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: SEPTEMBER 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
October 31, 2001: Shares of Common Stock, $0.01 par value: 25,131,909 shares
outstanding.
CORRECTIONS CORPORATION OF AMERICA
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets (Unaudited) as of
September 30, 2001 and December 31, 2000............................................. 1
b) Condensed Combined and Consolidated Statements of Operations (Unaudited)
for the three and nine months ended September 30, 2001 and 2000...................... 2
c) Condensed Combined and Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 2001 and 2000................................ 3
d) Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
for the nine months ended September 30, 2001......................................... 4
e) Notes to Condensed Combined and Consolidated Financial Statements......................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 47
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 49
Item 2. Changes in Securities and Use of Proceeds............................................... 49
Item 3. Defaults Upon Senior Securities......................................................... 49
Item 4. Submission of Matters to a Vote of Security Holders..................................... 50
Item 5. Other Information....................................................................... 50
Item 6. Exhibits and Reports on Form 8-K........................................................ 50
SIGNATURES......................................................................................... 51
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)
SEPTEMBER 30, December 31,
ASSETS 2001 2000
- -------------------------------------------------------------------------------- ----------------- -----------------
Cash and cash equivalents $ 33,376 $ 20,889
Restricted cash 10,024 9,209
Accounts receivable, net of allowance of $838 and $1,486, respectively 147,292 132,306
Income tax receivable 1,293 32,662
Prepaid expenses and other current assets 17,664 18,726
Assets held for sale under contract 23,912 24,895
--------------- -------------
Total current assets 233,561 238,687
Property and equipment, net 1,578,544 1,615,130
Investment in direct financing lease - 23,808
Assets held for sale 46,429 138,622
Goodwill 105,905 109,006
Other assets 36,265 51,739
--------------- -------------
Total assets $ 2,000,704 $ 2,176,992
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 198,994 $ 243,312
Income tax payable 8,824 8,437
Distributions payable 15,865 9,156
Current portion of long-term debt 286,528 14,594
--------------- -------------
Total current liabilities 510,211 275,499
Long-term debt, net of current portion 708,392 1,137,976
Deferred tax liabilities 58,426 56,450
Fair value of interest rate swap agreement 15,084 -
Other liabilities 19,329 19,052
--------------- -------------
Total liabilities 1,311,442 1,488,977
--------------- -------------
Commitments and contingencies
Preferred stock - $0.01 par value; 50,000 shares authorized:
Series A - 4,300 shares issued and outstanding; stated at liquidation preference of
$25.00 per share 107,500 107,500
Series B - 3,828 and 3,297 shares issued and outstanding at September 30, 2001 and
December 31, 2000, respectively; stated at liquidation preference of $24.46 per share 93,622 80,642
Common stock - $0.01 par value; 80,000 and 400,000 shares authorized; 25,133 and 235,395
shares issued and 25,132 and 235,383 shares outstanding at September 30, 2001 and
December 31, 2000, respectively 251 2,354
Additional paid-in capital 1,314,092 1,299,390
Deferred compensation (3,644) (2,723)
Retained deficit (819,178) (798,906)
Treasury stock, 1.2 shares and 12 shares, respectively, at cost (242) (242)
Accumulated other comprehensive loss (3,139) -
--------------- -------------
Total stockholders' equity 689,262 688,015
--------------- -------------
Total liabilities and stockholders' equity $ 2,000,704 $ 2,176,992
=============== =============
The accompanying notes are an integral part of these condensed combined
and consolidated financial statements.
1
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED Combined CONSOLIDATED Combined
THREE MONTHS Three Months NINE MONTHS Nine Months
ENDED Ended ENDED Ended
SEPTEMBER 30, September SEPTEMBER 30, September 30,
2001 30, 2000 2001 2000
--------------- -------------- --------------- ----------------
REVENUE:
Management and other $ 247,072 $ 26,066 $ 728,981 $ 26,066
Rental 1,116 15,464 5,314 38,390
Licensing fees from affiliates -- 2,324 -- 7,566
------------ ---------- ----------- ------------
248,188 43,854 734,295 72,022
------------ ---------- ----------- ------------
EXPENSES:
Operating 189,552 21,691 563,388 21,691
General and administrative 8,431 9,024 25,465 43,764
Lease -- 256 -- 256
Depreciation and amortization 14,211 15,439 40,088 41,770
Licensing fees to Operating Company -- 501 -- 501
Administrative service fee to Operating Company -- 900 -- 900
Write-off of amounts under lease arrangements -- 3,504 -- 11,920
Impairment loss -- 19,239 -- 19,239
------------ ---------- ----------- ------------
212,194 70,554 628,941 140,041
------------ ---------- ----------- ------------
OPERATING INCOME (LOSS) 35,994 (26,700) 105,354 (68,019)
------------ ---------- ----------- ------------
OTHER (INCOME) EXPENSE:
Equity loss and amortization of deferred gain, net 90 9,135 265 13,392
Interest expense, net 29,637 35,741 96,752 95,490
Other income -- (3,099) -- (3,099)
Change in fair value of interest rate swap agreement 5,649 - 11,945 --
Loss on disposal of assets 180 3,023 141 3,324
Unrealized foreign currency transaction (gain) loss (215) 2,012 129 9,542
Stockholder litigation settlements -- 75,406 -- 75,406
------------ ---------- ----------- ------------
35,341 122,218 109,232 194,055
------------ ---------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST 653 (148,918) (3,878) (262,074)
Income tax expense (1,217) (109,888) (1,479) (109,888)
------------ ---------- ----------- ------------
LOSS BEFORE MINORITY INTEREST (564) (258,806) (5,357) (371,962)
Minority interest in net loss of PMSI and JJFMSI -- 318 -- 318
------------ ---------- ----------- ------------
NET LOSS (564) (258,488) (5,357) (371,644)
Distributions to preferred stockholders (5,114) (2,585) (14,915) (6,885)
------------ ---------- ----------- ------------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS $ (5,678) $ (261,073) $ (20,272) $ (378,529)
============ ========== =========== ============
BASIC AND DILUTED NET LOSS AVAILABLE
TO COMMON STOCKHOLDERS PER
COMMON SHARE $ (0.23) $ (22.04) $ (0.84) $ (31.96)
============ ========== =========== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 24,749 11,846 24,215 11,842
============ ========== =========== ============
The accompanying notes are an integral part of these condensed combined and
consolidated financial statements.
2
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
CONSOLIDATED Combined
NINE MONTHS Nine Months Ended
ENDED SEPTEMBER September 30,
30, 2001 2000
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,357) $(371,644)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 40,088 41,770
Amortization of debt issuance costs and other non-cash interest 16,665 11,161
Deferred and other non-cash income taxes (1,616) 141,240
Equity in loss and amortization of deferred gain 265 13,392
Write-off of amounts under lease agreement -- 11,920
Loss on disposal of assets 141 3,324
Asset impairment -- 19,239
Change in fair value of interest rate swap agreement 11,945 --
Unrealized foreign currency transaction loss 129 9,542
Other non-cash items 1,774 1,672
Minority interest -- (318)
Changes in assets and liabilities:
Accounts receivable, prepaid expenses and other assets (14,911) (1,640)
Receivable from affiliates -- 21,929
Income tax receivable 31,369 (34,756)
Accounts payable, accrued expenses and other liabilities (22,606) 67,838
Payables to Operating Company -- 3,413
Income tax payable 387 3,492
--------- ---------
Net cash provided by (used in) operating activities 58,273 (58,426)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment, net (3,151) (73,731)
(Increase) decrease in restricted cash (815) 14,838
Payments received on investments in affiliates -- 6,686
Proceeds from sales of assets 116,078 --
Increase in other assets (1,300) (529)
Payments received on direct financing leases and notes receivable 1,747 3,740
--------- ---------
Net cash provided by (used in) investing activities 112,559 (48,996)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) debt, net (157,650) 45,885
Payment of debt and equity issuance costs (572) (10,563)
Payment of dividends (32) (4,381)
Purchase of common stock -- (200)
Purchase of treasury stock by PMSI and JJFMSI -- (13,304)
Cash paid for fractional shares (91) --
--------- ---------
Net cash provided by (used in) financing activities (158,345) 17,437
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,487 (89,985)
CASH AND CASH EQUIVALENTS, beginning of period 20,889 106,486
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 33,376 $ 16,501
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 76,633 $ 95,339
========= =========
Income taxes $ 2,532 $ 2,475
========= =========
The accompanying notes are an integral part of these condensed combined and
consolidated financial statements.
3
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED AND AMOUNTS IN THOUSANDS)
SERIES A SERIES B ADDITIONAL
PREFERRED PREFERRED COMMON TREASURY PAID-IN DEFERRED
STOCK STOCK STOCK STOCK CAPITAL COMPENSATION
----------- --------- --------- --------- --------- ------------
Balance as of
December 31, 2000 $107,500 $ 80,642 $ 2,354 $(242) $ 1,299,390 $(2,723)
-------- -------- ------- ----- ----------- -------
Comprehensive income (loss):
Net loss -- -- -- -- -- --
Cumulative effect of
accounting change -- -- -- -- -- --
Amortization of transition
adjustment -- -- -- -- -- --
-------- -------- ------- ----- ----------- -------
Total comprehensive loss -- -- -- -- -- --
-------- -------- ------- ----- ----------- -------
Distributions to preferred
stockholders -- 8,099 -- -- -- --
Issuance of common stock
under terms of stockholder
litigation settlement -- -- 159 -- 15,759 --
Amortization of deferred
compensation -- -- 3 -- (3) 814
Restricted stock issuances, net
of forfeitures -- 4,904 -- -- (3,179) (1,735)
Reverse stock split -- -- (2,265) -- 2,240 --
Other -- (23) -- -- (115) --
-------- -------- ------- ----- ----------- -------
BALANCE AS OF
SEPTEMBER 30, 2001 $107,500 $ 93,622 $ 251 $(242) $ 1,314,092 $(3,644)
======== ======== ======= ===== =========== =======
ACCUMULATED
OTHER
RETAINED COMPREHENSIVE
DEFICIT INCOME (LOSS) TOTAL
------------ ------------- -----------
Balance as of
December 31, 2000 $(798,906) $ -- $ 688,015
--------- ------- ---------
Comprehensive income (loss):
Net loss (5,357) -- (5,357)
Cumulative effect of
accounting change -- (5,023) (5,023)
Amortization of transition
adjustment -- 1,884 1,884
--------- ------- ---------
Total comprehensive loss (5,357) (3,139) (8,496)
--------- ------- ---------
Distributions to preferred
stockholders (14,915) -- (6,816)
Issuance of common stock
under terms of stockholder
litigation settlement -- -- 15,918
Amortization of deferred
compensation -- -- 814
Restricted stock issuances, net
of forfeitures -- -- (10)
Reverse stock split -- -- (25)
Other -- -- (138)
--------- ------- ---------
BALANCE AS OF
SEPTEMBER 30, 2001 $(819,178) $(3,139) $ 689,262
========= ======= =========
The accompanying notes are an integral part of these condensed combined and
consolidated financial statements.
4
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
NOTES TO CONDENSED COMBINED AND CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
1. ORGANIZATION AND OPERATIONS
Corrections Corporation of America (together with its subsidiaries, the
"Company", "we" or "us"), 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., referred to herein as "PMSI") 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., referred to herein as "JJFMSI").
Effective January 1, 1999, the Company operated so as to preserve its
ability to elect 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
5
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 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 PMSI and 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 defined, 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.
6
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
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 70 correctional and detention
facilities with a total design capacity of approximately 65,000 beds in
21 states, the District of Columbia and Puerto Rico, of which 66
facilities are operating, two are idle and two are under construction.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying interim condensed combined and 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 combined and 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 nine
months ended September 30, 2001 and the results of operations for the
three and nine months ended September 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 nine months ended
September 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.
7
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").
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") 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 ("APB") Opinion No. 17,
"Intangible Assets". Under this statement, goodwill and intangible assets
with indefinite useful lives will no longer be subject to amortization,
but instead will 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 and intangible assets with
indefinite useful lives is less than their carrying amounts 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 September 30, 2001, the Company had $105.9
million of goodwill reflected on the accompanying balance sheet
associated with the Operating Company Merger and the acquisitions of the
Service Companies completed during the fourth quarter of 2000. The
Company does not have any intangible assets with indefinite useful lives.
Amortization of goodwill for the three and nine months ended September
30, 2001 was $1.8 million and $5.7 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 some 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 in the Company's statement of
operations during the first quarter of 2002.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and the
8
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 retains the fundamental
provisions of SFAS 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by
sale, while also resolving significant implementation issues associated
with SFAS 121. Unlike SFAS 121, however, an impairment assessment under
SFAS 144 will never result in a write-down of goodwill. Rather, goodwill
is evaluated for impartment under SFAS 142. The provisions of SFAS 144
are effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years.
Adoption of SFAS 144 is not expected to have a material impact on the
financial statements of the Company.
RECLASSIFICATIONS
Merger transaction expenses, totaling $4.9 million and $33.0 million, for
the three and nine months ended September 30, 2000, respectively, 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 secured bank credit facility (the "Senior Bank Credit Facility").
On April 10, 2001, the Company sold its interest in a 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 Senior 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 Senior Bank Credit Facility.
On October 3, 2001, the Company sold its Southern Nevada Women's
Correctional Facility, a facility located in Nevada, which was classified
as held for sale during the second quarter of 2001, for a sales price of
approximately $24.1 million. Due to the pending sale, the carrying value
was reclassified as a current asset held for sale under contract as of
September 30, 2001. The net proceeds were used to pay-down a like portion
of amounts outstanding under the Senior Bank Credit Facility. Subsequent
to the sale, the Company continues to manage the facility pursuant to a
contract with the State of Nevada.
As of September 30, 2001, the Company was holding for sale three
additional correctional facilities and various parcels of undeveloped
land with an aggregate carrying value of $46.4
9
million. There can be no assurance that the Company will be able to
complete the sale of any of these assets, 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 its charter to reduce the number of shares of common
stock which the Company was authorized to issue to 80.0 million shares
from 400.0 million shares. As of September 30, 2001, the Company had 25.1
million shares of common stock issued and outstanding (on a post-reverse
stock split basis).
5. DEBT
SENIOR BANK CREDIT FACILITY
As of September 30, 2001, the Company had approximately $823.2 million
outstanding under the Senior Bank Credit Facility. During the first and
second quarters of 2001, the Company obtained amendments to the Senior
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 date for securitizing the lease payments (or
other similar transaction) related to the Company's Agecroft facility,
each as further discussed below. In addition, during the third quarter of
2001, the Company obtained a waiver and consent to the Senior Bank Credit
Facility to permit the Company's settlement of the outstanding litigation
with the Fortress/Blackstone investment group (as further discussed in
Note 7) and to permit the board of directors to declare and pay a cash
dividend on the Series A Preferred Stock (as also further discussed in
Note 7).
In January 2001, the requisite percentage of the Company's senior lenders
under the Senior 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
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also modified certain provisions of the Senior Bank Credit Facility to
permit the issuance of the promissory note.
In March 2001, the Company obtained an amendment to the Senior 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 Senior Bank Credit Facility. However, the covenant allowed
for a 30-day grace period during which the lenders under the Senior 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 Senior Bank Credit Facility, thereby fulfilling the
Company's covenant requirements with respect to the Agecroft transaction.
The Senior 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
Senior Bank Credit Facility of this financial reporting requirement. This
waiver also cured the resulting cross-default under the Company's $41.1
million convertible subordinated notes. As previously described above,
the Company also obtained waivers from the lenders under the Senior Bank
Credit Facility during the third quarter of 2001 to permit the settlement
of the Fortress/Blackstone litigation and to pay a one-time dividend with
respect to the Series A Preferred Stock.
The Senior 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 Senior 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 Senior Bank Credit
Facility; or
11
- certain types of asset sales by the Company, including the
sale-leaseback of the Company's corporate headquarters, but
excluding the securitization of lease payments (or other
similar transaction) with respect to the Agecroft facility.
The Senior 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") listing, and the uncertainty
regarding the Company's maturity of the revolving loans under the Senior
Bank Credit Facility, made the issuance of additional equity or debt
securities commercially 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 and second quarters of 2001, the Company completed the
sale of its Mountain View Correctional Facility for approximately $24.9
million and its Pamlico Correctional Facility for approximately $24.1
million, respectively. Subsequent to the third quarter of 2001, the
Company completed the sale of its Southern Nevada Women's 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
12
capital raising event as of June 30, 2001; however, there can be no
assurance that the lenders under the Senior Bank Credit Facility concur
with the Company's position that it has used commercially reasonable
efforts in its satisfaction of this covenant.
The revolving loan portion of the Senior Bank Credit Facility (of which
$280.4 million was outstanding as of September 30, 2001) matures on
January 1, 2002, and is therefore classified on the accompanying balance
sheet as a current liability at September 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
Senior Bank Credit Facility, during the fourth quarter of 2000 management
committed to a plan of disposal for certain long-lived assets. During
2001, the Company has paid-down approximately $138.7 million against the
Senior Bank Credit Facility through the sale of such assets.
Additionally, the Company is currently holding assets for sale with an
aggregate carrying value of $46.4 million. Management expects to use
anticipated proceeds from any future asset sales to pay-down additional
amounts outstanding under the Senior Bank Credit Facility.
The Company believes that utilizing sale proceeds to pay-down debt and
the generation of $105.4 million of operating income during the first
nine months of 2001 have improved its leverage ratios and overall
financial position, improving its ability to renew and refinance maturing
indebtedness, including primarily the Company's revolving loans under the
Senior Bank Credit Facility. Management is currently pursuing an
amendment and extension of the Senior Bank Credit Facility, which would
effectively extend the maturity of the revolving loans outstanding under
the Senior Bank Credit Facility to December 31, 2002 and permit the
reinstatement of the Series A Preferred Stock dividend, including the
payment of those dividends in arrears. Management believes that a
reinstatement of the Series A Preferred Stock dividend, including those
dividends in arrears, will result in an improvement in the Company's
credit rating, positioning the Company for a more favorable refinancing
than if the dividends remained in arrears. Management believes that given
the current market conditions and the Company's projected operating
results, it is in the Company's best interest to extend the maturity of
the revolving loans under the Senior Bank Credit Facility from January 1,
2002 to December 31, 2002 to coincide with the maturity of the term loans
under the Senior Bank Credit Facility. In addition, the Company is
seeking, and currently expects to complete, a comprehensive refinancing
of the Senior Bank Credit Facility during 2002. However, there can be no
assurance that the Company will be able to extend its debt obligation
maturing January 1, 2002 on commercially reasonable or any other terms.
The Company does not currently have sufficient working capital or any
other ability to satisfy the debt obligation maturing January 1, 2002.
Additionally, there can be no assurance that the lenders will agree to a
reinstatement of the Series A Preferred Stock dividend, including the
payment of those dividends in arrears, or that if the dividend is
reinstated, that the Company's credit rating will improve. Further, even
if the Company is successful in obtaining an amendment and extension of
the revolving loans maturing January 1, 2002, there can be no assurance
that the Company will be successful in completing a comprehensive
refinancing of the Senior Bank Credit Facility due December 31, 2002.
Based on the Company's current credit rating, the current interest rate
applicable to the Senior Bank Credit Facility as of September 30, 2001 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
13
and 4.5% over LIBOR for term loans. These rates were subject to an
increase of 25 basis points (0.25%) on July 1, 2001 if the Company had
not prepaid $100.0 million of the outstanding loans under the Senior Bank
Credit Facility, and are subject to an increase of 50 basis points
(0.50%) from these rates on October 1, 2001 if the Company has not
prepaid an aggregate of $200.0 million of the outstanding loans under the
Senior Bank Credit Facility. The Company satisfied the condition to
prepay, prior to July 1, 2001, $100.0 million of outstanding loans under
the Senior 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 lump sum pay-down of $35.0 million of outstanding loans under
the Senior Bank Credit Facility with cash on hand. The Company has not,
however, satisfied the condition to prepay, prior to October 1, 2001,
$200.0 million of outstanding loans under the Senior Bank Credit
Facility. As discussed herein, the Company sold its Southern Nevada
Women's Correctional Facility for approximately $24.1 million subsequent
to September 30, 2001 and is actively pursuing the sales of additional
assets. The interest rate will continue to be subject to an increase of
50 basis points (0.50%) from the interest rates at September 30, 2001
until the earlier of such time as the Company prepays $200.0 million of
outstanding loans under the Senior Bank Credit Facility in satisfaction
of this condition or the Senior Bank Credit Facility is amended and
extended in a manner that removes this provision. As discussed herein,
management is currently seeking to obtain an amendment and extension to
the Senior Bank Credit Facility during the fourth quarter of 2001.
Management anticipates that the provision associated with the 50 basis
point increase would be removed under the terms of any such amendment and
extension. However, based on current market conditions, management
currently expects the spread over LIBOR under terms of an amendment and
extension to exceed the current spread over LIBOR for the revolving
portion of the Senior Bank Credit Facility until a comprehensive
refinancing of the Senior Bank Credit Facility can be completed.
The Company believes that it is currently in compliance with the terms of
the debt covenants contained in the Senior 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 (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.
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 Senior Bank Credit Facility and if the lenders under the Senior Bank
Credit Facility elected to exercise their rights to accelerate the
Company's obligations under the Senior 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 $71.1 million convertible subordinated notes, which
would have a material adverse effect on the Company's liquidity and
financial position. Additionally, under the Company's $41.1 million
convertible subordinated notes, even if the lenders under the Senior Bank
Credit Facility did not elect to exercise their acceleration rights, the
holders of the $41.1 million convertible subordinated notes could
14
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.
$41.1 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 and, as described below, the $1.1 million
convertible subordinated notes issued in June 2000, in satisfaction of
outstanding interest upon the $40.0 million notes (collectively, the
"$41.1 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 other 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
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.
15
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 $41.1 Million Convertible Subordinated Notes.
Under the terms of the registration rights agreement between the Company
and the holders of the $41.1 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 later informed the Company that it would not
complete such an amendment. As a result, the Company completed and filed
a shelf registration statement with the SEC on September 13, 2001, which
became effective on September 26, 2001, in compliance with this covenant.
$30.0 MILLION CONVERTIBLE SUBORDINATED NOTES
At December 31, 2000, the Company was in default under the terms of the
note purchase agreement governing the Company's 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. 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 to the note purchase agreement governing the notes, 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
16
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, and stock options and
warrants.
The Company's restricted stock, stock options, and warrants were
convertible into 0.8 million and 0.5 million shares for each of the three
and nine months ended September 30, 2001, respectively, using the
treasury stock method. The Company's convertible subordinated notes were
convertible into 6.8 million shares for each of the three and nine months
ended September 30, 2001, using the if-converted method. For the three
and nine months ended September 30, 2000, the Company's stock options and
warrants were convertible into 284 and 1,620 shares, respectively, (on a
post-reverse stock split basis), using the treasury stock method. The
Company's convertible subordinated notes were convertible into 6.2
million shares (on a post-reverse stock split basis) for the three and
nine months ended September 30, 2000, using the if-converted method.
These incremental shares were excluded from the computation of diluted
earnings per share for the three and nine months ended September 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 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 September 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 the first or second quarter of 2002, increases the denominator used in
the earnings per share calculation, thereby reducing the net income
(loss) per common share of the Company.
17
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 proposed corporate restructurings led by the Fortress/Blackstone
investment group 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 is expected to 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 year.
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 September 30, 2001, the Company had paid a portion of the insurance
proceeds and 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 3.1 million settlement shares, and therefore the
promissory note, will be issued in the first or second quarter of 2002.
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
18
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 related to the Company's proposed corporate
restructuring led by the Fortress/Blackstone investment group. 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. During August 2001, the Company and plaintiffs
entered into a definitive agreement to settle this litigation. Under
terms of the agreement, the Company made a cash payment of $15.0 million
to the plaintiffs in full settlement of all claims. During 2000, the
Company recorded an accrual reflecting the estimated liability of this
matter.
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, 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. The
Company has entered into a definitive agreement with the plaintiffs to
settle their claims against the Company, subject to court approval. There
can be no assurance, however, that the settlement will be approved by the
court. During 2000, the Company recorded an accrual reflecting the
estimated liability of this matter.
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
statutory costs. 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. However, during the second quarter of 2001,
the Company reached an agreement in principle with all plaintiffs to
settle their asserted and unasserted claims against the Company, and the
Company 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 America, LLC
("TransCor"). The lawsuit, captioned Cheryl Schoenfeld v. TransCor
America, Inc., et al., alleges that two former employees of TransCor
sexually assaulted
19
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
ongoing. Both former employees are subject to pending criminal charges in
Houston, Harris County, Texas; one has pleaded guilty to a criminal civil
rights violation, and the other was recently convicted of sexual assault.
The plaintiffs have previously submitted a settlement demand exceeding
$20.0 million. TransCor is defending this action vigorously. The Company
expects that a portion of any liabilities resulting from this litigation
will be covered by liability insurance. The insurance carrier for the
Company and TransCor, 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, in which the
carrier asserts, among other things, that there is no coverage under
Texas law for the underlying events. The Company has recorded an accrual
reflecting management's best estimate of the ultimate outcome of this
matter based on consultation with legal counsel. 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 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 claimed that the merger between Operating Company and the
Company constituted a "restructuring transaction," which Merrill Lynch
further contended triggered 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. As of September
30, 2001, the Company had paid $1.0 million to Merrill Lynch in partial
satisfaction of this obligation.
DISTRIBUTIONS
Under the current terms of the Senior 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
20
Senior Bank Credit Facility. Quarterly dividends of $0.50 per share for
the second, third and fourth quarters of 2000, and for the first, second
and third quarters of 2001 have been accrued as of September 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. After
obtaining a waiver and consent from the lenders under the Senior Bank
Credit Facility, on September 28, 2001, the board of directors declared a
quarterly cash dividend on the Series A Preferred Stock, which was paid
October 15, 2001. Under terms of the Company's charter, the dividend
payment was credited against the first quarter of previously accrued and
unpaid dividends on the shares. As consideration for the waiver and
consent, $5.0 million of cash on hand was used to pay-down the Senior
Bank Credit Facility on October 1, 2001. Based on the remaining accrued
and unpaid dividends, however, the failure to pay dividends for the
fourth 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 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, as discussed in
Note 5, the Company is actively pursuing an amendment and extension of
the Senior Bank Credit Facility that would permit the reinstatement of
the Series A Preferred Stock dividend and the payment of those dividends
in arrears. Management is seeking to obtain such amendment and extension
of the revolving loan portion of the Senior Bank Credit Facility prior to
the maturity of the revolving loan portion of the facility which matures
on January 1, 2002. No assurance can be given, however, that the
amendment and extension will be obtained, or that the lenders will agree
to a reinstatement, and that as a result, if and when the Company will
commence the regular payment of cash dividends on its shares of Series A
Preferred Stock.
In the event dividends are unpaid and in arrears for six or more
quarterly periods, 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 of the Company's next annual meeting of stockholders will be
entitled to vote for two additional directors of the Company at the next
annual meeting, 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
21
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
22
December 31, 1998 and 1997 and is currently appealing those findings. The
Company currently is unable to predict the ultimate outcome of the IRS's
audits of Old CCA's 1998 and 1997 federal tax returns, the Company's 2000
and 1999 federal tax returns or the ultimate outcome of audits of other
tax returns of the Company or Old CCA by the IRS or by other taxing
authorities; however, it is possible that such audits will result in
claims against the Company in excess of reserves currently recorded by
the Company. In addition, to the extent that IRS audit adjustments
increase the accumulated earnings and profits of Old CCA, the Company
would be required to make timely distribution of the accumulated earnings
and profits of Old CCA to stockholders. Such results could have a
material adverse impact on the Company's financial position, results of
operations and cash flows.
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 Senior 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 September 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 $15.1
million. This negative fair value consists of a transition adjustment of
$5.0 million for the reduction in the fair value of the interest rate
swap agreement from its inception through the adoption of SFAS 133 on
January 1, 2001 reflected in other comprehensive income (loss) during the
first quarter of 2001 and a decrease in the fair value of the swap
agreement of $10.1 million reflected in earnings for the nine months
ended September 30, 2001.
23
In accordance with SFAS 133, as amended, the Company recorded a $11.9
million non-cash charge for the change in fair value of derivative
instruments for the nine months ended September 30, 2001, which includes
$1.9 million for amortization of the transition adjustment. The
unamortized transition adjustment at September 30, 2001 of $3.1 million
is expected to be reclassified into earnings as a non-cash charge, along
with a corresponding increase to stockholders' equity through accumulated
comprehensive income, over the remaining term of the swap agreement. 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 $11.9
million for the nine months ended September 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 Senior 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 condensed consolidated
balance sheet as of September 30, 2001, the issuance of the note is
currently expected to have a favorable impact on the Company's
consolidated financial position and results of operations initially;
thereafter, the financial statement impact will fluctuate based on
changes in the Company's stock price. 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 September 30, 2001, the Company owned and managed 36 correctional
and detention facilities, and managed 28 correctional and detention
facilities it does not own. During the second quarter of 2001, management
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
24
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.
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 nine months ended September 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:
CONSOLIDATED Combined CONSOLIDATED Combined
THREE MONTHS Three Months NINE MONTHS Nine Months
ENDED Ended ENDED Ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
2001 2000 2001 2000
--------- -------- --------- --------
Revenue:
Owned and managed $ 156,418 $ -- $ 467,668 $ --
Managed-only 86,355 26,066 248,274 26,066
--------- -------- --------- --------
Total management revenue 242,773 26,066 715,942 26,066
--------- -------- --------- --------
Operating expenses:
Owned and managed 116,251 -- 351,689 --
Managed-only 68,632 21,484 199,140 21,484
--------- -------- --------- --------
Total operating expenses 184,883 21,484 550,829 21,484
--------- -------- --------- --------
Facility contribution:
Owned and managed 40,167 -- 115,979 --
Managed-only 17,723 4,582 49,134 4,582
--------- -------- --------- --------
Total facility contribution 57,890 4,582 165,113 4,582
--------- -------- --------- --------
Other revenue (expense):
Rental and other revenue 5,415 17,788 18,353 45,956
Other operating expense (4,669) (207) (12,559) (207)
General and administrative (8,431) (9,024) (25,465) (43,764)
Lease -- (256) -- (256)
Depreciation and amortization (14,211) (15,439) (40,088) (41,770)
Licensing fees to
Operating Company -- (501) -- (501)
Administrative service fee to
Operating Company -- (900) -- (900)
Write-off of amounts under
lease arrangements -- (3,504) -- (11,920)
Impairment loss -- (19,239) -- (19,239)
--------- -------- --------- --------
Operating income (loss) $ 35,994 $(26,700) $ 105,354 $(68,019)
========= ======== ========= ========
25
SEPTEMBER 30, 2001 December 31, 2000
------------------ -----------------
Assets:
Owned and managed $1,574,279 $1,564,279
Managed-only 93,887 84,397
Corporate and other 332,538 528,316
---------- ----------
Total assets $2,000,704 $2,176,992
========== ==========
10. SUPPLEMENTAL CASH FLOW DISCLOSURE
During the nine months ended September 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 nine months ended September 30, 2001, the
Company issued $8.1 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. Finally, during the third quarter of 2001, the
Company issued 0.2 million shares of Series B Preferred Stock under the
terms of the Company's 2001 Series B Preferred Stock Restricted Stock
Plan.
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 nine months ended September
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.
26
PRO FORMA FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------------------------
(unaudited and amounts in thousands,
except per share amounts)
Revenue $ 653,424
Operating income $ 16,071
Net loss available to common stockholders $(178,447)
Net loss per common share:
Basic $ (12.76)
Diluted $ (12.76)
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
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.
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 our 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, we are subject to certain risks and uncertainties associated
with, among other things, the corrections and detention industry and
pending or threatened litigation. In addition, as a result of our
operation so as to preserve our ability to qualify as a REIT for the year
ended December 31, 1999, we are also currently subject to certain tax
related risks. We are also subject to risks and uncertainties associated
with the demands placed on our capital and liquidity associated with our
current capital structure. We have disclosed such risks in detail in our
annual report on Form 10-K for the fiscal year ended December 31, 2000,
filed with the Securities and
27
Exchange Commission on April 17, 2001 (File No. 0-25245). Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake 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
We were 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
referred to herein as Old CCA, on December 31, 1998 and CCA Prison Realty
Trust, a Maryland real estate investment trust referred to herein as Old
Prison Realty, on January 1, 1999 with and into the Company, which are
collectively referred to herein as the 1999 merger. As more fully
discussed in our 2000 Form 10-K, effective October 1, 2000, we completed
a series of previously announced restructuring transactions. As part of
the restructuring, our primary tenant, Corrections Corporation of
America, a privately-held Tennessee corporation formerly known as
Correctional Management Services Corporation, referred to herein as
Operating Company, was merged with and into our wholly-owned operating
subsidiary on October 1, 2000. This merger is referred to herein as the
Operating Company merger. In connection with the restructuring and the
Operating Company merger, we amended our charter to, among other things,
remove provisions relating to our operation and qualification as a real
estate investment trust, or REIT, for federal income tax purposes
commencing with our 2000 taxable year and change our name to "Corrections
Corporation of America." As more fully discussed in our 2000 Form 10-K,
effective December 1, 2000, each of the service companies, known herein
individually as Prison Management Services Inc., or PMSI, and Juvenile
and Jail Facility Management Services, Inc., or JJFMSI, also merged with
and into our wholly-owned operating subsidiary.
As the result of the Operating Company merger and the acquisitions of
PMSI and JJFMSI, we now specialize 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 our facilities offers a variety of
rehabilitation and educational programs, including basic education, life
skills and employment training and substance abuse treatment. We also
provide health care (including medical, dental and psychiatric services),
institutional food services and work and recreational programs.
We believe the comparison between the results of operations for the three
and nine months ended September 30, 2001 and the results of operations
for the three and nine months ended September 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, and as of October 1, 2000, also
includes the operations of the correctional and detention facilities
previously leased to and managed by Operating Company. In addition, our
financial condition and results of operations as of and for the three and
nine months ended
28
September 30, 2001 include the operations of PMSI and JJFSMI as of
December 1, 2000 (acquisition date) on a consolidated basis. For the
period January 1, 2000 through August 31, 2000, the investments in PMSI
and JJFMSI were accounted for and presented under the equity method of
accounting. For the period from September 1, 2000 through November 30,
2000, the investments in PMSI and JJFMSI were accounted for on a combined
basis with the results of our operations due to the repurchase by the
wholly-owned subsidiaries of PMSI and JJFMSI of the non-management,
outside stockholders' equity interest in PMSI and JJFMSI during September
2000.
Prior to the Operating Company merger, we had accounted for our 9.5%
non-voting interest in Operating Company under the cost method of
accounting. As such, we had not recognized any income or loss related to
our 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, our financial statements have been
restated to recognize our 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".
Since the 1999 merger and through September 30, 2000, we specialized in
acquiring, developing and owning correctional and detention facilities.
Operating Company was a private prison management company that operated
and managed the substantial majority of the facilities we owned. As a
result of the 1999 merger and certain contractual relationships with
Operating Company, we were dependent on Operating Company for a
significant source of our income. In addition, we were obligated to pay
Operating Company for services rendered to us in the development of our
correctional and detention facilities. As a result of certain liquidity
issues, we amended our contractual agreements with Operating Company
during the first three quarters of 2000. A more complete description of
the historical contractual relationships and amendments are more fully
described in our 2000 Form 10-K.
As required by our governing instruments, we operated and elected to be
taxed as a REIT for federal income tax purposes with respect to our
taxable year ended December 31, 1999. In connection with the completion
of the restructuring, on September 12, 2000, our stockholders approved an
amendment to our charter to remove the requirement that we elect to be
taxed and qualify as a REIT for federal income tax purposes commencing
with our 2000 taxable year. Accordingly, with respect to our taxable year
ended December 31, 2000 and thereafter, we have operated and are taxed as
a subchapter C corporation.
LIQUIDITY AND CAPITAL RESOURCES FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2001
As of September 30, 2001, our liquidity was provided by cash on hand of
approximately $33.4 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. During the nine months
ended September 30, 2001, we generated $58.3 million in cash through
operating activities. As of September 30, 2001, we had a net working
capital deficiency of $276.7 million. Contributing to the net working
capital deficiency was an accrual at September 30,
29
2001 of $59.5 million related to the settlement of our 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 our
$280.4 million revolving credit facility under our $1.0 billion senior
secured bank credit facility, referred to herein as the Senior Bank
Credit Facility, which matures on January 1, 2002, as current. As of
September 30, 2001, we had issued 1.6 million shares (out of the
aggregate of approximately 4.7 million shares) under terms of our
stockholder litigation settlement to plaintiffs' counsel in the actions,
as adjusted for the reverse stock split. We currently expect the issuance
of the note to have a favorable impact on our consolidated financial
position and results of operations initially; thereafter, the financial
statement impact will fluctuate based on changes in our stock price.
However, the impact cannot be determined until the promissory note is
issued and an estimated fair value of the promissory note is determined.
We have been advised by the settlement claims processing agent that the
remaining settlement shares, and therefore the promissory note, will be
issued in the first or second quarter of 2002.
Our principal capital requirements are for working capital, capital
expenditures and debt maturities. Capital requirements may also include
cash expenditures associated with our outstanding commitments and
contingencies, as further discussed in the notes to the financial
statements. We have financed, and intend 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. We currently expect to be
able to meet our cash expenditure requirements and extend or refinance
our debt maturities, including primarily the revolving credit facility
under the Senior Bank Credit Facility, due within the next year.
However, there can be no assurance that we will be able to extend or
refinance such debt. If we are unable to extend or refinance the debt
maturity on January 1, 2002, we currently do not have sufficient working
capital or any other ability to satisfy this obligation.
As a result of our current financial condition, including: (i) the
revolving loans under the Senior Bank Credit Facility maturing January 1,
2002; (ii) our negative working capital position; and (iii) our highly
leveraged capital structure, we are evaluating our current capital
structure, including the consideration of various potential transactions
that could improve our financial position.
Following the completion of the Operating Company merger and the
acquisitions of PMSI and JJFMSI, during the fourth quarter of 2000, our
new management conducted strategic assessments; developed a strategic
operating plan to improve our 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,
we completed the sale of one of these assets, a facility located in North
Carolina, for a sales price of approximately $24.9 million. During the
second quarter of 2001, we completed the sale of our interest in our
Agecroft facility located in Salford, England, 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 our
leverage ratios and providing us with additional liquidity. Subsequent to
September 30, 2001, we also completed the sale of a facility located in
Nevada for a sales price of approximately $24.1 million. The net proceeds
from these sales were used to pay-down outstanding balances under the
Senior Bank Credit Facility. During the fourth quarter of 2000, we
completed the sale of our interest in two international subsidiaries, an
Australian corporation, Corrections Corporation of Australia Pty., Ltd.,
and a company incorporated in England and Wales, U.K.
30
Detention Services Limited, for an aggregate sales price of $6.4 million.
As a result of these sales, we own only correctional and detention
facilities located in the United States and its Territories.
During the first and second quarters of 2001, we obtained amendments to
the Senior 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, to permit the issuance
of indebtedness in partial satisfaction of our obligations in the
stockholder litigation settlement, and to change the consummation date
for securitizing the lease payments (or other similar transaction)
related to our Agecroft facility. Also, during the first quarter of 2001,
we amended the provisions of the note purchase agreement governing our
$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.
We also have certain non-financial covenants that must be met in order to
remain in compliance with our debt agreements. Our Senior Bank Credit
Facility contained a non-financial covenant that required us to
consummate the securitization of lease payments (or other similar
transaction) with respect to the 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 Senior 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, we closed the Agecroft transaction through the sale
of all of the issued and outstanding capital stock of Agecroft Properties
Inc., one of our wholly-owned subsidiaries, thereby fulfilling our
covenant requirements with respect to the Agecroft transaction.
The Senior Bank Credit Facility also contains a non-financial covenant
requiring us to provide the lenders with audited financial statements
within 90 days of our fiscal year-end, subject to an additional five-day
grace period. Due to our attempts to close the sale of Agecroft, we did
not provide the audited financial statements within the required time
period. However, in April 2001, the lenders waived this financial
reporting requirement. This waiver also cured the resulting cross-default
under our $41.1 million convertible subordinated notes.
The Senior Bank Credit Facility also required us 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 Senior Bank
Credit Facility as any combination of the following transactions, which
together would result in net cash proceeds of at least $100.0 million:
- an offering of our common stock through the distribution of
rights to our existing stockholders;
- any other offering of our common stock or certain types of
our preferred stock;
- issuances of unsecured, subordinated indebtedness providing
for in-kind payments of principal and interest until
repayment of the Senior Bank Credit Facility; or
- certain types of asset sales, including the sale-leaseback
of our corporate headquarters, but excluding the
securitization of lease payments (or other similar
transaction) with respect to the Agecroft facility.
31
The Senior Bank Credit Facility also contains limitations upon the use of
proceeds obtained from the completion of such transactions. We had
considered a distribution of rights to purchase common or preferred stock
to our existing stockholders, or an equity investment from an outside
investor. However, we determined that it was not commercially reasonable
to issue additional equity or debt securities, other than those
securities for which we have already contractually agreed to issue,
including primarily the issuance of shares of our common stock in
connection with the settlement of our stockholder litigation. Further, as
a result of our restructuring during the third and fourth quarters of
2000, prior to the completion of the audit of our 2000 financial
statements and the filing of our annual report on Form 10-K for the year
ended December 31, 2000 with the SEC on April 17, 2001, we were unable to
provide the SEC with the requisite financial information required to be
included in a registration statement. Therefore, even if we had been able
to negotiate a public or private sale of our equity securities on
commercially reasonable terms, our 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 our equity securities likely would have
included a requirement that we register with the SEC the resale of our
securities issued to a private purchaser thereby also making it
impossible to complete any private issuance of its securities. Due to the
fact that we would have been unable to obtain an effective registration
statement, and therefore, would have been unable to make any public
issuance of our 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 we would technically have been able to file a registration
statement with the SEC following April 17, 2001, we believe that various
market factors, including the depressed market price of our common stock
immediately preceding April 17, 2001, the pending reverse stock split
required to maintain our continued NYSE listing, and the uncertainty
regarding the maturity of the revolving loans under the Senior Bank
Credit Facility, made the issuance of additional equity or debt
securities commercially unreasonable.
Because the issuance of additional equity or debt securities was deemed
unreasonable, we determined that the sale of assets represented the most
effective means by which we could satisfy the covenant. As discussed
above, during the first and second quarters of 2001, we completed the
sale of our Mountain View Correctional Facility for approximately $24.9
million and our Pamlico Correctional Facility for approximately $24.1
million, respectively. Subsequent to the third quarter of 2001, we
completed the sale of our Southern Nevada Women's Correctional Facility
for approximately $24.1 million, and are actively pursuing the sales of
additional assets. As a result of the foregoing, we believe we have
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 Senior Bank Credit Facility
concur with our position that we have used commercially reasonable
efforts in the satisfaction of this covenant.
As part of our plans to improve the financial position and address the
January 1, 2002 maturity of portions of the debt under the Senior Bank
Credit Facility, during the fourth quarter of 2000, we committed to a
plan of disposal for certain additional long-lived assets. During 2001,
we have paid-down approximately $138.7 million against the Senior Bank
Credit Facility through
32
the sale of such assets. Additionally, we are currently holding assets
for sale with an aggregate carrying value of $46.4 million. We expect to
use anticipated proceeds from any future asset sales to pay-down
additional amounts outstanding under the Senior Bank Credit Facility. We
believe that utilizing sale proceeds to pay-down debt and the generation
of $105.4 million of operating income during the first nine months of
2001 have improved our leverage ratios and overall financial position,
improving our ability to renew and refinance maturing indebtedness,
including primarily our revolving loans under the Senior Bank Credit
Facility. We are currently pursuing an amendment and extension of the
Senior Bank Credit Facility, which would effectively extend the maturity
of the revolving loans outstanding under the Senior Bank Credit Facility
to December 31, 2002 and permit the reinstatement of the Series A
Preferred Stock dividend, including the payment of those dividends in
arrears. We believe that a reinstatement of the Series A Preferred Stock
dividend, including those dividends in arrears, will result in an
improvement in our credit rating, positioning ourselves for a more
favorable refinancing than if the dividends remained in arrears. We
believe that given the current market conditions and our projected
operating results, it is in our best interest to extend the maturity of
the revolving loans under the Senior Bank Credit Facility from January 1,
2002 to December 31, 2002 to coincide with the maturity of the term loans
under the Senior Bank Credit Facility. In addition, we are seeking, and
currently expect to complete, a comprehensive refinancing of the Senior
Bank Credit Facility during 2002. However, there can be no assurance that
we will be able to extend our debt obligation maturing January 1, 2002 on
commercially reasonable or any other terms. The Company does not
currently have sufficient working capital or any other ability to satisfy
the debt obligation maturing January 1, 2002. Additionally, there can be
no assurance that the lenders will agree to a reinstatement of the Series
A Preferred Stock dividend, including the payment of those dividends in
arrears, or that if the dividend is reinstated, that our credit rating
will improve. Further, even if we are successful in obtaining an
amendment and extension of the revolving loans maturing January 1, 2002,
there can be no assurance that we will be successful in completing a
comprehensive refinancing of the Senior Bank Credit Facility due December
31, 2002.
Based on our current credit rating, the current interest rate applicable
to the Senior Bank Credit Facility as of September 30, 2001 is 2.75% over
the base rate and 4.25% over the London Interbank Offering Rate, or
LIBOR, for revolving loans, and 3.0% over the base rate and 4.5% over
LIBOR for term loans. These rates were subject to an increase of 25 basis
points (0.25%) on July 1, 2001 if we had not prepaid $100.0 million of
the outstanding loans under the Senior Bank Credit Facility, and are
subject to an increase of 50 basis points (0.50%) from these rates on
October 1, 2001 if we have not prepaid an aggregate of $200.0 million of
the outstanding loans under the Senior Bank Credit Facility. We satisfied
the condition to prepay, prior to July 1, 2001, $100.0 million of
outstanding loans under the Senior 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 lump sum pay-down of $35.0 million
of outstanding loans under the Senior Bank Credit Facility with cash on
hand. We have not, however, satisfied the condition to prepay, prior to
October 1, 2001, $200.0 million of outstanding loans under the Senior
Bank Credit Facility. As discussed herein, we sold our Southern Nevada
Women's Correctional Facility for approximately $24.1 million subsequent
to September 30, 2001 and are actively pursuing the sales of additional
assets. The interest rate will continue to be subject to an increase of
50 basis points (0.50%) from interest rates at September 30, 2001 until
the earlier of such time as we prepay $200.0
33
million of outstanding loans under the Senior Bank Credit Facility in
satisfaction of this condition or the Senior Bank Credit Facility is
amended and extended in a manner that removes this provision. As
discussed herein, we are currently seeking to obtain an amendment and
extension to the Senior Bank Credit Facility during the fourth quarter of
2001. We anticipate that the provision associated with the 50 basis point
increase would be removed under the terms of any such amendment and
extension. However, based on current market conditions, we currently
expect the spread over LIBOR to exceed the spread over LIBOR for the
revolving portion of the Senior Bank Credit Facility until a
comprehensive refinancing of the Senior Bank Credit Facility can be
completed.
We believe that we are currently in compliance with the terms of our debt
covenants. Further, we believe our operating plans and related
projections are achievable and, subject to the foregoing discussion
regarding the "capital raising event" covenant as more fully described in
Note 5 to the financial statements, will allow us to remain in compliance
with our 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 we will remain in compliance with our debt covenants
or that, if we default under any of our debt covenants, we will be able
to obtain additional waivers or amendments.
Due to certain cross-default provisions contained in certain of our debt
instruments, if we were to be in default under the Senior Bank Credit
Facility and if the lenders under the Senior Bank Credit Facility elected
to exercise their rights to accelerate our obligations under the Senior
Bank Credit Facility, such events could result in the acceleration of all
or a portion of the outstanding principal amount of our $100.0 million
senior notes and our aggregate $71.1 million convertible subordinated
notes, which would have a material adverse effect on our liquidity and
financial position. Additionally, under our $41.1 million convertible
subordinated notes, even if the lenders under the Senior Bank Credit
Facility did not elect to exercise their acceleration rights, the holders
of the $41.1 million convertible subordinated notes could require us to
repurchase such notes. We do not have sufficient working capital to
satisfy our debt obligations in the event of an acceleration of all or a
substantial portion of our outstanding indebtedness.
Under the current terms of the Senior Bank Credit Facility, we are
prohibited from declaring or paying any dividends with respect to our
currently outstanding Series A Preferred Stock until such time as we have
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 our
charter until such time as payment of such dividends is permitted under
the Senior Bank Credit Facility. Quarterly dividends of $0.50 per share
for the second, third and fourth quarters of 2000, and for the first,
second and third quarters of 2001 have been accrued as of September 30,
2001. Under the terms of our 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 our board of directors. After obtaining a
waiver and consent from the lenders under the Senior Bank Credit
Facility, on September 28, 2001, the board of directors declared a
quarterly cash dividend on the Series A Preferred Stock, which was paid
October 15, 2001. Under terms of our charter, the dividend payment was
credited against the first quarter of previously accrued and unpaid
dividends on the shares. As consideration for the waiver and consent,
$5.0 million of cash on hand was used to pay-down the Senior Bank
34
Credit Facility on October 1, 2001. Based on the remaining accrued and
unpaid dividends, however, the failure to pay dividends for the fourth
quarter of 2001 will result in the ability of the holders of the Series A
Preferred Stock to elect two additional directors to our board of
directors.
We currently believe that reinstating the payment of the dividends on the
Series A Preferred Stock is in the best interest of our stockholders for
a variety of reasons, including the fact that such reinstatement would:
(i) enhance our credit rating and thus our ability to refinance or renew
our debt obligations as they mature; (ii) eliminate the requirement that
two additional directors be elected to serve on our board of directors;
and (iii) restore our eligibility to use Form S-3 under the rules of the
SEC in connection with the registration of our securities in future
offerings. Accordingly, as discussed herein, we are actively pursuing an
amendment and extension of the Senior Bank Credit Facility that would
permit the reinstatement of the Series A Preferred Stock dividend and the
payment of those dividends in arrears. We are seeking to obtain such
amendment and extension of the revolving portion of the Senior Bank
Credit Facility prior to the maturity of the revolving loan portion of
the facility which matures on January 1, 2002. No assurance can be given,
however, that the amendment and extension will be obtained, or that the
lenders will agree to a reinstatement, and that as a result, if and when
we will commence the regular payment of cash dividends on our shares of
Series A Preferred Stock.
At our 2000 annual meeting of stockholders held in December 2000, the
holders of our common stock approved a reverse stock split of our common
stock at a ratio to be determined by the board of directors 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 our 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 our 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
our common stock. We paid our 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, which was 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 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 September 30, 2001, we had
approximately 25.1 million shares of common stock issued and outstanding
on a post-reverse stock split basis.
OPERATING ACTIVITIES
Our net cash provided by operating activities for the nine months ended
September 30, 2001, was $58.3 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 primarily the change in fair value of the
interest rate swap agreement. During the nine months of 2001, we received
significant tax refunds of approximately $31.3 million, contributing to
the net cash provided by operating activities. These refunds, however,
were partially offset by the payment of $15.0 million during August 2001
for a full settlement of all claims in a dispute regarding the
termination of a securities
35
purchase agreement in 2000 related to the Company's proposed corporate
restructuring led by the Fortress/Blackstone investment group.
INVESTING ACTIVITIES
Our cash flow provided by investing activities was $112.6 million for the
nine months ended September 30, 2001, and was primarily attributable to
the proceeds received from the sales of the Mountain View Correctional
Facility on March 16, 2001, the Agecroft facility on April 10, 2001, and
the Pamlico Correctional Facility, on June 28, 2001.
FINANCING ACTIVITIES
Our cash flow used in financing activities was $158.3 million for the
nine months ended September 30, 2001. Net payments on debt totaled $157.7
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 Senior Bank Credit Facility. In addition,
during June we paid-down a lump sum of $35.0 million on the Senior Bank
Credit Facility with cash on hand.
LIQUIDITY AND CAPITAL RESOURCES FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
A substantial portion of our revenue during the nine months ended
September 30, 2000 was derived from: (i) rents received under triple net
leases of correctional and detention facilities, including the leases
with Operating Company, referred to herein as 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 us from Operating Company, referred to herein
as the Operating Company note; and (iv) license fees earned under the
terms of a trade name use agreement with Operating Company. Operating
Company leased 37 of our 46 operating properties pursuant to the
Operating Company leases. We, therefore, were dependent for our 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 us under the Operating Company leases.
We incurred a net loss available to common stockholders for the three and
nine months ended September 30, 2000 of $261.1 million and $378.5
million, or $22.04 per share and $31.96 per share, respectively, during a
period of severe liquidity problems. Our financial condition at December
31, 1999, the inability of Operating Company to make certain of its
payment obligations to us, 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 our debt agreements as of December 31, 1999. The defaults related to
our failure to comply with certain financial covenants, the issuance of a
going concern opinion qualification with respect to our 1999 financial
statements, and certain transactions effected by
36
us, including the execution of a securities purchase agreement in
connection with a proposed restructuring led by Pacific Life Insurance
Company.
In June 2000, we obtained a waiver and amendment to the Senior Bank
Credit Facility and waivers and amendments to our convertible
subordinated notes to permit the Operating Company merger and the
amendments to the Operating Company leases and the other contractual
arrangements we had with Operating Company. At September 30, 2000, we
were not in compliance with certain applicable financial covenants
contained in the Senior Bank Credit Facility, including: (i) debt service
coverage ratio; (ii) interest coverage ratio; (iii) leverage ratio; and
(iv) net worth. We subsequently, however, obtained a consent and
amendment, effective November 17, 2000, to the Senior Bank Credit
Facility thereby avoiding an event of default under the facility.
In an effort to address the liquidity needs of Operating Company prior to
the completion of the Operating Company merger, and as permitted by the
terms of the Senior Bank Credit Facility, the Company and Operating
Company amended the terms of the Operating Company leases in June 2000.
As a result of this amendment, lease payments under the Operating Company
leases were due and payable on June 30 and December 31 of each year,
instead of monthly. In addition, the Company and Operating Company agreed
to defer, with interest, and with the exception of certain scheduled
payments, the first semi-annual rental payment under the revised terms of
the Operating Company leases, due June 30, 2000, until September 30,
2000.
In connection with the amendments to the Operating Company leases, the
terms of the Senior Bank Credit Facility also required the deferral of
our payment of fees to Operating Company which would otherwise be payable
pursuant to the terms of the amended and restated tenant incentive
agreement, the business development agreement, and the amended and
restated services agreement, as more fully discussed in our 2000 Form
10-K.
Immediately prior to the Operating Company merger, we entered into
agreements with Operating Company pursuant to which we forgave all unpaid
amounts due and payable to us through August 31, 2000, totaling
approximately $226.1 million, related to the Operating Company leases,
the interest due on the unpaid Operating Company leases balances, and the
interest accrued on the Operating Company note.
As a result of the Operating Company merger, the Operating Company
leases, the amended and restated tenant incentive agreement, the business
development agreement, and the amended and restated services agreement
were canceled.
During the three and nine months ended September 30, 2000, we recognized
rental income, net of reserves, from Operating Company based on the
actual cash payments received. In addition, we continued to record our
obligations to Operating Company under the various agreements discussed
above through the effective date of the Operating Company merger.
CASH FLOW FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
Our cash flow used in operating activities was $58.4 million for the nine
months ended September 30, 2000, and represents the year-to-date net loss
plus depreciation and
37
amortization and other non-cash charges including primarily deferred and
other non-cash income taxes and asset impairment losses, and changes in
the various components of working capital. Our cash flow used in
investing activities was $49.0 million for the nine months ended
September 30, 2000, and primarily represented the construction of several
real estate properties. Our cash flow provided by financing activities
was $17.4 million for the nine months ended September 30, 2000 and
represents net proceeds from debt, net of payments of debt and equity
issuance costs, payments of dividends on shares of our Series A Preferred
Stock and payments for the purchase of treasury stock of PMSI and JJFMSI.
RESULTS OF OPERATIONS
As previously discussed, management does not believe the comparison
between the results of operations for the three and nine months ended
September 30, 2001 and the results of operations for the same periods in
the prior year are 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.
We incurred a net loss available to common stockholders of $5.7 million,
or $0.23 per share, and $20.3 million, or $0.84 per share, for the three
and nine months ended September 30, 2001, respectively. Contributing to
the net losses each period are non-cash charges of $5.7 million and $11.9
million, respectively, related to the change in the estimated fair value
of our interest rate swap agreement.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
MANAGEMENT AND OTHER REVENUE
Management and other revenue consists of revenue earned from the
operation and management of adult and juvenile correctional and detention
facilities for the three and nine months ended September 30, 2001,
totaling $247.1 million and $729.0 million, respectively. Occupancy for
our facilities under contract for management was 88.8% and 88.7% for the
three and nine months ended September 30, 2001, respectively. During the
first quarter of 2001, the State of Georgia began filling two of our
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, we were informed that our current
contract with the District of Columbia to house its inmates at the
Northeast Ohio Correctional Facility, which expired September 8, 2001,
would not be renewed due to a new law that mandates the Federal Bureau of
Prisons, or the 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 $74,000 and $6.4 million during the
three and nine months ended September 30, 2001, respectively. The related
operating expenses at this facility were $0.8 million and $10.8 million
during the three and nine months ended September 30, 2001, respectively.
We
38
have engaged in discussions with the BOP regarding a sale of the
Northeast Ohio Correctional Facility to the BOP, and are also pursuing
agreements to increase occupancy at the facility; however, there can be
no assurance that we will be able to reach agreements on a sale or to
increase occupancy at the facility.
During the third quarter of 2001, due to a short-term decline in the
State of Wisconsin's inmate population, the State began transferring
inmates from our Whiteville Correctional Facility, located in Whiteville,
Tennessee, to the State's correctional system. The State is expected to
transfer, in the aggregate, approximately 650 inmates from the Whiteville
Correctional Facility by the end of 2001. Therefore, management and other
revenue is expected to continue to decline at this facility during the
fourth quarter of 2001.
We have responded to a proposal from the BOP for the placement of up to
1,500 inmates under the BOP's Criminal Alien Requirement II, or CAR II.
We have earmarked our McRae Correctional Facility located in McRae,
Georgia, which has a design capacity of 1,524 beds, for this opportunity.
The BOP has recently identified this facility as one of two "preferred
alternative" sites to house inmates under CAR II. If we are successful in
securing a contract under CAR II, management and other revenue is
expected to increase beginning in the second or third quarter of 2002 at
this facility. However, start-up expenses expected to be incurred prior
to the commencement of the contract, including but not limited to,
salaries, utilities, medical and food supplies and clothing, will result
in additional operating expenses before any revenue is generated,
resulting in a reduction in net income in the short-term. There can be no
assurance that we will be successful in securing CAR II, which is
expected to be awarded during the fourth quarter of 2001.
RENTAL REVENUE
Rental revenue was $1.1 million and $5.3 million for the three and nine
months ended September 30, 2001, respectively, and was generated from
leasing correctional and detention facilities to governmental agencies
and other private operators. On March 16, 2001, we sold the Mountain View
Correctional Facility, and on June 28, 2001, we sold the Pamlico
Correctional Facility, two facilities that had been leased to
governmental agencies. Therefore, no further rental revenue will be
received for these facilities. For the nine months ended September 30,
2001, rental revenue for these facilities totaled $2.0 million.
OPERATING EXPENSES
Operating expenses totaled $189.6 million and $563.4 million for the
three and nine months ended September 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 EXPENSE
For the three and nine months ended September 30, 2001, general and
administrative expenses totaled $8.4 million and $25.5 million,
respectively. General and administrative expenses
39
consist primarily of corporate management salaries and benefits,
professional fees and other administrative expenses.
DEPRECIATION AND AMORTIZATION
For the three and nine months ended September 30, 2001, depreciation and
amortization expense totaled $14.2 million and $40.1 million,
respectively. Amortization expense for the three and nine months ended
September 30, 2001 includes approximately $1.8 million and $5.7 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
nine months ended September 30, 2001 is also net of a reduction to
amortization expense of $1.6 million and $7.3 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 nine months ended September 30, 2001. Gross interest expense was
$31.2 million and $103.5 million for the three and nine months ended
September 30, 2001, respectively. Gross interest expense is based on
outstanding convertible subordinated notes payable balances, borrowings
under the Senior Bank Credit Facility, the Operating Company revolving
credit facility, our $100.0 million senior notes, net settlements on
interest rate swaps, and amortization of loan costs and unused facility
fees. The decrease in gross interest expense from the prior year is
primarily attributable to declining interest rates and lower amounts
outstanding under the Senior Bank Credit Facility.
Gross interest income was $1.6 million and $6.8 million for the three and
nine months ended September 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. On October 3, 2001, we sold our
Southern Nevada Women's Correctional Facility, which had been accounted
for as a direct financing lease. Therefore, no further interest income
will be received on this lease. For the three and nine months ended
September 30, 2001, interest income for this lease totaled $0.3 million
and $0.9 million, respectively. Subsequent to the sale, we continue to
manage the facility pursuant to a contract with the State of Nevada.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAP AGREEMENT
As of September 30, 2001, in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" referred to herein as SFAS 133, as amended, we have
reflected in earnings the change in the estimated fair value of our
interest rate swap agreement during the three and nine months ended
September 30, 2001. We estimate 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 we would have to pay to cancel
the contract or transfer it to other parties. As of September 30, 2001,
due to a reduction in interest rates since entering into the swap
agreement, the interest
40
rate swap agreement has a negative fair value of approximately $15.1
million. This negative fair value consists of a transition adjustment of
$5.0 million for the reduction in the fair value of the interest rate
swap agreement from its inception through the adoption of SFAS 133 on
January 1, 2001, and a reduction in the fair value of the swap agreement
of $5.0 million and $10.1 million during the three and nine months ended
September 30, 2001, respectively. In accordance with SFAS 133, we have
recorded a $5.6 million and $11.9 million non-cash charge for the change
in fair value of derivative instruments for the three and nine months
ended September 30, 2001, respectively, which includes $0.6 million and
$1.9 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 September 30, 2001 of $3.1 million is expected
to be reclassified into earnings as a non-cash charge, along with a
corresponding increase to stockholders' equity through accumulated
comprehensive income, over the remaining term of the swap agreement. The
non-cash charge of $11.9 million for the nine months ended September 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 Senior Bank Credit Facility. However, for each
quarterly period prior to the maturity of the swap agreement, we will
continue to adjust to market the swap agreement potentially resulting in
additional non-cash charges or gains.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
MANAGEMENT AND OTHER REVENUE
Management and other revenue consists of revenue earned by PMSI and
JJFMSI from operating and managing adult prison and jails and juvenile
detention facilities for the month of September. As further discussed
under the overview of the Company, for the period from September 1, 2000
through November 30, 2000, the investments in PMSI and JJFMSI were
accounted for on a combined basis with the results of our operations due
to the repurchase by the wholly-owned subsidiaries of PMSI and JJFMSI of
the non-management, outside stockholders' equity interest in PMSI and
JJFMSI during September 2000.
RENTAL REVENUE
Net rental revenue was $15.5 million and $38.4 million for the three and
nine months ended September 30, 2000, respectively, and was generated
from the leasing of our correctional and detention facilities. For the
three and nine months ended September 30, 2000, we reserved $69.5 million
and $213.3 million, respectively, of the $82.5 million and $244.3
million, respectively, of gross rental revenue due from Operating
Company, resulting from the uncertainty regarding the collectibility of
the payments. During September 2000, we forgave all unpaid rental
payments due from Operating Company as of August 31, 2000 (totaling
$190.8 million). The forgiveness did not impact our financial statements
as the amounts forgiven had been previously reserved. All existing leases
we had with Operating Company were canceled in connection with the
Operating Company merger.
41
LICENSING FEES FROM AFFILIATES
Licensing fees from affiliates were $2.3 million and $7.6 million for the
three and nine months ended September 30, 2000, respectively. Licensing
fees from affiliates were earned as a result of a service mark and trade
name use agreement we had with 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 fee was based upon gross revenue of Operating Company,
subject to a limitation of 2.75% of our gross revenue. The service mark
and trade name use agreement was canceled in connection with the
Operating Company merger.
OPERATING EXPENSES
Operating expenses consist of costs incurred by PMSI and JJFMSI in
operating and managing prisons and other correctional facilities for the
month of September 2000. Operating expenses associated with managing the
facilities for the three and nine months ended September 30, 2000 totaled
$21.5 million. Also included in operating expenses are our realized
losses on foreign currency transactions of $0.2 million for the three and
nine months ended September 30, 2000. This resulted from a detrimental
fluctuation in the foreign currency exchange rate upon the collection of
receivables denominated in British pounds. See "Unrealized foreign
currency transaction loss" for further discussion of these receivables.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses were $9.0 million and $43.8 million
for the three and nine months ended September 30, 2000, respectively.
General and administrative expenses for the three and nine months ended
September 30, 2000 include one month of general and administrative
expenses of PMSI and JJFMSI totaling approximately $0.3 million. General
and administrative expenses consist primarily of management salaries and
benefits, professional fees, and other administrative costs.
In addition, merger transaction fees, totaling $4.9 million and $33.0
million for the three and nine months ending September 30, 2000,
respectively, have been classified as general and administrative
expenses. 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 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. 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, we terminated the
services of one of our financial advisors during the third quarter of
2000. During the second and third quarters of 2000, we paid or accrued
expenses of $33.0 million in connection with existing and potential
litigation associated with the termination of the aforementioned
agreements and for additional merger transaction fees associated with the
42
restructuring. All disputes with these parties have since been settled,
as further described in the notes to the financial statements.
LEASE EXPENSE
Lease expense consists of office and operating equipment leased by PMSI
and JJFMSI in operating and managing prisons and other correctional
facilities. Lease expense for each of the three and nine months ended
September 30, 2000 totaled $0.3 million.
DEPRECIATION AND AMORTIZATION
Depreciation expense was $15.4 million and $41.8 million for the three
and nine months ended September 30, 2000, respectively. Depreciation and
amortization expense includes one month of deprecation and amortization
expense of PMSI and JJFMSI, totaling $0.9 million and $0.5 million,
respectively.
LICENSING FEES TO OPERATING COMPANY
All licensing fees to Operating Company were recognized under the terms
of a service mark and trade name use agreement between PMSI and JJFMSI
and Operating Company. Under the terms of this agreement, PMSI and JJFMSI
were required to pay two percent of gross management revenue for the use
of the Operating Company name and mark. For the month of September 2000,
PMSI and JJFMSI recognized expense of $0.3 million and $0.2 million,
respectively.
ADMINISTRATIVE SERVICES FEE TO OPERATING COMPANY
For the month of September 30, 2000 each of PMSI and JJFMSI paid
Operating Company $450,000 or a total of $0.9 million, for management and
general and administrative services.
WRITE-OFF OF AMOUNTS UNDER LEASE ARRANGEMENTS
During 2000, we opened or expanded five facilities that were operated and
leased by Operating Company. 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, we wrote-off the tenant incentive fees due Operating Company
on these facilities, totaling $3.5 million and $11.9 million for the
three and nine months ended September 30, 2000, respectively.
IMPAIRMENT LOSS
Included in property and equipment on the accompanying 2000 balance sheet
was approximately 268 acres of land in California and approximately 83
acres in Maryland and the District of Columbia. During the third quarter
of 2000, management determined to forsake further development of these
properties and to list these properties for sale. We reduced the carrying
values of the land to their approximate net realizable value, resulting
in a charge of $19.2 million for the three and nine months ended
September 30, 2000.
43
EQUITY LOSS AND AMORTIZATION OF DEFERRED GAIN, NET
Equity loss and amortization of deferred gain, net, was $9.1 million and
$13.4 million for the three and nine months ended September 30, 2000,
respectively. For the three months ended September 30, 2000, we
recognized equity losses of PMSI of $2.2 million. For the three and nine
months ended September 30, 2000, we recognized equity losses of JJFMSI of
$2.3 million and $0.8 million, respectively. We also received
distributions from PMSI and JJFMSI of $4.4 million and $2.3 million,
respectively for the nine months ended September 30, 2000. We did not
receive any distributions from PMSI and JJFMSI during the third quarter
of 2000.
In addition, we recognized equity losses of Operating Company of
approximately $7.3 million and $20.6 million for the three and nine
months ended September 30, 2000, respectively. For the three and nine
months ended September 30, 2000, we recognized amortization of deferred
gains of PMSI of $1.8 million and $5.3 million, respectively. For the
three and nine months ended September 30, 2000, we recognized
amortization of deferred gains of JJFMSI of $0.9 million and $2.7
million, respectively.
Prior to the Operating Company merger, we had accounted for our 9.5%
non-voting interest in Operating Company under the cost method of
accounting. As such, we had not recognized any income or loss related to
our 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 have been
restated to recognize our 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 and capitalized
interest for the three and nine months ended September 30, 2000. Gross
interest expense was $39.1 million and $105.5 million for the three and
nine months ended September 30, 2000, respectively. Gross interest
expense is based on outstanding convertible notes payable balances,
borrowings under the Senior Bank Credit Facility, and the $100.0 million
senior notes, net settlements on interest rate swaps, and amortization of
loan costs and unused facility fees. Interest expense is reported net of
capitalized interest on construction in progress of $0.01 million and
$9.3 million for the three and nine months ended September 30, 2000,
respectively. Interest for the nine months ended September 30, 2000 also
includes default interest on the $40 million convertible subordinated
notes through June 30, 2000. These events of default were subsequently
waived in June 2000, as discussed more fully herein and in our 2000 Form
10-K.
Gross interest income was $3.3 million and $10.0 million for the three
and nine months ended September 30, 2000, respectively. Gross interest
income is earned on cash used to collateralize letters of credit for
certain construction projects, direct financing leases and investments of
cash and cash equivalents.
44
As previously discussed, during September 2000 we forgave all interest
accrued on the Operating Company note through August 31, 2000 (totaling
$27.4 million). This forgiveness did not impact our financial statements
as the amounts forgiven had been previously reserved. Interest accrued
for the month of September totaling $1.4 million was fully reserved as of
September 30, 2000.
OTHER INCOME
Other income for the three and nine months ended September 30, 2000
totaled $3.1 million. On September 27, 2000 we received approximately
$4.5 million in final settlement of amounts held in escrow related to the
1998 acquisition of the outstanding capital stock of U.S. Corrections
Corporation. The $3.1 million represents the proceeds, net of
miscellaneous receivables arising from claims against the escrow.
LOSS ON DISPOSAL OF ASSETS
The loss on the disposal of assets was $3.0 million and $3.3 million for
the three and nine months ended September 30, 2000, respectively. During
the third quarter, JJFMSI entered into an agreement with Sodexho to sell
a 50% interest in Corrections Corporation of Australia Pty., Ltd.,
resulting in a $3.6 million loss. This loss was partially offset by a
gain of $0.6 million resulting from the sale of a correctional facility
in the third quarter of 2000.
UNREALIZED FOREIGN CURRENCY TRANSACTION LOSS
In connection with the construction and development of our Agecroft
facility, located in Salford, England, during the first quarter of 2000,
we entered into a 25-year property lease. We accounted for the lease as a
direct financing lease and recorded a receivable equal to the discounted
cash flows to be received over the lease term (54.1 million British
pounds at September 30, 2000). 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, we sold our interest in the
Agecroft facility, resulting in the disposition of the asset related to
the direct financing lease. We also extended a working capital loan to
the operator of this facility (3.2 million British pounds at September
30, 2000). This asset, along with various other short-term receivables,
is also denominated in British pounds; consequently, we adjust these
receivables to the current exchange rate at each balance sheet date, and
recognize the currency gain or loss in current period earnings. Due to
detrimental fluctuations in foreign currency exchange rates between the
British pound and the U.S. dollar, we recognized unrealized foreign
currency transaction losses of $2.0 million and $9.5 million for the
three and nine months ended September 30, 2000, respectively. Realized
losses of $0.2 million for the three and nine months ending September 30,
2000 are included in operating expenses.
STOCKHOLDER LITIGATION SETTLEMENTS
During the third quarter of 2000, we entered into settlement agreements
(which were modified and received final court approval during the first
quarter of 2001) regarding the settlement of all outstanding stockholder
litigation against us and certain of our existing and former directors
and executive
45
officers. The third quarter 2000 settlement agreements provided that we
would pay or issue the plaintiffs an aggregate of: (i) approximately
$47.5 million in cash payable solely from the proceeds under certain
insurance policies; and (ii) approximately $75.4 million in shares of the
Company's common stock. For the three and nine months ended September 30,
2000, we accrued $75.4 million related to the settlement. See Note 7 to
the accompanying financial statements for the terms of the final
settlement.
INCOME TAX EXPENSE
In connection with the restructuring, on September 12, 2000 our
stockholders approved an amendment to our charter to remove provisions
requiring us to preserve our ability to elect to qualify as a REIT for
federal income tax purposes effective January 1, 2000. Prior to the
amendment to our charter, we had operated so as to qualify as a REIT, and
elected REIT status for our taxable year ended December 31, 1999.
However, subsequent to the amendment to our charter, we have been taxed
as a subchapter C corporation beginning with our taxable year ending
December 31, 2000. In accordance with the provisions of Statement of
Financial Accounting Standards No. 109, we are required to establish
current and deferred tax assets and liabilities in our financial
statements in the period in which a change of tax status occurs. As such,
our financial statements, prior to combining with PMSI and JJFMSI, for
the three and nine months ended September 30, 2000, reflect an income tax
provision of $117.7 million primarily related to the change in tax status
and additional reserves for ongoing Internal Revenue Service audit
issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" referred to herein as 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 and intangible assets with
indefinite useful lives will no longer be subject to amortization, but
instead will 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 and intangible assets with
indefinite useful lives is less than their carrying amounts 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 September 30, 2001, we had $105.9 million of
goodwill reflected on the accompanying balance sheet associated with the
Operating Company merger and the acquisitions of the service companies
completed during the fourth quarter of 2000. We do not have any
intangible assets with indefinite useful lives. Amortization of goodwill
for the three and nine months ended September 30, 2001 was $1.8 million
and $5.7 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
46
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 in the statement of
operations.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" referred to herein as SFAS 144. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 retains the fundamental
provisions of SFAS 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by
sale, while also resolving significant implementation issues associated
with SFAS 121. Unlike SFAS 121, however, an impairment assessment under
SFAS 144 will never result in a write-down of goodwill. Rather, goodwill
is evaluated for impairment under SFAS 142. The provisions of SFAS 144
are effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years.
Adoption of SFAS 144 is not expected to have a material impact on our
financial statements.
INFLATION
We do not believe that inflation has had or will have a direct adverse
effect on our operations. Many of our 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 our 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 we receive for
our management services.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our 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. We are exposed to market risk related to our
Senior Bank Credit Facility and certain other indebtedness. The interest
on the Senior Bank Credit Facility and such other indebtedness is subject
to fluctuations in the market. If the interest rate for our outstanding
indebtedness under the Senior Bank Credit Facility was 100 basis points
higher or lower during the three and nine months ended September 30,
2001, interest expense would have been increased or decreased by
approximately $2.9 million and $9.3 million, respectively.
47
As of September 30, 2001, we had outstanding $100.0 million of 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 $93.6 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 our
financial statements.
The Senior Bank Credit Facility required us to hedge $325.0 million of
floating rate debt on or before August 16, 1999. We have 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
September 30, 2001 we recorded a $15.1 million liability, representing
the estimated amount we would have to pay to cancel the contract or
transfer it to other parties. The estimated negative fair value of the
swap agreement as of January 1, 2001 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 nine months ended September
30, 2001 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, unless the swap is
terminated in connection with a refinancing of the Senior Bank Credit
Facility.
Additionally, we may, from time to time, invest our cash in a variety of
short-term financial instruments. These instruments generally consist of
highly liquid investments with original maturities at the date of
purchase 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.
Our exposure to foreign currency exchange rate risk relates to our
construction, development and leasing of our Agecroft facility located in
Salford, England, which was sold in April 2001. We extended a working
capital loan to the operator of this facility. Such payments to us are
denominated in British pounds rather than the U.S. dollar. As a result,
we bear the risk of fluctuations in the relative exchange rate between
the British pound and the U.S. dollar. At September 30, 2001, the
receivables due us and denominated in British pounds totaled 3.8 million
British pounds. A hypothetical 10% increase in the relative exchange rate
would have resulted in an increase of $0.6 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 $0.6 million in the value of these
receivables and a corresponding unrealized foreign currency transaction
loss.
48
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 to the financial statements included in Part I, which is
specifically incorporated into Part II by this reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Under the terms of the Senior Bank Credit Facility, we are prohibited
from declaring or paying any dividends with respect to our currently
outstanding Series A Preferred Stock until such time as we have 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 our charter
until such time as payment of such dividends is permitted under the
Senior Bank Credit Facility. Quarterly dividends of $0.50 per share for
the second, third and fourth quarters of 2000, and for the first, second
and third quarters of 2001 have been accrued as of September 30, 2001.
Under the terms of our 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 our board of directors. After obtaining a waiver
and consent from the lenders under the Senior Bank Credit Facility, on
September 28, 2001, the board of directors declared a quarterly cash
dividend on the Series A Preferred Stock, which was paid October 15,
2001. Under terms of our charter, the dividend payment was credited
against the first quarter of previously accrued and unpaid dividends on
the shares. As consideration for the waiver and consent, $5.0 million of
cash on hand was used to pay-down the Senior Bank Credit Facility on
October 1, 2001. Based on the remaining accrued and unpaid dividends,
however, the failure to pay dividends for the fourth quarter of 2001 will
result in the ability of the holders of the Series A Preferred Stock to
elect two additional directors to our board of directors.
We currently believe that reinstating the payment of dividends on the
Series A Preferred Stock is in the best interest of our stockholders for
a variety of reasons, including the fact that such reinstatement would:
(i) enhance our credit rating and thus our ability to refinance or renew
our debt obligations as they mature; (ii) eliminate the requirement that
two additional directors be elected to serve on our board of directors;
and (iii) restore our eligibility to use Form S-3 under the rules of the
SEC in connection with the registration of our securities in future
offerings. Accordingly, as discussed in Note 5 to the financial
statements included in Part I, we are actively pursuing an amendment and
extension of the Senior Bank Credit Facility that would permit the
reinstatement of the Series A Preferred Stock dividend and the payment of
those dividends in arrears. We are seeking to obtain such amendment and
extension of the revolving loan portion of the Senior Bank Credit
Facility prior to the maturity of the revolving loan portion of the
facility, which matures on January 1, 2002. No assurance can be given,
however, that the amendment and extension will be obtained, or that the
lenders will agree to a reinstatement, and that as a result, if and when
we will commence the regular payment of cash dividends on our shares of
Series A Preferred Stock.
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In the event dividends are unpaid and in arrears for six or more
quarterly periods, the holders of the Series A Preferred Stock will be
entitled to vote for the election of two additional directors 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 of our
next annual meeting of stockholders will be entitled to vote for two
additional directors at the next annual meeting, 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 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,
which is specifically incorporated into Part II by this reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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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: November 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
Principal Accounting Officer
51