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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: JUNE 30, 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 July 31, 2001:
Shares of Common Stock, $0.01 par value: 25,131,909 shares outstanding.
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CORRECTIONS CORPORATION OF AMERICA
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
INDEX
PAGE
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets (Unaudited) as of
June 30, 2001 and December 31, 2000........................................... 1
b) Condensed Consolidated Statements of Operations (Unaudited) for
the three and six months ended June 30, 2001 and 2000......................... 2
c) Condensed Consolidated Statements of Cash Flows (Unaudited) for
the six months ended June 30, 2001 and 2000................................... 3
d) Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) for the six months ended June 30, 2001............................ 4
e) Notes to Condensed Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 39
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 41
Item 2. Changes in Securities and Use of Proceeds...................................... 41
Item 3. Defaults Upon Senior Securities................................................ 41
Item 4. Submission of Matters to a Vote of Security Holders............................ 42
Item 5. Other Information.............................................................. 42
Item 6. Exhibits and Reports on Form 8-K............................................... 42
SIGNATURES.............................................................................. 43
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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)
JUNE 30, December 31,
ASSETS 2001 2000
- ----------------------------------------------------------------------- ----------- -----------
Cash and cash equivalents $ 41,934 $ 20,889
Restricted cash 10,522 9,209
Accounts receivable, net of allowance of $857 and $1,486, respectively 119,738 132,306
Income tax receivable 650 32,662
Prepaid expenses and other current assets 20,252 18,726
Assets held for sale under contract -- 24,895
----------- -----------
Total current assets 193,096 238,687
Property and equipment, net 1,590,472 1,615,130
Investment in direct financing lease -- 23,808
Assets held for sale 71,413 138,622
Goodwill 108,638 109,006
Other assets 41,328 51,739
----------- -----------
Total assets $ 2,004,947 $ 2,176,992
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------
Accounts payable and accrued expenses $ 208,664 $ 243,312
Income tax payable 6,804 8,437
Distributions payable 13,522 9,156
Current portion of long-term debt 286,751 14,594
----------- -----------
Total current liabilities 515,741 275,499
Long-term debt, net of current portion 709,918 1,137,976
Deferred tax liabilities 58,789 56,450
Fair value of interest rate swap agreement 10,062 --
Other liabilities 21,351 19,052
----------- -----------
Total liabilities 1,315,861 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 107,500 107,500
$25.00 per share
Series B - 3,514 and 3,297 shares issued and outstanding at June 30, 2001 and
December 31, 2000, respectively; stated at liquidation preference of $24.46 per share 85,946 80,642
Common stock - $0.01 par value; 80,000 and 400,000 shares authorized; 25,138 and
235,395 shares issued and 25,137 and 235,383 shares outstanding at June 30, 2001 and
December 31, 2000, respectively 251 2,354
Additional paid-in capital 1,317,065 1,299,390
Deferred compensation (4,168) (2,723)
Retained deficit (813,500) (798,906)
Treasury stock, 1.2 shares and 12 shares, respectively, at cost (242) (242)
Accumulated other comprehensive loss (3,766) --
----------- -----------
Total stockholders' equity 689,086 688,015
----------- -----------
Total liabilities and stockholders' equity $ 2,004,947 $ 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 FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUE:
Management and other $ 243,937 $ -- $ 481,909 $ --
Rental 1,788 11,466 4,198 22,926
Licensing fees from affiliates -- 2,666 -- 5,242
--------- --------- --------- ---------
245,725 14,132 486,107 28,168
--------- --------- --------- ---------
EXPENSES:
Operating 189,181 -- 373,836 --
General and administrative 8,434 32,197 17,034 34,740
Depreciation and amortization 13,176 13,407 25,877 26,331
Write-off of amounts under lease arrangements -- 4,416 -- 8,416
--------- --------- --------- ---------
210,791 50,020 416,747 69,487
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 34,934 (35,888) 69,360 (41,319)
--------- --------- --------- ---------
OTHER (INCOME) EXPENSE:
Equity loss and amortization of deferred gain,
net 90 4,419 175 4,257
Interest expense, net 33,046 31,267 67,115 59,749
Change in fair value of interest rate swap agreement 327 -- 6,296 --
(Gain) loss on disposal of assets (39) 301 (39) 301
Unrealized foreign currency transaction (gain) loss (41) 7,530 344 7,530
--------- --------- --------- ---------
33,383 43,517 73,891 71,837
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 1,551 (79,405) (4,531) (113,156)
Income tax expense (1,037) -- (262) --
--------- --------- --------- ---------
NET INCOME (LOSS) 514 (79,405) (4,793) (113,156)
Distributions to preferred stockholders (4,980) (2,150) (9,801) (4,300)
--------- --------- --------- ---------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS $ (4,466) $ (81,555) $ (14,594) $(117,456)
========= ========= ========= =========
BASIC NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE $ (0.18) $ (6.89) $ (0.61) $ (9.92)
========= ========= ========= =========
DILUTED NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE $ (0.18) $ (6.89) $ (0.61) $ (9.92)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 24,653 11,841 23,938 11,840
========= ========= ========= =========
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 SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,793) $(113,156)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 25,877 26,331
Amortization of debt issuance costs and other non-cash interest 11,074 6,643
Deferred and other non-cash income taxes (1,253) --
Equity in loss and amortization of deferred gain 175 4,257
Write-off of amounts under lease agreement -- 8,416
(Gain) loss on disposal of assets (39) 301
Change in fair value of interest rate swap agreement 6,296 --
Unrealized foreign currency transaction loss 344 7,530
Other non-cash items 1,099 247
Changes in assets and liabilities:
Accounts receivable, prepaid expenses and other assets 10,029 1,248
Receivable from affiliates -- 10,789
Income tax receivable 32,012 --
Accounts payable, accrued expenses and other liabilities (14,674) 3,574
Income tax payable (1,633) 769
--------- ---------
Net cash provided by (used in) operating activities 64,514 (43,051)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment, net (1,694) (70,281)
(Increase) decrease in restricted cash (1,313) 14,993
Payments received on investments in affiliates -- 6,686
Proceeds from sales of assets 115,727 --
Increase in other assets (913) (107)
Payments received on direct financing leases and notes receivable 1,173 2,296
--------- ---------
Net cash provided by (used in) investing activities 112,980 (46,413)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) debt, net (155,901) 36,959
Payment of debt and equity issuance costs (425) (9,322)
Payment of dividends (32) (4,300)
Cash paid for fractional shares (91) --
--------- ---------
Net cash provided by (used in) financing activities (156,449) 23,337
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,045 (66,127)
CASH AND CASH EQUIVALENTS, beginning of period 20,889 84,493
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 41,934 $ 18,366
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 36,700 $ 53,599
========= =========
Income taxes $ 2,267 $ 615
========= =========
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 SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED AND AMOUNTS IN THOUSANDS)
SERIES A SERIES B ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN DEFERRED RETAINED
STOCK STOCK STOCK CAPITAL COMPENSATION DEFICIT
--------- --------- ------- ----------- ------------ ----------
Balance as of
December 31, 2000 $ 107,500 $ 80,642 $ 2,354 $ 1,299,390 $ (2,723) $ (798,906)
--------- --------- ------- ----------- ------------ ----------
Comprehensive income (loss):
Net loss -- -- -- -- -- (4,793)
Cumulative effect of
accounting change -- -- -- -- -- --
Amortization of transition
adjustment -- -- -- -- -- --
--------- --------- ------- ----------- ------------ ----------
Total comprehensive loss -- -- -- -- -- (4,793)
--------- --------- ------- ----------- ------------ ----------
Distributions to preferred
stockholders -- 5,327 -- -- -- (9,801)
Issuance of common stock
under terms of stockholder
litigation settlement -- -- 159 15,759 -- --
Amortization of deferred
compensation -- -- 3 (3) 513 --
Restricted stock issuances,
net of forfeitures -- -- -- (206) (1,958) --
Reverse stock split -- -- (2,265) 2,240 -- --
Other -- (23) -- (115) -- --
--------- --------- ------- ----------- ------------ ----------
BALANCE AS OF
JUNE 30, 2001 $ 107,500 $ 85,946 $ 251 $ 1,317,065 $ (4,168) $ (813,500)
========= ========= ======= =========== ============ ==========
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE
STOCK INCOME (LOSS) TOTAL
-------- -------------- ---------
Balance as of
December 31, 2000 $ (242) $ -- $ 688,015
-------- ------------ ---------
Comprehensive income (loss):
Net loss -- -- (4,793)
Cumulative effect of
accounting change -- (5,023) (5,023)
Amortization of transition
adjustment -- 1,257 1,257
-------- ------------ ---------
Total comprehensive loss -- (3,766) (8,559)
-------- ------------ ---------
Distributions to preferred
stockholders -- -- (4,474)
Issuance of common stock
under terms of stockholder
litigation settlement -- -- 15,918
Amortization of deferred
compensation -- -- 513
Restricted stock issuances,
net of forfeitures -- -- (2,164)
Reverse stock split -- -- (25)
Other -- -- (138)
-------- ------------ ---------
BALANCE AS OF
JUNE 30, 2001 $ (242) $ (3,766) $ 689,086
======== ============ =========
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
JUNE 30, 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 with and into the Company (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 the Company 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 inmate residential and 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 variety of rehabilitation and
educational programs, including basic education, life skills and
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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.
The Company currently owns or manages 71 correctional and detention
facilities with a total design capacity of approximately 66,000 beds in
21 states, the District of Columbia and Puerto Rico, of which 69
facilities are operating (of which two are idle) 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 its 2000 Annual
Report on Form 10-K 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 and six months ended June
30, 2001 and the results of operations for the three and six months ended
June 30, 2000 are not meaningful because, for the prior year quarters
(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 and six months ended June 30, 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 Accounting Principles
Board Opinion No. 18, "The Equity Method of Accounting for Investments in
Common Stock" ("APB 18").
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 addresses accounting and reporting
standards for acquired goodwill and other intangible assets and
supersedes Accounting Principles Board Opinion No. 17, "Intangible
Assets". Under this statement, goodwill will no longer be subject to
amortization over its estimated useful life. Instead, goodwill is to be
tested for impairment at least annually using a fair-value-based
approach. The impairment loss is the amount, if any, by which the implied
fair value of goodwill is less than the goodwill carrying amount and is
recognized in earnings. The statement also requires companies to disclose
information about the changes in the carrying amount of goodwill, the
carrying amount of intangible assets by major intangible asset class for
those assets subject to amortization and those not subject to
amortization, and the estimated intangible asset amortization expense for
the next five years. As of June 30, 2001, the Company had $108.6 million
of goodwill reflected in the accompanying condensed consolidated balance
sheet associated with the Operating Company Merger and the acquisitions
of the Service Companies completed during the fourth quarter of 2000.
Amortization of goodwill for the three and six months ended June 30, 2001
was $1.9 million and $3.8 million, respectively.
Provisions of SFAS 142 are required to be applied starting with fiscal
years beginning after December 15, 2001. Because goodwill and some
intangible assets will no longer be amortized, the reported amounts of
goodwill and intangible assets (as well as total assets) will not
decrease at the same time and in the same manner as under previous
standards. There may be more volatility in reported income than under
previous standards because impairment losses may occur irregularly and in
varying amounts. The amount of impairment losses, if any, has not yet
been determined. The impairment losses, if any, that arise due to the
initial application of SFAS 142 resulting from a transitional impairment
test applied as of January 1, 2002, will be reported as a cumulative
effect of a change in accounting principle.
RECLASSIFICATIONS
Merger transaction expenses, totaling $28.1 million, for the three and
six months ended June 30, 2000 have been reclassified to general and
administrative expense to conform with the 2001 presentation.
3. 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").
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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.
On June 28, 2001, the Company sold its Pamlico Correctional Facility, a
facility located in North Carolina, which was classified as held for sale
as of December 31, 2000, for a sales price of approximately $24.1
million. The net proceeds were used to pay-down a like portion of amounts
outstanding under the Company's Amended Bank Credit Facility.
During June 2001, the Company identified the direct financing lease of
Southern Nevada Women's Correctional Facility as a non-strategic asset
and entered into discussions with a potential buyer of this facility, and
accordingly reclassified this asset as held for sale. Despite a potential
sale, the Company does, however, expect to continue managing this
facility. As of June 30, 2001, the aggregate carrying value of all assets
held for sale was $71.4 million. There can be no assurance that the
Company will be able to complete the sale of any of the assets held for
sale, or that the net proceeds received from these sales will achieve
expected levels.
4. 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, which was effective May 18, 2001.
As a result of the reverse stock split, every ten shares of the Company's
common stock issued and outstanding immediately prior to the reverse
stock split has been reclassified and changed into one fully paid and
nonassessable share of the Company's common stock. The Company paid its
registered common stockholders cash in lieu of issuing fractional shares
in the reverse stock split at a post reverse-split rate of $8.60 per
share, totaling approximately $15,000. The number of common shares and
per share amounts have been retroactively restated in the accompanying
financial statements and these notes to the financial statements to
reflect the reduction in common shares and corresponding increase in the
per share amounts resulting from the reverse stock split. In conjunction
with the reverse stock split, during the second quarter of 2001, the
Company amended the charter to reduce the number of shares of common
stock which the Company has authorized to issue to 80.0 million shares
from 400.0 million shares. As of June 30, 2001, the Company had 25.1
million shares of common stock issued and outstanding (on a post-reverse
stock split basis).
5. DEBT
AMENDED BANK CREDIT FACILITY
As of June 30, 2001, the Company had approximately $824.7 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 7), modify certain financial covenants, and
change the consummation
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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 7. 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: (i) changed the date the securitization of lease
payments (or other similar transactions) with respect to the Company's
Agecroft facility was required to 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 resulting 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 under the Amended Bank Credit Facility. 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, 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 subordinated notes.
The revolving loan portion of the Amended Bank Credit Facility (of which
$280.4 million was outstanding as of June 30, 2001) matures on January 1,
2002, and is therefore classified on the accompanying balance sheet as a
current liability at June 30, 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 June 30,
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.
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The Amended Bank Credit Facility required 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. The
Company had considered 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
determined that it was not commercially reasonable to issue additional
equity or debt securities, 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 7. Further, as a result of the Company's restructuring
during the third and fourth quarters of 2000, prior to the completion of
the audit of the Company's 2000 financial statements and the filing of
the Company's Annual Report on Form 10-K for the year ended December 31,
2000 with the Securities and Exchange Commission (the "SEC") on April 17,
2001, the Company was unable to provide the SEC with the requisite
financial information required to be included in a registration
statement. Therefore, even if the Company had been able to negotiate a
public or private sale of its equity securities on commercially
reasonable terms, the Company's inability to obtain an effective SEC
registration statement with respect to such securities prior to April 17,
2001 would have effectively prohibited any such transaction. Moreover,
the terms of any private sale of the Company's equity securities likely
would have included a requirement that the Company register with the SEC
the resale of the Company's securities issued to a private purchaser
thereby also making it impossible to complete any private issuance of its
securities. Due to the fact that the Company would have been unable to
obtain an effective registration statement, and therefore, would have
been unable to make any public issuance of its securities (or any private
sale that included the right of resale), any actions prior to April 17,
2001 to complete a capital raising event through the sale of equity or
debt securities would have been futile.
Although the Company would technically have been able to file a
registration statement with the SEC following April 17, 2001, the Company
believes that various market factors, including the depressed market
price of the Company's common stock immediately preceding April 17, 2001,
the pending reverse stock split required to maintain the Company's
continued New York Stock Exchange ("NYSE")
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listing, and the uncertainty regarding the Company's maturity of the
revolving loans under the Amended Bank Credit Facility, made the issuance
of additional equity or debt securities unreasonable.
Because the issuance of additional equity or debt securities was deemed
unreasonable, the Company determined that the sale of assets represented
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. In
addition, during the second quarter of 2001 the Company completed the
sale of its Pamlico Correctional Facility for approximately $24.1 million
and is actively pursuing the sales of additional assets. As a result of
the foregoing, the Company believes it has demonstrated commercially
reasonable efforts to complete the $100.0 million capital raising event
as of June 30, 2001; however, there can be no assurance that the lenders
under the Amended Bank Credit Facility 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, were subject to an increase of 25 basis
points (0.25%) from the current interest rate on July 1, 2001 if the
Company had not prepaid $100.0 million of the outstanding loans under the
Amended Bank Credit Facility, and are subject to 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 outstanding
loans under the Amended Bank Credit Facility. The Company has satisfied
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, the Pamlico Correctional Facility and the completion of the
Agecroft transaction, and through the pay-down of $35.0 million of
outstanding loans under the Amended Bank Credit Facility with cash on
hand. The Company does not currently anticipate that cash generated from
operations combined with cash on hand will be sufficient to prepay an
aggregate of $200.0 million of outstanding loans prior to October 1,
2001. Therefore, the Company will be required to raise additional cash,
such as through the sale of additional assets, in order to satisfy this
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 the registration obligation under the
terms of the $40.0 million convertible subordinated notes (as described
herein), 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"). The notes bear interest at 10%, payable semi-annually. In
addition, due to the events of default, the Company is obligated to pay
the holders of the notes contingent interest sufficient to permit the
holders to receive a 15.5% rate of return, unless the holders of the
notes elect to convert the notes into the Company's common stock prior to
December 31, 2003, or if other contingencies are met, under terms of the
note purchase agreement. The existing and potential events of default
arose 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 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 $11.90, 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
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litigation against the Company, as further discussed in Note 7, will
cause an adjustment to the conversion price of the notes. MDP, however,
has indicated its belief that such an adjustment is required. At an
adjusted conversion price of $11.90, the $40.0 Million Convertible
Subordinated Notes are convertible into approximately 3.4 million shares
of the Company's common stock. The price and shares have been adjusted in
connection with the completion of the reverse stock split.
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 $11.90,
into approximately an additional 92,000 shares of the Company's common
stock. The price and shares have been 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.
Under the terms of the registration rights agreement between the Company
and the holders of the $40.0 Million Convertible Subordinated Notes, the
Company is required to use its best efforts to file and maintain with the
SEC an effective shelf registration statement covering the future sale by
the holders of the shares of common stock to be issued upon conversion of
the notes. As a result of the completion of the Restructuring, as
previously discussed herein, the Company was unable to file such a
registration statement with the SEC prior to the filing of the Company's
Form 10-K with the SEC on April 17, 2001. Following the filing of the
Company's Form 10-K, the Company commenced negotiations with MDP with
respect to an amendment to the registration rights agreement to defer the
Company's obligations to use its best efforts to file and maintain the
registration statement. MDP has now informed the Company that it does not
intend to complete such an amendment, and as a result, the Company is in
the process of preparing a registration statement for filing with the SEC
to achieve compliance with this covenant. Pursuant to the terms of the
Company's agreements with the holders of its $30.0 Million Convertible
Subordinated Notes and the holders of certain of its warrants, at the
request of such holders, the Company will be required to include the
shares of common stock to be issued to each party upon conversion of the
securities held by them under the registration statement. In the event
the Company is unable to complete and file the registration statement,
the Company would suffer a default under the terms of the $40.0 Million
Convertible Subordinated Notes which would result in a cross-default
under the terms of the Amended Bank Credit Facility, and if as a result
of such default, the holders of the $40.0 Million Convertible
Subordinated Notes accelerated amounts due thereunder, a cross-default
under the terms of the Company's $100.0 million senior notes and $30.0
Million Convertible Subordinated Notes.
$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 8.0%, $30.0 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.
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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 $10.68,
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 7, does 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, since all of the shares are not issued
simultaneously, multiple adjustments to the conversion ratio will be
required. The Company currently estimates that the $30.0 Million
Convertible Subordinated Notes will be convertible into approximately 3.4
million shares of the Company's common stock once all of the shares under
the stockholder litigation settlement have been issued. The price and
shares have been adjusted in connection with the completion of the
reverse stock split.
6. 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 period.
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
subordinated notes, restricted stock plans, stock options and warrants,
and in the prior year, also the convertible preferred stock.
The Company's restricted stock, stock options, and warrants were
convertible into 0.4 million shares for each of the three and six months
ended June 30, 2001, using the treasury stock method. The Company's
convertible subordinated notes were convertible into 6.8 million shares
for each of the three and six months ended June 30, 2001, using the
if-converted method. For the three and six months ended June 30, 2000,
the Company's stock options and warrants were convertible into 1,135 and
2,042 shares, respectively, (on a post-reverse stock split basis), using
the treasury stock method. The Company's convertible subordinated notes
were convertible into 0.3 million shares (on a post-reverse stock split
basis) for the three and six months ended June 30, 2000, using the
if-converted method. These incremental shares were excluded from the
computation of diluted earnings per share for the three and six months
ended June 30, 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
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former directors and executive officers (as further discussed in Note 7).
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 4.7 million shares of common stock, as
adjusted for the reverse stock split. As of June 30, 2001, the Company
had issued approximately 1.6 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 in late 2001 or early 2002, increases the
denominator used in the earnings per share calculation, thereby reducing
the net income (loss) per common share of the Company.
7. 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 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 4.7 million shares of
the Company's common stock, as adjusted for the reverse stock split; (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.
The promissory note, which will be issued at the same time the remaining
shares under the settlement agreement are issued, 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 $16.30 per share for any fifteen consecutive
trading days following the note's issuance and 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 $4.90 per share, based on the average
trading price of the stock following the date of the note's issuance and
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 June 30, 2001, the
Company had issued 1.6 million shares under terms of the settlement to
plaintiffs' counsel in the actions, as adjusted for the reverse stock
split. The Company has been advised by the settlement claims processing
agent that the remaining settlement shares and therefore the promissory
note, will be issued in late 2001 or early 2002.
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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
alleged that the defendants failed to pay amounts allegedly due under the
securities purchase agreement and asked for compensatory damages of
approximately $24.0 million consisting of various fees, expenses and
other relief the court may deem appropriate. During August 2001, the
Company and plaintiffs reached a definitive agreement to settle this
litigation. Under terms of the agreement, the Company will make a cash
payment of $15.0 million to the plaintiffs in full settlement of all
claims. The Company has recorded an accrual reflecting the terms of the
settlement.
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 agreement in principle to settle plaintiffs' claims
against the Company. However, no definitive agreement has been reached
between the plaintiffs and other defendants in the case as of the date
hereof, and there can be no assurance that a definitive settlement
agreement will be reached and/or approved by the courts. 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 potential settlement amount, for which the Company
is seeking partial reimbursement from its insurance carrier.
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'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,
during the second quarter of 2001, the Company and all plaintiffs
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reached an agreement in principle to settle their claims, asserted and
unasserted, against the Company, and subsequently executed a definitive
settlement agreement which was approved by the court with the full
settlement funded by insurance.
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, and one has pleaded guilty to criminal
charges. The plaintiffs have 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, indicated during the first quarter
of 2001 that, under Tennessee law, it will not be responsible for any
punitive damages. During the second quarter of 2001, the carrier filed a
declaratory judgment action in federal court in Houston, which complaint
has not been served on TransCor or the Company, in which the carrier
asserts, among other things, that there is no coverage under Texas law
for the underlying events. In the event any resulting liability is not
covered by insurance proceeds and is in excess of the amount accrued by
the Company, such liability would have a material adverse effect upon the
business or financial position of TransCor and, potentially, the Company
and its other 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.
OTHER COMMITMENTS
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
third 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.
In July 2001, Merrill Lynch agreed to accept payment of $3.0 million over
a one year period in full and complete satisfaction of the invoice.
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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 and second quarters of 2001 have been accrued as of June
30, 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 ability of
the holders of the Series A Preferred Stock 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 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 SEC in connection with the
registration of the Company's securities in future offerings.
Accordingly, management has expressed the desire to remove the
restriction on the payment of such dividends prior to September 30, 2001
in its discussions with the lenders regarding refinancing strategies for
the Amended Bank Credit Facility. As of the date hereof, the lenders have
not expressed a willingness to remove the restriction prior to September
30, 2001 or thereafter. However, management continues to actively 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, or in conjunction with a refinancing if the lenders do not agree to
an amendment prior to September 30, 2001. No assurance can be given,
however, that the lenders will agree to a reinstatement, 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.
In the event dividends are unpaid and in arrears through the third
quarter of 2001, the holders of the Series A Preferred Stock will be
entitled to vote for the election of two additional directors of the
Company at a special meeting called by the holders of record of at least
20% of the shares of Series A Preferred Stock. If a special meeting is
not called, the holders of the Series A Preferred Stock on the record
date will be entitled to vote for two additional directors of the Company
at the next annual meeting of stockholders, and at such subsequent annual
meeting until all dividends accumulated on such shares of Series A
Preferred Stock for the past dividend periods and the dividend for the
then current dividend period shall have been fully paid or declared and a
sum sufficient for the payment thereof set aside for payment.
The directors shall be elected upon affirmative vote of a plurality of
the Series A Preferred Shares present and voting in person or by proxy at
a meeting at which a majority of the outstanding Series A Preferred
Shares are represented. If and when all accumulated dividends
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and the dividend for the then current dividend period on the Series A
Preferred Shares shall have been paid in full or set aside for payment in
full, the holders thereof shall be divested of the foregoing voting
rights and, if all accumulated dividends and the dividend for the then
current dividend period have been paid in full or set aside for payment
in full, the term of office of each director so elected shall immediately
terminate.
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 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
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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.
8. 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 7.
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.
On January 1, 2001, the Company adopted SFAS 133, as amended, and
reflected in earnings the change in the estimated fair value of the
interest rate swap agreement during the first quarter of 2001. 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 June 30, 2001, due to
a reduction in interest rates since entering the swap agreement, the
interest rate swap agreement had a negative fair value of $10.1 million.
This negative fair value consists of a transition adjustment of $5.0
million as of January 1, 2001 reflected in other comprehensive income
(loss) during the first quarter of 2001 and a reduction in the fair value
of the swap agreement of $5.1 million reflected in earnings for the six
months ended June 30, 2001.
In accordance with SFAS 133, as amended, the Company recorded a $6.3
million non-cash charge for the change in fair value of derivative
instruments for the six months ended June 30, 2001, which includes $1.2
million for amortization of the transition adjustment. The unamortized
transition adjustment at June 30, 2001 of $3.8 million is expected to be
reclassified into earnings as a non-cash charge over the remaining term
of the swap agreement.
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The non-cash charge that will be reclassified into earnings during 2001
is expected to be approximately $2.5 million. The non-cash charge of
$5.1 million for the six months ended June 30, 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, unless the swap is terminated in conjunction with a refinancing
of the Amended Bank Credit Facility. 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. 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 $16.30 per share
for any fifteen consecutive trading days following the note's issuance
and 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 $4.90 per
share, based on the average trading price of the stock following the
date of the note's issuance and prior to the maturity of the note. 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 June 30, 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
June 30, 2001. However, the impact cannot be determined until the
promissory note is issued and an estimated fair value of the promissory
note is determined.
9. SEGMENT REPORTING
As of June 30, 2001, the Company owned and managed 37 correctional and
detention facilities, and managed 28 correctional and detention
facilities it does not own. During the second quarter of 2001, the
Company began viewing the Company's operating results in two segments:
owned and managed correctional and detention facilities and
managed-only correctional and detention facilities. The accounting
policies of the segments are the same as those described in the summary
of significant accounting policies in the notes to consolidated
financial statements included in the Company's 2000 Form 10-K. Owned
and managed facilities include the operating results of those
facilities owned and managed by the Company. Managed-only facilities
include the operating results of those facilities owned by a third
party and managed by the Company. The Company measures the operating
performance of each facility within the above two segments, without
differentiation, based on facility contribution. The Company defines
facility contribution as a facility's operating income or loss from
operations before interest, taxes, depreciation and amortization. Since
each of the Company's facilities within the two operating segments
exhibit similar economic characteristics, provide similar services to
governmental agencies, and operate under a similar set of operating
procedures and regulatory guidelines, the facilities within the
identified segments have been aggregated and reported as two operating
segments.
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The revenue and facility contribution for the reportable segments and a
reconciliation to the Company's operating income (loss) is as follows
for the three and six months ended June 30, 2001 and 2000 (dollars in
thousands). Intangible assets are not included in each segment's
reportable assets and the amortization of intangible assets is not
included in the determination of a segment's facility contribution:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenue:
Owned and managed $ 157,217 $ -- $ 311,250 $ --
Managed-only 81,989 -- 161,919 --
--------- --------- --------- ---------
Total management revenue 239,206 -- 473,169 --
--------- --------- --------- ---------
Operating expenses:
Owned and managed 119,362 -- 235,438 --
Managed-only 65,580 -- 130,508 --
--------- --------- --------- ---------
Total operating expenses 184,942 -- 365,946 --
--------- --------- --------- ---------
Facility contribution:
Owned and managed 37,855 -- 75,812 --
Managed-only 16,409 -- 31,411 --
--------- --------- --------- ---------
Total facility contribution 54,264 -- 107,223 --
--------- --------- --------- ---------
Other revenue (expense):
Rental and other revenue 6,519 14,132 12,938 28,168
Other operating expense (4,239) -- (7,890) --
General and administrative (8,434) (32,197) (17,034) (34,740)
Depreciation and amortization (13,176) (13,407) (25,877) (26,331)
Write-off of amounts under lease
arrangements -- (4,416) -- (8,416)
--------- --------- --------- ---------
Operating income (loss) $ 34,934 $ (35,888) $ 69,360 $ (41,319)
========= ========= ========= =========
JUNE 30, 2001 December 31, 2000
------------- -----------------
Assets:
Owned and managed $ 1,575,836 $ 1,564,279
Managed-only 78,786 84,397
Corporate and other 350,325 528,316
----------- -----------
Total assets $ 2,004,947 $ 2,176,992
=========== ===========
10. SUPPLEMENTAL CASH FLOW DISCLOSURE
During the six months ended June 30, 2001, the Company issued 1.6
million shares of common stock in partial satisfaction of the
stockholder litigation discussed in Note 7, as adjusted for the reverse
stock split. As a result, accounts payable and accrued expenses were
reduced by, and common stock and additional paid-in capital were
increased by, $15.9 million. Also during the six months ended June 30,
2001, the Company issued $5.3 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.
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11. 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 six months ended June 30,
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; and (vii) 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 SIX MONTHS ENDED
JUNE 30, 2000
----------------------------------
(unaudited)
Revenue $ 429,778
Operating income $ 29,520
Net loss available to common stockholders $ (48,130)
Net loss per common share:
Basic $ (3.44)
Diluted $ (3.44)
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 9.5 million shares of the Company's common stock (on a
post-reverse stock split basis) 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, restricted stock, stock options and warrants as
the provisions of SFAS 128 prohibit the inclusion of the effects of
potentially issuable shares in periods that a company reports losses
from continuing operations. The unaudited pro forma information also
does not include the dilutive effects of the expected issuance of an
aggregate of 4.7 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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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 (the "SEC") 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 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
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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 and six months ended June 30, 2001 and the results of
operations for the three and six months ended June 30, 2000 are not meaningful
because, for the prior year quarters (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 and six months ended June 30, 2001 also
include 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 Accounting Principles Board
Opinion No. 18, "The Equity Method of Accounting for Investments in Common
Stock"("APB 18").
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 the first three quarters of 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 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.
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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 inmate residential and 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 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 SIX MONTHS ENDED
JUNE 30, 2001
As of June 30, 2001, the Company's liquidity was provided by cash on hand of
approximately $41.9 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 six months ended June 30, 2001, the Company generated $64.5 million
in cash through operating activities. As of June 30, 2001, the Company had a net
working capital deficiency of $322.6 million. Contributing to the net working
capital deficiency was an accrual at June 30, 2001 of $59.5 million related to
the settlement of the Company's stockholder litigation (which is expected to be
satisfied through the remaining issuance of 3.1 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 $280.4 million revolving credit facility under
the Amended Bank Credit Facility, which matures on January 1, 2002, as current.
As of June 30, 2001, the Company had issued 1.6 million shares (out of the
aggregate of approximately 4.7 million shares) under terms of the Company's
stockholder litigation settlement to plaintiffs' counsel in the actions, as
adjusted for the reverse stock split. The Company has been advised by the
settlement claims processing agent that the remaining settlement shares will be
issued in late 2001 or early 2002.
The Company's principal capital requirements are for working capital, capital
expenditures and debt maturities. Capital requirements may also include cash
expenditures associated with the Company's outstanding litigation, as further
discussed in the notes to the financial statements. 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
currently expects to be able to meet its cash expenditure requirements and
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 Company's negative working capital position; and (iii) 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 operating plan to improve
the Company's financial position; developed revised projections for 2001;
evaluated the utilization of existing facilities, projects under development and
excess land parcels; and identified certain 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
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North Carolina, for a sales price of approximately $24.9 million. During the
second quarter of 2001, the Company completed the sale of its interest in a
facility located in Salford, England ("Agecroft"), for a sales price of
approximately $65.7 million, and an additional facility located in North
Carolina for a sales price of approximately $24.1 million, improving the
Company's leverage ratios and providing additional liquidity to the Company. The
net proceeds from the sales were used to pay-down outstanding balances under the
Amended Bank Credit Facility. 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 June 30, 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 of 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-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
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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 also required 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. The Company had
considered 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 determined that it was not commercially
reasonable to issue additional equity or debt securities, 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. Further,
as a result of the Company's restructuring during the third and fourth quarters
of 2000, prior to the completion of the audit of the Company's 2000 financial
statements and the filing of the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 with the SEC on April 17, 2001, the Company was
unable to provide the SEC with the requisite financial information required to
be included in a registration statement. Therefore, even if the Company had been
able to negotiate a public or private sale of its equity securities on
commercially reasonable terms, the Company's inability to obtain an effective
SEC registration statement with respect to such securities prior to April 17,
2001 would have effectively prohibited any such transaction. Moreover, the terms
of any private sale of the Company's equity securities likely would have
included a requirement that the Company register with the SEC the resale of the
Company's securities issued to a private purchaser thereby also making it
impossible to complete any private issuance of its securities. Due to the fact
that the Company would have been unable to obtain an effective registration
statement, and therefore, would have been unable to make any public issuance of
its securities (or any private sale that included the right of resale), any
actions prior to April 17, 2001 to complete a capital raising event through the
sale of equity or debt securities would have been futile.
Although the Company would technically have been able to file a registration
statement with the SEC following April 17, 2001, the Company believes that
various market factors, including the depressed market price of the Company's
common stock immediately preceding April 17, 2001, the pending reverse stock
split required to maintain the Company's continued NYSE listing, and the
uncertainty regarding the Company's maturity of the revolving loans under the
Amended Bank Credit Facility, made the issuance of additional equity or debt
securities unreasonable.
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Because the issuance of additional equity or debt securities was deemed
unreasonable, the Company determined that the sale of assets represented 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.
In addition, during the second quarter of 2001, the Company completed the sale
of its Pamlico Correctional Facility, for approximately $24.1 million, and is
actively pursuing the sales of additional assets. As a result of the foregoing,
the Company believes it has demonstrated commercially reasonable efforts to
complete the $100.0 million capital raising event as of June 30, 2001; however,
there can be no assurance that the lenders under the Amended Bank Credit
Facility 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, were subject to an increase of 25 basis points (0.25%) from the
current interest rate on July 1, 2001 if the Company had not prepaid $100.0
million of the outstanding loans under the Amended Bank Credit Facility, and are
subject to 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 outstanding loans under the Amended Bank Credit Facility. The Company has
satisfied 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, the
Pamlico Correctional Facility and the completion of the Agecroft transaction,
and through the pay-down of $35.0 million of outstanding loans under the Amended
Bank Credit Facility with cash on hand. The Company does not currently
anticipate that cash generated from operations combined with cash on hand will
be sufficient to prepay an aggregate of $200.0 million of outstanding loans
prior to October 1, 2001. Therefore, the Company will be required to raise
additional cash, such as through the sale of additional assets, in order to
satisfy this 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 its
debt covenants. 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 the registration obligation under the
terms of the $40.0 million convertible subordinated notes as more fully
described in Note 5 to the financial statements, 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
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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 and second quarters of 2001 have been accrued as of June 30,
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 ability of the holders of the Series A Preferred Stock 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 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 SEC in connection
with the registration of the Company's securities in future offerings.
Accordingly, management has expressed the desire to remove the restriction on
the payment of such dividends prior to September 30, 2001 in its discussions
with the lenders regarding refinancing strategies for the Amended Bank Credit
Facility. As of the date hereof, the lenders have not expressed a willingness to
remove the restriction prior to September 30, 2001 or thereafter. However,
management continues to actively 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, or in conjunction with a refinancing if the lenders
do not agree to an amendment prior to September 30, 2001. No assurance can be
given, however, that the lenders will agree to a reinstatement, 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, which was effective May 18, 2001. As a
result of the reverse stock split, every ten shares of the Company's common
stock issued and outstanding immediately prior to the reverse stock split has
been reclassified and changed into one fully paid and nonassessable share of the
Company's common stock. The Company paid its registered common stockholders cash
in lieu of issuing fractional shares in the reverse stock split at post
reverse-split rate of $8.60 per share, which is based on the closing price of
the common stock on the New York Stock Exchange on May 17, 2001, totaling
approximately $15,000. The number of common shares
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and per share amounts have been retroactively restated to reflect the reduction
in common shares and corresponding increase in per share amounts resulting from
the reverse stock split. As of June 30, 2001, the Company had 25.1 million
shares of common stock issued and outstanding on a post-reverse stock split
basis.
OPERATING ACTIVITIES
The Company's net cash provided by operating activities for the six months ended
June 30, 2001, was $64.5 million. This amount represents the year-to-date net
loss 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 half
of 2001, the Company received significant tax refunds of approximately $32.0
million, contributing to the net cash provided by operating activities.
INVESTING ACTIVITIES
The Company's cash flow provided by investing activities was $113.0 million for
the six months ended June 30, 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, the Agecroft facility, located in
Salford, England, on April 10, 2001, and the Pamlico Correctional Facility,
located in North Carolina, on June 28, 2001.
FINANCING ACTIVITIES
The Company's cash flow used in financing activities was $156.4 million for the
six months ended June 30, 2001. Net payments on debt totaled $155.9 million and
primarily represents the net cash proceeds received from the sale of the
Mountain View Correctional Facility, the Agecroft facility and the Pamlico
Correctional Facility that were immediately applied to amounts outstanding under
the Amended Bank Credit Facility. The Company paid-down an additional $35.0
million on the Amended Bank Credit Facility with cash on hand.
LIQUIDITY AND CAPITAL RESOURCES FOR THE SIX MONTHS ENDED JUNE 30, 2000
Substantially all of the Company's revenue during the three and six months ended
June 30, 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.
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The Company incurred a net loss available to common stockholders for the three
and six months ended June 30, 2000 of $81.6 million and $117.5 million, or $6.89
and $9.92 per share, respectively, 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. 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 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. As of June 30, 2000, all events of default under the Amended
Bank Credit Facility, the Company's $40.0 million convertible subordinated notes
and its $30.0 million convertible subordinated notes had been waived, as more
fully discussed in the Company's 2000 Form 10-K.
CASH FLOW FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company's cash flow used in operating activities was $43.1 million for the
six months ended June 30, 2000, and represents the year-to-date 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 $46.4 million for the six months ended June 30, 2000, and
primarily represented the construction of several real estate properties. The
Company's cash flow provided by financing activities was $23.3 million for the
six months ended June 30, 2000 and represents net proceeds from debt, net of
payments of debt and equity issuance costs and payments of dividends on shares
of the Company's Series A Preferred Stock.
RESULTS OF OPERATIONS
As previously discussed, management does not believe the comparison between the
results of operations for the three and six months ended June 30, 2001 and the
results of operations for the same periods in the prior year is meaningful.
Please refer to the discussion under the overview of the Company for further
information on the comparability of the results of operations between the
periods.
The Company incurred a net loss available to common stockholders of $4.5
million, or $0.18 per share, and $14.6 million, or $0.61 per share, for the
three and six months ended June 30, 2001, respectively. Contributing to the net
losses each period are non-cash charges of $0.3 million and $6.3 million,
respectively, related to the change in the estimated fair value of the Company's
interest rate swap agreement.
THREE AND SIX MONTHS ENDED JUNE 30, 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 and six months ended June 30, 2001, totaling $243.9
million and $481.9 million, respectively. Occupancy for the Company's facilities
under contract for management was 89.1% and 88.7% for the three and six months
ended June 30, 2001, respectively. During the first quarter of 2001, the State
of Georgia
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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.
During the second quarter of 2001, 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.
The District of Columbia began transferring inmates out of the facility during
the second quarter, and completed the process in July. Accordingly,
substantially all employees at the facility have been terminated. Total
management and other revenue at this facility was approximately $1.8 million and
$6.3 million during the three and six months, respectively, ended June 30, 2001.
The related operating expenses at this facility were $4.3 million and $10.1
million during the three and six months, respectively, ended June 30, 2001. The
Company is pursuing contracts to replace the contract at the Northeast Ohio
Correctional Facility; however, there can be no assurance that the Company will
be able to secure such contracts.
The Company has responded to a proposal from the BOP for the placement of up to
1,500 inmates under the BOP's Criminal Alien Requirement II ("CAR II"). The
Company has earmarked its McRae Correctional Facility located in McRae, Georgia,
which has a design capacity of 1,524 beds, for this opportunity. The
construction of McRae Correctional Facility is substantially complete, and is
immediately available to accommodate the BOP's requirements. If the Company is
successful in securing CAR II, management and other revenue will increase
beginning in 2002 at this facility. There can be no assurance that the Company
will be successful in securing CAR II, which is expected to be awarded early in
the fourth quarter.
RENTAL REVENUE
Rental revenue was $1.8 million and $4.2 million for the three and six months
ended June 30, 2001, respectively, and was generated from leasing correctional
and detention facilities to governmental agencies and other private operators.
On March 16, 2001, the Company sold the Mountain View Correctional Facility, and
on June 28, 2001, the Company sold the Pamlico Correctional Facility. Therefore,
no further rental revenue will be received for these facilities. For the three
and six months ended June 30, 2001, rental revenue for these facilities totaled
$0.7 million and $2.0 million, respectively.
OPERATING EXPENSES
Operating expenses totaled $189.2 million and $373.8 million for the three and
six months ended June 30, 2001, respectively. Operating expenses consist of
those expenses incurred in the operation and management of correctional and
detention facilities and other correctional facilities.
GENERAL AND ADMINISTRATIVE
For the three and six months ended June 30, 2001, general and administrative
expenses totaled $8.4 million and $17.0 million, respectively. General and
administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses.
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DEPRECIATION AND AMORTIZATION
For the three and six months ended June 30, 2001, depreciation and amortization
expense totaled $13.2 million and $25.9 million, respectively. Amortization
expense for the three and six months ended June 30, 2001 includes approximately
$1.9 and $3.8 million, respectively, for goodwill that was established in
connection with the acquisitions of Operating Company on October 1, 2000 and the
Service Companies on December 1, 2000. Amortization expense during the three and
six months ended June 30, 2001 is also net of a reduction to amortization
expense of $2.9 million and $5.8 million, respectively, 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 and six
months ended June 30, 2001. Gross interest expense was $35.0 million and $72.3
million for the three and six months ended June 30, 2001, respectively. 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 is
primarily attributable to less capitalized interest as a result of fewer ongoing
construction and development projects.
Gross interest income was $2.0 million and $5.2 million for the three and six
months ended June 30, 2001, respectively. Gross interest income is earned on
cash used to collateralize letters of credit for certain construction projects,
direct financing leases, notes receivable and investments of cash and cash
equivalents.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAP AGREEMENT
As of June 30, 2001, in accordance with Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("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 three and six months ended June 30, 2001. 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 June 30, 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 $10.1
million. This negative fair value consists 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. This is offset
during the second quarter of 2001 by an increase in the fair value of the swap
agreement of $0.3 million. In accordance with SFAS 133, the Company has recorded
a $0.3 million and $6.3 million non-cash charge for the change in fair value of
derivative instruments for the three and six months ended June 30, 2001,
respectively, which includes $0.6 million and $1.3 million, respectively, 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 in the
accompanying statement of stockholders' equity. The unamortized transition
adjustment at June
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30, 2001 of $3.8 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 of $5.1 million for the six months ended June 30, 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, unless the
swap is terminated in conjunction with a refinancing of the Amended Bank Credit
Facility. 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 had 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. This
asset was denominated in British pounds, and was adjusted to the current
exchange rate at each balance sheet date, resulting in the recognition of the
currency gain or loss in current period earnings. On April 10, 2001 the Company
sold its interest in the Agecroft facility, resulting in the disposition of the
asset related to the direct financing lease. The Company also has extended a
working capital loan to the operator of this facility. This asset, along with
various other short-term receivables, aggregating approximately $5.2 million at
June 30, 2001, are also 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 fluctuations in foreign currency exchange rates between the British pound
and the U.S. dollar, the Company recognized net unrealized foreign currency
transaction gains of approximately $41,000 and losses of $0.3 million for the
three and six months ended June 30, 2001, respectively.
THREE AND SIX MONTHS ENDED JUNE 30, 2000
RENTAL REVENUE
Net rental revenue was $11.5 million and $22.9 million for the three and six
months ended June 30, 2000, respectively, and was generated from leasing
correctional and detention facilities to Operating Company, governmental
agencies and other private operators. The Company reserved $72.6 million and
$143.8 million of the $81.6 million and $161.8 million in total revenue due from
Operating Company for the three and six months ended June 30, 2000,
respectively, 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 through August 31, 2000. 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 $2.7 million and $5.2 million for the three
and six months ended June 30, 2000, respectively. 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
General and administrative expenses were $32.2 million and $34.7 million for the
three and six months ended June 30, 2000. General and administrative expenses
consist primarily of corporate management salaries and benefits, professional
fees and other administrative expenses.
In addition, merger transaction fees, totaling $28.1 million for the three and
six months ending June 30, 2000, respectively, have been reclassified to general
and administrative expense. During the fourth quarter of 1999, the Company,
Operating Company, PMSI and JJFMSI entered into a series of agreements
concerning a proposed restructuring led by a group of institutional investors
consisting of an affiliate of Fortress Investment Group LLC and affiliates of
The Blackstone Group ("Fortress/Blackstone"). In April 2000, the securities
purchase agreement by and among the parties was terminated when
Fortress/Blackstone elected not to match the terms of a subsequent proposal by
Pacific Life Insurance Company ("Pacific Life"). In June 2000, the securities
purchase agreement by and among Pacific Life and the Company, Operating Company,
PMSI, and JJFMSI was mutually terminated by the parties after Pacific Life was
unwilling to confirm that the June 2000 Waiver and Amendment satisfied the terms
of the agreement with Pacific Life. In connection with the proposed
restructuring transactions with Fortress/Blackstone and Pacific Life and the
completion of the Restructuring, including the Operating Company Merger, the
Company terminated the services of one of its financial advisors during the
third quarter of 2000. During the second quarter of 2000, the Company accrued
expenses of $28.1 million in connection with existing and potential litigation
associated with the termination of the aforementioned agreements. All disputes
with these parties have since been settled, as further described in the notes to
the financial statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $13.4 million and $26.3 million for
the three and six months ended June 30, 2000. Depreciation expense includes the
addition of one facility during the first quarter of 2000 and two facilities
during the second quarter of 2000.
WRITE-OFF OF AMOUNTS UNDER LEASE ARRANGEMENTS
During the first and second quarter of 2000, the Company opened two new
facilities that were 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 facilities, totaling $4.4 million and $8.4 million for the three and
six months ended June 30, 2000, respectively.
EQUITY LOSS AND AMORTIZATION OF DEFERRED GAINS, NET
Equity loss and amortization of deferred gains was $4.4 million and $4.3 million
for the three and six months ended June 30, 2000. For the three and six months
ended June 30, 2000, the Company recognized equity in earnings of PMSI and
JJFMSI of $0.1 million and $0.1 million, respectively, and $2.2 million and $1.5
million, respectively, and received distributions from PMSI and JJFMSI of $3.8
million and $2.2 million, respectively, and $4.4 million and $2.3 million,
respectively. In addition the Company recognized equity in losses of Operating
Company of approximately $7.3 million and $13.3 million for the same periods.
For the three and six months ended June 30, 2000,
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the Company recognized amortization of deferred gains of PMSI and JJFMSI of $1.8
million and $0.9 million, respectively, and $3.5 million and $1.8 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".
INTEREST EXPENSE, NET
Interest expense, net, is reported net of interest income for the three and six
months ended June 30, 2000. Gross interest expense was $34.6 million and $66.4
million for the three and six months ended June 30, 2000, respectively. 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 also reported net of capitalized interest on construction in
progress of $4.1 million and $9.2 million for the three and six months ended
June 30, 2000, respectively. During the first half of 2000, the Company was in
default under its Amended 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. Interest expense for the three and six months
ended June 30, 2000, also includes default interest on the $40 Million
Convertible Subordinated Notes. These events of default were subsequently waived
in June 2000, as discussed more fully in the Company's 2000 Form 10-K.
Gross interest income was $3.4 and $6.7 million for the three and six months
ended June 30, 2000, respectively. Gross interest income is earned on cash used
to collateralize letters of credit for certain construction projects, direct
financing leases, notes receivable and investments of cash and cash equivalents
prior to the funding of construction projects.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 142 addresses accounting and reporting standards for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets". Under this statement, goodwill will no
longer be subject to amortization over its estimated useful life. Instead,
goodwill is to be tested for impairment at least annually using a
fair-value-based approach. The impairment loss is the amount, if any, by which
the implied fair value of goodwill is less than the goodwill carrying amount and
is recognized in earnings. The statement also requires companies to disclose
information about the changes in the carrying amount of goodwill, the carrying
amount of intangible assets by major intangible asset class for those assets
subject to amortization and those not subject to amortization, and the estimated
intangible asset amortization expense for the next five years. As of June 30,
2001, the Company had $108.6 million of goodwill reflected in the accompanying
condensed consolidated balance sheet associated with the Operating Company
Merger and the acquisitions of the Service
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Companies completed during the fourth quarter of 2000. Amortization of goodwill
for the three and six months ended June 30, 2001 was $1.9 million and $3.8
million, respectively.
Provisions of SFAS 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. Because goodwill and some intangible assets
will no longer be amortized, the reported amounts of goodwill and intangible
assets (as well as total assets) will not decrease at the same time and in the
same manner as under previous standards. There may be more volatility in
reported income than under previous standards because impairment losses may
occur irregularly and in varying amounts. The amount of impairment losses, if
any, has not yet been determined. The impairment losses, if any, that arise due
to the initial application of SFAS 142 resulting from a transitional impairment
test applied as of January 1, 2002, will be reported as a cumulative effect of a
change in accounting principle.
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 three and six months ended June 30, 2001, the Company's interest
expense would have been increased or decreased by approximately $3.1 million and
$6.3 million, respectively.
As of June 30, 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 $85.9
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 June 30, 2001 the Company
recorded a $10.1 million liability, representing the estimated amount the
Company would have to pay to cancel the contract or transfer
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it to other parties. The estimated negative fair value of the swap agreement as
of January 1, 2001 of $5.0 million 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 first and second quarters was charged to earnings. This decline in
fair value is due to declining interest 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 sold on April 10, 2001. The Company 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 June 30, 2001, the receivables
due the Company and denominated in British pounds totaled 3.6 million British
pounds. A hypothetical 10% increase in the relative exchange rate would have
resulted in an increase of $0.5 million in the value of these receivables and a
corresponding unrealized foreign currency transaction gain, and a hypothetical
10% decrease in the relative exchange rate would have resulted in a decrease of
$0.5 million in the value of these receivables and a corresponding unrealized
foreign currency transaction loss.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 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 and second quarters of 2001 have been
accrued as of June 30, 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 7, management has expressed the desire to remove the
restriction on the payment of such dividends prior to September 30, 2001 in its
discussions with the lenders regarding refinancing strategies for the Amended
Bank Credit Facility. As of the date hereof, the lenders have not expressed a
willingness to remove the restriction prior to September 30, 2001 or thereafter.
However, management continues to actively 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, or in conjunction with a refinancing
if the lenders do not agree to an amendment prior to September 30, 2001. No
assurance can be given, however, that the lenders will agree to a reinstatement,
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.
In the event dividends are unpaid and in arrears through the third quarter of
2001, the holders of the Series A Preferred Stock will be entitled to vote for
the election of two additional directors of the Company at a special meeting
called by the holders of record of at least 20% of the shares of Series A
Preferred Stock. If a special meeting is not called, the holders of the Series A
Preferred Stock on the record date will be entitled to vote for two additional
directors of the Company at the next annual meeting of stockholders, and at such
subsequent annual meeting until all dividends accumulated on such shares of
Series A Preferred Stock for the past dividend periods and the dividend for the
then current dividend period shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment.
The directors shall be elected upon affirmative vote of a plurality of the
Series A Preferred Shares present and voting in person or by proxy at a meeting
at which a majority of the outstanding Series A Preferred Shares are
represented. If and when all accumulated dividends and the dividend for the then
current dividend period on the Series A Preferred Shares shall have been paid in
full or set aside
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for payment in full, the holders thereof shall be divested of the foregoing
voting rights and, if all accumulated dividends and the dividend for the then
current dividend period have been paid in full or set aside for payment in full,
the term of office of each director so elected shall immediately terminate.
For a discussion of the Company's compliance with the terms of its indebtedness,
see Note 5 to the financial statements included in Part I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The share information presented herein is on a pre-reverse stock split basis as
the record date for the 2001 Annual Meeting of Stockholders was prior to the
effective date of the reverse stock split.
The Company's 2001 Annual Meeting of Stockholders was held on May 22, 2001. A
total of 173,270,070 shares of the Company's common stock, constituting a quorum
of those shares entitled to vote, were represented at the meeting by
stockholders either present in person or by proxy. At such meeting the following
eight nominees for election as directors of the Company were elected without
opposition, no nominee for director receiving less than 168,317,464 votes, or
97.1% of the shares represented at the meeting: William F. Andrews, John D.
Ferguson, Joseph V. Russell, Lucius E. Burch, III, John D. Correnti, C. Michael
Jacobi, John R. Prann, Jr., and Henri L. Wedell. Jean-Pierre Cuny, a former
director of the Company, resigned from the board effective May 21, 2001, and,
accordingly, did not stand for reelection at the annual meeting. As a result of
Mr. Cuny's resignation, the Company's Board of Directors resolved to decrease
the number of the Company's directors from nine to eight members. The
stockholders also ratified the action of the Board of Directors in selecting the
firm of Arthur Andersen LLP to be the independent auditors of the Company for
the fiscal year ending December 31, 2001 pursuant to the vote totals indicated
below.
VOTE (Number of Shares)
-------------------------------------
FOR AGAINST ABSTAINED
----------- ------- ---------
173,117,673 123,486 28,909
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 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 stock of the Company.
(b) Reports on Form 8-K.
The following Form 8-K was filed during the period April 1, 2001
through June 30, 2001:
(1) Filed May 8, 2001 (earliest event May 7, 2001) reporting under
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 to be effective May 18, 2001.
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SIGNATURES
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: August 13, 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,
Assistant Secretary and Principle Accounting Officer
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