fortress/Blackstone and Pacific Life
Insurance Company. Pursuant to the terms of the settlements, the Company
will issue or pay to the plaintiffs (and their respective legal counsel)
in the actions: (i) an aggregate of 46.9 million shares of the Company's
common stock; (ii) a subordinated promissory note in the aggregate
principal amount of $29.0 million; and (iii) approximately $47.5 million
in cash payable solely from the proceeds of certain insurance policies.
It is expected that the promissory note will be due January 2, 2009, and
will accrue interest at a rate of 8.0% per annum. Pursuant to the terms
of the settlement, the note and accrued interest may be extinguished if
the Company's common stock price meets or exceeds a "termination price"
equal to $1.63 per share for fifteen consecutive trading days prior to
the maturity date of the note. Additionally, to the extent the Company's
common stock price does not meet the termination price, the note will be
reduced by the amount that the shares of common stock issued to the
plaintiffs appreciate in value in excess of $0.49 per common share, based
on the average trading price of the stock prior to the maturity of the
note. The Company accrued the estimated obligation of approximately $75.4
million associated with the stockholder litigation during the third
quarter of 2000. As of March 31, 2001, the Company had issued 8.4 million
shares under terms of the settlement to plaintiffs' counsel in the
actions. Subsequent to March 31, 2001, the Company issued an additional
7.5 million shares under terms of the settlement to plaintiffs' counsel
in the actions. The remaining shares are expected to be issued during
2001.
On June 9, 2000, a complaint captioned Prison Acquisition Company, L.L.C.
v. Prison Realty Trust, Inc., Correction Corporation of America, Prison
Management Services, Inc. and Juvenile and Jail Facility Management
Services, Inc. was filed in federal court in the United States District
Court for the Southern District of New York to recover fees allegedly
owed the plaintiff as a result of the termination of a securities
purchase agreement by and among the parties related to a proposed
restructuring of the Company led by Fortress/Blackstone. The complaint
alleges that the defendants failed to pay amounts allegedly due under the
securities purchase agreement and asks for compensatory damages of
approximately $24.0 million consisting of various fees, expenses and
other relief the court may deem appropriate. The plaintiffs have filed a
motion for summary judgment. The Company is contesting this action
vigorously. The Company has recorded an accrual reflecting management's
best estimate of the ultimate outcome of this matter based on
consultation with legal counsel.
On September 14, 1998, a complaint captioned Thomas Horn, Ferman Heaton,
Ricky Estes, and Charles Combs, individually and on behalf of the U.S.
Corrections Corporation Employee Stock Ownership Plan and its
participants v. Robert B. McQueen, Milton Thompson, the U.S. Corrections
Corporation Employee Stock Ownership Plan, U.S. Corrections Corporation,
and Corrections Corporation of America was filed in the U.S. District
Court for the Western District of Kentucky alleging numerous violations
of the Employee Retirement Income Security Act ("ERISA"), including but
not limited to a failure to manage the assets of the U.S. Corrections
Corporation Employee Stock Ownership Plan (the "ESOP") in the sole
interest of the participants, purchasing assets without undertaking
adequate investigation of the investment, overpayment for employer
securities, failure to resolve conflicts of interest, lending money
between the ESOP and employer, allowing the ESOP to borrow money other
than for the acquisition of employer securities, failure to make
adequate, independent and reasoned investigation into the prudence and
advisability of certain transaction, and otherwise. The plaintiffs were
seeking damages in excess of $30.0 million plus prejudgment interest and
attorneys' fees. During the first quarter of 2001, the Company and
plaintiffs reached an
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agreement in principle to settle plaintiffs' claims against the Company.
However, no such agreement has been reached between the plaintiffs and
other defendants in the case. The Company's insurance carrier has
indicated that it did not receive timely notice of these claims and, as a
result, is currently contesting its coverage obligations under the
proposed settlement. The Company is currently contesting this issue with
the carrier. The Company has recorded an accrual reflecting the
settlement amount, which is not material, and for which the Company is
seeking reimbursement from its insurance carrier. Although the Company
has reached an agreement in principle to settle the plaintiffs' claims
against the Company, there can be no assurance that a definitive
settlement agreement will be reached and/or approved by the courts.
Commencing in late 1997 and through 1998, Old CCA became subject to
approximately sixteen separate suits in federal district court in the
state of South Carolina claiming the abuse and mistreatment of certain
juveniles housed in the Columbia Training Center, a South Carolina
juvenile detention facility formerly operated by Old CCA. These suits
claim unspecified compensatory and punitive damages, as well as certain
costs provided for by statute. One of these suits, captioned William
Pacetti v. Corrections Corporation of America, went to trial in late
November 2000, and in December 2000 the jury returned a verdict awarding
the plaintiff in the action $125,000 in compensatory damages, $3.0
million in punitive damages, and attorneys' fees. The Company was
challenging this verdict with post-judgment motions, and a final judgment
has not been entered in this case. The Company's insurance carrier had
indicated to the Company that its coverage did not extend to punitive
damages such as those initially awarded in Pacetti. However, the Company
and all plaintiffs reached an agreement in principle during the second
quarter of 2001 to settle their claims, asserted and unasserted, against
the Company. Although there can be no assurance that a definitive
settlement agreement will be reached and/or approved by the courts, the
Company does not expect that these cases, if adjudicated in a manner
adverse to the Company, will have a material adverse effect upon the
business or financial position of the Company.
In February 2000, a complaint was filed in federal court in the United
States District Court for the Western District of Texas against the
Company's inmate transportation subsidiary, TransCor. The lawsuit
captioned Cheryl Schoenfeld v. TransCor America, Inc., et al., names as
defendants TransCor and its directors. The lawsuit alleges that two
former employees of TransCor sexually assaulted plaintiff Schoenfeld
during her transportation to a facility in Texas in late 1999. An
additional individual, Annette Jones, has also joined the suit as a
plaintiff, alleging that she was also mistreated by the two former
employees during the same trip. Discovery and case preparation are
on-going. Both former employees are subject to pending criminal charges
in Houston, Harris County, Texas. Plaintiff Schoenfeld has previously
submitted a settlement demand exceeding $20.0 million. The Company, its
wholly-owned subsidiary (the parent corporation of TransCor and successor
by merger to Operating Company) and TransCor are defending this action
vigorously. The Company has recorded an accrual reflecting management's
best estimate of the ultimate outcome of this matter based on
consultation with legal counsel. It is expected that a portion of any
liabilities resulting from this litigation will be covered by liability
insurance. The Company and TransCor's insurance carrier, however, has
indicated that it did not receive proper notice of this claim, and as a
result, may challenge its coverage of any resulting liability of
TransCor. In addition, the insurance carrier asserts it will not be
responsible for punitive damages. The Company and TransCor are currently
contesting this issue with the carrier. In the event any resulting
liability is not covered by insurance proceeds and is in excess of the
amount accrued by the Company,
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such liability would have a material adverse effect upon the business or
financial position of TransCor and, potentially, the Company and its
other subsidiaries.
The Company has received an invoice, dated October 25, 2000, from Merrill
Lynch for $8.1 million for services as the Company's financial advisor in
connection with the Restructuring. Prior to their termination in the
second quarter of 2000, Merrill Lynch served as a financial advisor to
the Company and its board of directors in connection with the
Restructuring. Merrill Lynch claims that the merger between Operating
Company and the Company constitutes a "restructuring transaction," which
Merrill Lynch further contends would trigger certain fees under
engagement letters allegedly entered into between Merrill Lynch and the
Company and Merrill Lynch and Operating Company management, respectively.
The Company denies the validity of these claims. Merrill Lynch has not
initiated legal action or threatened litigation. If Merrill Lynch
initiated legal action on the basis of these claims, the Company would
contest those claims vigorously. The Company has recorded an accrual
reflecting management's best estimate of the ultimate outcome of this
matter based on consultation with legal counsel.
With the exception of certain insurance contingencies discussed above,
and with respect to the actions regarding Fortress/Blackstone and Merrill
Lynch, the Company believes it has adequate insurance coverage related to
the litigation matters discussed. Should the Company's insurance carriers
fail to provide adequate insurance coverage, the resolution of the
matters discussed above could result in a material adverse effect on the
business and financial position of the Company and its subsidiaries.
In addition to the above legal matters, the nature of the Company's
business results in claims and litigation alleging that the Company is
liable for damages arising from the conduct of its employees or others.
In the opinion of management, other than the outstanding litigation
discussed above, there are no pending legal proceedings that would have a
material effect on the consolidated financial position or results of
operations of the Company for which the Company has not established
adequate reserves.
DISTRIBUTIONS
Under the terms of the Amended Bank Credit Facility, the Company is
prohibited from declaring or paying any dividends with respect to the
Company's currently outstanding Series A Preferred Stock until such time
as the Company has raised at least $100.0 million in equity. Dividends
with respect to the Series A Preferred Stock will continue to accrue
under the terms of the Company's charter until such time as payment of
such dividends is permitted under the terms of the June 2000 Waiver and
Amendment to the Amended Bank Credit Facility. Quarterly dividends of
$0.50 per share for the second, third and fourth quarters of 2000, and
for the first quarter of 2001 have been accrued as of March 31, 2001.
Under the terms of the Company's charter, in the event dividends are
unpaid and in arrears for six or more quarterly periods the holders of
the Series A Preferred Stock will have the right to vote for the election
of two additional directors to the Company's board of directors. Based on
the existing non-payments, the failure to pay dividends through the third
quarter of 2001 will result in the requirement to elect two additional
directors to the Company's board of directors. Management currently
believes that reinstating the payment of dividends on the Series A
Preferred Stock prior to September 30, 2001 is in the best interest of
the Company and its stockholders for a variety of reasons, including the
fact that management believes such
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reinstatement would: (i) enhance the Company's credit rating and thus its
ability to refinance or renew its debt obligations as they mature; (ii)
eliminate the requirement that two additional directors be elected to
serve on the Company's board of directors; and (iii) restore the
Company's eligibility to use Form S-3 under the rules of the Securities
and Exchange Commission in connection with the registration of the
Company's securities in future offerings. Accordingly, management intends
to aggressively pursue an amendment to the terms of the Amended Bank
Credit Facility to remove the restriction on the payment of such
dividends prior to September 30, 2001. No assurance can be given,
however, that the lenders will agree to such amendment, and that as a
result, if and when the Company will commence the payment of cash
dividends on its shares of Series A Preferred Stock.
INCOME TAX CONTINGENCIES
Prior to the 1999 Merger, Old CCA operated as a taxable corporation for
federal income tax purposes since its inception, and, therefore,
generated accumulated earnings and profits to the extent its taxable
income, subject to certain adjustments, was not distributed to its
shareholders. To preserve its ability to qualify as a REIT, the Company
was required to distribute all of Old CCA's accumulated earnings and
profits before the end of 1999. If in the future the IRS makes
adjustments increasing Old CCA's earnings and profits, the Company may be
required to make additional distributions equal to the amount of the
increase.
Under previous terms of the Company's charter, the Company was required
to elect to be taxed as a REIT for the year ended December 31, 1999. The
Company, as a REIT, could not complete any taxable year with Accumulated
Earnings and Profits. For the year ended December 31, 1999, the Company
made approximately $217.7 million of distributions related to its common
stock and Series A Preferred Stock. The Company met the above described
distribution requirements by designating approximately $152.5 million of
the total distributions in 1999 as distributions of its Accumulated
Earnings and Profits. In addition to distributing its Accumulated
Earnings and Profits, the Company, in order to qualify for taxation as a
REIT with respect to its 1999 taxable year, was required to distribute
95% of its taxable income for 1999. The Company believes that this
distribution requirement has been satisfied by its distribution of shares
of the Company's Series B Preferred Stock. The Company's failure to
distribute 95% of its taxable income for 1999 or the failure of the
Company to comply with other requirements for REIT qualification under
the Code with respect to its taxable year ended December 31, 1999 could
have a material adverse impact on the Company's financial position,
results of operations and cash flows.
The Company's election of REIT status for its taxable year ended December
31, 1999 is subject to review by the IRS generally for a period of three
years from the date of filing of its 1999 tax return. Should the IRS
review the Company's election to be taxed as a REIT for the 1999 taxable
year and reach a conclusion disallowing the Company's dividends paid
deduction, the Company would be subject to income taxes and interest on
its 1999 taxable income and possibly subject to fines and/or penalties.
Income taxes, penalties and interest for the year ended December 31, 1999
could exceed $83.5 million, which would have an adverse impact on the
Company's financial position, results of operations and cash flows.
In connection with the 1999 Merger, the Company assumed the tax
obligations of Old CCA resulting from disputes with federal and state
taxing authorities related to tax returns filed by
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Old CCA in 1998 and prior taxable years. The IRS is currently conducting
audits of Old CCA's federal tax returns for the taxable years ended
December 31, 1998 and 1997, and the Company's federal tax returns for the
taxable years ended December 31, 2000 and 1999. The Company has received
the IRS's preliminary findings related to the taxable years ended
December 31, 1998 and 1997 and is currently appealing those findings. The
Company currently is unable to predict the ultimate outcome of the IRS's
audits of Old CCA's 1998 and 1997 federal tax returns, the Company's 2000
and 1999 federal tax returns or the ultimate outcome of audits of other
tax returns of the Company or Old CCA by the IRS or by other taxing
authorities; however, it is possible that such audits will result in
claims against the Company in excess of reserves currently recorded by
the Company. In addition, to the extent that IRS audit adjustments
increase the Accumulated Earnings and Profits of Old CCA, the Company
would be required to make timely distribution of the Accumulated Earnings
and Profits of Old CCA to stockholders. Such results could have a
material adverse impact on the Company's financial position, results of
operations and cash flows.
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133, as amended, establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS 133, as amended, requires that changes in a derivative's fair value
be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133, as amended, is effective for fiscal quarters
of fiscal years beginning after June 15, 2000. The Company's derivative
instruments include an interest rate swap agreement and, pending
issuance, an 8.0%, $29.0 million promissory note due in 2009, expected to
be issued in conjunction with the issuance of shares of common stock to
plaintiffs arising from the settlement of a series of stockholder
lawsuits against the Company and certain of its existing and former
directors and executive officers, as discussed in Note 6.
In accordance with the terms of the Amended Bank Credit Facility, the
Company entered into certain swap arrangements in order to hedge the
variable interest rate associated with portions of the debt. The swap
arrangements fix LIBOR at 6.51% (prior to the applicable spread) on
outstanding balances of at least $325.0 million through December 31, 2001
and at least $200.0 million through December 31, 2002. The difference
between the floating rate and the swap rate is recognized in interest
expense.
As of March 31, 2001, in accordance with SFAS 133, as amended, the
Company has reflected in earnings the change in the estimated fair value
of the interest rate swap agreement during the quarter. The Company
estimates the fair value of its interest rate swap agreements using
option-pricing models that value the potential for interest rate swap
agreements to become in-the-money through changes in interest rates
during the remaining terms of the agreements. A negative fair value
represents the estimated amount the Company would have to pay to cancel
the contract or transfer it to other parties. As of March 31, 2001, due
to a reduction in interest rates since entering into the swap agreement,
the interest rate swap agreement has a negative fair value of
approximately $10.4 million, consisting of a transition adjustment of
$5.0 million as of January 1, 2001 reflected in other comprehensive
income (loss) and a reduction in the fair value of the swap agreement of
$5.4 million during the first quarter of 2001 reflected in the statement
of operations. In accordance with SFAS 133, the Company has recorded a
$6.0
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million non-cash charge for the change in fair value of derivative
instruments during the first quarter of 2001, which includes $0.6 million
for amortization of the transition adjustment. The transition adjustment
represents the fair value of the swap agreement as of January 1, 2001,
and has been reflected as a liability on the accompanying balance sheet,
and as a cumulative effect of accounting change included in other
comprehensive income (loss) in the accompanying statement of
stockholders' equity. The unamortized transition adjustment at March 31,
2001 of $4.4 million is expected to be reclassified into earnings as a
non-cash charge over the remaining term of the swap agreement. The
non-cash charge which will be reclassified into earnings during 2001 is
expected to be approximately $2.5 million. Because the Company does not
expect to terminate the swap agreement prior to its maturity, the
non-cash charge of $5.4 million during the first quarter of 2001 is
expected to reverse into earnings through increases in the fair value of
the swap agreement, prior to the maturity of the swap agreement on
December 31, 2002. However, for each quarterly period prior to the
maturity of the swap agreement, the Company will continue to adjust to
market the swap agreement potentially resulting in additional non-cash
charges or gains.
The ultimate liability relating to the $29.0 million promissory note and
related interest is expected to be determined on the future issuance date
and thereafter, based upon fluctuations in the Company's common stock
price. If the promissory note is issued under the current terms, in
accordance with SFAS 133, as amended, the Company will reflect in
earnings, the change in the estimated fair value of the promissory note
from quarter to quarter. Since the Company has reflected the maximum
obligation of the contingency associated with the stockholder litigation
in the accompanying balance sheet as of March 31, 2001, the issuance of
the note may have a material impact on the Company's consolidated
financial position and results of operations if the fair value is deemed
to be significantly different than the carrying amount of the liability
at March 31, 2001. However, the impact cannot be determined until the
promissory note is issued and an estimated fair value of the promissory
note is determined.
8. REVERSE STOCK SPLIT
At the Company's 2000 annual meeting of stockholders held in December
2000, the holders of the Company's common stock approved a reverse stock
split of the Company's common stock at a ratio to be determined by the
board of directors of the Company of not less than one-for-ten and not to
exceed one-for-twenty. The board of directors subsequently approved a
reverse stock split of the Company's common stock at a ratio of
one-for-ten. Accordingly, the Company is expected to retroactively
restate the number of common shares and per share amounts for all periods
presented to reflect the reduction in common shares and corresponding
increase in the per share amounts resulting from the reverse stock split.
The Company will pay cash in lieu of issuing fractional shares in the
reverse stock split based on the closing price of the common stock on the
New York Stock Exchange on May 17, 2001. The Company is currently
soliciting the consent of the requisite percentage of lenders under the
Amended Bank Credit Facility in connection with the cash in lieu
payments. The reverse stock split is expected to be effective May 18,
2001. Following the completion of the reverse stock split, it is expected
that the Company will have approximately 25.2 million shares of common
stock issued and outstanding.
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9. SUPPLEMENTAL CASH FLOW DISCLOSURE
During the first quarter of 2001, the Company issued 8.4 million shares
of common stock in partial satisfaction of the stockholder litigation
discussed in Note 6. As a result, accounts payable and accrued expenses
were reduced by, and common stock and additional paid-in capital were
increased by, $8.4 million. Also during the first quarter of 2001, the
Company issued $2.7 million of Series B Preferred Stock in lieu of cash
distributions to the holders of shares of Series B Preferred Stock on the
applicable record date.
10. PRO FORMA INFORMATION
The following unaudited pro forma operating information presents a
summary of comparable results of combined operations of the Company,
Operating Company, PMSI and JJFMSI for the three months ended March 31,
2000 as if the Operating Company Merger and acquisitions of PMSI and
JJFMSI had collectively occurred as of the beginning of the period
presented. The unaudited information includes the dilutive effects of the
Company's common stock issued in the Operating Company Merger and the
acquisitions of PMSI and JJFMSI as well as the amortization of the
intangibles recorded in the Operating Company Merger and the acquisition
of PMSI and JJFMSI, but excludes: (i) transactions or the effects of
transactions between the Company, Operating Company, PMSI and JJFMSI
including rental payments, licensing fees, administrative service fees
and tenant incentive fees; (ii) the Company's write-off of amounts under
lease arrangements; (iii) the Company's recognition of deferred gains on
sales of contracts; (iv) the Company's recognition of equity in earnings
or losses of Operating Company, PMSI and JJFMSI; (v) non-recurring merger
costs expensed by the Company; (vi) strategic investor fees expensed by
the Company; (vii) excise taxes accrued by the Company in 1999 related to
its status as a REIT; and (viii) the Company's provisions for changes in
tax status in 2000. The unaudited pro forma operating information is
presented for comparison purposes only and does not purport to represent
what the Company's results of operations actually would have been had the
Operating Company Merger and acquisitions of PMSI and JJFMSI, in fact,
collectively occurred at the beginning of the period presented.
PRO FORMA FOR THE
THREE MONTHS ENDED
MARCH 31, 2000
--------------
(unaudited)
Revenue $ 212,626
Operating income $ 20,967
Net loss available to common stockholders $ (11,093)
Net loss per common share:
Basic $ (0.08)
Diluted $ (0.08)
The unaudited pro forma information presented above does not include
adjustments to reflect the dilutive effects of the fourth quarter of 2000
conversion of the Company's Series B Preferred Stock into approximately
95.1 million shares of the Company's common stock as if those conversions
occurred at the beginning of the period presented. Additionally, the
unaudited pro forma information does not include the dilutive effects of
the Company's potentially issuable common shares such as convertible debt
and equity securities, options and warrants as the provision of SFAS 128
prohibit the inclusion of the effects of potentially issuable shares in
periods that a company reports losses from continuing operations. The
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unaudited pro forma information also does not include the dilutive
effects of the expected issuance of an aggregate of 46.9 million shares
of the Company's common stock to be issued in connection with the
settlement of the Company's stockholder litigation.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements reflect the Company's current views
with respect to future events and financial performance, and these statements
can be identified, without limitations, by the use of the words "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "projects" and similar
expressions. Forward-looking statements are subject to risks, uncertainties and
other factors that may cause actual results or outcomes to differ materially
from future outcomes expressed or implied by the forward-looking statement. As
the owner and operator of correctional and detention facilities, the Company is
subject to certain risks and uncertainties associated with, among other things,
the corrections and detention industry and pending or threatened litigation
involving the Company. In addition, as a result of the Company's operation so as
to preserve its ability to qualify as a REIT for the year ended December 31,
1999, the Company is also currently subject to certain tax related risks. The
Company is also subject to risks and uncertainties associated with the demands
placed on the Company's capital and liquidity associated with its current
capital structure. The Company disclosed such risks in detail in its Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, filed with the
Securities and Exchange Commission on April 17, 2001 (File No. 0-25245) (the
"Company's Form 10-K"). Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.
OVERVIEW
THE COMPANY
The Company was formed in September 1998 as Prison Realty Corporation and
commenced operations on January 1, 1999, following the mergers of the former
Corrections Corporation of America, a Tennessee corporation ("Old CCA"), on
December 31, 1998 and CCA Prison Realty Trust, a Maryland real estate investment
trust ("Old Prison Realty"), on January 1, 1999 with and into the Company
(collectively, the "1999 Merger"). As more fully discussed in the Company's Form
10-K, effective October 1, 2000, the Company completed a series of previously
announced restructuring transactions (collectively, the "Restructuring"). As
part of the Restructuring, the Company's primary tenant, Corrections Corporation
of America, a privately-held Tennessee corporation formerly known as
Correctional Management Services Corporation ("Operating Company"), was merged
with and into a wholly-owned subsidiary of the Company on October 1, 2000 (the
"Operating Company Merger"). In connection with the Restructuring and the
Operating Company Merger, the Company amended its charter to, among other
things, remove provisions relating to the Company's operation and qualification
as a real estate investment trust, or REIT, for
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federal income tax purposes commencing with its 2000 taxable year and change its
name to "Corrections Corporation of America." Effective December 1, 2000, each
of Prison Management Services, Inc. ("PMSI") and Juvenile and Jail Facility
Management Services, Inc. ("JJFMSI"), two privately-held service companies which
managed certain government-owned prison and jail facilities under the
"Corrections Corporation of America" name (collectively the "Service
Companies"), merged with and into a wholly-owned subsidiary of the Company.
The condensed consolidated financial statements include the accounts of the
Company on a consolidated basis with its wholly-owned subsidiaries as of and for
each period presented. Management believes the comparison between the results of
operations for the three months ended March 31, 2001 and the results of
operations for the three months ended March 31, 2000 are not meaningful because,
for the prior year quarter (and through September 30, 2000), the financial
condition, results of operations and cash flows include real estate activities
between the Company and Operating Company during a period of severe liquidity
problems. The financial condition, results of operations and cash flows of the
Company since October 1, 2000, include the operations of the correctional and
detention facilities previously leased to and managed by Operating Company. In
addition, the Company's financial condition and results of operations as of and
for the three months ended March 31, 2001 also includes the operations of the
Service Companies (as of the December 1, 2000 acquisition date) on a
consolidated basis. For the period January 1, 2000 through August 31, 2000, the
investments in the Service Companies were accounted for and were presented under
the equity method of accounting. For the period from September 1, 2000 through
November 30, 2000, the investments in the Service Companies were accounted for
on a combined basis due to the repurchase by the wholly-owned subsidiaries of
the Service Companies of the non-management, outside stockholders' equity
interest in the Service Companies during September 2000.
Prior to the Operating Company Merger, the Company had accounted for its 9.5%
non-voting interest in Operating Company under the cost method of accounting. As
such, the Company had not recognized any income or loss related to its stock
ownership investment in Operating Company during the period from January 1, 1999
through September 30, 2000. However, in connection with the Operating Company
Merger, the financial statements of the Company have been restated to recognize
the Company's 9.5% pro-rata share of Operating Company's losses on a retroactive
basis for the period from January 1, 1999 through September 30, 2000 under the
equity method of accounting, in accordance with APB 18, "The Equity Method of
Accounting for Investments in Common Stock."
Since the 1999 Merger and through September 30, 2000, the Company had
specialized in acquiring, developing, owning and leasing correctional and
detention facilities. Operating Company had been a private prison management
company that operated and managed the substantial majority of facilities owned
by the Company. As a result of the 1999 Merger and certain contractual
relationships existing between the Company and Operating Company, the Company
was dependent on Operating Company for a significant source of its income. In
addition, the Company was obligated to pay Operating Company for services
rendered to the Company in the development of its correctional and detention
facilities. As a result of liquidity issues facing Operating Company and the
Company, the parties amended the contractual agreements between the Company and
Operating Company during 2000.
In connection with the completion of the Restructuring, on September 12, 2000,
the Company's stockholders approved an amendment to the Company's charter to
remove the requirements that the Company elect to be taxed and qualify as a REIT
for federal income tax purposes commencing with
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the Company's 2000 taxable year. As such, the Company operated and is taxed as a
subchapter C corporation with respect to its taxable year ended December 31,
2000 and thereafter.
As a result of the Operating Company Merger on October 1, 2000 and the
acquisitions of PMSI and JJFMSI on December 1, 2000, the Company now specializes
in owning, operating and managing prisons and other correctional facilities and
providing prisoner transportation services for governmental agencies. In
addition to providing the fundamental residential services relating to inmates,
each of the Company's facilities offers a large variety of rehabilitation and
educational programs, including basic education, life skills and employment
training and substance abuse treatment. The Company also provides health care
(including medical, dental and psychiatric services), institutional food
services and work and recreational programs.
LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE MONTHS ENDED MARCH 31, 2001
As of March 31, 2001, the Company's liquidity was provided by cash on hand of
approximately $58.9 million and $50.0 million available under a revolving credit
facility with a $50.0 million capacity which was assumed in connection with the
Operating Company Merger (the "Operating Company Revolving Credit Facility").
During the first quarter of 2001, the Company generated $41.8 million in cash
through operating activities. As of March 31, 2001, the Company had a net
working capital deficiency of $342.3 million. Contributing to the net working
capital deficiency was an accrual at March 31, 2001 of $67.0 million related to
the settlement of the Company's stockholder litigation (which is expected to be
satisfied through the remaining issuance of 38.5 million shares of common stock
and the issuance of a $29.0 million note payable due in 2009) and the
classification of the Company's $377.7 million revolving credit facility under
the Amended Bank Credit Facility, which matures on January 1, 2002, as current.
As of March 31, 2001, the Company had issued 8.4 million shares under terms of
the Company's stockholder litigation settlement to plaintiffs' counsel in the
actions. Subsequent to March 31, 2001, the Company issued an additional 7.5
million shares under terms of the settlement to plaintiffs' counsel in the
actions. The remaining shares are expected to be issued during 2001.
The Company's principal capital requirements are for working capital, capital
expenditures and debt maturities. The Company has financed, and intends to
continue to finance, the working capital and capital expenditure requirements
with existing cash balances, net cash provided by operations and borrowings
under the Operating Company Revolving Credit Facility. The Company expects to be
able to extend or refinance its debt maturities, including primarily the
revolving credit facility under the Amended Bank Credit Facility, due within the
next year.
As a result of the Company's current financial condition, including: (i) the
revolving loans under the Amended Bank Credit Facility maturing January 1, 2002;
(ii) the requirement under the Amended Bank Credit Facility to use commercially
reasonable efforts to complete any combination of certain transactions, as
defined therein, which together result in net cash proceeds of at least $100.0
million; (iii) the Company's negative working capital position; and (iv) the
Company's highly leveraged capital structure, the Company's management is
evaluating the Company's current capital structure, including the consideration
of various potential transactions that could improve the Company's financial
position.
Following the completion of the Operating Company Merger and the acquisitions of
PMSI and JJFMSI, during the fourth quarter of 2000, the Company's new management
conducted strategic assessments; developed a strategic
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operating plan to improve the Company's financial position; developed revised
projections for 2001; and evaluated the utilization of existing facilities,
projects under development and excess land parcels; and identified certain of
these non-strategic assets for sale. During the first quarter of 2001, the
Company completed the sale of one of these assets, a facility located in North
Carolina, for a sales price of approximately $24.9 million. The net proceeds
from the sale were used to pay-down outstanding balances under the Amended Bank
Credit Facility. Subsequent to quarter-end, the Company completed the sale of
its interest in an additional facility, located in Salford, England
("Agecroft"), for a sales price of approximately $65.7 million, improving the
Company's leverage ratios and providing additional liquidity to the Company.
During the fourth quarter of 2000, the Company completed the sale of its
interest in two international subsidiaries, an Australian corporation ("CC
Australia") and a company incorporated in England and Wales ("UKDS"), for an
aggregate sales price of $6.4 million. As a result of the sale of Agecroft, CC
Australia, and UKDS, the Company owns only correctional and detention facilities
located in the United States and its Territories, enabling management to focus
solely on domestic operations.
As discussed above, the revolving loan portion of the Amended Bank Credit
Facility matures on January 1, 2002. As part of management's plans to improve
the Company's financial position and address the January 1, 2002 maturity of
portions of the debt under the Amended Bank Credit Facility, management has
committed to a plan of disposal for certain additional long-lived assets. These
assets are being actively marketed for sale and are classified as held for sale
in the accompanying condensed consolidated balance sheet as of March 31, 2001.
Anticipated proceeds from these asset sales are to be applied as loan
repayments. The Company believes that utilizing such proceeds to pay-down debt
will improve its leverage ratios and overall financial position, improving its
ability to refinance or renew maturing indebtedness, including primarily the
Company's revolving loans under the Amended Bank Credit Facility.
During the first quarter of 2001, the Company obtained amendments to the Amended
Bank Credit Facility to modify the financial covenants to take into
consideration any loss of EBITDA that may result from certain asset dispositions
during 2001 and subsequent periods and to permit the issuance of indebtedness in
partial satisfaction of its obligations in the stockholder litigation
settlement. Also, during the first quarter of 2001, the Company amended the
provisions to the note purchase agreement governing its $30.0 million
convertible subordinated notes, to replace previously existing financial
covenants in order to remove existing defaults and attempt to remain in
compliance during 2001 and subsequent periods.
The Company also has certain non-financial covenants which must be met in order
to remain in compliance with its debt agreements. The Company's Amended Bank
Credit Facility contains a non-financial covenant which required the Company to
consummate the securitization of lease payments (or other similar transaction)
with respect to the Company's Agecroft facility by March 31, 2001. The Agecroft
transaction did not close by the required date. However, the covenant allowed
for a 30-day grace period during which the lenders under the Amended Bank Credit
Facility could not exercise their rights to declare an event of default. On
April 10, 2001, prior to the expiration of the grace period, the Company
consummated the Agecroft transaction through the sale of all of the issued and
outstanding capital stock of Agecroft Properties, Inc., a wholly-owned
subsidiary of the Company, thereby fulfilling the Company's covenant
requirements with respect to the Agecroft transaction.
The Amended Bank Credit Facility also contains a non-financial covenant
requiring the Company to provide the lenders with audited financial statements
within 90 days of the Company's fiscal year-
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end, subject to an additional five-day grace period. Due to the Company's
attempts to close the sale of Agecroft discussed above, the Company did not
provide the audited financial statements within the required time period.
However, in April 2001, the Company obtained a waiver from the lenders under the
Amended Bank Credit Facility of this financial reporting requirement. This
waiver also cured the resulting cross-default under the Company's $40.0 million
convertible notes.
The Amended Bank Credit Facility requires the Company to use commercially
reasonable efforts to complete a "capital raising event" on or before June 30,
2001. A "capital raising event" is defined in the Amended Bank Credit Facility
as any combination of the following transactions, which together would result in
net cash proceeds to the Company of at least $100.0 million:
- an offering of the Company's common stock through the distribution of
rights to the Company's existing stockholders;
- any other offering of the Company's common stock or certain types of the
Company's preferred stock;
- issuances by the Company of unsecured, subordinated indebtedness
providing for in-kind payments of principal and interest until repayment
of the Amended Bank Credit Facility; or
- certain types of asset sales by the Company, including the sale-leaseback
of the Company's headquarters, but excluding the securitization of lease
payments (or other similar transaction) with respect to the Agecroft
facility.
The Amended Bank Credit Facility also contains limitations upon the use of
proceeds obtained form the completion of such transactions. To date, the Company
has determined that as a result of the various prevailing market factors, the
sale of assets represents the most effective means by which the Company could
satisfy the covenant.
As discussed above, during the first quarter of 2001, the Company completed the
sale of its Mountain View Correctional Facility for approximately $24.9 million
and is actively pursuing the sales of additional assets. The Company is
currently evaluating a distribution of rights to purchase common or preferred
stock to the Company's existing stockholders, or an equity investment in the
Company from an outside investor. However, the Company does not believe that it
is commercially reasonable to issue additional equity or debt securities at this
time, other than those securities for which the Company has already
contractually agreed to issue, including primarily the issuance of shares of the
Company's common stock in connection with the settlement of the Company's
stockholder litigation. The Company, however, will continue to assess the
commercial reasonableness of issuing additional securities. While the Company
believes it will be able to demonstrate commercially reasonable efforts
regarding the $100.0 million capital raising event on or before June 30, 2001,
there can be no assurance that the lenders under the Amended Bank Credit
Facility will concur with the Company's position that it has used commercially
reasonable efforts in its satisfaction of this covenant.
Based on the Company's current credit rating, the current interest rate
applicable to the Company's Amended Bank Credit Facility is 2.75% over the base
rate and 4.25% over the London Interbank Offering Rate ("LIBOR") for revolving
loans, and 3.0% over the base rate and 4.5% over LIBOR for term loans. These
rates, however, are subject to (i) an increase of 25 basis points (0.25%) from
the current interest rate on July 1, 2001 if the Company has not prepaid $100.0
million of the outstanding loans under the Amended Bank Credit Facility, and
(ii) an increase of 50 basis points (0.50%) from the current interest rate on
October 1, 2001 if the Company has not prepaid an aggregate of $200.0 million of
the loans under the Amended Bank Credit Facility. The Company believes it will
be able
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to satisfy the condition to prepay, prior to July 1, 2001, $100.0 million of
outstanding loans under the Amended Bank Credit Facility through the application
of proceeds from the sale of the Mountain View Correctional Facility and the
completion of the Agecroft transaction, and through the pay-down of outstanding
loans under the Amended Bank Credit Facility with cash on hand. However, the
Company will be required to raise additional cash in order to satisfy the
condition to prepay an additional $100.0 million prior to October 1, 2001, as
future cash flows from operations will not be sufficient to satisfy such
condition. There can be no assurance that the Company will be successful in
generating sufficient cash in order to prepay such amount and satisfy this
condition.
The Company believes that it is currently in compliance with the terms of the
debt covenants contained in the Amended Bank Credit Facility. Further, the
Company believes its operating plans and related projections are achievable and,
subject to the foregoing discussion regarding the capital raising event
covenant, and obtainment of lender consent in connection with the reverse stock
split discussed in Note 8, will allow the Company to remain in compliance with
its debt covenants during 2001. However, there can be no assurance that the cash
flow projections will reflect actual results and there can be no assurance that
the Company will remain in compliance with its debt covenants or that, if the
Company defaults under any of its debt covenants, the Company will be able to
obtain additional waivers or amendments. Further, even if the Company is
successful in selling assets, there can be no assurance that it will be able to
refinance or renew its debt obligations maturing January 1, 2002 on commercially
reasonable or any other terms.
Due to certain cross-default provisions contained in certain of the Company's
debt instruments, if the Company were to be in default under the Amended Bank
Credit Facility and if the lenders under the Amended Bank Credit Facility
elected to exercise their rights to accelerate the Company's obligations under
the Amended Bank Credit Facility, such events could result in the acceleration
of all or a portion of the outstanding principal amount of the Company's $100.0
million senior notes and the Company's aggregate $70.0 million convertible
subordinated notes, which would have a material adverse effect on the Company's
liquidity and financial position. Additionally, under the Company's $40.0
million convertible subordinated notes, even if the lenders under the Amended
Bank Credit Facility did not elect to exercise their acceleration rights, the
holders of the $40.0 million convertible subordinated notes could require the
Company to repurchase such notes. The Company does not have sufficient working
capital to satisfy its debt obligations in the event of an acceleration of all
or a substantial portion of the Company's outstanding indebtedness.
Under the terms of the Amended Bank Credit Facility, the Company is prohibited
from declaring or paying any dividends with respect to the Company's currently
outstanding Series A Preferred Stock until such time as the Company has raised
at least $100.0 million in equity. Dividends with respect to the Series A
Preferred Stock will continue to accrue under the terms of the Company's charter
until such time as payment of such dividends is permitted under the terms of the
June 2000 Waiver and Amendment to the Amended Bank Credit Facility. Quarterly
dividends of $0.50 per share for the second, third and fourth quarters of 2000,
and for the first quarter of 2001 have been accrued as of March 31, 2001. Under
the terms of the Company's charter, in the event dividends are unpaid and in
arrears for six or more quarterly periods the holders of the Series A Preferred
Stock will have the right to vote for the election of two additional directors
to the Company's board of directors. Based on the existing non-payments, the
failure to pay dividends through the third quarter of 2001 will result in the
requirement to elect two additional directors to the Company's board of
directors. Management currently believes that reinstating the payment of the
dividends on the Series A Preferred Stock prior to September 30, 2001 is in the
best interest of the Company and its stockholders for a variety of reasons,
including the fact that management believes such reinstatement
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would: (i) enhance the Company's credit rating and thus its ability to refinance
or renew its debt obligations as they mature; (ii) eliminate the requirement
that two additional directors be elected to serve on the Company's board of
directors; and (iii) restore the Company's eligibility to use Form S-3 under the
rules of the Securities and Exchange Commission in connection with the
registration of the Company's securities in future offerings. Accordingly,
management intends to aggressively pursue an amendment to the terms of the
Amended Bank Credit Facility to remove the restriction on the payment of such
dividends prior to September 30, 2001. No assurance can be given, however, that
the lenders will agree to such amendment, and that as a result, if and when the
Company will commence the payment of cash dividends on its shares of Series A
Preferred Stock.
At the Company's 2000 annual meeting of stockholders held in December 2000, the
holders of the Company's common stock approved a reverse stock split of the
Company's common stock at a ratio to be determined by the board of directors of
the Company of not less than one-for-ten and not to exceed one-for-twenty. The
board of directors subsequently approved a reverse stock split of the Company's
common stock at a ratio of one-for-ten. Accordingly, the Company is expected to
retroactively restate the number of common shares and per share amounts for all
periods presented to reflect the reduction in common shares and corresponding
increase in the per share amounts resulting from the reverse stock split. The
Company will pay cash in lieu of issuing fractional shares in the reverse stock
split based on the closing price of the common stock on the New York Stock
Exchange on May 17, 2001. The Company is currently soliciting the consent of the
requisite percentage of lenders under the Amended Bank Credit Facility in
connection with the cash in lieu payments. The reverse stock split is expected
to be effective May 18, 2001. Following the completion of the reverse stock
split, it is expected that the Company will have approximately 25.2 million
shares of common stock issued and outstanding.
OPERATING ACTIVITIES
The Company's net cash provided by operating activities for the three months
ended March 31, 2001, was $41.8 million. This amount represents the net loss for
the quarter plus depreciation and amortization, changes in various components of
working capital and adjustments for various non-cash charges, including the
change in fair value of the interest rate swap agreement. During the first
quarter of 2001, the Company received significant tax refunds of approximately
$30.6 million, contributing to the net cash provided by operating activities.
INVESTING ACTIVITIES
The Company's cash flow provided by investing activities was $26.1 million for
the three months ended March 31, 2001, primarily attributable to the proceeds
received from the sale of the Company's Mountain View Correctional Facility,
located in North Carolina, on March 16, 2001.
FINANCING ACTIVITIES
The Company's cash flow used in financing activities was $29.9 million for the
three months ended March 31, 2001. Net payments on debt totaled $29.5 million
and primarily represents the net cash proceeds received from the sale of the
Mountain View Correctional Facility that were immediately applied to amounts
outstanding under the Amended Bank Credit Facility.
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LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE MONTHS ENDED MARCH 31, 2000
Substantially all of the Company's revenue during the three months ended March
31, 2000 was derived from: (i) rents received under triple net leases of
correctional and detention facilities, including the leases with Operating
Company (the "Operating Company Leases"); (ii) dividends from investments in the
non-voting stock of certain subsidiaries; (iii) interest income on a $137.0
million promissory note payable to the Company from Operating Company (the
"Operating Company Note"); and (iv) license fees earned under the terms of a
trade name use agreement between the Company and Operating Company. Operating
Company leased 37 of the Company's 46 operating properties pursuant to the
Operating Company Leases. The Company, therefore, was dependent for its rental
revenue upon Operating Company's ability to make the lease payments required
under the Operating Company Leases for such facilities. Operating Company had
incurred a net loss of $202.9 million as of December 31, 1999 and had net
working capital deficiencies. As a result, Operating Company was unable to pay
the first scheduled interest payment under the terms of the Operating Company
Note and the scheduled lease payments to the Company under the Operating Company
Leases.
The Company incurred a net loss available to common stockholders for the three
months ended March 31, 2000 of $35.9 million, or $0.30 per share, during a
period of severe liquidity problems. The financial condition of the Company at
December 31, 1999, the inability of Operating Company to make certain of its
payment obligations to the Company, and the actions taken by the Company and
Operating Company in attempts to resolve liquidity issues of the Company and
Operating Company resulted in a series of defaults under provisions of the
Company's debt agreements as of December 31, 1999. As of March 31, 2000, the
Company remained in default under the Amended Bank Credit Facility, the
Company's $40.0 million convertible subordinated notes and its $30.0 million
convertible subordinated notes. The defaults related to the Company's failure to
comply with certain financial covenants, the issuance of a going concern opinion
qualification with respect to the Company's 1999 consolidated financial
statements, and certain transactions effected by the Company, including the
execution of a securities purchase agreement in connection with a proposed
restructuring led by Pacific Life Insurance Company. These events of default
were subsequently waived, as more fully discussed in the Company's Form 10-K.
CASH FLOW FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company's cash flow used in operating activities was $20.8 million for the
three months ended March 31, 2000, and represented the net loss plus
depreciation and amortization and other non-cash charges and changes in the
various components of working capital. The Company's cash flow used in investing
activities was $47.3 million for the three months ended March 31, 2000, and
primarily represented the construction of several real estate properties. The
Company's cash flow used in financing activities was $3.7 million for the three
months ended March 31, 2000 and represents payments of debt, and payments of
dividends on shares of the Company's preferred and common stock.
RESULTS OF OPERATIONS
As previously discussed, management does not believe the comparison between the
results of operations for the three months ended March 31, 2001 and the results
of operations for the same period in the prior year is meaningful. Please refer
to the discussion under the overview of the
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Company for further information on the comparability of the results of
operations between the two quarters.
The Company incurred a net loss available to common stockholders of $10.1
million, or $0.04 per share, for the three months ended March 31, 2001.
Contributing to the net loss is a non-cash charge of $6.0 million related to the
change in the estimated fair value of the Company's interest rate swap
agreement.
THREE MONTHS ENDED MARCH 31, 2001
MANAGEMENT AND OTHER REVENUE
Management and other revenue consists of revenue earned by the Company from the
operation and management of adult and juvenile correctional and detention
facilities for the three months ended March 31, 2001, totaling $238.0 million.
During the first quarter of 2001, occupancy for the Company's facilities under
contract for management was 88.3%. During the first quarter of 2001, the State
of Georgia began filling two of the Company's facilities that had been expanded
during 2000 to accommodate an additional 524 beds at each facility, contributing
to an increase in management and other revenue at these facilities. Also during
the first quarter of 2001, the Company successfully renewed contracts at
increased rates in five jurisdictions representing approximately 1,900 beds,
resulting in increased management and other revenue at these facilities.
Subsequent to quarter-end, the Company was informed that the Company's current
contract with the District of Columbia to house its inmates at the Northeast
Ohio Correctional Facility, which expires September 8, 2001, will not be renewed
due to a new law that mandates the Federal Bureau of Prisons ("BOP") to assume
jurisdiction of all District of Columbia offenders by the end of 2001. The
Northeast Ohio Correctional Facility is a 2,016-bed medium-security prison.
Because the BOP has begun transferring inmates from the Northeast Ohio facility,
management and other revenue is expected to decline at this facility. This
decline in revenue, however, is expected to be mitigated by a reduction in
operating expenses due to staff reductions at the facility. Additionally, the
Company is pursuing contracts to replace the contract with the BOP; however,
there can be no assurance that the Company will be able to secure such
contracts.
RENTAL REVENUE
Rental revenue was $2.4 million for the three months ended March 31, 2001 and
was generated from leasing correctional and detention facilities to governmental
agencies and other private operators. On March 16, 2001, the Company sold one of
these facilities, the Mountain View Correctional Facility, and therefore will no
longer receive rental revenue on this facility.
OPERATING EXPENSES
Operating expenses totaled $184.7 million for the three months ended March 31,
2001. Operating expenses consist of those expenses incurred in the operation and
management of correctional and detention facilities and other correctional
facilities. Also included in operating expenses are the Company's realized
losses on foreign currency transactions of $0.2 million for the three months
ended March 31, 2001. This loss resulted from a detrimental fluctuation in the
foreign currency exchange rate upon the collection of certain receivables
denominated in British pounds. See "Unrealized foreign currency transaction
loss" herein for further discussion of these receivables.
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GENERAL AND ADMINISTRATIVE
For the three months ended March 31, 2001, general and administrative expenses
totaled $8.6 million. General and administrative expenses consist primarily of
corporate management salaries and benefits, professional fees and other
administrative expenses.
DEPRECIATION AND AMORTIZATION
For the three months ended March 31, 2001, depreciation and amortization expense
totaled $12.7 million. Amortization expense for the three months ended March 31,
2001 includes approximately $1.9 million for goodwill, which was established in
connection with the acquisitions of Operating Company on October 1, 2000 and the
Services Companies on December 1, 2000. Amortization expense during the first
quarter of 2001 is also net of a reduction to amortization expense of $2.9
million for the amortization of a liability relating to contract values
established in connection with the mergers completed in 2000.
INTEREST EXPENSE, NET
Interest expense, net, is reported net of interest income for the three months
ended March 31, 2001. Gross interest expense was $37.3 million for the three
months ended March 31, 2001. Gross interest expense is based on outstanding
convertible subordinated notes payable balances, borrowings under the Company's
Amended Bank Credit Facility, the Operating Company Revolving Credit Facility,
the Company's senior notes, net settlements on interest rate swaps, and
amortization of loan costs and unused facility fees. The increase in gross
interest expense from the prior year first quarter is primarily attributable to
(i) higher average debt balances outstanding, primarily related to the Amended
Bank Credit Facility; (ii) the assumption of the Operating Company Revolving
Credit Facility in connection with the Operating Company Merger; and (iii) less
capitalized interest as a result of fewer ongoing construction and development
projects.
Gross interest income was $3.2 million for the three months ended March 31,
2001. Gross interest income is earned on cash used to collateralize letters of
credit for certain construction projects, direct financing leases and
investments of cash and cash equivalents.
CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
As of March 31, 2001, in accordance with SFAS 133, as amended, the Company has
reflected in earnings the change in the estimated fair value of its interest
rate swap agreement during the quarter. The Company estimates the fair value of
interest rate swap agreements using option-pricing models that value the
potential for interest rate swap agreements to become in-the-money through
changes in interest rates during the remaining terms of the agreements. A
negative fair value represents the estimated amount the Company would have to
pay to cancel the contract or transfer it to other parties. As of March 31,
2001, due to a reduction in interest rates since entering into the swap
agreement, the interest rate swap agreement has a negative fair value of
approximately $10.4 million, consisting of a transition adjustment of $5.0
million as of January 1, 2001 and a reduction in the fair value of the swap
agreement of $5.4 million during the first quarter of 2001. In accordance with
SFAS 133, the Company has recorded a $6.0 million non-cash charge for the change
in fair value of derivative instruments during the first quarter of 2001, which
includes $0.6 million for amortization of the transition adjustment. The
transition adjustment represents the fair value of the swap agreement as of
January 1, 2001, and has been reflected as a liability on the accompanying
balance
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sheet, and as a cumulative effect of accounting change included in other
comprehensive income in the accompanying statement of stockholders' equity. The
unamortized transition adjustment at March 31, 2001 of $4.4 million is expected
to be reclassified into earnings as a non-cash charge over the remaining term of
the swap agreement. Because the Company does not expect to terminate the swap
agreement prior to its maturity, the non-cash charge of $5.4 million during the
first quarter of 2001 is expected to reverse into earnings through increases in
the fair value of the swap agreement, prior to the maturity of the swap
agreement on December 31, 2002. However, for each quarterly period prior to the
maturity of the swap agreement, the Company will continue to adjust to market
the swap agreement potentially resulting in additional non-cash charges or
gains.
UNREALIZED FOREIGN CURRENCY TRANSACTION LOSS
In connection with the construction and development of the Company's Agecroft
facility, located in Salford, England, during the first quarter of 2000, the
Company entered into a 25-year property lease. The Company has been accounting
for the lease as a direct financing lease and recorded a receivable equal to the
discounted cash flows to be received by the Company over the lease term. The
Company also has extended a working capital loan to the operator of this
facility. These assets, along with various other short-term receivables, are
denominated in British pounds; consequently, the Company adjusts these
receivables to the current exchange rate at each balance sheet date, and
recognizes the currency gain or loss in its current period earnings. Due to
negative fluctuations in foreign currency exchange rates between the British
pound and the U.S. dollar, the Company recognized net unrealized foreign
currency transaction losses of $0.4 million for the three months ended March 31,
2001. On April 10, 2001 the Company sold its interest in the Agecroft facility.
THREE MONTHS ENDED MARCH 31, 2000
RENTAL REVENUE
Net rental revenue was $11.5 million for the three months ended March 31, 2000
and was generated from leasing correctional and detention facilities to
Operating Company, governmental agencies and other private operators. The
Company reserved $68.7 million of the $77.7 million in total revenue due from
Operating Company for the three months ended March 31, 2000 resulting from the
uncertainty regarding the collectibility of the payments. On September 30, 2000,
the Company forgave all unpaid rental revenue due from Operating Company. The
forgiveness did not impact the amounts previously reported in the Company's
financial statements as the amounts forgiven had been previously reserved. The
Operating Company Leases were cancelled in the Operating Company Merger.
LICENSING FEES FROM AFFILIATES
Licensing fees from affiliates were $2.6 million for the three months ended
March 31, 2000. Licensing fees were earned as a result of a service mark and
trade name use agreement (the "Trade Name Use Agreement") between the Company
and Operating Company, which granted Operating Company the right to use the name
"Corrections Corporation of America" and derivatives thereof subject to
specified terms and conditions therein. The Trade Name Use Agreement was
cancelled in the Operating Company Merger.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses were $2.5 million for the three months ended
March 31, 2000. General and administrative expenses consist primarily of
corporate management salaries and benefits, professional fees and other
administrative expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $12.9 million for the three months
ended March 31, 2000. Depreciation expense included the addition of one facility
during the first quarter of 2000.
WRITE-OFF OF AMOUNTS UNDER LEASE ARRANGEMENTS
During the first quarter of 2000, the Company opened one facility that was
operated and leased by Operating Company prior to the Operating Company Merger.
Based on Operating Company's financial condition, as well as the proposed merger
with Operating Company and the proposed termination of the Operating Company
Leases in connection therewith, the Company wrote-off the accrued tenant
incentive fees due Operating Company in connection with opening the facility,
totaling $4.0 million for the three months ended March 31, 2000.
EQUITY (EARNINGS) LOSS AND AMORTIZATION OF DEFERRED GAINS, NET
Equity in earnings and amortization of deferred gains was $0.2 million for the
three months ended March 31, 2000. For the three months ended March 31, 2000,
the Company recognized equity in earnings of PMSI and JJFMSI of $2.1 million and
$1.3 million, respectively, and received distributions from PMSI and JJFMSI of
$0.6 million and $0.1 million, respectively. In addition the Company recognized
equity in losses of Operating Company of approximately $5.9 million for the same
period. For the three months ended March 31, 2000, the Company recognized
amortization of deferred gains of PMSI and JJFMSI of $1.8 million and $0.9
million, respectively.
Prior to the Operating Company Merger, the Company had accounted for its 9.5%
non-voting interest in Operating Company under the cost method of accounting. As
such, the Company had not recognized any income or loss related to its stock
ownership investment in Operating Company during the period from January 1, 1999
through September 30, 2000. However, in connection with the Operating Company
Merger, the financial statements of the Company have been restated to recognize
the Company's 9.5% pro-rata share of Operating Company's losses on a retroactive
basis for the period from January 1, 1999 through September 30, 2000 under the
equity method of accounting, in accordance with APB 18, "The Equity Method of
Accounting for Investments in Common Stock" ("APB 18").
INTEREST EXPENSE, NET
Interest expense, net, is reported net of interest income for the three months
ended March 31, 2000. Gross interest expense was $31.8 million for the three
months ended March 31, 2000. Gross interest expense is based on outstanding
convertible subordinated notes payable balances, borrowings under the Company's
Amended Bank Credit Facility, the Company's senior notes, and amortization of
loan costs and unused facility fees. Interest expense is reported net of
capitalized interest on construction in progress of $5.2 million. At March 31,
2000, the Company was in default under its Amended
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Bank Credit Facility. As a result, interest expense includes a default rate of
interest equal to 2.0% of amounts outstanding under the Amended Bank Credit
Facility. Additionally, interest expense for the three months ended March 31,
2000, includes default interest on the $40 Million Convertible Subordinated
Notes.
Gross interest income was $3.3 million for the three months ended March 31,
2000. Gross interest income is earned on cash used to collateralize letters of
credit for certain construction projects, direct financing leases and
investments of cash and cash equivalents prior to the funding of construction
projects.
INFLATION
The Company does not believe that inflation has had or will have a direct
adverse effect on its operations. Many of the Company's management contracts
include provisions for inflationary indexing, which mitigates an adverse impact
of inflation on net income. However, a substantial increase in personnel costs
or medical expenses could have an adverse impact on the Company's results of
operations in the future to the extent that wages or medical expenses increase
at a faster pace than the per diem or fixed rates received by the Company for
its management services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is to changes in U.S. interest rates
and fluctuations in foreign currency exchange rates between the U.S. dollar and
the British pound. The Company is exposed to market risk related to its Amended
Bank Credit Facility and certain other indebtedness. The interest on the Amended
Bank Credit Facility and such other indebtedness is subject to fluctuations in
the market. If the interest rate for the Company's outstanding indebtedness
under the Amended Bank Credit Facility was 100 basis points higher or lower
during the first quarter of 2001, the Company's interest expense, net of amounts
capitalized, would have been increased or decreased by approximately $3.2
million.
As of March 31, 2001, the Company had outstanding $100.0 million of its 12.0%
senior notes with a fixed interest rate of 12.0%, $41.1 million of convertible
subordinated notes with a fixed interest rate of 10.0%, $30.0 million of
convertible subordinated notes with a fixed interest rate of 8.0%, $107.5
million of Series A Preferred Stock with a fixed dividend rate of 8.0% and $83.3
million of Series B Preferred Stock with a fixed dividend rate of 12.0%. Because
the interest and dividend rates with respect to these instruments are fixed, a
hypothetical 10.0% increase or decrease in market interest rates would not have
a material impact on the Company.
The Amended Bank Credit Facility required the Company to hedge $325.0 million of
its floating rate debt on or before August 16, 1999. The Company has entered
into certain swap arrangements fixing LIBOR at 6.51% (prior to the applicable
spread) on outstanding balances of at least $325.0 million through December 31,
2001 and at least $200.0 million through December 31, 2002. The difference
between the floating rate and the swap rate is recognized in interest expense.
In accordance with SFAS 133, as amended, as of March 31, 2001 the Company
recorded a $10.4 million liability, representing the estimated amount the
Company would have to pay to cancel the contract or transfer it to other
parties. The estimated negative fair value of the swap agreement as of January
1, 2001 was reflected as a cumulative effect of accounting change included in
other comprehensive income in the statement of stockholders' equity. The
reduction in the fair value of the swap agreement during the quarter was charged
to earnings. This decline in fair value is due to declining interest
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rates and is expected to reverse into earnings prior to the maturity of the swap
on December 31, 2002.
Additionally, the Company may, from time to time, invest its 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
between three and twelve months. While these investments are subject to interest
rate risk and will decline in value if market interest rates increase, a
hypothetical 10% increase or decrease in market interest rates would not
materially affect the value of these investments.
The Company's exposure to foreign currency exchange rate risk relates to its
construction, development and leasing of the Agecroft facility located in
Salford, England, which was held for sale by the Company as of March 31, 2001.
The Company entered into a 25-year lease and recognized a direct financing lease
receivable equal to the discounted cash flows expected to be received by the
Company over the lease term. The Company also has extended a working capital
loan to the operator of this facility. Such payments to the Company are
denominated in British pounds rather than the U.S. dollar. As a result, the
Company bears the risk of fluctuations in the relative exchange rate between the
British pound and the U.S. dollar. At March 31, 2001, the receivables due the
Company, excluding amounts due under the direct financing lease held for sale,
and denominated in British pounds totaled 3.5 million British pounds. A
hypothetical 10% increase in the relative exchange rate would have resulted in
an additional $0.5 million increase in value of these receivables and an
unrealized foreign currency transaction gain, and a hypothetical 10% decrease in
the relative exchange rate would have resulted in an additional $0.5 million
decrease in value of these receivables and an unrealized foreign currency
transaction loss. The Company sold its interest in the Agecroft facility on
April 10, 2001.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the financial statements included in Part I.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Under the terms of the Company's $1.0 billion senior credit facility, the
Company is prohibited from declaring or paying any dividends with respect to the
Company's currently outstanding Series A Preferred Stock until such time as the
Company has raised at least $100.0 million in equity. Dividends with respect to
the Series A Preferred Stock will continue to accrue under the terms of the
Company's charter until such time as payment of such dividends is permitted
under the terms of the June 2000 Waiver and Amendment to the Amended Bank Credit
Facility. Quarterly dividends of $0.50 per share for the second, third and
fourth quarters of 2000, and for the first quarter of 2001 have been accrued as
of March 31, 2001. Under the terms of the Company's charter, in the event
dividends are unpaid and in arrears for six or more quarterly periods the
holders of the Series A Preferred Stock will have the right to vote for the
election of two additional directors to the Company's board of directors. No
assurance can be given as to if and when the Company will commence the payment
of cash dividends on its shares of Series A Preferred Stock. As further
discussed in Note 6, management intends to aggressively pursue an amendment to
the terms of the Amended Bank Credit Facility to remove the restriction on the
payment of such dividend prior to September 30, 2001. No assurance can be given,
however, that the lenders will agree to such amendment, and that as a result, if
and when the Company will commence the payment of cash dividends on its shares
of Series A Preferred Stock.
For a discussion of the Company's compliance with the terms of its indebtedness,
see Note 4 to the financial statements included in Part I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Form of Amendment to the Charter of the Company effecting the reverse
stock split of the Company's common stock and a related reduction in
the stated capital of the Company (previously filed as Exhibit 3.1 to
the Company's Current Report on
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Form 8-K (File no. 0-25245) filed with the Commission on May 8,
2001 and incorporated herein by this reference).
10.1 Second Waiver and Amendment, dated as of April 16, 2001, by and
among the Company, certain of the Company's subsidiaries as
Subsidiary Guarantors, certain of the Company's lenders, and
Lehman, as Administrative Agent.
10.2 Waiver to Loan and Security Agreement, as amended, dated as
of April 16, 2001, by and among Operating Company, as Borrower,
certain of Operating Company's subsidiaries as Subsidiary
Guarantors, certain lenders and Lehman, as Administrative Agent.
99.1 Press Release, dated as of May 7, 2001, announcing, among
other things, the declaration of the reverse stock split of the
Company's common stock at a ratio of one-for-ten (previously
filed as Exhibit 99.1 to the Company's Current Report on Form
8-K (File no. 0-25245) filed with the Commission on May 8, 2001
and incorporated herein by this reference).
(b) Reports on Form 8-K.
The following Form 8-K was filed during the period January 1, 2001
through March 31, 2001:
(1) Filed February 16, 2001 (earliest event February 13, 2001)
reporting in Item 5., final court approvals of revised terms
of the definitive agreements with respect to the settlement of
a series of class action and derivative lawsuits brought
against the Company by current and former stockholders of the
Company and its predecessors.
The following Form 8-K was filed subsequent to March 31, 2001:
(1) Filed May 8, 2001 (earliest event May 7, 2001) reporting in
Item 5., the approval by the board of directors of a reverse
stock split of the Company's common stock at a ratio of
one-for-ten.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORRECTIONS CORPORATION OF AMERICA
Date: May 11, 2001
/s/ John D. Ferguson
--------------------------------------------
John D. Ferguson
President and Chief Executive Officer
/s/ Irving E. Lingo, Jr.
--------------------------------------------
Irving E. Lingo, Jr.
Executive Vice President, Chief Financial
Officer, and Secretary and Principle
Accounting Officer
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