Corrections Corporation of America
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2006
OR
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o |
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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: 001-16109
CORRECTIONS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
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MARYLAND
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62-1763875 |
(State or other jurisdiction of
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(I.R.S. Employer Identification Number) |
incorporation or organization) |
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10 BURTON HILLS BLVD., NASHVILLE, TENNESSEE 37215
(Address and zip code of principal executive offices)
(615) 263-3000
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each class of Common Stock as of October 31, 2006:
Shares of Common Stock, $0.01 par value per share: 60,727,290 shares outstanding.
CORRECTIONS CORPORATION OF AMERICA
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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September 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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|
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Cash and cash equivalents |
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$ |
58,066 |
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$ |
64,901 |
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Restricted cash |
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11,676 |
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|
11,284 |
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Investments |
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71,728 |
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19,014 |
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Accounts receivable, net of allowance of $2,053 and $2,258, respectively |
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211,185 |
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176,560 |
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Deferred tax assets |
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18,198 |
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32,488 |
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Prepaid expenses and other current assets |
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19,965 |
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15,884 |
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Total current assets |
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390,818 |
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320,131 |
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Property and equipment, net |
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1,772,634 |
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1,710,794 |
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Investment in direct financing lease |
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15,691 |
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16,322 |
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Goodwill |
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15,246 |
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15,246 |
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Other assets |
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24,755 |
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23,820 |
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Total assets |
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$ |
2,219,144 |
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$ |
2,086,313 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Accounts payable and accrued expenses |
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$ |
165,733 |
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$ |
141,090 |
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Income taxes payable |
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2,660 |
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|
1,435 |
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Current portion of long-term debt |
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296 |
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11,836 |
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Current liabilities of discontinued operations |
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506 |
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1,774 |
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Total current liabilities |
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169,195 |
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156,135 |
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Long-term debt, net of current portion |
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976,040 |
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963,800 |
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Deferred tax liabilities |
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27,203 |
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12,087 |
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Other liabilities |
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38,357 |
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37,660 |
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Total liabilities |
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1,210,795 |
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1,169,682 |
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Commitments and contingencies |
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Common stock $0.01 par value; 80,000 shares authorized; 60,670 and
59,541 shares issued and outstanding at September 30, 2006 and December
31, 2005, respectively |
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607 |
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|
595 |
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Additional paid-in capital |
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1,519,042 |
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1,505,986 |
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Deferred compensation |
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(5,563 |
) |
Retained deficit |
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(511,300 |
) |
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(584,387 |
) |
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Total stockholders equity |
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1,008,349 |
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916,631 |
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Total liabilities and stockholders equity |
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$ |
2,219,144 |
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$ |
2,086,313 |
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The accompanying notes are an integral part of these consolidated financial statements.
1
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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REVENUE: |
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Management and other |
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$ |
338,206 |
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$ |
303,368 |
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$ |
978,355 |
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$ |
872,488 |
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Rental |
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1,061 |
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999 |
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3,146 |
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2,955 |
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339,267 |
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304,367 |
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981,501 |
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875,443 |
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EXPENSES: |
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Operating |
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249,121 |
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226,006 |
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723,969 |
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664,353 |
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General and administrative |
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16,379 |
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14,352 |
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46,717 |
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40,477 |
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Depreciation and amortization |
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17,538 |
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15,315 |
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49,567 |
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44,132 |
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283,038 |
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255,673 |
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820,253 |
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748,962 |
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OPERATING INCOME |
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56,229 |
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48,694 |
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|
161,248 |
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126,481 |
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OTHER EXPENSES: |
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Interest expense, net |
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14,825 |
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|
15,273 |
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|
44,503 |
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48,245 |
|
Expenses associated with debt refinancing and
recapitalization transactions |
|
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|
982 |
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35,269 |
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Other (income) expenses |
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(299 |
) |
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|
191 |
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(413 |
) |
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|
240 |
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14,526 |
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15,464 |
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45,072 |
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83,754 |
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INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
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41,703 |
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|
33,230 |
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|
|
116,176 |
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42,727 |
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|
|
|
|
|
|
|
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|
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|
|
|
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Income tax expense |
|
|
(15,573 |
) |
|
|
(12,437 |
) |
|
|
(43,089 |
) |
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(15,817 |
) |
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INCOME FROM CONTINUING OPERATIONS |
|
|
26,130 |
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|
20,793 |
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|
73,087 |
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26,910 |
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|
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|
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Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
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(193 |
) |
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|
|
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NET INCOME |
|
$ |
26,130 |
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|
$ |
20,793 |
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|
$ |
73,087 |
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|
$ |
26,717 |
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|
|
|
|
|
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|
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BASIC EARNINGS PER SHARE: |
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|
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Income from continuing operations |
|
$ |
0.44 |
|
|
$ |
0.35 |
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|
$ |
1.22 |
|
|
$ |
0.47 |
|
Loss from discontinued operations, net of taxes |
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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Net income |
|
$ |
0.44 |
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|
$ |
0.35 |
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$ |
1.22 |
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|
$ |
0.47 |
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DILUTED EARNINGS PER SHARE: |
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Income from continuing operations |
|
$ |
0.42 |
|
|
$ |
0.34 |
|
|
$ |
1.19 |
|
|
$ |
0.45 |
|
Loss from discontinued operations, net of taxes |
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Net income |
|
$ |
0.42 |
|
|
$ |
0.34 |
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|
$ |
1.19 |
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$ |
0.45 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
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For the Nine Months |
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Ended September 30, |
|
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|
2006 |
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|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
|
$ |
73,087 |
|
|
$ |
26,717 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
49,567 |
|
|
|
44,318 |
|
Amortization of debt issuance costs and other non-cash interest |
|
|
3,396 |
|
|
|
4,034 |
|
Expenses associated with debt refinancing and recapitalization
transactions |
|
|
982 |
|
|
|
35,269 |
|
Deferred income taxes |
|
|
28,441 |
|
|
|
12,402 |
|
Income tax benefit of equity compensation |
|
|
(10,553 |
) |
|
|
5,220 |
|
Other expenses |
|
|
(416 |
) |
|
|
231 |
|
Non-cash equity compensation |
|
|
4,705 |
|
|
|
2,210 |
|
Other non-cash items |
|
|
458 |
|
|
|
822 |
|
Changes in assets and liabilities, net: |
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|
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Accounts receivable, prepaid expenses and other assets |
|
|
(39,088 |
) |
|
|
(20,091 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
20,302 |
|
|
|
8,468 |
|
Income taxes payable |
|
|
11,778 |
|
|
|
(20,175 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
142,659 |
|
|
|
99,425 |
|
|
|
|
|
|
|
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|
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|
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
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Expenditures for facility acquisitions, development, and expansions |
|
|
(73,012 |
) |
|
|
(48,658 |
) |
Expenditures for other capital improvements |
|
|
(35,236 |
) |
|
|
(24,727 |
) |
(Increase) decrease in restricted cash |
|
|
(184 |
) |
|
|
1,897 |
|
Purchases of investments |
|
|
(52,714 |
) |
|
|
(211 |
) |
Proceeds from sale of assets |
|
|
62 |
|
|
|
1,039 |
|
Decrease in other assets |
|
|
160 |
|
|
|
758 |
|
Payments received on direct financing lease and notes receivable |
|
|
559 |
|
|
|
489 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(160,365 |
) |
|
|
(69,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from issuance of debt |
|
|
150,000 |
|
|
|
375,000 |
|
Scheduled principal repayments |
|
|
(133 |
) |
|
|
(835 |
) |
Other principal repayments |
|
|
(148,950 |
) |
|
|
(360,135 |
) |
Payment of debt issuance and other refinancing and related costs |
|
|
(3,972 |
) |
|
|
(36,224 |
) |
Income tax benefit of equity compensation |
|
|
10,553 |
|
|
|
|
|
Purchase and retirement of common stock |
|
|
(7,030 |
) |
|
|
(33 |
) |
Proceeds from exercise of stock options and warrants |
|
|
10,403 |
|
|
|
7,679 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
10,871 |
|
|
|
(14,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(6,835 |
) |
|
|
15,464 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
64,901 |
|
|
|
50,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
58,066 |
|
|
$ |
66,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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|
|
|
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|
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|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest (net of amounts capitalized of $3,434 and $3,689 in 2006
and 2005, respectively) |
|
$ |
44,670 |
|
|
$ |
43,491 |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
6,790 |
|
|
$ |
15,636 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED AND AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
Additional |
|
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|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Deferred |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Compensation |
|
|
Deficit |
|
|
Total |
|
Balance as of
December 31, 2005 |
|
|
59,541 |
|
|
$ |
595 |
|
|
$ |
1,505,986 |
|
|
$ |
(5,563 |
) |
|
$ |
(584,387 |
) |
|
$ |
916,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,087 |
|
|
|
73,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,087 |
|
|
|
73,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of common stock |
|
|
(252 |
) |
|
|
(3 |
) |
|
|
(7,027 |
) |
|
|
|
|
|
|
|
|
|
|
(7,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation, net of forfeitures |
|
|
(51 |
) |
|
|
|
|
|
|
3,359 |
|
|
|
|
|
|
|
|
|
|
|
3,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit of equity
compensation |
|
|
|
|
|
|
|
|
|
|
10,553 |
|
|
|
|
|
|
|
|
|
|
|
10,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grant |
|
|
256 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred
compensation on nonvested stock
upon adoption of SFAS 123R |
|
|
|
|
|
|
|
|
|
|
(5,563 |
) |
|
|
5,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation of unvested stock
options |
|
|
|
|
|
|
|
|
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
|
1,309 |
|
Stock options exercised |
|
|
1,176 |
|
|
|
12 |
|
|
|
10,391 |
|
|
|
|
|
|
|
|
|
|
|
10,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2006 |
|
|
60,670 |
|
|
$ |
607 |
|
|
$ |
1,519,042 |
|
|
$ |
|
|
|
$ |
(511,300 |
) |
|
$ |
1,008,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED AND AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Deferred |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Compensation |
|
|
Deficit |
|
|
Total |
|
Balance as of
December 31, 2004 |
|
|
53,123 |
|
|
$ |
531 |
|
|
$ |
1,451,708 |
|
|
$ |
(1,736 |
) |
|
$ |
(634,509 |
) |
|
$ |
815,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,717 |
|
|
|
26,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,717 |
|
|
|
26,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of subordinated
notes |
|
|
5,043 |
|
|
|
50 |
|
|
|
29,928 |
|
|
|
|
|
|
|
|
|
|
|
29,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
2 |
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of common stock |
|
|
(1 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation, net of
forfeitures |
|
|
(18 |
) |
|
|
|
|
|
|
(142 |
) |
|
|
2,301 |
|
|
|
|
|
|
|
2,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit of equity
compensation |
|
|
|
|
|
|
|
|
|
|
5,220 |
|
|
|
|
|
|
|
|
|
|
|
5,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grant |
|
|
296 |
|
|
|
3 |
|
|
|
6,993 |
|
|
|
(6,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised |
|
|
107 |
|
|
|
1 |
|
|
|
999 |
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
776 |
|
|
|
8 |
|
|
|
6,671 |
|
|
|
|
|
|
|
|
|
|
|
6,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2005 |
|
|
59,328 |
|
|
$ |
593 |
|
|
$ |
1,501,395 |
|
|
$ |
(6,431 |
) |
|
$ |
(607,792 |
) |
|
$ |
887,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
1. |
|
ORGANIZATION AND OPERATIONS |
|
|
|
As of September 30, 2006, Corrections Corporation of America, a Maryland corporation
(together with its subsidiaries, the Company), owned 43 correctional, detention and
juvenile facilities, three of which are leased to other operators. As of September 30, 2006,
the Company operated 65 facilities, including 40 facilities that it owned, located in 19
states and the District of Columbia. The Company is also constructing an additional
correctional facility in Eloy, Arizona that is expected to be completed mid-2007. |
|
|
|
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 Companys facilities offer a variety of rehabilitation and
educational programs, including basic education, religious services, 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. |
|
|
|
The Companys website address is www.correctionscorp.com. The Company makes its Form 10-K,
Form 10-Q, Form 8-K, and Section 16 reports under the Securities Exchange Act of 1934, as
amended, available on its website, free of charge, as soon as reasonably practicable after
these reports are filed with or furnished to the Securities and Exchange Commission (the
SEC). |
|
2. |
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
The accompanying unaudited interim condensed consolidated financial statements have been
prepared by the Company 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 U.S. 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, 2005 (the 2005 Form 10-K) with respect to
certain significant accounting and financial reporting policies as well as other pertinent
information of the Company. |
6
|
|
Reclassifications have been made to certain 2005 balance sheet amounts to conform with the
2006 presentation. |
|
3. |
|
RECENT ACCOUNTING PRONOUNCEMENTS |
|
|
|
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS
157 applies under other accounting pronouncements that require or permit fair value
measurements. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS
157 is effective for financial statements issued for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. The Company is in the process of
evaluating the impact that SFAS 157 will have on the Companys financial position, results of
operations, and disclosures. |
|
4. |
|
STOCK SPLIT |
|
|
|
On August 3, 2006, the Company announced that its Board of Directors had declared a
3-for-2 stock split to be effected in the form of a 50% stock dividend on its common stock.
The stock dividend was payable on September 13, 2006, to stockholders of record on September
1, 2006. Each shareholder of record at the close of business on the record date received one
additional share of the Companys common stock for every two shares of common stock held on
that date. Shareholders received cash in lieu of fractional shares. 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 increase in common
shares and corresponding decrease in the per share amounts resulting from the 3-for-2 stock
split. |
|
5. |
|
ACCOUNTING FOR STOCK-BASED COMPENSATION |
|
|
|
In December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R, Share-Based Payment (SFAS 123R), which is a revision of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS
123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and amends Statement of Financial Accounting Standards No. 95,
Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach
described in SFAS 123. However, SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure is no longer an alternative. |
|
|
|
The Company adopted the fair value recognition provisions of SFAS 123R on January 1, 2006
using the modified prospective method. The modified prospective method requires
compensation cost to be recognized beginning with the effective date (a) based on the
requirements of SFAS 123R for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS 123 for all awards granted to |
7
|
|
employees prior to the
effective date of SFAS 123R that remain unvested on the effective date. |
|
|
|
Effective December 30, 2005, the Companys board of directors approved the acceleration of
the vesting of outstanding options previously awarded to executive officers and employees
under its Amended and Restated 1997 Employee Share Incentive Plan and its Amended and
Restated 2000 Stock Incentive Plan. As a result of the acceleration, all unvested options
became exercisable. All of the unvested options were in-the-money on the effective date of
acceleration. |
|
|
|
The purpose of the accelerated vesting of stock options was to enable the Company to avoid
recognizing compensation expense associated with these options in future periods as required
by SFAS 123R, estimated at the date of acceleration to be $3.8 million in 2006, $2.0 million
in 2007, and $0.5 million in 2008. In order to prevent unintended benefits to the holders of
these stock options, the Company imposed resale restrictions to prevent the sale of any
shares acquired from the exercise of an accelerated option prior to the original vesting date
of the option. The resale restrictions automatically expire upon the individuals termination
of employment. All other terms and conditions applicable to such options, including the
exercise prices, remained unchanged. As a result of the acceleration, the Company recognized
a non-cash, pre-tax charge of $1.0 million in the fourth quarter of 2005 for the estimated
value of the stock options that would have otherwise been forfeited. |
|
|
|
At September 30, 2006, the Company has equity incentive plans under which, among other
things, incentive and non-qualified stock options are granted to certain employees and
non-employee directors of the Company by the compensation committee of the Companys board of
directors. The options are generally granted with exercise prices equal to the market value
at the date of grant. Vesting periods for options recently granted to employees generally
range from three to four years. Options granted to non-employee directors vest at the date
of grant. The term of such options is ten years from the date of grant. |
|
|
|
The weighted average fair value of options granted during the nine months ended September 30,
2006 and 2005 was $10.18 and $8.89, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
Ended September 30, |
|
|
2006 |
|
2005 |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected stock price volatility |
|
|
25.2 |
% |
|
|
26.9 |
% |
Risk-free interest rate |
|
|
4.7 |
% |
|
|
4.1 |
% |
Expected life of options |
|
6 years |
|
6 years |
|
|
The Company estimates expected stock price volatility based on actual historical changes
in the market value of the Companys stock. The risk-free interest rate is based on the U.S.
Treasury yield with a term that is consistent with the expected life of the stock options.
The expected life of stock options is based on the Companys |
8
|
|
historical experience and is calculated separately for groups of employees that have similar
historical exercise behavior.
As previously described herein, the Companys board of directors approved the acceleration of
the vesting effective December 30, 2005 of all outstanding stock options previously awarded
to the Companys executive officers and employees. Stock options outstanding at September
30, 2006, are summarized below (in thousands, except per share data and years): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
No. of |
|
|
Exercise Price |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
options |
|
|
of options |
|
|
Term |
|
|
Value |
|
|
Outstanding at December 31, 2005 |
|
|
4,994 |
|
|
$ |
17.24 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
436 |
|
|
|
29.63 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,176 |
) |
|
|
8.85 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(109 |
) |
|
|
68.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
4,145 |
|
|
$ |
19.58 |
|
|
|
6.1 |
|
|
$ |
68,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
3,795 |
|
|
$ |
18.70 |
|
|
|
5.8 |
|
|
$ |
67,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Companys average stock price during the first
nine months of 2006 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders exercised their
options on September 30, 2006. This amount changes based on the fair market value of the
Companys stock. The total intrinsic value of options exercised during the nine months ended
September 30, 2006 was $27.5 million. |
|
|
|
Nonvested stock option transactions relating to the Companys incentive and non-qualified
stock option plans as of September 30, 2006 and changes during the nine months ended
September 30, 2006 are summarized below (in thousands, except exercise prices): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
average exercise |
|
|
|
options |
|
|
price per option |
|
Nonvested at December 31, 2005 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
436 |
|
|
$ |
29.63 |
|
Cancelled |
|
|
(26 |
) |
|
$ |
28.54 |
|
Vested |
|
|
(60 |
) |
|
$ |
33.11 |
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
350 |
|
|
$ |
29.12 |
|
|
|
|
|
|
|
|
|
|
|
The Company currently has $2.7 million of total unrecognized compensation cost related
to stock options that is expected to be recognized over a remaining weighted-average period
of 2.8 years. Notwithstanding the aforementioned accelerated vesting of all options on
December 30, 2005 to avoid future compensation charges and a change in the Companys
historical business practices in 2005 with respect to awarding stock-based employee
compensation by reducing the amount of stock options being |
9
|
|
issued and issuing restricted common stock to many employees who have historically been
issued stock options largely as a result of the pending adoption of SFAS 123R, as a result
of adopting Statement 123R on January 1, 2006, the Companys income from continuing
operations before income taxes and net income for the nine months ended September 30, 2006,
are $1.3 million and $0.8 million lower, respectively, than if it had continued to account
for share-based compensation under APB 25. Basic and diluted earnings per share for the nine
months ended September 30, 2006 are both $0.01 lower than if the Company had continued to
account for share-based compensation under APB 25. See Note 10 for further discussion of the
compensation charges associated with the issuance of restricted common stock. |
|
|
|
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (the
FSP). The FSP provides that companies may elect to use a specified short-cut method to
calculate the historical pool of windfall tax benefits upon adoption of SFAS 123R. The
Company elected to use the short-cut method when SFAS 123R was adopted on January 1, 2006.
Prior to the adoption of SFAS 123R, the Company reported all tax benefits of equity
compensation as operating cash flows in the consolidated statement of cash flows. In
accordance with SFAS 123R, for the nine months ended September 30, 2006 the presentation of
the statement of cash flows has changed from prior periods to report tax benefits from equity
compensation of $10.6 million resulting from tax deductions in excess of the compensation
cost recognized for those equity awards (excess tax benefits) as financing cash flows. |
|
|
|
Prior to adoption of SFAS 123R on January 1, 2006, the Company accounted for equity incentive
plans under the recognition and measurement principles of APB 25. As such, no employee
compensation cost for the Companys stock options is reflected in net income prior to January
1, 2006, except for $1.0 million recognized in the fourth quarter of 2005 as a result of the
accelerated vesting of outstanding options on December 30, 2005 as previously described
herein. The following table illustrates the effect on net income and income per share for the
three and nine months ended September 30, 2005 assuming the Company had applied the fair
value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands,
except per share data).
|
10
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
As Reported: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
20,793 |
|
|
$ |
26,910 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
(193 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
20,793 |
|
|
$ |
26,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
20,026 |
|
|
$ |
23,892 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
(193 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
20,026 |
|
|
$ |
23,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported: |
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.35 |
|
|
$ |
0.47 |
|
Income from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.35 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported: |
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.34 |
|
|
$ |
0.45 |
|
Income from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.34 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma: |
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.34 |
|
|
$ |
0.41 |
|
Income from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.34 |
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma: |
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.33 |
|
|
$ |
0.39 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.33 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
|
|
The effect of applying SFAS 123 for disclosing compensation costs under such
pronouncement may not be representative of the effects on reported net income for future
years. |
|
|
|
Refer to Note 10 for further information regarding additional stock-based compensation
awarded during 2006 and 2005. |
6. |
|
GOODWILL AND OTHER INTANGIBLE ASSETS |
|
|
|
Goodwill was $15.2 million as of September 30, 2006 and December 31, 2005 and was
associated with the facilities the Company manages but does not own. This goodwill was
established in connection with the acquisitions of two service companies during 2000. During
the first quarter of 2005, the Company recognized $138,000 of goodwill impairment resulting
from the pending termination of the Companys contract to |
11
|
|
manage the David L. Moss Criminal Justice Center located in Tulsa, Oklahoma. This charge is
included in loss from discontinued operations, net of taxes, in the accompanying statement of
operations for the nine months ended September 30, 2005. |
|
|
The components of the Companys amortized intangible assets and liabilities are as follows
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Contract acquisition costs |
|
$ |
873 |
|
|
$ |
(857 |
) |
|
$ |
873 |
|
|
$ |
(855 |
) |
Customer list |
|
|
765 |
|
|
|
(410 |
) |
|
|
765 |
|
|
|
(328 |
) |
Contract values |
|
|
(35,688 |
) |
|
|
21,636 |
|
|
|
(35,688 |
) |
|
|
19,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(34,050 |
) |
|
$ |
20,369 |
|
|
$ |
(34,050 |
) |
|
$ |
18,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract acquisition costs and the customer list are included in other non-current
assets, and contract values are included in other non-current liabilities in the accompanying
balance sheets. Contract values are amortized using the interest method. Amortization
income, net of amortization expense, for intangible assets and liabilities during the three
months ended September 30, 2006 and 2005 was $1.1 million and $1.0 million, respectively,
while amortization income, net of amortization expense, for intangible assets and liabilities
during the nine months ended September 30, 2006 and 2005 was $3.4 million and $3.1 million,
respectively. Interest expense associated with the amortization of contract values for the
three months ended September 30, 2006 and 2005 was $0.4 million and $0.4 million,
respectively, while interest expense associated with the amortization of contract values for
the nine months ended September 30, 2006 and 2005 was $1.2 million and $1.4 million,
respectively. Estimated amortization income, net of amortization expense, for the remainder
of 2006 and the five succeeding fiscal years is as follows (in thousands): |
|
|
|
|
|
2006 (remainder) |
|
$ |
1,139 |
|
2007 |
|
|
4,552 |
|
2008 |
|
|
4,552 |
|
2009 |
|
|
3,095 |
|
2010 |
|
|
2,534 |
|
2011 |
|
|
134 |
|
7. |
|
FACILITY ACTIVATIONS |
|
|
|
During the first quarter of 2006, the Company re-opened its 1,440-bed North Fork Correctional
Facility in Sayre, Oklahoma with a small population of inmates from the state of Vermont.
The facility was also re-opened in anticipation of additional inmate population needs from
various existing state and federal customers. In June 2006, the Company entered into a new
agreement with the state of Wyoming to house up to 600 of the states male medium-security
inmates at the North Fork Correctional Facility. The terms of the contract include an initial
two-year period and may be renewed upon mutual agreement. Prior to its re-opening, this
facility had been vacant since the third quarter of 2003, when all of the
Wisconsin inmates housed at the facility were |
12
|
|
transferred in order to satisfy a contractual provision mandated by the state of Wisconsin. |
|
|
In April 2006, the Company modified an agreement with Williamson County, Texas to house
non-criminal detainees from the U.S. Immigration and Customs Enforcement (ICE) under an
inter-governmental service agreement between Williamson County and the ICE. The agreement
enables the ICE to accommodate non-criminal aliens being detained for deportation at the
Companys 512-bed T. Don Hutto Residential Center in Taylor, Texas. The Company originally
announced an agreement in December 2005 to house up to 600 male detainees for the ICE.
However, for various reasons the initial intake of detainees originally scheduled to occur in
February 2006 was delayed. The modified agreement, which was effective beginning May 8,
2006, provides for an indefinite term and a fixed monthly payment based on the 512-bed
capacity of the facility. |
|
|
|
In June 2006, the Company entered into a new agreement with Stewart County, Georgia to house
detainees from ICE under an inter-governmental service agreement between Stewart County and
ICE. The agreement will enable ICE to accommodate detainees at the Companys 1,524-bed
Stewart Detention Center in Lumpkin, Georgia. The agreement between Stewart County and the
Company is effective through December 31, 2011, and provides for an indefinite number of
renewal options. The Company began receiving ICE detainees at the Stewart facility during
October 2006 and expects that ICE will substantially occupy the facility sometime during
2007. |
|
|
|
During February 2005, the Company commenced construction of the Red Rock Correctional Center,
a new 1,596-bed correctional facility located in Eloy, Arizona. The facility was completed
during July 2006 for an aggregate cost of approximately $81 million. The beds available at
the Red Rock facility are expected to be substantially occupied by inmates from the states of
Hawaii and Alaska by December 2006. |
8. |
|
DISCONTINUED OPERATIONS |
|
|
|
The results of operations, net of taxes, and the assets and liabilities of discontinued
operations have been reflected in the accompanying consolidated financial statements as
discontinued operations in accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets for all periods
presented. |
|
|
|
During March 2005, the Company received notification from the Tulsa County Commission in
Oklahoma that, as a result of a contract bidding process, the County elected to have the
Tulsa County Sheriffs Office manage the 1,440-bed David L. Moss Criminal Justice Center. The
Companys contract expired on June 30, 2005. Accordingly, the Company transferred operation
of the facility to the Tulsa County Sheriffs Office on July 1, 2005. |
|
|
|
The following table summarizes the results of operations for this facility for the nine
months ended September 30, 2006 and 2005 (amounts in thousands): |
13
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
REVENUE: |
|
|
|
|
|
|
|
|
Managed-only |
|
$ |
|
|
|
$ |
10,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
Managed-only |
|
|
|
|
|
|
10,804 |
|
Depreciation and amortization |
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS |
|
|
|
|
|
|
(309 |
) |
|
|
|
|
|
|
|
|
|
OTHER INCOME: |
|
|
|
|
|
|
|
|
Gain on disposal of assets |
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES |
|
|
|
|
|
|
(294 |
) |
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAXES |
|
$ |
|
|
|
$ |
(193 |
) |
|
|
|
|
|
|
|
|
|
The assets and liabilities of the discontinued operations presented in the
accompanying condensed consolidated balance sheets are as follows (amounts in thousands): |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
506 |
|
|
$ |
1,774 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
506 |
|
|
$ |
1,774 |
|
|
|
|
|
|
|
|
|
|
During September 2006, the Company received notification from the Liberty County
Commission in Liberty County, Texas that, as a result of a contract bidding process, the
County elected to transfer management of the 380-bed Liberty County Jail/Juvenile Center to
another operator. The Companys current contract expires in January 2007. The Company
expects to reclassify the results of operations, net of taxes, and the assets and liabilities
of this facility as discontinued operations beginning in the first quarter of 2007 for all
periods presented. The termination is not expected to have a material impact on the Companys
financial statements. |
9. |
|
DEBT |
|
|
|
Debt outstanding as of September 30, 2006 and December 31, 2005 consists of the following (in
thousands): |
14
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Senior Bank Credit Facility: |
|
|
|
|
|
|
|
|
Term Loan E Facility, with quarterly principal payments of
varying amounts with unpaid balance originally due in March
2008; interest payable periodically at variable interest rates.
The
interest rate was 6.0% at December 31, 2005. This loan was
paid-off in connection with issuance of the 6.75% Senior Notes
in January 2006. |
|
$ |
|
|
|
$ |
138,950 |
|
|
|
|
|
|
|
|
|
|
Revolving Loan, principal due at maturity in March 2006; interest
payable periodically at variable interest rates. The interest rate
was 5.9% at December 31, 2005. This facility was replaced with
a new revolving credit facility during the first quarter of 2006,
as
further described hereafter. |
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
New Revolving Credit Facility, principal due at maturity in February
2011; interest payable periodically at variable interest rates. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.5% Senior Notes, principal due at maturity in May 2011; interest
payable semi-annually in May and November at 7.5%. |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
7.5% Senior Notes, principal due at maturity in May 2011; interest
payable semi-annually in May and November at 7.5%. These notes were
issued with a $2.3 million premium, of which $1.3
million and $1.5 million was unamortized at September 30, 2006
and December 31, 2005, respectively. |
|
|
201,331 |
|
|
|
201,548 |
|
|
|
|
|
|
|
|
|
|
6.25% Senior Notes, principal due at maturity in March 2013; interest
payable semi-annually in March and September at 6.25%. |
|
|
375,000 |
|
|
|
375,000 |
|
|
|
|
|
|
|
|
|
|
6.75% Senior Notes, principal due at maturity in January 2014;
interest payable semi-annually in January and July at 6.75%. |
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
5 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
976,336 |
|
|
|
975,636 |
|
Less: Current portion of long-term debt |
|
|
(296 |
) |
|
|
(11,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
976,040 |
|
|
$ |
963,800 |
|
|
|
|
|
|
|
|
|
|
Senior Bank Credit Facility. As of December 31, 2005, the Companys senior secured
bank credit facility (the Senior Bank Credit Facility) was comprised of a $139.0 million
term loan expiring March 31, 2008 (the Term Loan E Facility) and a revolving loan (the
Revolving Loan) with a capacity of up to $125.0 million, including a $75.0 million
subfacility for letters of credit, expiring March 31, 2006. On April 18, 2005, the Company
completed an amendment to the Senior Bank Credit Facility that resulted in a reduction to the
interest rates applicable to the term loan portion from 2.25% over the London Interbank
Offered Rate (LIBOR) to 1.75% over LIBOR and a reduction to the interest rates applicable
to the Revolving Loan from 3.50% over LIBOR to 1.50% over LIBOR, while the fees associated
with the unused portion of the Revolving Loan were reduced from 0.50% to 0.375%. The base
rate margin applicable to the term loan portion was reduced to 0.75% from 1.25% and the base
rate margin applicable to the Revolving Loan was reduced to 0.50% from 2.50%. |
15
|
|
In connection with a substantial prepayment in March 2005 with net proceeds from the issuance
of the 6.25% Senior Notes (as defined hereafter), along with cash on hand, the Company
amended the Senior Bank Credit Facility to permit the incurrence of additional unsecured
indebtedness to be used for the purpose of purchasing, through a tender offer, the 9.875%
Senior Notes (as defined hereafter), prepaying a portion of the then outstanding term loan
portion of the Senior Bank Credit Facility (the Term Loan D Facility), and paying the
related tender premium, fees, and expenses incurred in connection therewith. The tender
offer for the 9.875% Senior Notes and pay-down of the Term Loan D Facility resulted in
expenses associated with refinancing transactions of $35.0 million during the first quarter
of 2005, consisting of a tender premium paid to the holders of the 9.875% Senior Notes who
tendered their notes to the Company at a price of 111% of par, estimated fees and expenses
associated with the tender offer, and the write-off of existing deferred loan costs
associated with the purchase of the 9.875% Senior Notes and lump sum pay-down of the Term
Loan D Facility. |
|
|
|
During January 2006, in connection with the sale and issuance of the 6.75% Senior Notes (as
defined hereafter), the Company used the net proceeds to completely pay-off the outstanding
balance of the Term Loan E Facility, after repaying the outstanding $10.0 million balance on
the Revolving Loan in January 2006 with cash on hand. Additionally, in February 2006, the
Company reached an agreement with a group of lenders to enter into a new $150.0 million
senior secured revolving credit facility with a five-year term (the New Revolving Credit
Facility). The New Revolving Credit Facility was used to replace the existing Revolving
Loan, including any outstanding letters of credit issued thereunder, which totaled $37.4
million as of September 30, 2006. The Company incurred a pre-tax charge of approximately
$1.0 million during the first quarter of 2006 for the write-off of existing deferred loan
costs associated with the retirement of the Revolving Loan and pay-off of the Term Loan E
Facility. |
|
|
|
The New Revolving Credit Facility has a $10.0 million sublimit for swingline loans and a
$100.0 million sublimit for the issuance of standby letters of credit. The Company has an
option to increase the availability under the New Revolving Credit Facility by up to $100.0
million (consisting of revolving credit, term loans, or a combination of the two) subject to,
among other things, the receipt of commitments for the increased amount. Interest on the New
Revolving Credit Facility is based on either a base rate plus a margin ranging from 0.00% to
0.50% or a LIBOR plus a margin ranging from 0.75% to 1.50%. The applicable margin rates are
subject to adjustment based on the Companys leverage ratio. Effective May 18, 2006, interest
rates on the New Revolving Credit Facility were reduced to a base rate or a LIBOR plus a
margin of 1.00% from a base rate plus a margin of 0.25% or a LIBOR plus a margin of 1.25% as
a result of an improvement to the Companys leverage ratio pursuant to the terms of the New
Revolving Credit Facility. |
|
|
|
The New Revolving Credit Facility is secured by a pledge of all of the capital stock of the
Companys domestic subsidiaries, 65% of the capital stock of the Companys foreign
subsidiaries, all of the Companys accounts receivable, and all of the Companys deposit
accounts. |
|
|
|
The New Revolving Credit Facility requires the Company to meet certain financial covenants,
including, without limitation, a maximum total leverage ratio and a |
16
|
|
minimum interest ratio coverage. In addition, the New Revolving Credit Facility contains
certain covenants which, among other things, limit the incurrence of additional indebtedness,
investments, payment of dividends, transactions with affiliates, asset sales, acquisitions,
capital expenditures, mergers and consolidations, prepayments and modifications of other
indebtedness, liens and encumbrances, and other matters customarily restricted in such
agreements. In addition, the New Revolving Credit Facility is subject to certain
cross-default provisions with terms of the Companys other indebtedness. |
|
|
|
$250 Million 9.875% Senior Notes. Interest on the $250.0 million aggregate principal amount
of the Companys 9.875% unsecured senior notes issued in May 2002 (the 9.875% Senior Notes)
accrued at the stated rate and was payable semi-annually on May 1 and November 1 of each
year. The 9.875% Senior Notes were scheduled to mature on May 1, 2009. As previously
described herein, the 9.875% Senior Notes were purchased through a tender offer by the
Company during the first quarter of 2005. |
|
|
|
$250 Million 7.5% Senior Notes. Interest on the $250.0 million aggregate principal amount of
the Companys 7.5% unsecured senior notes issued in May 2003 (the $250 Million 7.5% Senior
Notes) accrues at the stated rate and is payable semi-annually on May 1 and November 1 of
each year. The $250 Million 7.5% Senior Notes are scheduled to mature on May 1, 2011. At
any time on or before May 1, 2006, the Company could have redeemed 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 remained outstanding after the redemption. The Company may redeem all or
a portion of the notes on or after May 1, 2007. Redemption prices are set forth in the
indenture governing the $250 Million 7.5% Senior Notes. The $250 Million 7.5% Senior Notes
are guaranteed on an unsecured basis by all of the Companys domestic subsidiaries. |
|
|
|
$200 Million 7.5% Senior Notes. Interest on the $200.0 million aggregate principal amount of
the Companys 7.5% unsecured senior notes issued in August 2003 (the $200 Million 7.5%
Senior Notes) accrues at the stated rate and is payable semi-annually on May 1 and November
1 of each year. However, the notes were issued at a price of 101.125% of the principal
amount of the notes, resulting in a premium of $2.25 million, which is amortized as a
reduction to interest expense over the term of the notes. The $200 Million 7.5% Senior Notes
were issued under the existing indenture and supplemental indenture governing the $250
Million 7.5% Senior Notes. |
|
|
|
$375 Million 6.25% Senior Notes. As previously described herein, on March 23, 2005, the
Company completed the sale and issuance of $375.0 million aggregate principal amount of its
6.25% unsecured senior notes (the 6.25% Senior Notes) in a private placement to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
During April 2005, the Company filed a registration statement with the SEC, which the SEC
declared effective May 4, 2005, to exchange the 6.25% Senior Notes for a new issue of
identical debt securities registered under the Securities Act of 1933, as amended. Proceeds
from the original note offering, along with cash on hand, were used to purchase, through a
cash tender offer, all of the 9.875% Senior Notes, to pay-down $110.0 million of the then
outstanding Term Loan D Facility portion of the Senior Bank Credit Facility, and to pay fees
and expenses in |
17
|
|
connection therewith. The Company capitalized approximately $7.5 million of costs associated
with the issuance of the 6.25% Senior Notes. |
|
|
|
Interest on the 6.25% Senior Notes accrues at the stated rate and is payable on March 15 and
September 15 of each year. The 6.25% Senior Notes are scheduled to mature on March 15, 2013.
At any time on or before March 15, 2008, 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 notes on or after March 15, 2009. Redemption prices are set forth in the
indenture governing the 6.25% Senior Notes. |
|
|
|
$150 Million 6.75% Senior Notes. During January 2006, the Company completed the sale and
issuance of $150.0 million aggregate principal amount of its 6.75% unsecured senior notes
(the 6.75% Senior Notes) pursuant to a prospectus supplement under an effective shelf
registration statement that was filed by the Company with the SEC on January 17, 2006. The
Company used the net proceeds from the sale of the 6.75% Senior Notes to prepay the $139.0
million balance outstanding on the term loan indebtedness under the Companys Senior Bank
Credit Facility, to pay fees and expenses, and for general corporate purposes. The Company
reported a charge of $0.9 million during the first quarter of 2006 in connection with the
prepayment of the term portion of the Senior Bank Credit Facility. The Company capitalized
approximately $3.0 million of costs associated with the issuance of the 6.75% Senior Notes. |
|
|
|
Interest on the 6.75% Senior Notes accrues at the stated rate and is payable on January 31
and July 31 of each year. The 6.75% Senior Notes are scheduled to mature on January 31,
2014. At any time on or before January 31, 2009, 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 notes on or after January 31, 2010. Redemption prices are set
forth in the indenture governing the 6.75% Senior Notes. |
10. |
|
STOCKHOLDERS EQUITY |
|
|
|
During the nine months ended September 30, 2006, the Company issued 256,014 shares of
restricted common stock to certain of the Companys employees, with an aggregate value of
$7.4 million, including 202,464 restricted shares to employees whose compensation is charged
to general and administrative expense and 53,550 restricted shares to employees whose
compensation is charged to operating expense. During 2005, the Company issued 295,539 shares
of restricted common stock to certain of the Companys employees, with an aggregate value of
$7.7 million, including 233,334 restricted shares to employees whose compensation is charged
to general and administrative expense and 62,205 shares to employees whose compensation is
charged to operating expense. |
|
|
|
The employees whose compensation is charged to general and administrative expense have
historically been issued stock options as opposed to restricted common stock. However, in
2005 the Company made changes to its historical business practices with |
18
|
|
respect to awarding stock-based employee compensation as a result of, among other reasons,
the issuance of SFAS 123R, whereby the Company issued a combination of stock options and
restricted common stock to such employees. The Company established performance-based vesting
conditions on the restricted stock awarded to the Companys officers and executive officers.
Unless earlier vested under the terms of the restricted stock, 136,510 shares issued in 2006
and 161,925 shares issued in 2005 to officers and executive officers are subject to vesting
over a three-year period based upon the satisfaction of certain performance criteria. No
more than one-third of such shares may vest in the first performance period; however, the
performance criteria are cumulative for the three-year period. Because the first performance
criteria with respect to the restricted shares issued in 2005 were satisfied, one-third of
such shares issued and still outstanding on the date the performance criteria were deemed
satisfied, or 52,830 restricted shares, became vested in March 2006. Unless earlier vested
under the terms of the restricted stock, the remaining 119,504 shares of restricted stock
issued in 2006 and 133,614 shares of restricted stock issued in 2005 to certain other
employees of the Company vest during 2009 and 2008, respectively, as long as the employees
awarded such shares do not terminate employment prior to the vesting dates. |
|
|
|
During 2004 and 2003, the Company issued 78,900 shares and 141,750 shares of restricted
common stock, respectively, to certain of the Companys wardens. Each of the aggregate
grants was valued at $1.6 million on the date of the award. All of the shares granted during
2003 vested during February 2006, while all of the shares granted during 2004 vest during
2007. Nonvested restricted common stock transactions as of September 30, 2006 and for the
nine months ended September 30, 2006 are summarized below (in thousands, except per share
amounts). |
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
Weighted |
|
|
|
restricted |
|
|
average grant date |
|
|
|
common stock |
|
|
fair value |
|
Nonvested at December 31, 2005 |
|
|
477 |
|
|
$ |
21.41 |
|
Granted |
|
|
256 |
|
|
$ |
28.82 |
|
Cancelled |
|
|
(52 |
) |
|
$ |
26.28 |
|
Vested |
|
|
(178 |
) |
|
$ |
16.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
|
503 |
|
|
$ |
26.60 |
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2006, the Company expensed $1,228,000, net of
forfeitures, relating to restricted common stock ($345,000 of which was recorded in operating
expenses and $883,000 of which was recorded in general and administrative expenses), while
during the three months ended September 30, 2005, the Company expensed $871,000 net of
forfeitures, relating to restricted common stock ($361,000 of which was recorded in operating
expenses and $510,000 of which was recorded in general and administrative expenses). During
the nine months ended September 30, 2006, the Company expensed $3,359,000, net of
forfeitures, relating to restricted common stock ($963,000 of which was recorded in operating
expenses and $2,396,000 of which was recorded in general and administrative expenses), while
during the nine months ended September 30, 2005, the Company expensed $2,159,000, net of
forfeitures, relating to restricted common stock ($985,000 of which was recorded |
19
|
|
in operating expenses and $1,174,000 of which was recorded in general and administrative
expenses). As of September 30, 2006, 502,562 of these shares of restricted stock remained
outstanding and subject to vesting. The unrecognized compensation related to these shares
was approximately $8.0 million as of September 30, 2006 and is expected to be recognized over
a weighted average period of 2.0 years. |
11. |
|
EARNINGS PER SHARE |
|
|
|
In accordance with Statement of Financial Accounting Standards No.
128, Earnings Per Share, basic earnings per share is computed by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. For the Company, diluted
earnings per share is computed by dividing net income 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 a follows (in thousands,
except per share data): |
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
NUMERATOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
26,130 |
|
|
$ |
20,793 |
|
|
$ |
73,087 |
|
|
$ |
26,910 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,130 |
|
|
$ |
20,793 |
|
|
$ |
73,087 |
|
|
$ |
26,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
26,130 |
|
|
$ |
20,793 |
|
|
$ |
73,087 |
|
|
$ |
26,910 |
|
Interest expense applicable to convertible notes, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income from continuing operations |
|
|
26,130 |
|
|
|
20,793 |
|
|
|
73,087 |
|
|
|
27,034 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income |
|
$ |
26,130 |
|
|
$ |
20,793 |
|
|
$ |
73,087 |
|
|
$ |
26,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
60,021 |
|
|
|
58,661 |
|
|
|
59,693 |
|
|
|
57,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
60,021 |
|
|
|
58,661 |
|
|
|
59,693 |
|
|
|
57,291 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants |
|
|
1,540 |
|
|
|
1,627 |
|
|
|
1,500 |
|
|
|
1,761 |
|
Convertible notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,091 |
|
Restricted stock-based compensation |
|
|
147 |
|
|
|
186 |
|
|
|
166 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and assumed conversions |
|
|
61,708 |
|
|
|
60,474 |
|
|
|
61,359 |
|
|
|
60,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.44 |
|
|
$ |
0.35 |
|
|
$ |
1.22 |
|
|
$ |
0.47 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.44 |
|
|
$ |
0.35 |
|
|
$ |
1.22 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.42 |
|
|
$ |
0.34 |
|
|
$ |
1.19 |
|
|
$ |
0.45 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.42 |
|
|
$ |
0.34 |
|
|
$ |
1.19 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
Legal Proceedings |
|
|
|
General. The nature of the Companys business results in claims and litigation alleging that
it is liable for damages arising from the conduct of its employees, inmates or others. The
nature of such claims include, but is not limited to, claims arising from employee or inmate
misconduct, medical malpractice, employment matters, property loss, contractual claims, and
personal injury or other damages resulting from contact with the Companys facilities,
personnel or prisoners, including damages arising from a prisoners escape or from a
disturbance or riot at a facility. The Company maintains insurance to cover many of these
claims, which may mitigate the risk that any single claim would have a material effect on the
Companys consolidated financial position, results of operations, or cash flows, provided the
claim is one for which coverage is available. The combination of self-insured retentions and
deductible amounts means that, in the aggregate, the Company is subject to substantial
self-insurance risk. |
21
|
|
The Company records litigation reserves related to certain matters for which it is probable
that a loss has been incurred and the range of such loss can be estimated. Based upon
managements review of the potential claims and outstanding litigation and based upon
managements experience and history of estimating losses, management believes a loss in
excess of amounts already recognized would not be material to the Companys financial
statements. In the opinion of management, there are no pending legal proceedings that would
have a material effect on the Companys consolidated financial position, results of
operations, or cash flows. Any receivable for insurance recoveries is recorded separately
from the corresponding litigation reserve, and only if recovery is determined to be probable.
Adversarial proceedings and litigation are, however, subject to inherent uncertainties, and
unfavorable decisions and rulings could occur which could have a material adverse impact on
the Companys consolidated financial position, results of operations, or cash flows for the
period in which such decisions or rulings occur, or future periods. Expenses associated with
legal proceedings may also fluctuate from quarter to quarter based on changes in the
Companys assumptions, new developments, or by the effectiveness of the Companys litigation
and settlement strategies. |
|
|
|
Insurance Contingencies |
|
|
|
Each of the Companys management contracts and the statutes of certain states require the
maintenance of insurance. The Company maintains various insurance policies including
employee health, workers compensation, automobile liability, and general liability
insurance. These policies are fixed premium policies with various deductible amounts that
are self-funded by the Company. Reserves are provided for estimated incurred claims for
which it is probable that a loss has been incurred and the range of such loss can be
estimated. |
|
|
|
Guarantees |
|
|
|
Hardeman County Correctional Facilities Corporation (HCCFC) is a nonprofit, mutual benefit
corporation organized under the Tennessee Nonprofit Corporation Act to purchase, construct,
improve, equip, finance, own and manage a correctional facility located in Hardeman County,
Tennessee. HCCFC was created as an instrumentality of Hardeman County to implement the
Countys incarceration agreement with the state of Tennessee to house certain inmates. |
|
|
|
During 1997, HCCFC issued $72.7 million of revenue bonds, which were primarily used for the
construction of a 2,016-bed medium security correctional facility. In addition, HCCFC
entered into a construction and management agreement with the Company in order to assure the
timely and coordinated acquisition, construction, development, marketing and operation of the
correctional facility. |
|
|
|
HCCFC leases the correctional facility to Hardeman County in exchange for all revenue from
the operation of the facility. HCCFC has, in turn, entered into a management agreement with
the Company for the correctional facility. |
22
|
|
In connection with the issuance of the revenue bonds, the Company is obligated, under a debt
service deficit agreement, to pay the trustee of the bonds trust indenture (the Trustee)
amounts necessary to pay any debt service deficits consisting of principal and interest
requirements (outstanding principal balance of $52.0 million at September 30, 2006 plus
future interest payments). In the event the state of Tennessee, which is currently utilizing
the facility to house certain inmates, exercises its option to purchase the correctional
facility, the Company is also obligated to pay the difference between principal and interest
owed on the bonds on the date set for the redemption of the bonds and amounts paid by the
state of Tennessee for the facility plus all other funds on deposit with the Trustee and
available for redemption of the bonds. Ownership of the facility reverts to the state of
Tennessee in 2017 at no cost. Therefore, the Company does not currently believe the state of
Tennessee will exercise its option to purchase the facility. At September 30, 2006, the
outstanding principal balance of the bonds exceeded the purchase price option by $12.2
million. The Company also maintains a restricted cash account of $5.5 million as collateral
against a guarantee it has provided for a forward purchase agreement related to the bond
issuance. |
13. |
|
INCOME TAXES |
|
|
|
Income taxes are accounted for under the provisions of SFAS 109. SFAS 109 generally requires
the Company to record deferred income taxes for the tax effect of differences between book
and tax bases of its assets and liabilities. |
|
|
|
Deferred income taxes reflect the available net operating losses and 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 the Companys past earnings history, expected future earnings, the character
and jurisdiction of such earnings, unsettled circumstances that, if unfavorably
resolved, would adversely affect utilization of its deferred tax assets, carryback and
carryforward periods, and tax strategies that could potentially enhance the likelihood
of realization of a deferred tax asset. |
|
|
|
The Companys effective tax rate was approximately 37% during both the three and nine
months ended September 30, 2006 and 2005. The effective tax rates during 2005 resulted
from certain tax planning strategies implemented during the fourth quarter of 2004 that
were favorably impacted by the recognition of deductible expenses associated with the
Companys debt refinancing transactions completed during the first and second quarters
of 2005. The effective tax rates during 2006 were also favorably impacted by changes in
the Companys valuation allowance that were applied to certain deferred tax assets as
well as an increase in the income tax benefits of equity compensation during 2006. The
Companys overall effective tax rate is estimated based on the Companys current
projection of taxable income and could change in the future as a result of changes in
these estimates, the implementation of additional tax strategies, changes in federal or
state tax rates, changes in tax laws, or changes in state apportionment factors, as well
as changes in the valuation allowance applied to the Companys deferred tax assets that
are based primarily on the amount of state net operating losses and tax credits that
could expire unused. |
23
|
|
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), which is an interpretation of FASB Statement No. 109, Accounting for
Income Taxes (SFAS 109). FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The guidance prescribed in FIN 48 establishes a
recognition threshold of more likely than not that a tax position will be sustained upon
examination. The measurement attribute of FIN 48 requires that a tax position be measured at
the largest amount of benefit that is greater than 50 percent likely of being realized upon
ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company is in the process of evaluating the impact that FIN 48 will have on the
Companys financial position or results of operations and currently plans to adopt FIN 48 on
January 1, 2007. |
14. |
|
SEGMENT REPORTING |
|
|
|
As of September 30, 2006, the Company owned and managed 40
correctional and detention facilities, and managed 25 correctional and
detention facilities it did not own. Management views the Companys
operating results in two reportable segments: owned and managed
correctional and detention facilities and managed-only correctional
and detention facilities. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in the notes to consolidated financial statements
included in the Companys 2005 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 reportable segments, without
differentiation, based on facility contribution. The Company defines
facility contribution as a facilitys operating income or loss from
operations before interest, taxes, depreciation and amortization.
Since each of the Companys facilities within the two reportable
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
reportable segment. |
|
|
|
The revenue and facility contribution for the reportable segments and
a reconciliation to the Companys operating income is as follows for
the three and nine months ended September 30, 2006 and 2005 (dollars
in thousands): |
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed |
|
$ |
245,302 |
|
|
$ |
214,096 |
|
|
$ |
705,191 |
|
|
$ |
615,018 |
|
Managed-only |
|
|
88,308 |
|
|
|
85,882 |
|
|
|
261,458 |
|
|
|
246,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management revenue |
|
|
333,610 |
|
|
|
299,978 |
|
|
|
966,649 |
|
|
|
861,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed |
|
|
166,585 |
|
|
|
151,342 |
|
|
|
483,499 |
|
|
|
440,299 |
|
Managed-only |
|
|
76,841 |
|
|
|
69,645 |
|
|
|
224,277 |
|
|
|
207,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
243,426 |
|
|
|
220,987 |
|
|
|
707,776 |
|
|
|
647,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility contribution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed |
|
|
78,717 |
|
|
|
62,754 |
|
|
|
221,692 |
|
|
|
174,719 |
|
Managed-only |
|
|
11,467 |
|
|
|
16,237 |
|
|
|
37,181 |
|
|
|
38,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total facility contribution |
|
|
90,184 |
|
|
|
78,991 |
|
|
|
258,873 |
|
|
|
213,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and other revenue |
|
|
5,657 |
|
|
|
4,389 |
|
|
|
14,852 |
|
|
|
14,310 |
|
Other operating expense |
|
|
(5,695 |
) |
|
|
(5,019 |
) |
|
|
(16,193 |
) |
|
|
(16,451 |
) |
General and administrative |
|
|
(16,379 |
) |
|
|
(14,352 |
) |
|
|
(46,717 |
) |
|
|
(40,477 |
) |
Depreciation and amortization |
|
|
(17,538 |
) |
|
|
(15,315 |
) |
|
|
(49,567 |
) |
|
|
(44,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
56,229 |
|
|
$ |
48,694 |
|
|
$ |
161,248 |
|
|
$ |
126,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes capital expenditures for the reportable segments for
the three and nine months ended September 30, 2006 and 2005 (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed |
|
$ |
36,632 |
|
|
$ |
25,640 |
|
|
$ |
85,788 |
|
|
$ |
62,735 |
|
Managed-only |
|
|
6,915 |
|
|
|
1,331 |
|
|
|
15,237 |
|
|
|
3,548 |
|
Corporate and other |
|
|
5,212 |
|
|
|
2,648 |
|
|
|
13,597 |
|
|
|
12,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
48,759 |
|
|
$ |
29,619 |
|
|
$ |
114,622 |
|
|
$ |
78,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets for the reportable segments are as follows (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Assets: |
|
|
|
|
|
|
|
|
Owned and managed |
|
$ |
1,764,458 |
|
|
$ |
1,672,941 |
|
Managed-only |
|
|
115,466 |
|
|
|
92,101 |
|
Corporate and other |
|
|
339,220 |
|
|
|
321,271 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,219,144 |
|
|
$ |
2,086,313 |
|
|
|
|
|
|
|
|
15. |
|
SUPPLEMENTAL CASH FLOW DISCLOSURE |
|
|
|
During the nine months ended September 30, 2005, $30.0 million
of convertible subordinated notes were converted into 5.0
million shares of common stock. As a result, long term debt
was reduced by, and common stock and additional paid-in capital
were increased by, $30.0 million. |
25
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. |
The following discussion should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this report.
This quarterly report on Form 10-Q contains statements as to our beliefs and expectations of the
outcome of future events that are forward-looking statements as defined within the meaning of the
Private Securities Litigation Reform Act of 1995. 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 forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ
materially from the statements made. These include, but are not limited to, the risks and
uncertainties associated with:
|
|
|
fluctuations in operating results because of changes in occupancy levels, competition,
increases in cost of operations, fluctuations in interest rates, and risks of operations; |
|
|
|
|
changes 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,
including as the result of sufficient governmental appropriations, inmate disturbances,
and the timing of the opening of new facilities and the commencement of new management
contracts to utilize current available beds and new capacity as development and expansion
projects are completed; |
|
|
|
|
increases in costs to develop or expand correctional facilities that exceed original
estimates, or the inability to complete such projects on schedule as a result of various
factors, many of which are beyond our control, such as weather, labor conditions, and
material shortages, resulting in increased construction costs; |
|
|
|
|
changes in governmental policy and in legislation and regulation of the corrections and
detention industry that adversely affect our business; |
|
|
|
|
the availability of debt and equity financing on terms that are favorable to us; 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, 2005, filed with the
Securities and Exchange Commission (the SEC) on March 7, 2006 (File No. 001-16109) (the 2005
Form 10-K) and in other reports we file with the SEC from time to time. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as of the date
hereof. We
26
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 2005 Form 10-K.
OVERVIEW
The Company
As of September 30, 2006, we owned 43 correctional, detention and juvenile facilities, three of
which we leased to other operators. As of September 30, 2006, we operated 65 facilities, including
40 facilities that we owned, with a total design capacity of approximately 72,500 beds in 19 states
and the District of Columbia. We are also constructing an additional correctional facility in
Eloy, Arizona that is expected to be completed during mid-2007.
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, religious
services, 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.
Our website address is www.correctionscorp.com. We make our Form 10-K, Form 10-Q, Form 8-K, and
Section 16 reports under the Securities Exchange Act of 1934, as amended (the Exchange Act),
available on our website, free of charge, as soon as reasonably practicable after these reports are
filed with or furnished to the SEC.
CRITICAL ACCOUNTING POLICIES
The condensed consolidated financial statements in this report 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 2005 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 September 30, 2006, we had $1.8 billion in long-lived assets. We
evaluate the recoverability of the carrying values of our long-lived assets, other than goodwill,
when events suggest that an impairment may have occurred. Such events primarily include, but are
not limited to, the termination of a management contract or a significant decrease in inmate
populations within a correctional facility we own or manage. In these circumstances, we utilize
estimates of undiscounted cash flows to determine if an impairment
27
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. As of September 30, 2006, we had $15.2 million of goodwill. We evaluate the
carrying value of goodwill during the fourth quarter of each year, in connection with our annual
budgeting process, and whenever circumstances indicate the carrying value of goodwill may not be
recoverable. Such circumstances primarily include, but are not limited to, the termination of a
management contract or a significant decrease in inmate populations within a reporting unit. We
test for impairment by comparing the fair value of each reporting unit with its carrying value.
Fair value is determined using a collaboration of various common valuation techniques, including
market multiples, discounted cash flows, and replacement cost methods. Each of these techniques
requires considerable judgment and estimations which could change in the future.
Income taxes. Income taxes are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 generally
requires us to record deferred income taxes for the tax effect of differences between book and tax
bases of our assets and liabilities.
Deferred income taxes reflect the available net operating losses and 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 past earnings
history, expected future earnings, the character and jurisdiction of such earnings, unsettled
circumstances that, if unfavorably resolved, would adversely affect utilization of our deferred tax
assets, carryback and carryforward periods, and tax strategies that could potentially enhance the
likelihood of realization of a deferred tax asset.
We currently expect to utilize our remaining federal net operating losses in 2006. We also have
approximately $10.0 million in net operating losses applicable to various states that we expect to
carry forward in future years to offset taxable income in such states. These net operating losses
have begun to expire. Accordingly, we have a valuation allowance of $2.7 million for the estimated
amount of the net operating losses that will expire unused, in addition to a $6.0 million valuation
allowance related to state tax credits that are also expected to expire unused. Although our
estimate of future taxable income is based on current assumptions that we believe to be reasonable,
our assumptions may prove inaccurate and could change in the future, which could result in the
expiration of additional net operating losses or credits. We would be required to establish a
valuation allowance at such time that we no longer expected to utilize these net operating losses
or credits, which could result in a material impact on our results of operations in the future.
Self-funded insurance reserves. As of September 30, 2006, we had $34.2 million in accrued
liabilities for employee health, workers compensation, and automobile insurance claims. We are
significantly self-insured for employee health, workers compensation, and automobile liability
insurance claims. As such, our insurance expense is largely dependent on claims experience and our
ability to control our claims. We have consistently accrued the estimated liability for employee
health insurance claims based on our history of claims experience and the time lag between the
incident date and the date the cost is paid by us. We have accrued the estimated liability for
workers compensation and automobile insurance
28
claims based on a third-party actuarial valuation of the outstanding liabilities, discounted to the
net present value of the outstanding liabilities. These estimates could change in the future. It
is possible 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.
Legal reserves. As of September 30, 2006, we had $15.3 million in accrued liabilities related to
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 our General Counsels office and, as
appropriate, outside counsel handling these matters, and are based upon an analysis of potential
results, assuming a combination of litigation and settlement strategies. It is possible 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.
RESULTS OF OPERATIONS
Our results of operations are impacted by the number of facilities we owned and managed, the number
of facilities we managed but did not own, the number of facilities we leased to other operators,
and the facilities we owned that were not yet in operation. The following table sets forth the
changes in the number of facilities operated for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
and |
|
|
Managed |
|
|
|
|
|
|
|
|
|
|
|
|
Date |
|
|
Managed |
|
|
Only |
|
|
Leased |
|
|
Incomplete |
|
|
Total |
|
Facilities as of December 31, 2004 |
|
|
|
|
|
|
38 |
|
|
|
25 |
|
|
|
3 |
|
|
|
1 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of the management
contract for the David L.
Moss
Criminal Justice Center |
|
July 1, 2005 |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Completion of construction at
the Stewart Detention
Center |
|
October 10, 2005 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities as of December 31, 2005 |
|
|
|
|
|
|
39 |
|
|
|
24 |
|
|
|
3 |
|
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion of construction at
the Red Rock Correctional
Center |
|
July 1, 2006 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Management contract awarded
for the Camino Nuevo
Female
Correctional Facility |
|
July 1, 2006 |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities as of September 30,
2006 |
|
|
|
|
|
|
40 |
|
|
|
25 |
|
|
|
3 |
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We also have an additional facility located in Eloy, Arizona that is under construction as
of September 30, 2006. This facility is not counted in the foregoing table because it currently
has no impact on our results of operations.
29
Three and Nine Months Ended September 30, 2006 Compared to the Three and Nine Months Ended
September 30, 2005
Net income was $26.1 million, or $0.42 per diluted share, for the three months ended September 30,
2006, compared with net income of $20.8 million, or $0.34 per diluted share, for the three months
ended September 30, 2005. During the nine months ended September 30, 2006, we generated net income
of $73.1 million, or $1.19 per diluted share, compared with net income of $26.7 million, or $0.45
per diluted share, for the nine months ended September 30, 2005.
Net income during the three and nine months ended September 30, 2006 was favorably impacted by the
increase in operating income of $7.5 million, or 15%, for the three-month period over the prior
year and $34.8 million, or 27%, for the nine-month period over the prior year. Contributing to the
increase in operating income during 2006 compared with the previous year was an increase in
occupancy levels across our portfolio of facilities and the commencement of selected new management
contracts, partially offset by increases in general and administrative expenses and depreciation
and amortization.
Net income during the nine months ended September 30, 2005 was negatively impacted by a $35.3
million charge associated with debt refinancing transactions completed during the first and second
quarters of 2005, as further described hereafter, which consisted of a tender premium paid to the
holders of the 9.875% senior notes who tendered their notes to us at a price of 111% of par
pursuant to a tender offer we made for their notes in March 2005, estimated fees and expenses
associated with the tender offer, and the write-off of existing deferred loan costs associated with
the purchase of the 9.875% senior notes and a lump sum pay-down of our old senior bank credit
facility, as well as the write-off of existing deferred loan costs and third-party fees incurred in
connection with obtaining an amendment to our senior bank credit facility.
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, which
represents the revenue we generate and expenses we incur for one inmate for one calendar day.
Revenue and expenses per compensated man-day are computed by dividing facility revenue and expenses
by the total number of compensated man-days during the period. A compensated man-day represents a
calendar day for which we are paid for the occupancy of an inmate. We believe the measurement is
useful because we are compensated for operating and managing facilities at an inmate per-diem rate
based upon actual or minimum guaranteed occupancy levels. We also measure our ability to contain
costs on a per-compensated man-day basis, which is largely dependent upon the number of inmates we
accommodate. Further, per man-day measurements are also used to estimate our potential
profitability based on certain occupancy levels relative to design capacity. Revenue and expenses
per compensated man-day for all of the facilities we owned or managed, exclusive of those
discontinued (see further discussion below regarding discontinued operations), were as follows for
the three and nine months ended September 30, 2006 and 2005:
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue per compensated man-day |
|
$ |
52.81 |
|
|
$ |
50.82 |
|
|
$ |
52.46 |
|
|
$ |
50.35 |
|
Operating expenses per compensated
man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
28.63 |
|
|
|
28.17 |
|
|
|
28.56 |
|
|
|
28.66 |
|
Variable expense |
|
|
9.90 |
|
|
|
9.27 |
|
|
|
9.85 |
|
|
|
9.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
38.53 |
|
|
|
37.44 |
|
|
|
38.41 |
|
|
|
37.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin per compensated man-day |
|
$ |
14.28 |
|
|
$ |
13.38 |
|
|
$ |
14.05 |
|
|
$ |
12.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
27.0 |
% |
|
|
26.3 |
% |
|
|
26.8 |
% |
|
|
24.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated occupancy |
|
|
94.5 |
% |
|
|
92.7 |
% |
|
|
94.4 |
% |
|
|
90.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated occupancy for the third quarter of 2006 increased to 94.5% from 92.7% in
the third quarter of 2005 due to increases in inmate populations across our portfolio, and largely
as a result of a full quarters impact from a contract with the Federal Bureau of Prisons, or the
BOP, that commenced in June 2005 at our Northeast Ohio Correctional Center, and the commencement of
a new management contract in May 2006 to house non-criminal detainees from the U.S. Immigration and
Customs Enforcement, or the ICE, at our T. Don Hutto Residential Center. Compensated occupancy
also increased as a result of an increase in the population at our Prairie Correctional Facility
largely as a result of additional inmates from the states of Minnesota, Washington and Idaho, and
an increase in the population at our North Fork Correctional Facility as a result of a new
management contract with the state of Wyoming, which commenced in June 2006. Further, inmate
populations increased notably at our Otter Creek Correctional Facility as a result of contracts
with the states of Kentucky and Hawaii to house female inmates to replace the inmates from the
state of Indiana that were removed during the second quarter of 2005.
Business from our federal customers, including primarily the BOP, the U.S. Marshals Service, or the
USMS, and ICE continues to be a significant component of our business. Our federal customers
generated approximately 40% of our total management revenue for each of the nine months ended
September 30, 2006 and 2005, increasing 13.7%, from $341.6 million during the nine months ended
September 30, 2005 to $388.3 million during the nine months ended September 30, 2006. We currently
expect business from our federal customers to continue to result in increasing revenue, as it did
during the third quarter of 2006, based on our belief that the federal governments enhanced focus
on illegal immigration and initiatives to secure the nations borders will result in increased
demand for federal detention services. In addition, business from our state customers increased
12.2% from $424.6 million for the nine months ended September 30, 2005 to $476.5 million for the
same period in 2006, as we have also experienced an increase in demand from state customers.
Operating expenses totaled $249.1 million and $226.0 million for the three months ended September
30, 2006 and 2005, respectively, while operating expenses for the nine months ended September 30,
2006 and 2005 totaled $724.0 million and $664.4 million, respectively. Operating expenses consist
of those expenses incurred in the operation and management of adult and juvenile correctional and
detention facilities and for our inmate transportation subsidiary.
31
The increase in fixed expenses per compensated man-day during the three-month periods from $28.17
in 2005 to $28.63 in 2006 was primarily the result of an increase in salaries and benefits of $0.46
per compensated man-day. The increase in salaries and benefits per compensated man-day was
primarily the result of staffing expenses incurred at our Stewart Detention Center in preparation
for the receipt of ICE detainees, as well as modest increases in workers compensation, employee
medical insurance, and utilities.
Salaries and benefits represent the most significant component of fixed operating expenses and
represented approximately 63% of total operating expenses during the third quarter of 2006. During
the three and nine months ended September 30, 2006, facility salaries and benefits expense
increased $12.8 million and $27.4 million, respectively. However, salaries and benefits expense
for the nine months ended September 30, 2006 decreased by $0.27 per compensated man-day compared
with the same period in the prior year, as we were able to leverage our salaries and benefits over
a larger inmate population. Additionally, the decrease in salaries and benefits per compensated
man-day was caused by increased staffing levels in the prior year nine-month period in anticipation
of increased inmate populations at our Northeast Ohio Correctional Center due to the commencement
of the new BOP contract on June 1, 2005, and at our Otter Creek Correctional Center as a result of
the aforementioned transition of state inmate populations, partially offset by increased staffing
levels at our Stewart Detention Center during the third quarter of 2006 in anticipation of
receiving ICE detainees in October 2006 pursuant to a new contract award.
Facility variable expenses increased $0.63 per compensated man-day during each of the three
and nine months ended September 30, 2006, compared with the same periods in the prior year. The
increase in variable expenses per compensated man-day includes primarily an increase in legal
expenses resulting from the successful negotiation of a number of outstanding legal matters in the
prior year.
With regard to legal expenses, during the first nine months of 2005, we settled a number of
outstanding legal matters for amounts less than reserves previously established for such matters
which, on a net basis, reduced our expenses during 2005. As a result, operating expenses associated
with legal settlements increased by $2.2 million and $6.4 million during the three- and nine-month
periods ended September 30, 2006, respectively, compared with the same periods in the prior year.
Expenses associated with legal proceedings may fluctuate from quarter to quarter based on new
lawsuits, changes in our assumptions, new developments, or by the effectiveness of our litigation
and settlement strategies.
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 were
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. 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
32
managed-only facilities. The following tables display the revenue and expenses per compensated
man-day for the facilities we own and manage and for the facilities we manage but do not own:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Owned and Managed Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per compensated man-day |
|
$ |
61.27 |
|
|
$ |
58.88 |
|
|
$ |
60.71 |
|
|
$ |
58.61 |
|
Operating expenses per
compensated man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
30.84 |
|
|
|
31.53 |
|
|
|
30.94 |
|
|
|
32.04 |
|
Variable expense |
|
|
10.76 |
|
|
|
10.09 |
|
|
|
10.69 |
|
|
|
9.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
41.60 |
|
|
|
41.62 |
|
|
|
41.63 |
|
|
|
41.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin per
compensated man-day |
|
$ |
19.67 |
|
|
$ |
17.26 |
|
|
$ |
19.08 |
|
|
$ |
16.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
32.1 |
% |
|
|
29.3 |
% |
|
|
31.4 |
% |
|
|
28.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated occupancy |
|
|
93.2 |
% |
|
|
89.9 |
% |
|
|
93.1 |
% |
|
|
87.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Managed Only Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per compensated man-day |
|
$ |
38.18 |
|
|
$ |
37.90 |
|
|
$ |
38.39 |
|
|
$ |
37.24 |
|
Operating expenses per
compensated man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
24.81 |
|
|
|
22.78 |
|
|
|
24.51 |
|
|
|
23.29 |
|
Variable expense |
|
|
8.41 |
|
|
|
7.95 |
|
|
|
8.42 |
|
|
|
8.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
33.22 |
|
|
|
30.73 |
|
|
|
32.93 |
|
|
|
31.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin per
compensated man-day |
|
$ |
4.96 |
|
|
$ |
7.17 |
|
|
$ |
5.46 |
|
|
$ |
5.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
13.0 |
% |
|
|
18.9 |
% |
|
|
14.2 |
% |
|
|
15.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated occupancy |
|
|
96.8 |
% |
|
|
97.4 |
% |
|
|
96.6 |
% |
|
|
96.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussions under Owned and Managed Facilities and Managed-Only Facilities
address significant events that impacted our results of operations for the respective periods, and
events that are expected to affect our results of operations in the future.
Owned and Managed Facilities
During April 2006, we modified an agreement with Williamson County, Texas to house non-criminal
detainees from the ICE under an inter-governmental service agreement between Williamson County and
the ICE. The agreement enables the ICE to accommodate non-criminal aliens being detained for
deportation at our T. Don Hutto Residential Center in
33
Taylor, Texas. We originally announced an agreement in December 2005 to house up to 600 male
detainees for the ICE. However, for various reasons, the initial intake of detainees originally
scheduled to occur in February 2006 was delayed. The modified agreement, which was effective
beginning May 8, 2006, provides for an indefinite term. This new agreement contributed to
increased revenue and operating margins in 2006, particularly during the third quarter of 2006
compared with the third quarter of 2005. Further, the increase in the operating margin was
positively affected during the third quarter of 2006 because the agreement provides for a fixed
monthly payment based on the 512-bed capacity of the facility, even though detainee populations
were continuing to increase during the third quarter of 2006. We expect operating expenses at this
facility to increase as utilization continues to increase.
On December 23, 2004, we received a contract award from the BOP to house approximately 1,195
federal inmates at our 2,016-bed Northeast Ohio Correctional Center. The contract, awarded as part
of the Criminal Alien Requirement Phase 4 Solicitation (CAR 4), provides for an initial four-year
term with three two-year renewal options. The terms of the contract provide for a 50% guaranteed
rate of occupancy for 90 days following a Notice to Proceed, and a 90% guaranteed rate of occupancy
thereafter. The contract commenced June 1, 2005. As of September 30, 2006, we housed 1,338 BOP
inmates at this facility. Total revenue at this facility increased by $4.0 million and $21.7
million during the three and nine months ended September 30, 2006 compared with the same periods in
the prior year. This increase in revenue was also attributable to an increase in USMS inmates held
at this facility during the nine months ended September 30, 2006 compared with the nine months
ended September 30, 2005.
During the first nine months of 2006, our 1,600-bed Prairie Correctional Facility in Appleton,
Minnesota housed a daily average of approximately 1,520 inmates as a result of new contract awards
in mid-2004 and subsequent increasing demand for beds from the states of Minnesota and Washington,
and under a new contract with the state of Idaho, compared with a daily average of approximately
692 inmates during the same period in the prior year. As a result, total revenue increased by $2.5
million and $13.4 million at this facility during the three and nine months ended September 30,
2006 compared with the same periods in the prior year. In early 2006, we were notified by the
state of Idaho of their intention to withdraw their inmates from the Prairie facility. The state of
Idaho substantially completed this withdrawal during the second quarter of 2006. As of September
30, 2006, we housed 1,437 inmates from the states of Washington, Minnesota, and Idaho.
As a result of increased inmate populations from the USMS and ICE at our 1,216-bed San Diego
Correctional Facility located in San Diego, California, total revenues increased by $3.5 million
during the nine-month period ended September 30, 2006, compared with the same period in the prior
year. The average compensated population during the nine-month period in 2005 was 1,153 compared
with an average compensated population during the nine-month period in 2006 of 1,245. Effective
July 1, 2005, the ICE awarded us a contract for the continued management at this facility.
Due to a combination of rate increases and/or an increase in population at our 1,794-bed, Crowley
County Correctional Facility, 1,824-bed Florence Correctional Center, and 656-bed Otter Creek
Correctional Center, primarily from the state of Colorado, the USMS, the state of Hawaii, and the
state of Kentucky, total management and other revenue at these facilities
34
increased during the three- and nine-month periods ended September 30, 2006 from the comparable
periods in 2005, by $3.7 million and $12.2 million, respectively. However, the Florence
Correctional Center experienced a slight reduction in revenues during the three-month period in
2006 compared with 2005 as a result of the transfer of Alaskan inmates to the Red Rock Correctional
Center discussed in further detail hereafter.
During January 2006, we received notification from the BOP of its intent not to exercise its
renewal option at our 1,500-bed Eloy Detention Center in Eloy, Arizona. At December 31, 2005, the
Eloy facility housed approximately 500 inmates from the BOP and approximately 800 detainees from
the ICE, pursuant to a subcontract between the BOP and the ICE. The BOP completed the transfer of
its inmates from the Eloy facility to other BOP facilities by February 28, 2006. During February
2006, we reached an agreement with the City of Eloy to manage detainees from the ICE at this
facility under an inter-governmental service agreement between the City of Eloy and the ICE,
effectively providing the ICE the ability to fully utilize Eloy Detention Center for existing and
potential future requirements. Under our agreement with the City of Eloy, we are eligible for
periodic rate increases that were not provided in the previous contract with the BOP. Total
revenue at this facility decreased by $2.9 million during the nine months ended September 30, 2006
compared with the same period in the prior year as a result of the loss of the BOP inmates. The
average compensated occupancy during the nine months ended September 30, 2006 and 2005 was 81.3%
and 94.6%, respectively. As of September 30, 2006, this facility housed 1,446 ICE detainees.
During the first quarter of 2006, we re-opened our 1,440-bed North Fork Correctional Facility
located in Sayre, Oklahoma, with a small population of inmates from the state of Vermont. The
facility was also re-opened in anticipation of additional inmate population needs from various
existing state and federal customers. Prior to its re-opening, this facility had been vacant since
the third quarter of 2003, when all of the Wisconsin inmates housed at the facility were
transferred out of the facility in order to satisfy a contractual provision mandated by the state
of Wisconsin.
In June 2006, we entered into a new agreement with the state of Wyoming to house up to 600 of the
states male medium-security inmates at our North Fork Correctional Facility. The terms of the
contract include an initial two-year period and may be renewed upon mutual agreement. As of
September 2006, this facility housed 96 and 441 inmates from the states of Vermont and Wyoming,
respectively.
In October 2006, we announced that as a result of an emergency proclamation declared by the
Governor of California, we entered into a new agreement with the state of California Department of
Corrections and Rehabilitation (CDCR) to house California male inmates at our North Fork
Correctional Facility, our Florence Correctional Center, our Diamondback Correctional Facility, our
West Tennessee Detention Facility, and our Tallahatchie County Correctional Facility. The terms of
the agreement include an initial three-year term and may be extended for successive two-year terms
by mutual agreement. In addition, the contract provides for a guarantee of 90% of the capacity
allocated to CDCR offenders. The 90% guarantee applies to beds allocated to the CDCR at each
facility on the earliest of achieving 90% of the capacity designated for CDCR offenders at each
facility or 120 days after the first inmate arrives at the facility. We expect to initially provide
up to 1,000 beds to the CDCR. We began receiving inmates on November 3, 2006 at our West Tennessee
facility, and expect
35
approximately 1,000 CDCR inmates to be housed in the agreed upon facilities by the end of the first
quarter of 2007.
Several employee unions and advocacy groups in California filed lawsuits against California
officials seeking to halt the out-of-state inmate transfers. Although
California courts so far have not
blocked the transfers, and we began receiving CDCR inmates on November 3, 2006, we cannot
predict the ultimate outcome of these lawsuits.
Based on our expectation of increased demand from a number of existing state and federal customers,
we intend to expand our North Fork Correctional Facility by 960 beds. We began construction during
the third quarter of 2006 and anticipate that construction will be completed during the fourth
quarter of 2007, at an estimated cost of $55.0 million.
During October 2005, construction was completed on the Stewart Detention Center in Stewart County,
Georgia and the facility became available for occupancy. Accordingly, we began depreciating the
facility in the fourth quarter of 2005 and ceased capitalizing interest on this project. During
the three- and nine-month periods ended September 30, 2005, we capitalized $0.9 million and $2.8
million, respectively, in interest costs incurred on this facility. The book value of the facility
was approximately $72.5 million upon completion of construction. Because the facility has been
vacant since completion of construction, our overall occupancy percentage has been negatively
impacted as a result of the additional vacant beds available at the Stewart facility.
In June 2006, we entered into a new agreement with Stewart County, Georgia to house detainees from
the ICE under an inter-governmental service agreement between Stewart County and the ICE. The
agreement will enable the ICE to accommodate detainees at our Stewart Detention Center. The
agreement with Stewart County is effective through December 31, 2011, and provides for an
indefinite number of renewal options. We began receiving ICE detainees at the Stewart facility in
October 2006 and expect that the ICE detainees will substantially occupy the Stewart facility
sometime during 2007. As of October 31, 2006, we held 444 detainees at this facility. We expect to
incur capital expenditures of approximately $5.5 million to modify the facility to meet the ICE
requests.
During February 2005, we commenced construction of the Red Rock Correctional Center, a new
1,596-bed correctional facility located in Eloy, Arizona. The facility was completed during July
2006 for an aggregate cost of approximately $81 million. We relocated all of the Alaskan inmates
from our Florence Correctional Center into this new facility during the third quarter of 2006. The
beds made available at the Florence facility are expected to be used to satisfy anticipated state
and federal demand for detention beds in the Arizona area, including approximately 440 inmates from
the state of California by the end of the first quarter 2007. The balance of beds available at the
Red Rock facility is expected to be substantially occupied by inmates from the states of Hawaii and
Alaska by December 2006. As of September 30, 2006, the Red Rock facility housed 923 Alaskan
inmates and 189 Hawaiian inmates.
While start-up activities and staffing expenses incurred in preparation for the arrival of
detainees at the Stewart Detention Center and inmates at the Red Rock Correctional Center have had
and are expected to continue to have an adverse impact on our results of operations
36
during the second half of 2006, the utilization of this increased bed capacity is expected to
contribute to an increase in revenue and profitability in 2007.
Managed-Only Facilities
Our operating margins decreased at managed-only facilities during the three and nine months ended
September 30, 2006 to 13.0% and 14.2%, respectively, from 18.9% and 15.7%, respectively, during the
same periods in 2005 primarily as a result of an increase in salaries and benefits caused in part
by an increase in employee medical insurance. The deterioration of operating margins at
managed-only facilities was also as a result of a new contract at the newly expanded Lake City
Correctional Facility located in Lake City, Florida. During November 2005, the Florida Department
of Management Services (DMS) solicited proposals for the management of the Lake City Correctional
Facility beginning July 1, 2006. We responded to the proposal and were notified in April 2006 of
the Florida DMSs intent to award a contract to us. We negotiated a three-year contract in
exchange for a reduced per diem effective July 1, 2006, which resulted in a reduction in revenue
and operating margin at this facility from the prior year. The Lake City Correctional Facility was
expanded from 350 beds to 893 beds late in the first quarter of 2005. The average daily inmate
population at the Lake City Correctional Facility during the three- and nine-month periods ended
September 30, 2006 was approximately 888 and 889 inmates, respectively, compared with approximately
893 and 621 inmates, respectively, during the same periods in 2005.
In December 2005, the Florida DMS announced that we were awarded the project to design, construct,
and operate expansions through June 30, 2007 at the Bay Correctional Facility located in Panama
City, Florida by 235 beds and the Gadsden Correctional Institution located in Quincy, Florida by
384 beds. Both of these expansions will be funded by the state of Florida and construction is
expected to be complete during the third quarter of 2007.
During October 2005, Hernando County, Florida completed an expansion by 382 beds of the Hernando
County Jail we manage in Brooksville, Florida, increasing the design capacity to 730 beds. As a
result of the expansion, the average daily inmate population during the three-and nine-month
periods ended September 30, 2006 was approximately 677 and 645 inmates, respectively, compared with
approximately 496 and 465 inmates, respectively, during the same periods in 2005, contributing to
an increase in revenue of $0.8 million and $2.4 million, respectively, during the three- and
nine-month periods ended September 30, 2006 from the same periods in 2005.
During June 2005, Bay County, Florida solicited proposals for the management of the Bay County Jail
beginning October 1, 2006. During April 2006, we were selected for the continued management and
construction of both new and replacement beds at the facility. During May 2006, we signed a new
contract for the continued management of the Bay County Jail for a base term of six years with one
six-year renewal option. The construction of the new and replacement beds at the facility will be
paid by Bay County at a fixed price, and is expected to be complete during the second quarter of
2008. We do not expect a material change in inmate populations resulting from these new
agreements.
During May 2006, we announced that we were awarded a contract with the New Mexico Department of
Corrections to operate and manage the State-owned Camino Nuevo Female Correctional Facility. The
192-bed facility located in Albuquerque, New Mexico houses
37
overflow offenders from our New Mexico Womens Correctional Facility located in Grants, New Mexico.
Eventually, the facility will also function as a pre-release center for female offenders that will
be re-entering the community. The facility began receiving an initial population of females in
July 2006.
General and administrative expense
For the three months ended September 30, 2006 and 2005, general and administrative expenses totaled
$16.4 million and $14.4 million, respectively, while general and administrative expenses totaled
$46.7 million and $40.5 million, respectively, during the nine months ended September 30, 2006 and
2005. General and administrative expenses increased from the first nine months of 2005 primarily
due to an increase in salaries and benefits, including an increase of $1.2 million of restricted
stock-based compensation awarded to employees who have historically been awarded stock options
(including an increase of $0.4 million during the third quarter of 2006 from the third quarter of
2005), and $1.3 million of stock option expense (including an increase of $0.3 million during the
third quarter of 2006 from the third quarter of 2005).
In 2005, the Company made changes to its historical business practices with respect to awarding
stock-based employee compensation as a result of, among other reasons, the issuance of Statement of
Financial Accounting Standards No. 123R, Share-Based Payment, or SFAS 123R. During the year ended
December 31, 2005, we recognized $1.7 million of general and administrative expense for the
amortization of restricted stock issued during 2005 to employees whose compensation was charged to
general and administrative expense, including $1.2 million during the first nine months of 2005
($0.2 million during the first quarter, $0.5 million during the second quarter, and $0.5 million
during the third quarter). For the year ending December 31, 2006, we currently expect to recognize
approximately $3.3 million of general and administrative expense for the amortization of restricted
stock granted to these employees in both 2005 and 2006, since the amortization period spans the
three-year vesting period of each restricted share award. During the three and nine months ended
September 30, 2006, we recognized $0.9 million and $2.4 million, respectively, for such expense.
Further, on January 1, 2006, we began recognizing general and administrative expenses for the
amortization of employee stock options granted after January 1, 2006 to employees whose
compensation is charged to general and administrative expense, which heretofore have not been
recognized in our income statement, except with respect to a compensation charge of $1.0 million
reported in the fourth quarter of 2005 for the acceleration of vesting of outstanding options as
further described hereafter. For the year ending December 31, 2006, we currently expect to
recognize $1.6 million of general and administrative expense for the amortization of employee stock
options granted after January 1, 2006, including $0.1 million recognized during the first quarter
of 2006, $1.0 million recognized during the second quarter of 2006, and $0.3 million recognized
during the third quarter of 2006. We currently have $2.7 million of total unrecognized
compensation cost related to stock options that is expected to be recognized over a remaining
weighted-average period of 2.8 years.
Effective December 30, 2005, our board of directors approved the acceleration of the vesting of
outstanding options previously awarded to executive officers and employees under our Amended and
Restated 1997 Employee Share Incentive Plan and our Amended and Restated
38
2000 Stock Incentive Plan. As a result of the acceleration, approximately 1.5 million unvested
options became exercisable, 45% of which would have vested in February 2006 under the original
terms. The purpose of the accelerated vesting of stock options was to enable us to avoid
recognizing compensation expense associated with these options in future periods as required by
SFAS 123R, estimated at the date of acceleration to be $3.8 million in 2006, $2.0 million in 2007,
and $0.5 million in 2008. In order to limit unintended benefits to the holders of these stock
options, we imposed resale restrictions to prevent the sale of any shares acquired from the
exercise of an accelerated option prior to the original vesting date of the option. The resale
restrictions automatically expire upon the individuals termination of employment. All other terms
and conditions applicable to such options, including the exercise prices, remained unchanged. As a
result of the acceleration, we recognized a non-cash, pre-tax charge of $1.0 million in the fourth
quarter of 2005 for the estimated value of the stock options that would have otherwise been
forfeited.
Our general and administrative expenses were also higher as a result of an increase in corporate
staffing levels. We continued to re-evaluate our organizational structure during 2005 and expanded
our infrastructure to help ensure the quality and effectiveness of our facility operations. This
intensified focus on quality assurance contributed to the increase in salaries and benefits
expense, as well as a number of other general and administrative expense categories. We have also
experienced increasing expenses to implement and support numerous technology initiatives.
Depreciation and amortization
For the three months ended September 30, 2006 and 2005, depreciation and amortization expense
totaled $17.5 million and $15.3 million, respectively. For the nine months ended September 30,
2006 and 2005, depreciation and amortization expense totaled $49.6 million and $44.1 million,
respectively. The increase in depreciation and amortization from the comparable periods in 2005
resulted from the combination of additional depreciation expense recorded on various completed
facility expansion and development projects and the additional depreciation on our investments in
technology. The investments in technology are expected to provide long-term benefits enabling us
to provide enhanced quality service to our customers while creating scalable operating
efficiencies.
Interest expense, net
Interest expense is reported net of interest income and capitalized interest for the three and nine
months ended September 30, 2006 and 2005. Gross interest expense, net of capitalized interest, was
$17.5 and $16.7 million, respectively, for the three months ended September 30, 2006 and 2005 and
was $51.1 million and $52.0 million, respectively, for the nine months ended September 30, 2006 and
2005. Gross interest expense is based on outstanding borrowings under our senior bank credit
facility, our outstanding senior notes, convertible subordinated notes payable balances (until
converted), and amortization of loan costs and unused facility fees. Interest expense declined
from the comparable periods in 2005 as a result of the aforementioned refinancing and
recapitalization transactions completed during the first six months of 2005 and additional
refinancing transactions completed during the first quarter of 2006, as further described
hereafter.
39
Gross interest income was $2.7 million and $1.4 million for the three months ended September 30,
2006 and 2005, respectively. Gross interest income was $6.5 million and $3.8 million for the nine
months ended September 30, 2006 and 2005, respectively. Gross interest income is earned on cash
collateral requirements, a direct financing lease, notes receivable, investments, and cash and cash
equivalents, and increased due to the accumulation of higher cash and investment balances generated
from operating cash flows.
Capitalized interest was $0.6 million and $1.4 million during the three months ended September 30,
2006 and 2005, respectively, and was $3.4 million and $3.7 million during the nine months ended
September 30, 2006 and 2005, respectively. Capitalized interest was associated with various
construction and expansion projects further described under Liquidity and Capital Resources
hereafter.
Expenses associated with debt refinancing and recapitalization transactions
For the nine months ended September 30, 2006 and 2005, expenses associated with debt refinancing
and recapitalization transactions were $1.0 million and $35.3 million, respectively.
Charges of $1.0 million in the first quarter of 2006 consisted of the write-off of existing
deferred loan costs associated with the pay-off and retirement of the old senior bank credit
facility. Charges of $35.0 million in the first quarter of 2005 consisted of a tender premium paid
to the holders of the $250.0 million 9.875% senior notes who tendered their notes to us at a price
of 111% of par pursuant to a tender offer we made for their notes in March 2005, the write-off of
existing deferred loan costs associated with the purchase of the $250.0 million 9.875% senior notes
and lump sum pay-down of the term portion of our senior bank credit facility made with the proceeds
from the issuance of $375.0 million of 6.25% senior notes, and estimated fees and expenses
associated with each of the foregoing transactions. The remaining charges in 2005 consisted of the
write-off of existing deferred loan costs and third-party fees and expenses associated with an
amendment to the senior bank credit facility obtained during the second quarter of 2005, whereby we
reduced the interest rate margins associated with the facility and prepaid $20.0 million of the
term portion of the facility with proceeds from a draw of a like amount on the revolving portion of
the facility.
Income tax expense
We incurred income tax expense of $15.6 million and $43.1 million for the three and nine months
ended September 30, 2006, respectively, while we incurred income tax expense of $12.4 million and
$15.8 million for the three and nine months ended September 30, 2005, respectively.
Our effective tax rate was 37% during both the three and nine months ended September 30, 2006 and
2005. The effective tax rates during 2005 resulted from certain tax planning strategies
implemented during the fourth quarter of 2004 that were favorably impacted by the recognition of
deductible expenses associated with our debt refinancing transactions completed during the first
and second quarters of 2005. The effective tax rates during 2006 were also favorably impacted by
changes in our valuation allowance applied to certain deferred tax assets as well as an increase in
the income tax benefits of equity compensation during 2006. Our effective tax rate is estimated
based on our current projection of taxable
40
income and could fluctuate based on changes in these estimates, the implementation of additional
tax strategies, changes in federal or state tax rates, changes in tax laws, or changes in state
apportionment factors, as well as changes in the valuation allowance applied to our deferred tax
assets that are based primarily on the amount of state net operating losses and tax credits that
could expire unused.
Discontinued operations
On March 21, 2005, the Tulsa County Commission in Oklahoma provided us notice that, as a result of
a contract bidding process, the County elected to have the Tulsa County Sheriffs Office assume
management of the David L. Moss Criminal Justice Center upon expiration of the contract on June 30,
2005. Operations were transferred to the Sheriffs Office on July 1, 2005. Total revenue during
the nine months ended September 30, 2005 was $10.7 million, and total operating expenses were $10.8
million. After depreciation expense and income taxes, the facility experienced a loss of $0.2
million for the nine months ended September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
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 and as
further described in our 2005 Form 10-K. We may incur additional capital expenditures to expand
the design capacity of certain of our facilities (in order to retain management contracts) and to
increase our inmate bed capacity for anticipated demand from current and future customers. We may
acquire additional correctional facilities that we believe have favorable investment returns and
increase value to our stockholders. We will also consider opportunities for growth, including
potential acquisitions of businesses within our line of business and those that provide
complementary services, provided we believe such opportunities will broaden our market share and/or
increase the services we can provide to our customers.
As a result of increasing demand from both our federal and state customers and the utilization of a
significant portion of our existing available beds, we have intensified our efforts to deliver new
capacity to address the lack of available beds that our existing and potential customers are
experiencing. We can provide no assurance, however, that the increased capacity that we construct
will be utilized. The following addresses certain significant projects that are currently in
process:
During September 2005, we announced that Citrus County renewed our contract for the continued
management of the Citrus County Detention Facility located in Lecanto, Florida. The contract has a
ten-year base term with one five-year renewal option. The terms of the new agreement include a
360-bed expansion that commenced during the fourth quarter of 2005 and is expected to be completed
during the first quarter of 2007. The expansion of the facility, which is owned by the County, is
currently anticipated to cost approximately $18.5 million, which we will fund by utilizing our cash
on hand. The estimated remaining cost to complete the expansion is $6.5 million as of September
30, 2006. If the County terminates the management contract at any time prior to twenty years
following completion of
41
construction, the County would be required to pay us an amount equal to the construction cost less
an allowance for the amortization over a twenty-year period.
In order to maintain an adequate supply of available beds to meet anticipated demand, while
offering the state of Hawaii the opportunity to consolidate its inmates into fewer facilities, we
commenced construction during the fourth quarter of 2005 of the Saguaro Correctional Facility, a
new 1,896-bed correctional facility located adjacent to our recently completed Red Rock
Correctional Center in Eloy, Arizona. The Saguaro Correctional Facility is expected to be
completed mid-2007 at an estimated cost of approximately $100 million with a remaining cost to
complete of approximately $56.1 million as of September 30, 2006. We currently expect to
consolidate inmates from the state of Hawaii from several of our other facilities to this new
facility. Although we can provide no assurance, we currently expect that growing state and federal
demand for beds will ultimately absorb the beds vacated by the state of Hawaii. As of September
30, 2006, we housed 1,944 inmates from the state of Hawaii.
Based on our expectations for increased federal demand for detention space along the Texas border
with Mexico, we recently initiated an expansion of our 480-bed Webb County Detention Center located
in Laredo, Texas by 722 beds. During August 2006, we announced that, as a result of a modification
to a Request for Proposal (RFP) issued by the USMS for detention beds in the vicinity of Laredo,
Texas, we elected to defer the development of the 722-bed expansion at our Webb County Detention
Center. We instead will propose an expansion of our Webb County Detention Center to meet the
specific requirements contained within the modified RFP, which is seeking up to 1,500 detention
beds within a geographic area of 50 miles of Laredo, Texas. We expect that on or about December 31,
2006, the USMS will select a successful bidder from the proposals submitted.
In July 2006 we were notified by the state of Colorado that the State had accepted our proposal to
expand our 700-bed Bent County Correctional Facility in Las Animas, Colorado by 720 beds to fulfill
part of a 2,250-bed request for proposal issued by the state of Colorado in December 2005. As a
result of the award, we have now entered into an Implementation Agreement with the state of
Colorado for the expansion of our Bent County Correctional Facility by 720 beds. In addition,
during November 2006 we entered into another Implementation Agreement to also expand our 768-bed
Kit Carson Correctional Center in Burlington, Colorado by 720 beds.
We expect to commence construction on the expansion of the Bent and Kit Carson facilities during
the first half of 2007. Construction of the Bent and Kit Carson facilities is estimated to cost
approximately $88 million. Both expansions are anticipated to be completed during the second
quarter of 2008.
Based on our expectation of demand from a number of existing state and federal customers, during
August 2006 we announced our intention to expand our 1,440-bed North Fork Correctional Facility by
960 beds, our 1,104-bed Tallahatchie County Correctional Facility in Tutwiler, Mississippi by 360
beds, and our 568-bed Crossroads Correctional Center in Shelby, Montana, by 96 beds. The estimated
cost to complete these expansions is approximately $81 million. As previously described herein, we
recently signed a contract with the state of Wyoming for up to 600 inmates at the North Fork
facility, which also houses inmates from the state of Vermont, and expect the state of California
to utilize up to 240 additional beds at this facility by early 2007. Our Tallahatchie facility was
89% occupied as
42
of September 30, 2006, mostly with inmates from the state of Hawaii, while our Crossroads facility
was 98% occupied with inmates from the state of Montana and the USMS.
The following table summarizes the aforementioned construction and expansion projects expected to
be completed through the second quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated remaining |
|
|
|
|
|
|
|
|
|
|
|
cost to complete as of |
|
|
|
No. of |
|
|
Estimated |
|
|
September 30, 2006 |
|
Facility |
|
beds |
|
|
completion date |
|
|
(in thousands) |
|
Citrus
County Detention Facility Lecanto, FL |
|
|
360 |
|
|
First quarter 2007 |
|
$ |
6,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crossroads
Correctional Center Shelby, MT |
|
|
96 |
|
|
First quarter 2007 |
|
|
4,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Saguaro
Correctional Facility Eloy, AZ |
|
|
1,896 |
|
|
Mid-2007 |
|
|
56,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Fork
Correctional Facility Sayre, OK |
|
|
960 |
|
|
Fourth quarter 2007 |
|
|
54,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tallahatchie County Correctional
Facility Tutwiler, MS |
|
|
360 |
|
|
Fourth quarter 2007 |
|
|
20,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bent County
Correctional Facility Las Animas, CO |
|
|
720 |
|
|
Second quarter 2008 |
|
|
44,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kit Carson
Correctional Center Burlington, CO |
|
|
720 |
|
|
Second quarter 2008 |
|
|
44,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,112 |
|
|
|
|
|
|
$ |
229,617 |
|
|
|
|
|
|
|
|
|
|
|
|
In order to retain federal inmate populations we currently manage in the San Diego
Correctional Facility, we may be required to construct a new facility in the future. The San Diego
Correctional Facility is subject to a ground lease with the County of San Diego. Under the
provisions of the lease, the facility is divided into three different properties (Initial, Existing
and Expansion Premises), all of which have separate terms ranging from June 2006 to December 2015,
subject to extension by the County. Upon expiration of any lease term, ownership of the applicable
portion of the facility automatically reverts to the County. The County has the right to buy out
the Initial and Expansion portions of the facility at various times prior to the end term of the
ground lease at a price generally equal to the cost of the premises, less an allowance for the
amortization over a 20-year period. The third portion of the lease (Existing Premises) included
200 beds that expired in June 2006 and was not renewed. However, we did not lose any inmates at
this facility as a result of the expiration, as we had the ability to consolidate inmates from the
Existing Premises to the Initial and Expansion Premises. Ownership of the 200-bed Expansion
Premises reverts to the County in December 2007. We are currently negotiating with the County to
extend the reversion date of the Expansion Premises. However, if we are unsuccessful, we may be
required to relocate a portion of the existing federal inmate population to other available beds
within or outside the San Diego Correctional Facility, which could include the acquisition of an
alternate
site for the construction of a new facility. However, we can provide no assurance that we will be
able to retain these inmate populations.
43
We continue to pursue additional expansion and development opportunities in order to satisfy
increasing demand from existing and potential customers.
Additionally, we believe investments in technology enable us to operate safe and secure facilities
with more efficient, highly skilled and better-trained staff, and to reduce turnover through the
deployment of innovative technologies, many of which are unique and new to the corrections
industry. During the first nine months of 2006, we capitalized $10.5 million of expenditures
related to technology. These investments in technology are expected to provide long-term benefits
enabling us to provide enhanced quality service to our customers while creating scalable operating
efficiencies. We expect to incur approximately $4.6 million in information technology expenditures
during the remainder of 2006.
We have the ability to fund our capital expenditure requirements, including our construction
projects, information technology expenditures, working capital, and debt service requirements, with
investments and cash on hand, net cash provided by operations, and borrowings available under our
new revolving credit facility.
The term loan portion of our old senior bank credit facility was scheduled to mature on March 31,
2008, while the revolving portion of the old facility, which as of December 31, 2005 had an
outstanding balance of $10.0 million along with $36.5 million in outstanding letters of credit
under a subfacility, was scheduled to mature on March 31, 2006. During January 2006, we completed
the sale and issuance of $150.0 million aggregate principal amount of 6.75% senior notes due 2014,
the proceeds of which were used in part to completely pay-off the outstanding balance of the term
loan portion of our old senior bank credit facility after repaying the $10.0 million balance on the
revolving portion of the old facility with cash on hand. Further, during February 2006, we closed
on a new revolving credit facility with various lenders providing for a new $150.0 million
revolving credit facility to replace the revolving portion of the old credit facility. The new
revolving credit facility has a five-year term and currently has no outstanding balance other than
$37.4 million in outstanding letters of credit under a subfacility. We have an option to increase
the availability under the new revolving credit facility by up to $100.0 million (consisting of
revolving credit, term loans or a combination of the two) subject to, among other things, the
receipt of commitments for the increased amount. Interest on the new revolving credit facility is
based on either a base rate plus a margin ranging from 0.00% to 0.50% or a LIBOR plus a margin
ranging from 0.75% to 1.50%, subject to adjustment based on our leverage ratio. The new revolving
credit facility currently bears interest at a base rate or a LIBOR plus a margin of 1.00%.
During the nine months ended September 30, 2005, we were not required to pay income taxes, other
than primarily for the alternative minimum tax and certain state taxes, as a result of the
utilization of existing net operating loss carryforwards to offset our taxable income. However, we
paid $15.5 million in tax payments primarily for the repayment of excess refunds we received in
2002 and 2003. During 2006, we expect to generate sufficient taxable income to utilize our
remaining federal net operating loss carryforwards. As a result, we began paying federal income
taxes during 2006, with an obligation to pay a full years taxes beginning in 2007. We currently
expect to pay an aggregate of approximately $15 million in federal and state income taxes during
2006.
44
As of September 30, 2006, our liquidity was provided by cash on hand of $58.1 million, investments
of $71.7 million, and $112.6 million available under our $150.0 million revolving credit facility.
During the nine months ended September 30, 2006 and 2005, we generated $142.7 million and $99.4
million, respectively, of cash through operating activities, and as of September 30, 2006 and 2005,
we had net working capital of $221.6 million and $151.2 million, respectively. We currently expect
to be able to meet our cash expenditure requirements for the next year utilizing these resources.
In addition, we have an effective shelf registration statement under which we may issue an
indeterminate amount of securities from time to time when we determine that market conditions and
the opportunity to utilize the proceeds from the issuance of such securities are favorable.
As a result of the completion of numerous recapitalization and refinancing transactions over the
past several years, we have significantly reduced our exposure to variable rate debt, substantially
eliminated our subordinated indebtedness, lowered our after-tax interest obligations associated
with our outstanding debt, further increasing our cash flow, and extended our total weighted
average debt maturities. Also as a result of the completion of these capital transactions,
covenants under our senior bank credit facility were amended to provide greater flexibility for,
among other matters, incurring unsecured indebtedness, capital expenditures, and permitted
acquisitions. With the most recent pay-off of our senior bank credit facility in January 2006 and
the completion of our new revolving credit facility in February 2006, we removed the requirement to
secure the senior bank credit facility with liens on our real estate assets and, instead,
collateralized the facility primarily with security interests in our accounts receivable and
deposit accounts. At September 30, 2006, the interest rates on all our outstanding indebtedness
are fixed, with a weighted average stated interest rate of 6.9%, while our total weighted average
maturity was 5.7 years. As an indication of the improvement of our operational performance and
financial flexibility, Standard & Poors Ratings Services raised our corporate credit rating from
B at December 31, 2000 to BB- currently (an improvement by two ratings levels) and our senior
unsecured debt rating from CCC+ to BB- (an improvement by four ratings levels). Moodys
Investors Service upgraded our senior unsecured debt rating from Caa1 at December 31, 2000 to
Ba3 currently (an improvement by four ratings levels).
Operating Activities
Our net cash provided by operating activities for the nine months ended September 30, 2006 was
$142.7 million, compared with $99.4 million for the same period in the prior year. Cash provided
by operating activities represents the year to date net income plus depreciation and amortization,
changes in various components of working capital, and adjustments for expenses associated with debt
refinancing and recapitalization transactions and various non-cash charges, including primarily
deferred income taxes. The increase in cash provided by operating activities for the nine months
ended September 30, 2006 was due to the increase in operating income, interest expense savings
resulting from our refinancing activities, as well as a reduction in cash taxes paid from the first
nine months of 2005 for the aforementioned repayment during 2005 of excess tax refunds received in
2003 and 2002. Positive fluctuations in working capital during the first nine months of 2006
compared with the same period in the prior year also contributed to the increase in cash provided
by operating activities.
45
Investing Activities
Our cash flow used in investing activities was $160.4 million for the nine months ended September
30, 2006 and was primarily attributable to capital expenditures during the nine-month period of
$108.2 million, which included expenditures for acquisitions and development of $73.0 million
primarily related to the aforementioned facility expansion and development projects during the
period. Cash flow used in investing activities during the first nine months of 2006 was also
attributable to $52.7 million of additional purchases of investments in auction rate certificates
in order to maximize interest income. Our cash flow used in investing activities was $69.4 million
for the nine months ended September 30, 2005 and was primarily attributable to capital expenditures
during the nine-month period of $73.4 million, which included expenditures for acquisitions and
development of $48.7 million related to the various facility expansion and development projects,
including primarily the completion of construction of our Stewart Detention Center located in
Lumpkin, Georgia, and the commencement of construction of our Red Rock Correctional Center located
in Eloy, Arizona.
Financing Activities
Our cash flow provided by financing activities was $10.9 million for the nine months ended
September 30, 2006 and was primarily attributable to the aforementioned refinancing and
recapitalization transactions completed during the first nine months, combined with proceeds
received from the exercise of stock options and the income tax benefit of equity compensation. The
income tax benefit of equity compensation was reported as a financing activity in 2006 pursuant to
SFAS 123R, and as an operating activity in 2005. Our cash flow used in financing activities was
$14.5 million for the nine months ended September 30, 2005 and was primarily attributable to
refinancing and recapitalization transactions completed during the first nine months of 2005.
Proceeds from the issuance of the $375 million 6.25% senior notes along with cash on hand were used
to purchase all of the outstanding $250 million 9.875% senior notes, make a lump sum prepayment on
the old senior bank credit facility of $110 million and pay fees and expenses related thereto.
These transactions resulted in fees and expenses of $36.2 million paid during the first nine months
of 2005.
Contractual Obligations
The following schedule summarizes our contractual cash obligations by the indicated period as of
September 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Year Ended December 31, |
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(remainder) |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
|
Total |
|
Long-term debt |
|
$ |
5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
975,000 |
|
|
$ |
975,005 |
|
Environmental
remediation |
|
|
222 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227 |
|
Contractual facility
expansions |
|
|
6,908 |
|
|
|
57,837 |
|
|
|
29,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,499 |
|
Operating leases |
|
|
108 |
|
|
|
435 |
|
|
|
444 |
|
|
|
453 |
|
|
|
462 |
|
|
|
2,195 |
|
|
|
4,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
|
$ |
7,243 |
|
|
$ |
58,277 |
|
|
$ |
30,198 |
|
|
$ |
453 |
|
|
$ |
462 |
|
|
$ |
977,195 |
|
|
$ |
1,073,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
The cash obligations in the table above do not include future cash obligations for interest
associated with our outstanding indebtedness. During the nine months ended September 30, 2006, we
paid $48.1 million in interest, including capitalized interest. We had $37.4 million of letters of
credit outstanding at September 30, 2006 primarily to support our requirement to repay fees under
our workers compensation plan in the event we do not repay the fees due in accordance with the
terms of the plan. The letters of credit are renewable annually. We did not have any draws under
any outstanding letters of credit during the nine months ended September 30, 2006 or 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued SFAS 123R, which is a revision of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and amends Statement of Financial Accounting Standards No. 95, Statement of
Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described in SFAS
123. However, SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative.
In accordance with the SECs April 2005 ruling, SFAS 123R must be adopted for annual periods that
begin after June 15, 2005. We adopted SFAS 123R on January 1, 2006 using the modified
perspective method. The modified prospective method requires compensation cost to be recognized
beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the
effective date.
Prior to adoption of SFAS 123R on January 1, 2006, we accounted for equity incentive plans under
the recognition and measurement principles of APB 25. As such, no employee compensation cost for
our stock options is reflected in net income prior to January 1, 2006, except for $1.0 million
recognized in the fourth quarter of 2005 as a result of the accelerated vesting of outstanding
options on December 30, 2005 as previously described herein. The impact of adoption of SFAS 123R
depends on levels of share-based payments awarded. Because we made changes in 2005 to our
historical business practices with respect to awarding stock-based employee compensation, the
impact of the standard is expected to be less than the historical pro forma impact as described in
the disclosure of pro forma net income and earnings per share in the footnote, Accounting for
Stock-Based Compensation, in our Notes to Consolidated Financial Statements herein, and in Note 2
to the financial statements included with our 2005 Form 10-K. Further, the pro forma data for 2005
presented in the 2005 Form 10-K also includes $6.3 million of compensation expense associated with
the accelerated vesting of all stock options outstanding effective December 30, 2005.
SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating cash flow as required under previous
literature.
47
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), which is an interpretation of SFAS 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The guidance prescribed in FIN 48 establishes a
recognition threshold of more likely than not that a tax position will be sustained upon
examination. The measurement attribute of FIN 48 requires that a tax position be measured at the
largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are in the
process of evaluating the impact that FIN 48 will have on our financial position or results of
operations and currently plan to adopt FIN 48 on January 1, 2007.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair
value measurements. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS
157 is effective for financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We are in the process of evaluating the impact that
SFAS 157 will have on our financial position, results of operations, and disclosures.
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,
workers compensation or food and medical expenses could have an adverse impact on our results of
operations in the future to the extent that these expenses increase at a faster pace than the per
diem or fixed rates we receive for our management services.
SEASONALITY AND QUARTERLY RESULTS
Our business is somewhat subject to seasonal fluctuations. Because we are generally compensated
for operating and managing facilities at an inmate per diem rate, our financial results are
impacted by the number of calendar days in a fiscal quarter. Our fiscal year follows the calendar
year and therefore, our daily profits for the third and fourth quarters include two more days than
the first quarter (except in leap years) and one more day than the second quarter. Further,
salaries and benefits represent the most significant component of operating expenses. Significant
portions of the Companys unemployment taxes are recognized during the first quarter, when base
wage rates reset for state unemployment tax purposes. Finally, quarterly results are affected by
government funding initiatives, the timing of the opening of new facilities, or the commencement of
new management contracts and related start-up expenses which may mitigate or exacerbate the impact
of other seasonal influences. Because of these seasonality factors, results for any quarter are
not necessarily indicative of the results that may be achieved for the full fiscal year.
48
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risk exposure is to changes in U.S. interest rates. In the event we have an
outstanding balance under our revolving credit facility, we would be exposed to market risk because
the interest rate on our revolving credit facility is subject to fluctuations in the market. As of
September 30, 2006, there were no amounts outstanding under our revolving credit facility (other
than $37.4 million in outstanding letters of credit). Therefore, a hypothetical 100 basis point
increase or decrease in market interest rates would not have a material impact on our financial
statements.
As of September 30, 2006, we had outstanding $450.0 million of senior notes with a fixed interest
rate of 7.5%, $375.0 million of senior notes with a fixed interest rate of 6.25%, and $150.0
million of senior notes with a fixed interest rate of 6.75%. Because the interest rates with
respect to these instruments are fixed, a hypothetical 100 basis point increase or decrease in
market interest rates would not have a material impact on our financial statements.
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 of three months or less. While these investments are subject to interest rate risk and
will decline in value if market interest rates increase, a hypothetical 100 basis point increase or
decrease in market interest rates would not materially affect the value of these investments.
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was performed under the supervision and with the participation of our senior
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this
quarterly report. Based on that evaluation, our senior management, including our Chief Executive
Officer and Chief Financial Officer, concluded that as of the end of the period covered by this
quarterly report our disclosure controls and procedures are effective in causing material
information relating to us (including our consolidated subsidiaries) to be recorded, processed,
summarized and reported by management on a timely basis and to ensure that the quality and
timeliness of our public disclosures complies with SEC disclosure obligations. There have been no
changes in our internal control over financial reporting that occurred during the period covered by
this report that have materially affected, or are likely to materially affect, our internal control
over financial reporting.
49
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See the information reported in Note 12 to the financial statements included in Part I, which
information is incorporated hereunder by this reference.
ITEM 1A. RISK FACTORS.
There have been no material changes in our Risk Factors as previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Audit Committee Matters.
Section 10A(i)(1) of the Exchange Act, as added by Section 202 of the Sarbanes-Oxley Act of 2002,
requires that the Companys Audit Committee (or one or more designated members of the Audit
Committee who are independent directors of the Companys board of directors) pre-approve all audit
and non-audit services provided to the Company by its external auditor, Ernst & Young LLP. Section
10A(i)(2) of the Exchange Act further requires that the Company disclose in its periodic reports
required by Section 13(a) of the Exchange Act any non-audit services approved by the Audit
Committee to be performed by Ernst & Young.
Consistent with the foregoing requirements, during the third quarter, the Companys Audit Committee
pre-approved the engagement of Ernst & Young for audit and non-audit services, as defined by the
SEC, including a subscription to an online accounting and research tool, an agreed-upon procedures
letter, and certain tax consulting services.
50
ITEM 6. EXHIBITS.
The following exhibits are filed herewith:
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibits |
|
|
|
31.1
|
|
Certification of the Companys Chief Executive Officer pursuant to Securities and Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
31.2
|
|
Certification of the Companys Chief Financial Officer pursuant to Securities and Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
32.1
|
|
Certification of the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
CORRECTIONS CORPORATION OF AMERICA |
|
|
|
|
|
|
|
Date: November 7, 2006 |
|
|
|
|
|
|
|
|
|
|
|
/s/ John D. Ferguson
John D. Ferguson
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
/s/ Irving E. Lingo, Jr. |
|
|
|
|
Irving E. Lingo, Jr.
|
|
|
|
|
Executive Vice President, Chief Financial Officer, |
|
|
|
|
Assistant Secretary and Principal Accounting Officer |
|
|
52