UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-25245
CORRECTIONS CORPORATION OF AMERICA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 62-1763875
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10 BURTON HILLS BLVD., NASHVILLE, TENNESSEE 37215
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
(615) 263-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each class of Common Stock
as of April 30, 2002:
Shares of Common Stock, $0.01 par value: 27,978,243 shares outstanding.
1
CORRECTIONS CORPORATION OF AMERICA
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets (Unaudited) as of
March 31, 2002 and December 31, 2001........................................ 3
b) Condensed Consolidated Statements of Operations (Unaudited) for
the three months ended March 31, 2002 and 2001.............................. 4
c) Condensed Consolidated Statements of Cash Flows (Unaudited) for
the three months ended March 31, 2002 and 2001.............................. 5
d) Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) for the three months ended March 31, 2002....................... 6
e) Notes to Condensed Consolidated Financial Statements........................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 40
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 42
Item 2. Changes in Securities and Use of Proceeds...................................... 42
Item 3. Defaults Upon Senior Securities................................................ 42
Item 4. Submission of Matters to a Vote of Security Holders............................ 42
Item 5. Other Information.............................................................. 42
Item 6. Exhibits and Reports on Form 8-K............................................... 42
SIGNATURES................................................................................ 44
2
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, December 31,
ASSETS 2002 2001
- -------------------------------------------------------------------------------- ----------- ------------
Cash and cash equivalents $ 52,257 $ 46,307
Restricted cash 12,630 12,537
Accounts receivable, net of allowance of $715 and $729, respectively 134,155 144,078
Income tax receivable 32,599 568
Prepaid expenses and other current assets 12,174 12,841
----------- -----------
Total current assets 243,815 216,331
Property and equipment, net 1,584,409 1,573,152
Investment in direct financing lease 18,747 18,873
Assets held for sale 1,758 22,312
Goodwill 24,432 104,019
Other assets 30,079 36,593
----------- -----------
Total assets $ 1,903,240 $ 1,971,280
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 136,795 $ 145,157
Income tax payable 11,369 10,137
Distributions payable 5,132 15,853
Fair value of interest rate swap agreement 9,525 13,564
Current portion of long-term debt 789,838 792,009
----------- -----------
Total current liabilities 952,659 976,720
Long-term debt, net of current portion 170,449 171,591
Deferred tax liabilities 55,301 56,511
Other liabilities 19,041 19,297
----------- -----------
Total liabilities 1,197,450 1,224,119
----------- -----------
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 - 4,064 and 3,948 shares issued and outstanding at March 31, 2002 and
December 31, 2001, respectively; stated at liquidation preference of
$24.46 per share 99,400 96,566
Common stock - $0.01 par value; 80,000 shares authorized; 27,979 and 27,921
shares issued and 27,978 and 27,920 shares outstanding at March 31, 2002 and
December 31, 2001, respectively 280 279
Additional paid-in capital 1,342,896 1,341,958
Deferred compensation (2,596) (3,153)
Retained deficit (839,565) (793,236)
Treasury stock, one share, at cost (242) (242)
Accumulated other comprehensive loss (1,883) (2,511)
----------- -----------
Total stockholders' equity 705,790 747,161
----------- -----------
Total liabilities and stockholders' equity $ 1,903,240 $ 1,971,280
=========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
--------- ---------
REVENUE:
Management and other $ 240,059 $ 237,972
Rental 1,127 2,410
--------- ---------
241,186 240,382
--------- ---------
EXPENSES:
Operating 188,922 184,655
General and administrative 7,191 8,600
Depreciation and amortization 12,458 12,701
--------- ---------
208,571 205,956
--------- ---------
OPERATING INCOME 32,615 34,426
--------- ---------
OTHER (INCOME) EXPENSE:
Equity in (earnings) loss of joint venture (117) 85
Interest expense, net 28,760 34,069
Change in fair value of interest rate swap agreement (3,411) 5,969
Gain on sale of assets (3) --
Unrealized foreign currency transaction loss 95 385
--------- ---------
25,324 40,508
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 7,291 (6,082)
Income tax benefit 31,733 775
--------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 39,024 (5,307)
Cumulative effect of accounting change (80,276) --
--------- ---------
NET LOSS (41,252) (5,307)
Distributions to preferred stockholders (5,077) (4,821)
--------- ---------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (46,329) $ (10,128)
========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Before cumulative effect of accounting change $ 1.23 $ (0.43)
Cumulative effect of accounting change (2.91) --
--------- ---------
Net loss available to common stockholders $ (1.68) $ (0.43)
========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Before cumulative effect of accounting change $ 1.02 $ (0.43)
Cumulative effect of accounting change (2.25) --
--------- ---------
Net loss available to common stockholders $ (1.23) $ (0.43)
========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(41,252) $ (5,307)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 12,458 12,701
Cumulative effect of accounting change 80,276 --
Amortization of debt issuance costs and other non-cash interest 6,186 4,627
Deferred and other non-cash income taxes (769) (775)
Equity in (earnings) loss of joint venture (117) 85
Change in fair value of interest rate swap agreement (3,411) 5,969
Gain on sale of assets (3) --
Unrealized foreign currency transaction loss 95 385
Other non-cash items 729 538
Changes in assets and liabilities, net:
Accounts receivable, prepaid expenses and other assets 10,588 101
Income tax receivable (32,031) 30,572
Accounts payable, accrued expenses and other liabilities (8,450) (5,636)
Income tax payable 1,232 (1,423)
-------- --------
Net cash provided by operating activities 25,531 41,837
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment, net (3,902) (311)
(Increase) decrease in restricted cash (93) 178
Proceeds from sale of assets 22 25,693
Increase in other assets (478) (138)
Payments received on direct financing leases and notes receivable 132 681
-------- --------
Net cash provided by (used in) investing activities (4,319) 26,103
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt, net (2,199) (29,469)
Payment of debt issuance costs (78) (351)
Preferred stock issuance costs (21) --
Payment of dividends (12,964) (108)
-------- --------
Net cash used in financing activities (15,262) (29,928)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,950 38,012
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 46,307 20,889
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,257 $ 58,901
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 19,152 $ 18,144
======== ========
Income taxes $ 30 $ 1,412
======== ========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED AND AMOUNTS IN THOUSANDS)
ACCUMULATED
SERIES A SERIES B ADDITIONAL OTHER
PREFERRED PREFERRED COMMON PAID-IN DEFERRED RETAINED TREASURY COMPREHENSIVE
STOCK STOCK STOCK CAPITAL COMPENSATION DEFICIT STOCK INCOME (LOSS) TOTAL
-------- -------- ------ ----------- ------------ --------- -------- ------------- ---------
Balance as of
December 31, 2001 $107,500 $ 96,566 $279 $ 1,341,958 $(3,153) $(793,236) $(242) $ (2,511) $ 747,161
-------- -------- ---- ----------- ------- --------- ----- -------- ---------
Comprehensive income (loss):
Net loss -- -- -- -- -- (41,252) -- -- (41,252)
Amortization of transition
adjustment -- -- -- -- -- -- -- 628 628
-------- -------- ---- ----------- ------- --------- ----- -------- ---------
Total comprehensive loss -- -- -- -- -- (41,252) -- 628 (40,624)
-------- -------- ---- ----------- ------- --------- ----- -------- ---------
Distributions to preferred
stockholders -- 2,834 -- -- -- (5,077) -- -- (2,243)
Conversion of subordinated
notes -- -- 1 1,113 -- -- -- -- 1,114
Stock issuance costs -- -- -- (21) -- -- -- -- (21)
Amortization of deferred
compensation, net of
forfeitures -- -- -- (154) 557 -- -- -- 403
-------- -------- ---- ----------- ------- --------- ----- -------- ---------
BALANCE AS OF
MARCH 31, 2002 $107,500 $ 99,400 $280 $ 1,342,896 $(2,596) $(839,565) $(242) $ (1,883) $ 705,790
======== ======== ==== =========== ======= ========= ===== ======== =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
1. ORGANIZATION AND OPERATIONS
As of March 31, 2002, Corrections Corporation of America, a Maryland
corporation (together with its subsidiaries, the "Company"), owned 39
correctional, detention and juvenile facilities, three of which are
leased to other operators, and two additional facilities which are not
yet in operation. The Company also has a leasehold interest in a juvenile
facility. At March 31, 2002, the Company operated 64 facilities,
including 36 company-owned facilities, with a total design capacity of
approximately 61,000 beds in 21 states, the District of Columbia and
Puerto Rico.
The Company 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,
the Company's facilities offer a variety of rehabilitation and
educational programs, including basic education, life skills and
employment training and substance abuse treatment. These services are
intended to reduce recidivism and to prepare inmates for their successful
re-entry into society upon their release. The Company also provides
health care (including medical, dental and psychiatric services), food
services and work and recreational programs.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim condensed consolidated financial statements have
been prepared by the Company without audit, and in the opinion of
management, reflect all normal recurring adjustments necessary for a fair
presentation of results for the unaudited interim periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The results of
operations for the interim period are not necessarily indicative of the
results to be obtained for the full fiscal year. Reference is made to the
audited financial statements of the Company included in its Annual Report
on Form 10-K as of and for the year ended December 31, 2001 (the "2001
Form 10-K") with respect to certain significant accounting and financial
reporting policies as well as other pertinent information of the Company.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), which establishes new accounting and reporting requirements
for goodwill and other intangible assets. Under SFAS 142, all goodwill
amortization ceased effective January 1, 2002 (first quarter 2001
goodwill amortization was $2.3 million) and goodwill attributable to each
of the Company's reporting units was tested for impairment by comparing
the fair value of each reporting unit with its carrying value. Fair value
was determined using a collaboration of various common valuation
techniques, including market multiples, discounted cash flows, and
replacement cost methods.
7
These impairment tests are required to be performed at adoption of SFAS
142 and at least annually thereafter. On an ongoing basis (absent any
impairment indicators), the Company expects to perform its impairment
tests during the fourth quarter, in connection with the annual budgeting
process.
Based on the Company's initial impairment tests, the Company recognized
an impairment of $80.3 million to write-off the carrying value of
goodwill associated with the Company's owned and managed facilities. This
goodwill was established in connection with the acquisition of
Correctional Management Services Corporation, a privately-held operating
company and Tennessee corporation subsequently also known as Corrections
Corporation of America ("Operating Company"). The remaining goodwill,
which is associated with the facilities the Company manages but does not
own, was deemed to be not impaired, and remains recorded on the balance
sheet. This goodwill was established in connection with the acquisitions
of Prison Management Services, Inc. ("PMSI") and Juvenile and Jail
Facility Management Services, Inc. ("JJFMSI"), both of which were
privately-held service companies and Tennessee corporations that managed
certain government-owned adult and juvenile prison and jail facilities.
The implied fair value of goodwill of the owned and managed reporting
segment did not support the carrying value of any goodwill, primarily due
to its highly leveraged capital structure. No impairment of goodwill
allocated to the managed-only reporting segment was deemed necessary,
primarily because of the relatively minimal capital expenditure
requirements, and therefore indebtedness, in connection with obtaining
such management contracts. Under SFAS 142, the impairment recognized at
adoption of the new rules was reflected as a cumulative effect of
accounting change in the Company's statement of operations for the first
quarter of 2002. Impairment adjustments recognized after adoption, if
any, generally are required to be recognized as operating expenses.
SFAS 142 also requires certain previous separately identified intangible
assets, such as workforce values, to be reclassified as goodwill. The
carrying amount of goodwill attributable to each reportable operating
segment with goodwill balances and changes therein is as follows (in
thousands):
Owned and
Managed Managed-only
Segment Segment Total
--------- ------------ ---------
Balance as of December 31, 2001 $ 79,876 $24,143 $ 104,019
Value of workforce reclassified as goodwill 400 289 689
Impairment adjustment (80,276) -- (80,276)
-------- ------- ---------
Balance as of March 31, 2002 $ -- $24,432 $ 24,432
======== ======= =========
In connection with the adoption of SFAS 142, the Company also reassessed
the useful lives and the classification of its identifiable intangible
assets and liabilities and determined that they continue to be
appropriate. The components of the Company's amortized intangible assets
and liabilities are as follows (in thousands):
8
MARCH 31, 2002 December 31, 2001
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED Gross Carrying Accumulated
AMOUNT AMORTIZATION Amount Amortization
-------------- ------------ -------------- ------------
Contract acquisition costs $ 2,659 $(1,911) $ 2,659 $(1,754)
Contract values established in
connection with certain business
combinations (25,215) 7,085 (25,215) 6,919
-------- ------- -------- -------
Total $(22,556) $ 5,174 $(22,556) $ 5,165
======== ======= ======== =======
Amortization income, net of amortization expense, for intangible assets
and liabilities during the first quarter of 2002 was $0.7 million.
Estimated amortization income, net of amortization expense, for the
remainder of 2002 and the five succeeding fiscal years is as follows (in
thousands):
2002 (remainder) $ (1,020)
2003 (1,581)
2004 (3,201)
2005 (4,248)
2006 (4,586)
2007 (4,586)
Actual results of operations for the three months ended March 31, 2002
and pro forma results of operations for the three months ended March 31,
2001 had the Company applied the non-amortization provisions of SFAS 142
in that period are as follows (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31,
2002 2001
---------- ----------
Reported net loss available to common
stockholders $ (46,329) $ (10,128)
Add: Goodwill amortization -- 2,251
---------- ----------
Adjusted net loss available to common
stockholders $ (46,329) $ (7,877)
========== ==========
Basic loss per share:
Reported net loss available to common
stockholders $ (1.68) $ (0.43)
Goodwill amortization -- 0.10
---------- ----------
Adjusted net loss available to common
stockholders $ (1.68) $ (0.33)
========== ==========
Diluted loss per share:
Reported net loss available to common
stockholders $ (1.23) $ (0.43)
Goodwill amortization -- 0.10
---------- ----------
Adjusted net loss available to common
stockholders $ (1.23) $ (0.33)
========== ==========
9
In August 2001, the Financial Accounting Standards Board ("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 Long-Lived Assets to be Disposed Of" ("SFAS 121"),
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 Company adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144
did not have a material impact on the financial statements of the
Company.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," referred
to herein as SFAS 145. SFAS 145 rescinds Statement of Financial
Accounting Standards No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as
an extraordinary item, net of related income tax effect. As a result, the
criteria in Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual an Infrequently Occurring Events
and Transactions" will now be used to classify those gains and losses.
SFAS 64 amended SFAS 4, and is no longer necessary because SFAS 4 has
been rescinded. SFAS 44 was issued to establish accounting requirements
for the effects of transition to the provisions of the Motor Carrier Act
of 1980. Because the transition has been completed, SFAS 44 is no longer
necessary. SFAS 145 amends SFAS 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. SFAS 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in
some instances, they may change accounting practice. The provisions of
SFAS 145 are effective for financial statements issued for fiscal years
beginning after May 15, 2002, and interim periods within those fiscal
years. Other than prospective changes to the classification from
extraordinary of gains and losses from extinguishments of debt completed
after December 31, 2002, the adoption of SFAS 145 is not expected to have
a material impact on the financial statements of the Company.
4. FACILITY OPERATIONS
During the fourth quarter of 2000, the Company's management committed to
a plan of disposal for certain long-lived assets of the Company,
including the Leo Chesney Correctional Center ("Leo Chesney"), located in
Live Oak, California, and the Queensgate Correctional Facility
("Queensgate"), located in Cincinnati, Ohio. These facilities are
currently leased to third party operators. The facilities, with estimated
net realizable values totaling $20.6 million at December 31, 2001, were
classified on the consolidated balance sheet as assets held for sale as
10
of December 31, 2001. During the first quarter of 2002, these facilities
were reclassified to assets held for use and included in property and
equipment, net, on the condensed consolidated balance sheet at March 31,
2002, because the Company was unable to achieve acceptable sales prices.
Also during the first quarter of 2002, the Company entered into a mutual
agreement with Children and Family Services Corporation ("CFSC") to
terminate the Company's management contract at Southwest Indiana Regional
Youth Village, effective April 1, 2002, prior to the contract's
expiration date in 2004. In connection with the mutual agreement to
terminate the management contract, CFSC also paid in full an outstanding
note receivable totaling approximately $0.7 million, which was previously
considered uncollectible and was fully reserved.
In late 2001 and early 2002, the Company was provided notice from the
Commonwealth of Puerto Rico of its intention to terminate the management
contracts at the Ponce Young Adult Correctional Facility and the Ponce
Adult Correctional Facility, located in Ponce, Puerto Rico, upon the
expiration of the management contracts in February 2002. Attempts to
negotiate continued operation of these facilities were unsuccessful. As a
result, the transition period to transfer operation of the facilities to
the Commonwealth of Puerto Rico ended May 4, 2002, at which time
operation of the facilities was transferred to the Commonwealth of Puerto
Rico. The Company expects to record a non-cash charge of approximately
$1.8 million during the second quarter of 2002 for the write-off of the
carrying value of assets associated with the terminated management
contracts. During the fourth quarter of 2001, the Company signed an
extension of its management contract with the Commonwealth of Puerto Rico
for the operation of the Guayama Correctional Center located in Guayama,
Puerto Rico, through December 2006. However, on May 7, 2002, the Company
received notice from the Commonwealth of Puerto Rico terminating the
Company's contract to manage this facility. The Commonwealth of Puerto
Rico has requested that the transfer of operations of the facility be
completed by June 30, 2002. The termination of the Guayama Correctional
Center management contract will result in, at the effective time of the
termination, a non-cash charge of approximately $0.5 million for the
write-off of the carrying value of assets associated with this management
contract.
5. DEBT
References to the Old Senior Bank Credit Facility refers to the Company's
senior secured bank credit facility existing prior to the refinancing
completed during the second quarter of 2002, as more fully described
below.
11
Debt consists of the following:
MARCH 31, December 31,
2002 2001
--------- ------------
(in thousands)
Old Senior Bank Credit Facility:
Term loans, with quarterly principal payments of $2.2 million with
unpaid balance due December 31, 2002; interest payable periodically at
variable interest rates. The interest rate was 7.40% and 7.41% at March
31, 2002 and December 31, 2001, respectively. This debt was refinanced
in the second quarter of 2002, as further discussed below $ 789,733 $ 791,906
Senior Notes, principal due at maturity in June 2006, interest payable
semi-annually at 12%. A substantial portion of these notes was repaid in
the second quarter of 2002 in connection with the refinancing further
discussed below 100,000 100,000
10.0% Convertible Subordinated Notes, principal due at maturity in December
2008, interest payable semi-annually in June and December at 10.0% 40,000 40,000
8.0% Convertible Subordinated Notes, principal due at maturity in February
2005 with call provisions beginning in February 2003, interest payable
quarterly at 8.0% 30,000 30,000
10.0% Convertible Subordinated Notes, principal due at maturity in
December 2003, interest payable semi-annually at 10.0%. These notes were
converted into approximately 0.1 million shares of common stock on
January 14, 2002 -- 1,114
Other 554 580
--------- ---------
960,287 963,600
Less: Current portion of long-term debt (789,838) (792,009)
--------- ---------
$ 170,449 $ 171,591
========= =========
DECEMBER 2001 AMENDMENT AND RESTATEMENT OF THE OLD SENIOR BANK CREDIT
FACILITY
Pursuant to an amendment and restatement of the Old Senior Bank Credit
Facility in December 2001 (the "December 2001 Amendment and
Restatement"), all loans under the Old Senior Bank Credit Facility were
payable at a variable interest rate of 5.5% over the London Interbank
Offering Rate ("LIBOR"), or 4.5% over the base rate, at the Company's
option.
As a result of the December 2001 Amendment and Restatement, certain
financial and non-financial covenants were amended, including the removal
of prior restrictions on the Company's ability to pay cash dividends on
shares of the Company's issued and outstanding Series A Preferred Stock,
including all dividends in arrears. Following the December 2001 Amendment
and Restatement, on December 13, 2001, the Company's board of directors
declared a cash dividend on the Series A Preferred Stock for the fourth
quarter of 2001 and for all five quarters in arrears. As a result of the
board's declaration, the holders of the Company's Series A Preferred
Stock received $3.00 for every share of Series A Preferred Stock they
held on the record date. The dividend was based on a dividend rate of 8%
per annum of the stock's stated value of $25.00 per share. On January 15,
2002, the Company paid $12.9 million to shareholders of Series A
Preferred Stock as a result of this dividend, which was accrued as of
December 31, 2001.
12
COMPREHENSIVE REFINANCING
On May 3, 2002, the Company completed a comprehensive refinancing (the
"Refinancing") of its senior indebtedness through the refinancing of its
Old Senior Bank Credit Facility and the offering of $250.0 million
aggregate principal amount of 9.875% unsecured senior notes due 2009 (the
"New Senior Notes") in a private placement to a group of initial
purchasers. The proceeds of the offering of the New Senior Notes were
used to repay a portion of amounts outstanding under the Old Senior Bank
Credit Facility, to purchase approximately $89.2 million of the Company's
existing 12% Senior Notes due 2006 pursuant to a tender offer and consent
solicitation more fully described below, and to pay related fees and
expenses.
$250.0 Million New Senior Notes. Interest on the New Senior Notes accrues
at a rate of 9.875% per year, and is payable semi-annually on May 1 and
November 1 of each year, beginning November 1, 2002. The New Senior Notes
mature on May 1, 2009. At any time before May 1, 2005, the Company may
redeem up to 35% of the notes with the net proceeds of certain equity
offerings, as long as 65% of the aggregate principal amount of the notes
remains outstanding after the redemption. The Company may redeem all or a
portion of the New Senior Notes on or after May 1, 2006. Redemption
prices are set forth in the indenture governing the New Senior Notes. The
New Senior Notes are guaranteed on an unsecured basis by the all of the
Company's domestic subsidiaries (other than the Company's Puerto Rican
subsidiary).
Pursuant to the terms and conditions of a Registration Rights Agreement
by and among the Company, the Company's subsidiary guarantors, and the
initial purchasers, dated as of May 3, 2002, the Company and the
Company's subsidiary guarantors have agreed to file a registration
statement with the Securities and Exchange Commission relating to an
offer to exchange the New Senior Notes and related guarantees for
publicly tradeable notes and guarantees on substantially identical terms
within a designated time period.
New Senior Bank Credit Facility. As part of the Refinancing, the Company
obtained a new $715.0 million senior secured bank credit facility (the
"New Senior Bank Credit Facility"), which replaced the Old Senior Bank
Credit Facility. Lehman Commercial Paper Inc. serves as administrative
agent under the new facility, which is comprised of a $75.0 million
revolving loan with a term of approximately four years (the "Revolving
Loan"), a $75.0 million term loan with a term of approximately four years
(the "Term Loan A Facility"), and a $565.0 million term loan with a term
of approximately six years (the "Term Loan B Facility"). All borrowings
under the New Senior Bank Credit Facility initially bear interest at a
base rate or LIBOR plus 3.5%, at the Company's option. The applicable
margin for the Revolving Loan and the Term Loan A Facility is subject to
adjustment based on the Company's leverage ratio. The Company is also
required to pay a commitment fee on the difference between committed
amounts and amounts actually utilized under the facility, equal to 0.50%
per year subject to adjustment based on the Company's leverage ratio.
The Revolving Loan will be used by the Company for working capital and
general corporate needs.
The Term Loan A Facility and the Term Loan B Facility are repayable in
quarterly installments in an aggregate principal amount for each year as
set forth below (in thousands):
13
TERM LOAN A TERM LOAN B
FACILITY FACILITY TOTAL
----------- ----------- --------
2002 (remainder) $11,250 $ 4,238 $ 15,488
2003 17,250 5,650 22,900
2004 20,250 5,650 25,900
2005 21,000 5,650 26,650
2006 5,250 5,650 10,900
2007 -- 377,137 377,137
2008 -- 161,025 161,025
------- -------- --------
Total $75,000 $565,000 $640,000
======= ======== ========
Prepayment of loans outstanding under the New Senior Bank Credit Facility
is permitted at any time without premium or penalty, upon the giving of
proper notice. In addition, the Company is required to prepay amounts
outstanding under the New Senior Bank Credit Facility in an amount equal
to: (i) 50% of the net cash proceeds from any sale or issuance of equity
securities by the Company or any of the Company's subsidiaries, subject
to certain exceptions; (ii) 100% of the net cash proceeds from any
incurrence of additional indebtedness (excluding certain permitted debt),
subject to certain exceptions; (iii) 100% of the net cash proceeds from
any sale or other disposition by the Company, or any of the Company's
subsidiaries, of any assets, subject to certain exclusions and
reinvestment provisions and excluding certain dispositions in the
ordinary course of business; and (iv) 50% of the Company's "excess cash
flow" (as such term is defined in the New Senior Bank Credit Facility)
for each fiscal year.
The New Senior Bank Credit Facility requires the Company to meet certain
financial tests, including, without limitation, a minimum fixed charge
coverage ratio, a maximum leverage ratio and a minimum interest coverage
ratio. In addition, the New Senior Bank Credit Facility contains certain
covenants which, among other things, limit the incurrence of additional
indebtedness, investments, dividends, transactions with affiliates, asset
sales, acquisitions, capital expenditures, mergers and consolidations,
prepayments of other indebtedness, liens and encumbrances and other
matters customarily restricted in such agreements.
The loans and other obligations under the New Senior Bank Credit Facility
are guaranteed by each of the Company's domestic subsidiaries. The
Company's obligations under the New Senior Bank Credit Facility and the
guarantees are secured by: (i) a perfected first priority security
interest in substantially all of the Company's tangible and intangible
assets and substantially all of the tangible and intangible assets of the
Company's subsidiaries; and (ii) a pledge of all of the capital stock of
the Company's domestic subsidiaries and 65% of the capital stock of
certain of the Company's foreign subsidiaries.
Tender Offer and Consent Solicitation for $100.0 Million Senior Notes.
Pursuant to the terms of a tender offer and consent solicitation
previously announced by the Company on April 19, 2002, in connection with
the Refinancing, on May 3, 2002, the Company purchased approximately
$89.2 million in aggregate principal amount of its $100.0 Million 12%
Senior Notes due 2006 with proceeds from the issuance of the New Senior
Notes. The purchase comprised of all notes tendered on or before April
29, 2002. The notes were purchased at a price of 110% of par, which
included a 3% consent payment, plus accrued and unpaid interest to the
payment date. In connection with the tender offer and consent
solicitation, the Company received sufficient consents and amended the
indenture governing the 12% Senior Notes to delete substantially all of
the restrictive covenants and events of default contained therein. The
14
tender offer will expire on May 16, 2002, unless extended by the Company.
Payments for notes tendered and accepted after April 29, 2002 but on or
prior to May 16, 2002 will be made promptly following the expiration of
the tender offer.
To the extent any of the 12% Senior Notes remain outstanding following
completion of the tender, the Company will be required to pay on the
remaining notes outstanding interest and principal upon maturity, in
accordance with the original terms of such notes.
Operating Company Revolving Credit Facility. In connection with the
Refinancing, a revolving credit facility with a $50.0 million capacity
assumed by the Company in connection with the merger with Operating
Company in the fourth quarter of 2000, was terminated. No amounts were
outstanding on this facility as of March 31, 2002 or December 31, 2001.
CONVERSION OF $1.1 MILLION CONVERTIBLE SUBORDINATED NOTES
In connection with the June 2000 waiver and amendment to the note
purchase agreement relating to the Company's $40.0 million convertible
subordinated notes with MDP Ventures IV LLC and certain affiliated
purchasers ("MDP"), the Company issued additional convertible
subordinated notes to MDP 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 were convertible, at an adjusted conversion price
of $11.90. On January 14, 2002, MDP converted the $1.1 million
convertible subordinated notes into approximately 94,000 shares of common
stock.
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 year.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. For the
Company, diluted earnings per share is computed by dividing net income
(loss), as adjusted, by the weighted average number of common shares
after considering the additional dilution related to convertible
subordinated notes, restricted common stock plans, and stock options and
warrants.
A reconciliation of the numerator and denominator of the basic earnings
per share computation to the numerator and denominator of the diluted
earnings per share computation is as follows (in thousands, except per
share data, which has also been adjusted for the reverse stock split in
May 2001):
15
MARCH 31,
----------------------
2002 2001
-------- --------
NUMERATOR
BASIC:
Income (loss) before cumulative effect of accounting change $ 33,947 $(10,128)
Cumulative effect of accounting change (80,276) --
-------- --------
Net loss available to common stockholders $(46,329) $(10,128)
======== ========
DILUTED:
Income (loss) before cumulative effect of accounting change $ 33,947 $(10,128)
Interest expense applicable to convertible notes 2,485 --
-------- --------
Diluted income (loss) before cumulative effect of accounting
change 36,432 (10,128)
Cumulative effect of accounting change (80,276) --
-------- --------
Diluted net loss available to common stockholders $(43,844) $(10,128)
======== ========
DENOMINATOR
BASIC:
Weighted average common shares outstanding 27,641 23,603
======== ========
DILUTED:
Weighted average common shares outstanding 27,641 23,603
Effect of dilutive securities:
Stock options and warrants 656 --
Stockholder litigation 310 --
Convertible notes 6,747 --
Restricted stock-based compensation 248 --
-------- --------
Weighted average shares and assumed conversions 35,602 23,603
======== ========
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect of accounting change $ 1.23 $ (0.43)
Cumulative effect of accounting change (2.91) --
-------- --------
Net loss available to common stockholders $ (1.68) $ (0.43)
======== ========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect of accounting change $ 1.02 $ (0.43)
Cumulative effect of accounting change (2.25) --
-------- --------
Net loss available to common stockholders $ (1.23) $ (0.43)
======== ========
For the three months ended March 31, 2001, the Company's restricted
stock, stock options and warrants were convertible into 0.3 million
shares of common stock (as adjusted for the reverse stock split in May
2001), using the treasury stock method. For the three months ended March
31, 2001, the Company's convertible subordinated notes were convertible
into 6.8 million shares of common stock (as adjusted for the reverse
stock split in May 2001) using the if-converted method. These incremental
shares were excluded from the computation of diluted earnings per share
for the three months ended March 31, 2001, as the effect of their
inclusion was anti-dilutive.
For the three months ended March 31, 2001, 4.3 million shares of common
stock were contingently issuable under the terms of the settlement
agreement of all formerly existing stockholder litigation against the
Company and certain of its existing and former directors and executive
officers completed during the first quarter of 2001. These contingently
issuable
16
shares were excluded from the computation of diluted earnings per share
for the three months ended March 31, 2001, as the effect of their
inclusion was anti-dilutive. All of these shares, with the exception of
approximately 0.3 million shares, were issued during 2001.
7. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
General. The nature of the Company's business results in claims and
litigation alleging that it is liable for damages arising from the
conduct of its employees or others. In the opinion of management, there
are no pending legal proceedings that would have a material effect on the
Company's consolidated financial position or results of operations for
which it has not established adequate reserves.
Recently Settled Operational Proceedings. On April 5, 2002, the Company's
inmate transportation subsidiary, TransCor America, LLC ("TransCor"),
reached an agreement to settle certain litigation pending in federal
court in the United States District Court for the Western District of
Texas, captioned Cheryl Schoenfeld v. TransCor America, Inc. et al. The
lawsuit was filed by two plaintiffs who alleged that two former employees
of TransCor sexually assaulted the plaintiffs during their transportation
to a facility in Texas in late 1999. The parties have agreed to settle
all claims with a confidential cash payment to be made to the plaintiffs
in the litigation, the majority of which will be funded by insurance
proceeds. The parties are in the process of negotiating a formal
settlement and release agreement with respect to the litigation and it is
expected that such an agreement will be completed expeditiously. Until
the parties complete a formal release agreement and the settlement is
paid in full, however, the risk exists that the settlement will not be
completed.
INCOME TAX CONTINGENCIES
In connection with the merger with the former Corrections Corporation of
America, a Tennessee corporation ("Old CCA") on December 31, 1998, the
Company assumed the tax obligations of Old CCA. The Internal Revenue
Service ("IRS") has completed field audits of Old CCA's federal tax
returns for the taxable years ended December 31, 1998 and 1997, and is
currently auditing the Company's federal tax returns for the taxable year
ended December 31, 2000. The Company has received the IRS agent's report
related to 1998 and 1997, which includes a determination by the IRS to
increase taxable income by approximately $120.0 million. If ultimately
upheld, these adjustments would result in a cash tax liability to the
Company of approximately $46.8 million, not including penalties and
interest. The Company is currently appealing the IRS's preliminary
findings with the Appeals Office of the IRS. While the Company intends to
vigorously defend its position, it is currently unable to predict the
ultimate outcome of these IRS audits. It is possible that such audits
will result in claims against the Company in excess of reserves currently
recorded.
In connection with the IRS's audit of the Company's 2000 federal income
tax return, the agent conducting the audit has indicated that the IRS
intends to disallow a loss the Company claimed as the result of its
forgiveness in September 2000 of certain indebtedness to one of its
former operating companies. The IRS, however, has not made any assessment
of tax liability against
17
the Company to date. In the event the IRS does make such an assessment
and prevails, the Company would be required to pay the IRS in excess of
$56.0 million in cash plus penalties and interest. This adjustment would
also substantially eliminate the Company's net operating loss
carryforward. The Company believes that it has meritorious defenses of
its positions. The Company has not established a reserve for this
matter. However, no assurance can be given that the IRS will not make
such an assessment and prevail in any such claim.
In addition, although the IRS has concluded the audit of the Company's
federal tax return for the taxable year ended December 31, 1999, the
statute of limitations for such taxable year still has not expired. Thus,
the Company's election of real estate investment trust ("REIT") status
for 1999 remains subject to review by the IRS generally until such
expiration of three years from the date of filing the 1999 federal tax
return. While the Company believes that it met the qualifications as a
REIT for 1999, qualification as a REIT involves the application of highly
technical and complex provisions of the Code for which there is only
limited judicial and administrative interpretations. Should the IRS
subsequently disallow the Company's election to be taxed as REIT for the
1999 taxable year, it would be subject to income taxes and interest on
its 1999 taxable income and possibly could be subject to penalties, which
would have an adverse impact on the Company's financial position, results
of operations and cash flows. To the extent that any IRS audit
adjustments, including any adjustments resulting from the audit of Old
CCA's 1997 and 1998 tax returns, increase the accumulated earnings and
profits of Old CCA, the Company could be required to make additional
distributions of such to its stockholders, either in cash or through the
issuance of certain types of its securities, in order to preserve its
REIT status for its 1999 taxable year. With respect to an increase in Old
CCA's earnings and profits for 1997 and 1998, if the IRS ultimately
increases taxable income as described above and requires the Company to
distribute the full amounts of the increase in Old CCA's earnings and
profits (less any taxes, interest and penalties), the Company would be
required to distribute approximately $70.5 million in cash or securities
to its stockholders of record at the time of distribution, none of which
is currently accrued. Pursuant to the terms of the New Senior Bank Credit
Facility, however, the Company would not be permitted to satisfy any such
obligation with cash. In addition, the terms of the New Senior Notes
restrict the Company's ability to satisfy such an obligation in cash or
securities.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities ("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. The Company
adopted SFAS 133, as amended, effective January 1, 2001. At March 31,
2002, the Company's derivative instruments included an interest rate swap
agreement and, upon issuance, will also include an 8.0%, $2.9 million
subordinated promissory note due in 2009, expected to be issued in
conjunction with the issuance of shares of common stock to plaintiffs
arising from the state court portion of a stockholder litigation
settlement completed during 2001. As described below, the issuance of
these shares, and consequently the promissory note, is currently expected
to occur during the second quarter of 2002.
In accordance with the terms of the Old Senior Bank Credit Facility, the
Company entered into a swap agreement in order to hedge the variable
interest rate associated with portions of the
18
debt. The swap agreement fixes LIBOR at 6.51% (prior to the applicable
spread) on outstanding balances of at least $325.0 million through its
expiration on December 31, 2002. The difference between the floating
rate and the swap rate is recognized in interest expense.
The Company has elected not to attempt to meet the hedge accounting
criteria for the interest rate swap agreement under SFAS 133, as amended,
and has reflected in earnings the change in the estimated fair value of
the interest rate swap agreement. As of March 31, 2002, due to decreases
in interest rates since entering into the swap agreement, the interest
rate swap agreement had a negative fair value of $9.5 million, including
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) effective January 1, 2001.
In accordance with SFAS 133, as amended, the Company recorded a $3.4
million non-cash gain for the change in fair value of the interest rate
swap agreement for the three months ended March 31, 2002, which is net of
$0.6 million for amortization of the transition adjustment. The Company
was no longer required to maintain the existing interest rate swap
agreement due to the early extinguishment of the Old Senior Bank Credit
Facility. During May 2002, the Company terminated the swap agreement
prior to its expiration at a price of approximately $10.7 million. In
accordance with SFAS 133, the Company will continue to amortize the
unamortized portion of the transition adjustment of $1.9 million as of
March 31, 2002, as a non-cash expense through December 31, 2002.
The New Senior Bank Credit Facility requires the Company to hedge $192.0
million of the term loan portions of the facility within 60 days
following the closing of the loan. In May 2002, the Company entered into
an interest rate cap agreement to fulfill this requirement, capping LIBOR
at 5.0% on outstanding balances of $200.0 million through the expiration
of the cap agreement on May 20, 2004. The Company currently believes that
it will be able to meet the hedge accounting criteria under SFAS 133 in
accounting for the interest rate cap agreement. As a result, the
estimated fair value of the interest rate cap agreement will be reported
on the balance sheet, and changes in the fair value of the interest rate
cap agreement will be reported through other comprehensive income in the
statement of stockholders' equity (for the effective portion of the
interest rate cap agreement) and through the statement of operations (for
the ineffective portion of the interest rate cap agreement and for the
expiration of the time value of the $1.0 million premium paid to enter
into the agreement). There can be no assurance that the interest rate cap
agreement will be effective in mitigating the Company's exposure to
interest rate risk, or that the Company will be able to meet the hedge
accounting criteria under SFAS 133.
On December 31, 2001, approximately 2.8 million shares of the Company's
common stock were issued, along with a $26.1 million subordinated
promissory note, in conjunction with the final settlement of the federal
court portion of the stockholder litigation settlement. Under the terms
of the promissory note, the note and accrued interest became extinguished
in January 2002 once the average closing price of the common stock
exceeded a "termination price" equal to $16.30 per share for fifteen
consecutive trading days following the issuance of such note. The terms
of the note, which allow the principal balance to fluctuate dependent on
the trading price of the Company's common stock, created a derivative
instrument that was valued and accounted for under the provisions of SFAS
133. As a result of the extinguishment of the note in January 2002, the
derivative instrument was also extinguished. Since the estimated fair
19
value of the derivative asset was equal to the face amount of the note as
of December 31, 2001, the extinguishment had no financial statement
impact in 2002.
The state court portion of the stockholder litigation settlement has not
yet been completed; however, the settlement is expected to result in the
issuance of approximately 0.3 million additional shares of the Company's
common stock and a $2.9 million subordinated promissory note, which may
also be extinguished if the average closing price of the Company's common
stock meets or exceeds $16.30 per share for fifteen consecutive trading
days following the note's issuance and prior to its maturity in 2009.
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 remaining 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 derivative
included in the promissory note from quarter to quarter. Since the
Company has reflected the maximum obligation of the contingency
associated with the state court portion of the stockholder litigation in
the accompanying consolidated balance sheet as of March 31, 2002, 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 derivative included in the promissory note is determined.
9. 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
(on a post-reverse stock split basis) from 400.0 million shares (on
pre-reverse stock split basis). As of March 31, 2002, the Company had
approximately 28.0 million shares of common stock issued and outstanding
(on a post-reverse stock split basis).
20
10. SEGMENT REPORTING
As of March 31, 2002, the Company owned and managed 36 correctional and
detention facilities, and managed 28 correctional and detention
facilities it does not own. Management views 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 2001 Form
10-K. Owned and managed facilities include the operating results of those
facilities owned and managed by the Company. Managed-only facilities
include the operating results of those facilities owned by a third party
and managed by the Company. The Company measures the operating
performance of each facility within the above two segments, without
differentiation, based on facility contribution. The Company defines
facility contribution as a facility's operating income or loss from
operations before interest, taxes, depreciation and amortization. Since
each of the Company's facilities within the two operating segments
exhibit similar economic characteristics, provide similar services to
governmental agencies, and operate under a similar set of operating
procedures and regulatory guidelines, the facilities within the
identified segments have been aggregated and reported as one operating
segment.
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 months ended March 31, 2002 and 2001 (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:
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
--------- ---------
Revenue:
Owned and managed $ 155,196 $ 152,007
Managed-only 80,982 81,950
--------- ---------
Total management revenue 236,178 233,957
--------- ---------
Operating expenses:
Owned and managed 118,424 113,781
Managed-only 65,962 67,224
--------- ---------
Total operating expenses 184,386 181,005
--------- ---------
Facility contribution:
Owned and managed 36,772 38,226
Managed-only 15,020 14,726
--------- ---------
Total facility contribution 51,792 52,952
--------- ---------
Other revenue (expense):
Rental and other revenue 5,008 6,425
Other operating expense (4,536) (3,650)
General and administrative (7,191) (8,600)
Depreciation and amortization (12,458) (12,701)
--------- ---------
Operating income $ 32,615 $ 34,426
========= =========
21
MARCH 31, December 31,
2002 2001
---------- ----------
Assets:
Owned and managed $1,583,526 $1,597,697
Managed-only 85,410 86,598
Corporate and other 234,304 286,985
---------- ----------
Total assets $1,903,240 $1,971,280
========== ==========
11. SUPPLEMENTAL CASH FLOW DISCLOSURE
During the first quarters of 2002 and 2001, the Company issued $2.8
million and $2.7 million, respectively, of its Series B Preferred Stock
in lieu of cash distributions to the holders of shares of Series B
Preferred Stock on the applicable record date. Additionally, the Company
issued approximately 94,000 shares of common stock on January 14, 2002
due to the conversion of $1.1 million of convertible subordinated notes
by the holder of such notes.
22
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
This quarterly report on Form 10-Q contains statements that are forward-looking
statements as defined within the meaning of the Private Securities Litigation
Reform Act of 1935. Forward-looking statements give our current expectations of
forecasts of future events. All statements other than statements of current or
historical fact contained herein, including statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
The words "anticipate," "believe," "continue," "estimate," "expect," "intend,"
"may," "plan," "projects," "will," and similar expressions, as they relate to
us, are intended to identify forward-looking statements. These statements are
based on our current plans and actual future activities, and our results of
operations may be materially different from those set forth in the
forward-looking statements. In particular, these include, among other things,
statements relating to:
- The growth in the privatization of the corrections and detention
industry and the public acceptance of our services;
- our ability to obtain and maintain correctional facility
management contracts;
- changes in government policy and in legislation and regulation
of the corrections and detention industry that adversely affect
our business;
- tax related risks, particularly with respect to our operation so
as to preserve our ability to qualify as a real estate
investment trust for the year ended December 31, 1999;
- fluctuations in operating results because of changes in
occupancy levels, competition, increases in cost of operations,
fluctuations in interest rates and risks of operations; and
- general economic and market conditions.
Any or all of our forward-looking statements in this quarterly report may turn
out to be inaccurate. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. They can be affected by
inaccurate assumptions we might make or by known or unknown risks, uncertainties
and assumptions, including the risks, uncertainties and assumptions described in
risk factors disclosed in detail in our annual report on Form 10-K for the
fiscal year ended December 31, 2001, filed with the Securities and Exchange
Commission on March 22, 2002 (File No. 0-25245) (the "2001 Form 10-K"). 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. All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the cautionary statements contained in this report and in the 2001 Form 10-K.
23
OVERVIEW
THE COMPANY
As of March 31, 2002, we owned 39 correctional, detention and juvenile
facilities, three of which we lease to other operators, and two additional
facilities which are not yet in operation. We also have a leasehold interest in
a juvenile facility. At March 31, 2002, we operated 64 facilities, including 36
company-owned facilities, with a total design capacity of approximately 61,000
beds in 21 states, the District of Columbia and Puerto Rico.
We 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, our facilities offer a variety of rehabilitation
and education programs, including basic education, life skills and employment
training and substance abuse treatment. These services are intended to reduce
recidivism and to prepare inmates for their successful re-entry into society
upon their release. We also provide health care (including medical, dental and
psychiatric services), food services and work and recreational programs.
CRITICAL ACCOUNTING POLICIES
The condensed consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. A summary of our significant accounting policies is
described in our 2001 Form 10-K. The significant accounting policies and
estimates which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results include the following:
Asset impairments. As of March 31, 2002, we had approximately $1.6 billion in
long-lived assets. We evaluate the recoverability of the carrying values of our
long-lived assets, other than intangibles, when events suggest that an
impairment may have occurred. In these circumstances, we utilize estimates of
undiscounted cash flows to determine if an impairment exists. If an impairment
exists, it is measured as the amount by which the carrying amount of the asset
exceeds the estimated fair value of the asset.
Goodwill impairments. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), which establishes new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS 142, all goodwill amortization
ceased effective January 1, 2002 (first quarter 2001 goodwill amortization was
$2.3 million) and goodwill attributable to each of our reporting units was
tested for impairment by comparing the fair value of each reporting unit with
its carrying value. Fair value was determined using a collaboration of various
common valuation techniques, including market multiples, discounted cash flows,
and replacement cost methods. These impairment tests are required to be
performed at adoption of SFAS 142 and at least annually thereafter. On an
ongoing basis (absent any impairment indicators), we expect to perform our
impairment tests during the fourth quarter, in connection with our annual
budgeting process.
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Based on our initial impairment tests, we recognized an impairment of $80.3
million to write-off the carrying value of goodwill associated with our owned
and managed facilities. This goodwill was established in connection with the
acquisition of Operating Company. The remaining goodwill, which is associated
with the facilities we manage but do not own, was deemed to be not impaired, and
remains recorded on the balance sheet. This goodwill was established in
connection with the acquisitions of Prison Management Services, Inc. ("PMSI")
and Juvenile and Jail Facility Management Services, Inc. ("JJFMSI"), both of
which were privately-held service companies and Tennessee corporations that
managed certain government-owned adult and juvenile prison and jail facilities.
The implied fair value of goodwill of the owned and managed reporting segment
did not support the carrying value of any goodwill, primarily due to its highly
leveraged capital structure. No impairment of goodwill allocated to the
managed-only reporting segment was deemed necessary, primarily because of the
relatively minimal capital expenditure requirements, and therefore indebtedness,
in connection with obtaining such management contracts. Under SFAS 142, the
impairment recognized at adoption of the new rules was reflected as a cumulative
effect of accounting change in our statement of operations for the first quarter
of 2002. Impairment adjustments recognized after adoption, if any, generally are
required to be recognized as operating expenses.
Income taxes. As of March 31, 2002, we had approximately $137.6 million in
deferred tax assets. Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Realization of the future tax benefits related to deferred tax assets is
dependent on many factors, including our ability to generate taxable income
within the net operating loss carryforward period. Since the change in tax
status in connection with the restructuring in 2000, and as of March 31, 2002,
we have provided a valuation allowance to reserve the deferred tax assets in
accordance with SFAS 109, "Accounting for Income Taxes." The valuation allowance
was recognized based on the weight of available evidence indicating that it was
more likely than not that the deferred tax assets would not be realized. This
evidence primarily consisted of, but was not limited to, recurring operating
losses for federal tax purposes.
Our assessment of the valuation allowance could change in the future. Removal of
the valuation allowance in whole or in part would result in a non-cash reduction
in income tax expense during the period of removal. To the extent no reserve is
established for our deferred tax assets, the financial statements would reflect
a provision for income taxes at the applicable federal and state tax rates on
income before taxes.
As further discussed in Note 7 to our financial statements, we have received the
IRS's preliminary findings related to audits of Old CCA's federal tax returns
for the taxable years ended December 31, 1998 and 1997, in which the IRS has
proposed to increase taxable income by approximately $120.0 million. If
ultimately upheld, these adjustments would result in a cash tax liability to us
of approximately $46.8 million, not including penalties and interest. We are
currently appealing the IRS's preliminary findings with the Appeals Office of
the IRS. While we intend to vigorously defend our position, we are currently
unable to predict the ultimate outcome of these IRS audits. It is possible,
however, that future cash flows could be materially affected by claims against
us, and results of operations could be materially affected by claims against us
in excess of reserves currently recorded.
In addition, to the extent that any IRS audit adjustments increase the
accumulated earnings and profits of Old CCA, we could be required to make
additional distributions of such to our
25
stockholders, either in cash or through the issuance of certain types of our
securities, in order to preserve our REIT status for our 1999 taxable year. If
the IRS ultimately upholds the adjustments described above and requires us to
distribute the full amount of the increase in Old CCA's earnings and profits
(less any taxes, interest and penalties paid by us), we would be required to
distribute approximately $70.5 million in cash or securities to our stockholders
of record at the time of distribution, none of which is currently accrued.
Pursuant to the terms of our New Senior Bank Credit Facility (as hereafter
defined), however, we are not permitted to satisfy any such obligation with
cash. In addition, the terms of our New Senior Notes (as hereafter defined)
issued subsequent to quarter-end restrict our ability to satisfy such an
obligation in cash or securities.
Self-funded insurance reserves. As of March 31, 2002, we had approximately $24.0
million in accrued liabilities for employee health, workers' compensation, and
automobile insurance. We are significantly self-insured for employee health,
workers' compensation, and automobile liability insurance. As such, our
insurance expense is largely dependent on claims experience and our ability to
control our claims experience. We have consistently accrued the estimated
liability for employee health based on our history of claims experience and time
lag between the incident date and the date the cost is reported to us. We have
accrued the estimated liability for workers' compensation and automobile
insurance based on a third-party actuarial valuation of the outstanding
liabilities. These estimates could change in the future.
Legal reserves. As of March 31, 2002, we had approximately $21.4 million in
accrued liabilities for litigation for certain legal proceedings in which we are
involved. We have accrued our estimate of the probable costs for the resolution
of these claims based on a range of potential outcomes. In addition, we are
subject to current and potential future legal proceedings for which little or no
accrual has been reflected because our current assessment of the potential
exposure is nominal. These estimates have been developed in consultation with
inside legal counsel and, if applicable, outside counsel handling our defense in
these matters, and are based upon an analysis of potential results, assuming a
combination of litigation and settlement strategies. It is possible, however,
that future cash flows and results of operations could be materially affected by
changes in our assumptions, new developments, or by the effectiveness of our
strategies.
LIQUIDITY AND CAPITAL RESOURCES FOR THE THREE MONTHS ENDED MARCH 31, 2002
Our principal capital requirements are for working capital, capital expenditures
and debt service payments. Capital requirements may also include cash
expenditures associated with our outstanding commitments and contingencies, as
further discussed in the notes to the financial statements herein and as further
described in our 2001 Form 10-K. In addition, we may incur capital expenditures
to expand the design capacity of our facilities in order to retain management
contracts, or when the economics of an expansion are compelling. We currently
expect to be able to meet our cash expenditure requirements for the next year.
We have financed, and intend to continue to finance, the working capital and
capital expenditure requirements with existing cash balances and net cash
provided by operations. We may also sell non-strategic assets and apply the net
proceeds to pay-down our outstanding indebtedness.
As of March 31, 2002, our liquidity was provided by cash on hand of
approximately $52.3 million and $50.0 million available under a revolving credit
facility with a $50.0 million capacity. During the three months ended March 31,
2002, we generated $25.5 million in cash through operating activities. In
addition, as a result of a change in tax law that became effective March 9,
2002,
26
permitting an extension of the carryback period of net operating losses from two
years to five years, in April 2002 we received an income tax refund of
approximately $32.2 million. This refund provides us with additional liquidity.
As of March 31, 2002, we had a net working capital deficiency of $708.8 million.
Contributing to the net working capital deficiency was the classification of the
outstanding balance of $789.7 million under our then existing senior secured
bank credit facility, referred to herein as the Old Senior Bank Credit Facility,
which was scheduled to mature on December 31, 2002, as a current liability.
During the fourth quarter of 2000, as a result of our financial condition
existing at that time, including: (i) the pending maturity of the loans under
the Old Senior Bank Credit Facility; (ii) our negative working capital position;
and (iii) our highly leveraged capital structure, our new management conducted
strategic assessments; developed revised financial projections; evaluated the
utilization of existing facilities, projects under development and excess land
parcels; identified certain of these non-strategic assets for sale; and
identified various potential transactions that could improve our financial
position.
During 2001, we believe we were successful in repositioning our capital
structure for a comprehensive refinancing of our senior indebtedness, including
primarily the Old Senior Bank Credit Facility. We paid-down $189.0 million in
total debt through a combination of $138.7 million in cash generated from asset
sales and internally generated cash. We improved operating margins to 23.1%
during 2001 from 18.0% during 2000. Average occupancy during 2001 increased to
88.5% from 84.8% during 2000. We settled a number of outstanding legal matters,
including (i) the class action and derivative stockholder lawsuits brought
against us and certain of our former directors and executive officers; (ii)
litigation regarding fees and expenses we allegedly owed as a result of the
termination of a securities purchase agreement related to our proposed corporate
restructuring in 2000 led by the Fortress/Blackstone investment group, and (iii)
a disputed invoice from Merrill Lynch & Co. for services as our financial
advisor in connection with the corporate restructuring in 2000.
In May 2001, we completed a one-for-ten reverse stock split of our common stock,
which satisfied a condition of continued listing of our common stock on the New
York Stock Exchange. We also believe the reverse stock split encouraged greater
interest in our stock by the financial community and investing public. During
December 2001, we completed an amendment and restatement of our Old Senior Bank
Credit Facility. As part of the December 2001 amendment and restatement, the
existing $269.4 million revolving portion of the Old Senior Bank Credit
Facility, which was to mature on January 1, 2002, was replaced with a term loan
of the same amount maturing on December 31, 2002, to coincide with the maturity
of the other loans under the Old Senior Bank Credit Facility. Pursuant to terms
of the December 2001 amendment and restatement, all loans under the Old Senior
Bank Credit Facility accrued interest at a variable rate of 5.5% over LIBOR, or
4.5% over the base rate, at our option.
As a result of the December 2001 amendment and restatement, certain financial
and non-financial covenants were amended, including the removal of prior
restrictions on our ability to pay cash dividends on shares of our issued and
outstanding Series A Preferred Stock. Under the terms of the December 2001
amendment and restatement, we were permitted to pay quarterly dividends, when
declared by the board of directors, on the shares of Series A Preferred Stock,
including all dividends in arrears. On December 13, 2001, our board of directors
declared a cash dividend on the shares of Series A Preferred Stock for the
fourth quarter of 2001, and for all five quarters then unpaid and in
27
arrears, payable on January 15, 2002 to the holders of record of Series A
Preferred Stock on December 31, 2001. As a result of the board's declaration, we
paid an aggregate of $12.9 million to shareholders of the Series A Preferred
Stock in January 2002.
We believed, and continue to believe, that a short-term extension of the
revolving portion of our Old Senior Bank Credit Facility was in our best
interests for a longer-term financing strategy, particularly due to difficult
market conditions for the issuance of debt securities following the terrorist
attacks on September 11, 2001, and during the fourth quarter of 2001.
Additionally, we believed that certain terms of the amendment and restatement,
including primarily the removal of prior restrictions to pay cash dividends on
our shares of Series A Preferred Stock, including all dividends in arrears,
would result in an improvement to our credit ratings, enhancing the terms of a
more comprehensive refinancing.
After completing the amendment and restatement of the Old Senior Bank Credit
Facility in December 2001, Moody's Investors Service upgraded the rating on our
senior secured debt to "B2" from "B3", our senior unsecured debt to "B3" from
"Caa1", and our preferred stock to "Caa2" from "Ca".
On May 3, 2002, we completed a comprehensive refinancing of our senior
indebtedness through the refinancing of our Old Senior Bank Credit Facility and
the offering of $250.0 million aggregate principal amount of 9.875% unsecured
senior notes due 2009, referred to herein as the New Senior Notes, in a private
placement to a group of initial purchasers. The proceeds from the offering of
the New Senior Notes were used to repay a portion of amounts outstanding under
the Old Senior Bank Credit Facility, to purchase approximately $89.2 million of
the Company's existing 12% Senior Notes due 2006, referred to herein as the Old
Senior Notes, pursuant to a tender offer and consent solicitation announced on
April 19, 2002, and to pay related fees and expenses. Upon the completion of the
refinancing, Moody's Investors Service upgraded its rating of our senior secured
debt to "B1" from "B2", our senior unsecured debt to "B2" from "B3", and our
preferred stock to "Caa1" from "Caa2", and Standard & Poor's upgraded our
corporate credit rating and its rating of our senior secured debt to "B+" from
"B" and our senior unsecured debt to "B-" from "CCC+".
Interest on the New Senior Notes accrues at a rate of 9.875% per year, and is
payable semi-annually on May 1 and November 1 of each year, beginning November
1, 2002. The New Senior Notes mature on May 1, 2009. At any time before May 1,
2005, we may redeem up to 35% of the notes with the net proceeds of certain
equity offerings, as long as 65% of the aggregate principal amount of the notes
remains outstanding after the redemption. We may redeem all or a portion of the
New Senior Notes on or after May 1, 2006. Redemption prices are set forth in the
indenture governing the New Senior Notes. The New Senior Notes are guaranteed on
an unsecured basis by all of our domestic subsidiaries (other than our Puerto
Rican subsidiary).
As part of the refinancing, we obtained a new $715.0 million senior secured bank
credit facility, referred to herein as the New Senior Bank Credit Facility,
which replaced the Old Senior Bank Credit Facility. Lehman Commercial Paper Inc.
serves as administrative agent under the new facility, which is comprised of a
$75.0 million revolving loan with a term of approximately four years, referred
to herein as the Revolving Loan, a $75.0 million term loan with a term of
approximately four years, referred to herein as the Term Loan A Facility, and a
$565.0 million term loan with a term of approximately six years, referred to
herein as the Term Loan B Facility. All borrowings under the New Senior Bank
Credit Facility initially bear interest at a base rate or LIBOR plus 3.5%, at
our option. The applicable margin for the Revolving Loan and the Term Loan A
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Facility is subject to adjustment based on our leverage ratio. We are also
required to pay a commitment fee on the difference between committed amounts and
amounts actually utilized under the facility, equal to 0.50% per year subject to
adjustment based on our leverage ratio.
The Term Loan A Facility is repayable in quarterly installments commencing June
30, 2002 in an aggregate principal amount for each year as follows: $15.0
million in year one, $18.0 million in year two, $21.0 million in year three, and
$21.0 million in year four. The Term Loan B Facility is repayable in nominal
quarterly installments of approximately $1.4 million commencing June 30, 2002
for the first five years and in substantial quarterly installments during the
final year.
Prepayments of loans outstanding under the New Senior Bank Credit Facility are
permitted at any time without premium or penalty, upon the giving of proper
notice. In addition, we are required to prepay amounts outstanding under the New
Senior Bank Credit Facility in an amount equal to: (i) 50% of the net cash
proceeds from any sale or issuance of our equity securities or any equity
securities of our subsidiaries, subject to certain exceptions; (ii) 100% of the
net cash proceeds from any incurrence of additional indebtedness (excluding
certain permitted debt), subject to certain exceptions; (iii) 100% of the net
cash proceeds from any sale or other disposition by us, or any of our
subsidiaries, of any assets, subject to certain exclusions and reinvestment
provisions and excluding certain dispositions in the ordinary course of
business; and (iv) 50% of our "excess cash flow" (as such term is defined in the
New Senior Bank Credit Facility) for each fiscal year.
The New Senior Bank Credit Facility requires us to meet certain financial tests,
including, without limitation, a minimum fixed charge coverage ratio, a maximum
leverage ratio and a minimum interest coverage ratio. In addition, the New
Senior Bank Credit Facility contains certain covenants which, among other
things, limit the incurrence of additional indebtedness, investments, dividends,
transactions with affiliates, asset sales, acquisitions, capital expenditures,
mergers and consolidations, prepayments of other indebtedness, liens and
encumbrances and other matters customarily restricted in such agreements.
The loans and other obligations under the New Senior Bank Credit Facility are
guaranteed by each of our domestic subsidiaries. Our obligations under the New
Senior Bank Credit Facility and the guarantees are secured by: (i) a perfected
first priority security interest in substantially all of our tangible and
intangible assets and substantially all of the tangible and intangible assets of
our subsidiaries; and (ii) a pledge of all of the capital stock of our domestic
subsidiaries and 65% of the capital stock of certain of our foreign
subsidiaries.
Pursuant to the terms of the aforementioned tender offer and consent
solicitation announced on April 19, 2002, in connection with the refinancing, on
May 3, 2002, we purchased approximately $89.2 million in aggregate principal
amount of our Old Senior Notes with proceeds from the issuance of the New Senior
Notes. The purchase comprised of all notes tendered on or before April 29, 2002.
The notes were purchased at a price of 110% of par, which included a 3% consent
payment, plus accrued and unpaid interest to the payment date. In connection
with the tender offer and consent solicitation, we received sufficient consents
and amended the indenture governing the Old Senior Notes to delete substantially
all of the restrictive covenants and events of default contained therein. The
tender offer will expire on May 16, 2002, unless we extend it. Payments for
notes tendered and accepted after April 29, 2002 but on or prior to May 16, 2002
will be made promptly following the expiration of the tender offer.
29
To the extent any of the Old Senior Notes remain outstanding following
completion of the tender, we will be required to pay on the remaining notes
outstanding interest and principal upon maturity, in accordance with the
original terms of such notes.
In connection with the refinancing, our operating subsidiary's revolving credit
facility with a $50.0 million capacity was terminated. No amounts were
outstanding on this facility as of March 31, 2002 or at the time of its
termination.
In connection with the refinancing, we also terminated an interest rate swap
agreement at a price of approximately $10.7 million. The swap agreement, which
fixed LIBOR at 6.51% on outstanding balances of $325.0 million through its
expiration on December 31, 2001, had been entered into in order to satisfy a
requirement of the Old Senior Bank Credit Facility. In addition, in order to
satisfy a requirement of the New Senior Bank Credit Facility, we purchased an
interest rate cap agreement, capping LIBOR at 5.0% on outstanding balances of
$200.0 million through the expiration of the cap agreement on May 20, 2004, for
a price of $1.0 million. The termination of the swap agreement and the purchase
of the cap agreement were funded with cash on hand.
As a result of the early extinguishment of the Old Senior Bank Credit Facility
and the purchase of substantially all of our Old Senior Notes, we will record an
extraordinary loss during our second quarter of 2002, representing the write-off
of existing deferred loan costs, certain bank fees, premiums paid and certain
other costs associated with the refinancing.
OPERATING ACTIVITIES
Our net cash provided by operating activities for the three months ended March
31, 2002, was $25.5 million, compared with $41.8 million for the same period in
the prior year. Cash provided by operating activities represents net loss for
the year plus depreciation and amortization, changes in various components of
working capital and adjustments for various non-cash charges, including
primarily the cumulative effect of accounting change in 2002 and the change in
fair value of the interest rate swap agreement. During the first quarter of
2001, we received a significant tax refund of approximately $30.6 million,
contributing to the reduction in cash provided by operating activities in 2002
compared with 2001. In April 2002, we received an additional tax refund of
approximately $32.2 million due to a change in federal income tax law that
became effective in March 2002. This receipt is expected to contribute to a
substantial increase in cash provided by operating activities in the second
quarter of 2002.
INVESTING ACTIVITIES
Our cash flow used in investing activities was $4.3 million for the three months
ended March 31, 2002, and was primarily attributable to capital expenditures
during the quarter of $3.9 million. Our cash flow provided by investing
activities was $26.1 million for the three months ended March 31, 2001, and was
primarily attributable to the proceeds received from the sale of our Mountain
View Correctional Facility, located in Spruce Pine, North Carolina, on March 16,
2001.
FINANCING ACTIVITIES
Our cash flow used in financing activities was $15.3 million for the three
months ended March 31, 2002, compared with $29.9 million for the same period in
the prior year. During the first quarter of 2002, we paid cash dividends of
$12.9 million on our Series A Preferred Stock for the fourth quarter
30
of 2001 and for all five quarters in arrears, as permitted under the terms of an
amendment to our Old Senior Bank Credit Facility obtained in December 2001. Net
payments on debt during the first quarter of 2001 totaled $29.5 million and
primarily represented the net cash proceeds received from the sale of the
Mountain View Correctional Facility that were immediately applied to amounts
outstanding under the Old Senior Bank Credit Facility.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
We incurred a net loss available to common stockholders of $46.3 million or
$1.23 per diluted share for the three months ended March 31, 2002, compared with
a net loss available to common stockholders of $10.1 million, or $0.43 per
diluted share, for the three months ended March 31, 2001. Contributing to the
net loss in 2002 was a non-cash charge for the cumulative effect of accounting
change of $80.3 million related to the adoption of SFAS 142. The cumulative
effect of accounting change was partially offset by a one-time cash income tax
benefit of $32.2 million related to a change in tax law that became effective in
March 2002, which enabled us to utilize certain of our net operating losses to
offset taxable income generated in 1997 and 1996.
FACILITY OPERATIONS
A key performance indicator we use to measure the revenue and expenses
associated with the operation of the facilities we own or manage is expressed in
terms of a compensated man-day, and represents the revenue we generate and
expenses we incur for one inmate for one calendar day. During the three months
ended March 31, 2002, we generated $49.08 in revenue per compensated man-day,
and incurred $38.31 in operating expenses per compensated man-day, resulting in
an operating margin of 21.9%. During the three months ended March 31, 2001, we
generated $47.91 in revenue per compensated man-day, and incurred $37.06 in
operating expenses per compensated man-day, resulting in an operating margin of
22.6%.
The operation of the facilities we own carries a higher degree of risk
associated with a management contract than the operation of the facilities we
manage but do not own because we incur significant capital expenditures to
construct or acquire facilities we own. Additionally, correctional and detention
facilities have a limited or no alternative use. Therefore, if a management
contract is terminated on a facility we own, we continue to incur certain
operating expenses, such as real estate taxes, utilities, and insurance, that we
would not incur if a management contract was terminated for a managed-only
facility. As a result, revenue per compensated man-day is typically higher for
facilities we own and manage than for managed-only facilities. Revenue per
compensated man-day for the facilities we own and manage was $55.73 for the
three months ended March 31, 2002, compared with $53.16 for the same period in
the prior year. Revenue per compensated man-day for the managed-only facilities
was $39.93 for the three months ended March 31, 2002, compared with $40.48 for
the same period in the prior year. Because we incur higher expenses such as
repairs and maintenance, real estate taxes, and insurance on the facilities we
own and manage, our cost structure for facilities we own and manage is also
higher than the cost structure for the managed-only facilities. Operating
expense per compensated man-day for the facilities we own and manage was $42.53
for the three months ended March 31, 2002, compared with $39.79 for the same
period in the prior year. Operating expense per compensated man-day for the
managed-only facilities was $32.52 for the three months ended March 31, 2002,
compared with $33.20 for the same period in the prior year. Operating margins,
therefore, for owned and managed facilities and managed-only facilities
31
were 23.7% and 18.5%, respectively, for the three months ended March 31, 2002.
Operating margins for the same period during 2001 were 25.1% and 18.0% for the
owned and managed facilities and managed-only facilities, respectively.
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 we own or manage, which, for the three months ended March
31, 2002 and 2001, totaled $240.1 million and $238.0 million, respectively.
Occupancy for the facilities we operate was 87.4% for the three months ended
March 31, 2002, including 80.7% for facilities we own and manage, and 98.5% for
our managed-only facilities. During the same period in the prior year, occupancy
for the facilities we operate was 88.3%, including 82.8% for facilities we own
and manage, and 97.5% for our managed-only facilities.
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 contract with the
District of Columbia to house its inmates in our Northeast Ohio Correctional
Center, which expired September 8, 2001, would not be renewed due to a new law
that mandated 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 Center is a 2,016-bed medium-security prison. The District of
Columbia began transferring inmates out of the facility during the second
quarter of 2001 and completed the process in July 2001. Total management and
other revenue at this facility was approximately $4.6 million during the first
quarter of 2001. The related operating expenses at this facility were $5.8
million during the first quarter of 2001. While no revenue is currently
generated from this facility, we incurred approximately $0.8 million of
operating expenses during the first quarter of 2002 for real estate taxes,
utilities, insurance and other necessary expenses associated with owning the
facility. Overall, our occupancy decreased by approximately 1,300 inmates at our
facilities as a result of this mandate. We have engaged in discussions with the
BOP regarding a sale of the Northeast Ohio Correctional Center to the BOP, and
are also pursuing agreements to reopen the facility; however, there can be no
assurance that we will be able to reach agreements on a sale or to reopen this
facility.
During the third quarter of 2001, due to a short-term decline in the State of
Wisconsin's inmate population, the State transferred approximately 700 inmates
out of our Whiteville Correctional Facility, located in Whiteville, Tennessee,
to the State's correctional system. Total management revenue at this facility
decreased $3.6 million, or 60%, from the first quarter of 2001. We are currently
pursuing a contract with the State of Tennessee to replace the vacancy from
these inmates, although we can provide no assurance that we will be successful
in this pursuit.
In late 2001 and early 2002, we were provided notice from the Commonwealth of
Puerto Rico of its intention to terminate the management contracts at the
500-bed multi-security Ponce Young Adult Correctional Facility and the 1,000-bed
medium-security Ponce Adult Correctional Facility, located in Ponce, Puerto
Rico, upon the expiration of the management contracts in February 2002. Attempts
to negotiate continued operation of these facilities were unsuccessful. As a
result, the transition period to transfer operation of the facilities to the
Commonwealth of Puerto Rico ended May 4, 2002, at which time operation of the
facilities was transferred to the Commonwealth of Puerto Rico. During the three
months ended March 31, 2002, these facilities generated total revenue of $5.4
million and operating expenses of $4.5 million. We expect to record a non-cash
charge of
32
approximately $1.8 million during the second quarter of 2002 for the write-off
of the carrying value of assets associated with these terminated management
contracts.
During the fourth quarter of 2001, we signed an extension of our management
contract with the Commonwealth of Puerto Rico for the operation of the 1,000-bed
medium-security Guayama Correctional Center located in Guayama, Puerto Rico,
through December 2006. However, on May 7, 2002, we received notice from the
Commonwealth of Puerto Rico terminating our contract to manage this facility.
The Commonwealth of Puerto Rico has requested that the transfer of operations of
the facility be completed by June 30, 2002. The termination of the Guayama
Correctional Center management contract will result in, at the effective time of
the termination, a non-cash charge of approximately $0.5 million for the
write-off of the carrying value of assets associated with this management
contract. During the first quarter of 2002, this facility generated $4.8 million
of total revenue and $3.2 million of operating expenses.
During the first quarter of 2002, the income tax benefit reported on our
statement of operations was net of $1.0 million of taxes payable to the
Commonwealth of Puerto Rico associated with our operation of the three
facilities located in Puerto Rico. Along with the operating revenues and
expenses associated with the management contracts, we will no longer incur taxes
payable to the Commonwealth of Puerto Rico upon the termination of the
management contracts.
As of March 31, 2002, accounts receivable included $15.4 million from the
Commonwealth of Puerto Rico. We currently believe that we will collect these
amounts due. While the Commonwealth of Puerto Rico has historically been a slow
payer of outstanding charges, we do not believe that the termination of the
management contracts will have any impact on the collectibility of the amounts
outstanding. The Commonwealth of Puerto Rico has not disputed any of the amounts
outstanding, and continues to pay delinquent charges on amounts due, with
interest. Accordingly, no allowance for doubtful accounts has been established
for the accounts receivable balance. We can provide no assurance, however, that
we will collect all or a portion of the amounts due from the Commonwealth of
Puerto Rico. Non-payment of such charges could have a material adverse impact on
our results of operations and cash flows.
During the first quarter of 2002, we entered into a mutual agreement with
Children and Family Services Corporation, referred to herein as CFSC, to
terminate our management contract at Southwest Indiana Regional Youth Village,
effective April 1, 2002, prior to the contract's expiration date in 2004. In
connection with the mutual agreement to terminate the management contract, CFSC
also paid in full an outstanding note receivable totaling approximately $0.7
million, which was previously considered uncollectible and was fully reserved.
During the three months ended March 31, 2002 this facility generated total
revenue of $0.2 million. Termination of this management contract will not have a
material impact on our financial statements.
In September 2001, the BOP identified our McRae Correctional Facility located in
McRae, Georgia as a "preferred alternative" site to house federal detainees
under the BOP's Criminal Alien Requirement II, or CAR II, proposal. Under the
proposal, we would house 1,448 inmates at our McRae facility pursuant to a
contract with the BOP having an initial term of three years and seven one-year
renewal options. The proposed contract would guarantee at least 95% occupancy on
a take-or-pay basis. The McRae facility is currently complete and unoccupied;
however, we would expect to incur approximately $6 million of additional capital
expenditures required to prepare this facility for operations pursuant to BOP
specifications. As a result of a series of extensions by the BOP to the
requisite comment period for the proposal, no award of the contract has been
made. We continue to
33
believe that the contract will be awarded; however, the grant and timing of the
contract are in the sole discretion of the BOP. There can be no assurance that
we will be successful in securing CAR II or any other contract to utilize our
McRae, Georgia facility.
We currently house approximately 2,500 adult male inmates for the Oklahoma
Department of Corrections, or the ODC, at three of our owned facilities in
Oklahoma. Our contracts with the ODC expired in March 2002. Rather than renew
the contracts pursuant to their renewal provisions, the ODC has issued a Request
for Proposal, or RFP, that covers substantially all inmates currently housed in
the six privately owned and operated prisons located in the state of Oklahoma,
including three facilities managed by other private prison operators. The ODC
has indicated that the purpose of the RFP is to establish consistent terms and
scope of services among all of the ODC's contracts with private operators. We
have submitted proposals in response to the RFP to continue housing inmates in
our three Oklahoma facilities, and have also submitted a proposal to expand the
number of inmates we could house at one of these facilities. Responses to the
RFP were due on or before May 7, 2002, and final awards are expected to be made
on or before July 1, 2002. We expect to continue to operate the three Oklahoma
facilities pursuant to our contacts with the ODC through the completion of the
RFP process. We will be competing with other prison operators who respond to the
RFP, including other private prison operators and, potentially, government
operators. Thus, no assurance can be given that we will be awarded any contracts
by the ODC to house the inmates subject to our existing contracts or any
additional inmates, or that any contracts we do obtain will be on terms
comparable to our existing contracts. The failure to obtain contracts from the
ODC on terms comparable to our existing contracts would significantly reduce our
revenues and earnings before interest, taxes, depreciation and amortization, or
EBITDA, and, accordingly, would have a material adverse effect on our results of
operations and financial position. According to the State of Oklahoma, as of
March 31, 2002, the occupancy rate of facilities operated by the ODC was
approximately 99%, and the State of Oklahoma currently does not have any new
prison beds under construction. In addition, we currently estimate that the
unused capacity of other facilities managed by private prison operations in the
state of Oklahoma is approximately 500 beds.
Operating expenses. Operating expenses totaled $188.9 million for the three
months ended March 31, 2002, compared with $184.7 million for the same period in
the prior year. Operating expenses consist of those expenses incurred in the
operation and management of correctional and detention facilities and other
correctional facilities.
Salaries and benefits represent the most significant component of operating
expenses. During 2001, we incurred wage increases due to tight labor markets,
particularly for correctional officers. However, as the unemployment rate has
increased, we have seen an increase in the availability of potential employees,
providing some moderation to the trend of increasing salary requirements.
Nonetheless, the market for correctional officers has remained challenging. In
addition, ten of our facilities currently have contracts with the federal
government requiring that our wage and benefit rates comply with wage
determination rates set forth, and as adjusted from time to time, under the
Service Contract Act of the U.S. Department of Labor. Our contracts generally
provide for reimbursement of a portion of the increased costs resulting from
wage determinations in the form of increased per-diems, thereby mitigating the
effect of increased salaries and benefits expenses at those facilities. We may
also be subject to adverse claims, or government audits, relating to alleged
violations of wage and hour laws applicable to us, which may result in
adjustments to amounts previously paid as wages and, potentially interest and/or
monetary penalties.
34
We also experienced a trend of increasing insurance expense during the three
months ended March 31, 2002, as compared to the same period in the prior year.
Because we are significantly self-insured for employee health, workers'
compensation, and automobile liability insurance, our insurance expense is
dependent on claims experience and our ability to control our claims experience.
Our insurance policies contain various deductibles and stop-loss amounts
intended to limit our exposure for individually significant occurrences.
However, the nature of our self-insurance policies provides little protection
for a deterioration in claims experience in general. We continue to incur
increasing insurance expense due to adverse claims experience. We have begun
implementing a strategy to improve the management of our future loss claims but
can provide no assurance that this strategy will be successful. Additionally,
general liability insurance costs have risen substantially since the terrorist
attacks on September 11, 2001. Unanticipated additional insurance expenses
resulting from adverse claims experience or a continued increasing cost
environment for general liability insurance could result in increasing expenses
in the future.
During the first quarter of 2001, we hired a General Counsel to deal with our
legal matters and to develop procedures to minimize the incidence of litigation
in the future. We have been able to settle numerous cases, including those
further discussed under "Liquidity and Capital Resources for the Three Months
Ended March 31, 2002," on terms we believe are favorable. In addition, during
the first quarter of 2002, we settled a number of outstanding legal matters for
amounts less than reserves previously established for such matters, which
resulted in a reduction to operating expenses of approximately $1.0 million
during the first quarter of 2002.
RENTAL REVENUE
Rental revenue was $1.1 million for the three months ended March 31, 2002,
compared with $2.4 during the same period in the prior year. Rental revenue 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 has been received for these
facilities during the three months ended March 31, 2002. For the three months
ended March 31, 2001, rental revenue for these facilities totaled $1.3 million.
GENERAL AND ADMINISTRATIVE EXPENSE
For the three months ended March 31, 2002 and 2001, general and administrative
expenses totaled $7.2 million and $8.6 million, respectively. General and
administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses, and decreased
from the first quarter of 2001 primarily due to a reduction in salaries and
benefits, including incentive compensation. Management currently expects the
quarterly general and administrative expense amount to increase in future
periods from the amount experienced during the first quarter of 2002.
DEPRECIATION AND AMORTIZATION
For the three months ended March 31, 2002 and 2001, depreciation and
amortization expense totaled $12.5 million and $12.7 million, respectively.
Amortization expense for the three months ended March 31, 2001 included
approximately $2.3 million for goodwill that was established in connection with
acquisitions occurring in 2000. Goodwill was no longer subject to amortization
effective January 1, 2002, in accordance with a new accounting pronouncement, as
further discussed under "Recent Accounting Pronouncements" herein. Amortization
expense during the three months ended March 31, 2001 is also net of a reduction
to amortization expense of $2.9 million for the amortization of a liability
relating to contract values established in connection with the mergers completed
in 2000. Due to certain of these liabilities becoming fully amortized during
2001, the reduction to amortization expense during the three months ended March
31, 2002 was $0.9 million.
35
INTEREST EXPENSE, NET
Interest expense, net, is reported net of interest income for the three months
ended March 31, 2002 and 2001. Gross interest expense was $30.0 million and
$37.3 million, respectively, for the three months ended March 31, 2002 and 2001.
Gross interest expense is based on outstanding convertible subordinated notes
payable balances, borrowings under the Old Senior Bank Credit Facility, the
Operating Company revolving credit facility, the $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 first
quarter in the prior year is primarily attributable to declining interest rates
and lower amounts outstanding under the Old Senior Bank Credit Facility. During
2001, we paid-down $189.0 million in total debt through a combination of $138.7
million in cash generated from asset sales and internally generated cash. We
currently expect to achieve additional interest savings as a result of the
comprehensive refinancing of our senior debt completed during the second quarter
of 2002, and due to the termination of the interest rate swap agreement.
Gross interest income was $1.3 million and $3.2 million, respectively, for three
months ended March 31, 2002 and 2001. Gross interest income is earned on cash
collateral requirements, 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 interest income was received on this lease
during the three months ended March 31, 2002. For the three months ended March
31, 2001, interest income for this lease totaled $0.3 million. Subsequent to the
sale, we continue to manage the facility pursuant to a contract with the State
of Nevada.
CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
As of March 31, 2002, in accordance with 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 months ended March 31, 2002 and 2001. We estimate the
fair value of the interest rate swap agreement 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.
Our swap agreement fixed LIBOR at 6.51% (prior to the applicable spread) on
outstanding balances of at least $325.0 million through its expiration on
December 31, 2002. As of March 31, 2002 and 2001, due to decreases in interest
rates since entering into the swap agreement, the interest rate swap agreement
had a negative fair value of $9.5 million and $10.4 million, respectively,
including 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. In accordance with SFAS 133, we have
recorded a $3.4 million non-cash gain and a $6.0 million non-cash charge,
respectively, for the change in fair value of the swap agreement for the three
months ended March 31, 2002 and 2001, which includes $0.6 million for
amortization of the transition adjustment during both periods. We were no longer
required to maintain the existing interest rate swap agreement due to the early
extinguishment of the Old Senior Bank Credit Facility. During May 2002, we
terminated the swap agreement prior to its expiration at a price of
approximately $10.7 million. In accordance with SFAS 133, we will continue to
amortize the unamortized portion of the transition adjustment of $1.9 million as
of March 31, 2002, as a non-cash expense through December 31, 2002.
36
The New Senior Bank Credit Facility requires us to hedge $192.0 million of the
term loan portions of the facility within 60 days following the closing of the
loan. In May 2002, we entered into an interest rate cap agreement to fulfill
this requirement, capping LIBOR at 5.0% on outstanding balances of $200.0
million through the expiration of the cap agreement on May 20, 2004. We
currently believe that we will be able to meet the hedge accounting criteria
under SFAS 133 in accounting for the interest rate cap agreement. As a result,
the estimated fair value of the interest rate cap agreement will be reported on
the balance sheet, and changes in the fair value of the interest rate cap
agreement will be reported through other comprehensive income in the statement
of stockholders' equity (for the effective portion of the interest rate cap
agreement) and through the statement of operations (for the ineffective portion
of the interest rate cap agreement and for the expiration of the time value of
the $1.0 million premium paid to enter into the agreement). There can be no
assurance that the interest rate cap agreement will be effective in mitigating
our exposure to interest rate risk, or that we will be able to meet the hedge
accounting criteria under SFAS 133.
On December 31, 2001, approximately 2.8 million shares of common stock were
issued, along with a $26.1 million subordinated promissory note, in conjunction
with the final settlement of the federal court portion of our stockholder
litigation settlement. Under the terms of the promissory note, the note and
accrued interest became extinguished in January 2002 once the average closing
price of the common stock exceeded a "termination price" equal to $16.30 per
share for fifteen consecutive trading days following the issuance of such note.
The terms of the note, which allow the principal balance to fluctuate dependent
on the trading price of our common stock, created a derivative instrument that
was valued and accounted for under the provisions of SFAS 133. As a result of
the extinguishment of the note in January 2002, the derivative instrument was
also extinguished. Since the estimated fair value of the derivative asset was
equal to the face amount of the note as of December 31, 2001, the extinguishment
had no financial statement impact in 2002.
The state court portion of the stockholder litigation settlement has not yet
been completed; however, the settlement is expected to result in the issuance of
approximately 0.3 million additional shares of common stock and a $2.9 million
subordinated promissory note, which may also be extinguished if the average
closing price of the common stock meets or exceeds $16.30 per share for fifteen
consecutive trading days following the note's issuance and prior to its maturity
in 2009. Additionally, to the extent the 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 remaining
promissory note is issued under the current terms, in accordance with SFAS 133,
as amended, we will reflect in earnings the change in the estimated fair value
of the derivative included in the promissory note from quarter to quarter. Since
we have reflected the maximum obligation of the contingency associated with the
state court portion of the stockholder litigation in the consolidated balance
sheet as of March 31, 2002, the issuance of the note is currently expected 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
derivative included in the promissory note is determined.
INCOME TAX EXPENSE
We generated an income tax benefit of approximately $31.7 million and $0.8
million for the three months ended March 31, 2002 and 2001, respectively.
Contributing to the increase in the income tax
37
benefit during the three months ended March 31, 2002, was an income tax benefit
related to a change in tax law that became effective in March 2002, which
enabled us to utilize certain of our net operating losses to offset taxable
income generated in 1997 and 1996.
On March 9, 2002, the "Job Creation and Worker Assistance Act of 2002" was
signed into law. Among other changes, the law extends the net operating loss
carryback period to five years from two years for net operating losses arising
in tax years ending in 2001 and 2002, and allows use of net operating loss
carrybacks and carryforwards to offset 100% of the alternative minimum taxable
income. We experienced net operating losses during 2001 resulting primarily from
the sale of assets at prices below the tax basis of such assets. Under terms of
the new law, we utilized certain of our net operating losses to offset taxable
income generated in 1997 and 1996. As a result of this tax law change in 2002,
we reported an income tax benefit and requested a refund of approximately $32.2
million during the first quarter of 2002, which was received in April 2002.
As of March 31, 2002, our deferred tax assets totaled approximately $137.6
million. Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Realization of
the future tax benefits related to deferred tax assets is dependent on many
factors, including our ability to generate taxable income within the net
operating loss carryforward period. Since the change in tax status in connection
with the restructuring in 2000, and as of March 31, 2002, we have provided a
valuation allowance to reserve the deferred tax assets in accordance with SFAS
109. The valuation allowance was recognized based on the weight of available
evidence indicating that it was more likely than not that the deferred tax
assets would not be realized. This evidence primarily consisted of, but was not
limited to, recurring operating losses for federal tax purposes.
Our assessment of the valuation allowance could change in the future. Removal of
the valuation allowance in whole or in part would result in a non-cash reduction
in income tax expense during the period of removal. To the extent no reserve is
established for our deferred tax assets, our financial statements would reflect
a provision for income taxes at the applicable federal and state tax rates on
income before taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, we adopted SFAS 142, which establishes new accounting
and reporting requirements for goodwill and other intangible assets. Under SFAS
142, all goodwill amortization ceased effective January 1, 2002 (first quarter
2001 goodwill amortization was $2.3 million) and goodwill attributable to each
of our reporting units was tested for impairment by comparing the fair value of
each reporting unit with its carrying value. Fair value was determined using a
collaboration of various common valuation techniques, including market
multiples, discounted cash flows, and replacement cost methods. These impairment
tests are required to be performed at adoption of SFAS 142 and at least annually
thereafter. On an ongoing basis (absent any impairment indicators), we expect to
perform our impairment tests during our fourth quarter, in connection with our
annual budgeting process.
Based on our initial impairment tests, we recognized an impairment of $80.3
million to write-off the carrying value of goodwill associated with our owned
and managed facilities. This goodwill was established in connection with the
acquisition of Operating Company. The remaining goodwill, which is associated
with the facilities we manage but do not own, was deemed to be not impaired,
38
and remains recorded on the balance sheet. This goodwill was established in
connection with the acquisitions of PMSI and JJFMSI, both of which were
privately-held service companies that managed certain government-owned adult and
juvenile prisons and jail facilities. The implied fair value of goodwill of the
owned and managed reporting segment did not support the carrying value of any
goodwill, primarily due to its highly leveraged capital structure. No impairment
of goodwill allocated to the managed-only reporting segment was deemed
necessary, primarily because of the relatively minimal capital expenditure
requirements, and therefore indebtedness, in connection with obtaining such
management contracts. Under SFAS 142, the impairment recognized at adoption of
the new rules was reflected as a cumulative effect of accounting change in our
statement of operations for the first quarter of 2002. Impairment adjustments
recognized after adoption, if any, generally are required to be recognized as
operating expenses.
In August 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," referred to 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 Long-Lived Assets
to be Disposed Of," referred to as SFAS 121, 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. We adopted SFAS 144 on January 1,
2002. The adoption of SFAS 144 did not have a material impact on our financial
statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," referred to herein as SFAS 145.
SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations -- Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual an Infrequently Occurring Events and Transactions"
will now be used to classify those gains and losses. SFAS 64 amended SFAS 4, and
is no longer necessary because SFAS 4 has been rescinded. SFAS 44 was issued to
establish accounting requirements for the effects of transition to the
provisions of the Motor Carrier Act of 1980. Because the transition has been
completed, SFAS 44 is no longer necessary. SFAS 145 amends SFAS 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS 145 also makes technical corrections to
existing pronouncements. While those corrections are not substantive in nature,
in some instances, they may change accounting practice. The provisions of SFAS
145 are effective for financial statements issued for fiscal years beginning
after May 15, 2002, and interim periods within those fiscal years. Other than
prospective changes to the classification from extraordinary of gains and losses
from extinguishments of debt completed after December 31, 2002, the adoption of
SFAS 145 is not expected to have a material impact on our financial statements.
39
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 have been exposed to market risk related to our Old Senior
Bank Credit Facility and certain other indebtedness, and will continue to be
exposed to market risk related to our New Senior Bank Credit Facility. The
interest on the Old Senior Bank Credit Facility and such other indebtedness has
been subject to fluctuations in the market. If the interest rate for our
outstanding indebtedness under the Old Senior Bank Credit Facility was 100 basis
points higher or lower during the first quarter of 2002 and 2001, respectively,
our interest expense, net of amounts capitalized, would have been increased or
decreased by approximately $1.2 and $1.6 million, respectively, including the
effects of our interest rate swap agreement discussed below.
As of March 31, 2002, we had outstanding $100.0 million of 12.0% senior notes
with a fixed interest rate of 12.0%, $40.0 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 $99.4 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 Old Senior Bank Credit Facility required us to hedge $325.0 million of our
floating rate debt on or before August 16, 1999. We have entered into a swap
agreement fixing LIBOR at 6.51% (prior to the applicable spread) on outstanding
balances of at least $325.0 million through December 31, 2002. The difference
between the floating rate and the swap rate is recognized in interest expense.
In accordance with SFAS 133, as amended, as of March 31, 2002 we recorded a $9.5
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 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
liability during the quarter was included in earnings as a non-cash gain.
Increasing interest rates during the first quarter of 2002 (along with the
passage of time) contributed to the reduction in the fair value of the swap
liability.
In May 2002, we terminated the interest rate swap agreement at a price of
approximately $10.7 million. In addition, in order to satisfy a requirement of
the New Senior Bank Credit Facility, we purchased an interest rate cap
agreement, capping LIBOR at 5.0% on outstanding balances of $200.0 million
through the expiration of the cap agreement on May 20, 2004, for a price of $1.0
million.
40
We currently expect to achieve interest expense savings as a result of the
refinancing completed during the second quarter of 2002, and due to the
termination of the interest rate swap agreement.
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 the 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 March
31, 2002, the receivables due to us and denominated in British pounds totaled
4.0 million British pounds. A hypothetical 10% increase in the relative exchange
rate would have resulted in an additional $0.6 million increase in value of
these receivables and an unrealized foreign currency transaction gain, and a
hypothetical 10% decrease in the relative exchange rate would have resulted in
an additional $0.6 million decrease in value of these receivables and an
unrealized foreign currency transaction loss.
41
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 7 to the financial statements included in Part I.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
See Note 5 to the financial statements included in Part I.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Regulation FD Disclosure.
The Company intends to post certain supplemental information and data with
respect to the Company's financial and operating results for the first quarter
of 2002 on its website at www.correctionscorp.com under "Investor." The
information to be provided on the Company's website is referred to herein
pursuant to Regulation FD promulgated by the Securities and Exchange Commission
(the "SEC") and shall not be deemed to be "filed" for the purposes of Section 18
of the Securities Exchange Act of 1934 or otherwise subject to the liabilities
of that Section, unless the Company specifically incorporates it by reference in
a document filed under the Securities Act of 1933 or the Securities Exchange Act
of 1934. By referring to this information, the Company makes no admission as to
the materiality of any information that is required to be disclosed solely by
reason of Regulation FD or that the information includes material investor
information which was not previously publicly available.
The information to be provided on the Company's website is summary information
that is intended to be considered in the context of its SEC filings and other
public announcements it makes, by press release or otherwise, from time to time.
The Company undertakes no duty or obligation to publicly update or revise the
information contained therein, although it may do so from time to time as it
believes is warranted. Any such updating may be made through the filing of other
reports or documents with the SEC, through press releases or through other
public disclosure.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
42
(b) Reports on Form 8-K.
The following Reports on Form 8-K were filed during the period January
1, 2002 through March 31, 2002:
(1) Filed January 3, 2002 (earliest event December 31, 2001)
reporting in Item 1., completion of the claims process in the
federal stockholder litigation settlement with respect to a
series of class action and derivative lawsuits brought against
the Company and the other defendants.
(2) Filed March 8, 2002 (earliest event March 6, 2002), reporting in
Item 9., a presentation for an analyst and institutional
investor conference and supplemental financial and operating
information and data included on the Company's website.
The following Reports on Form 8-K were filed subsequent to March 31,
2002:
(1) Filed April 11, 2002 (earliest event March 26, 2002) reporting
in Item 5., a summary of the expected material terms of the New
Senior Bank Credit Facility upon completion of the refinancing
of the Old Senior Bank Credit Facility.
(2) Filed April 19, 2002 (earliest event April 19, 2002) reporting
in Item 5., reporting the Company's commencement of a tender
offer for its existing $100.0 Million Senior Notes due 2006.
(3) Filed April 25, 2002 (earliest event April 24, 2002) reporting
in Item 5., the pricing of the Company's new $250.0 million
9.875% Senior Notes due 2009 and amendment to the indenture
governing the Company's existing 12% Senior Notes due 2006.
(4) Filed May 7, 2002 (earliest event May 3, 2002) reporting in Item
5., the completion of the refinancing.
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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: March 14, 2002
/s/ John D. Ferguson
------------------------
John D. Ferguson
President and Chief Executive Officer
/s/ Irving E. Lingo, Jr.
------------------------
Irving E. Lingo, Jr.
Executive Vice President, Chief Financial Officer, and
Assistant Secretary and Principle Accounting Officer
44