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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13
OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest
event reported): December 27, 2002 (October 25, 2002)
Corrections Corporation of America
(Exact name of registrant as
specified in its charter)
| Maryland
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0-25245
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62-1763875
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| (State or
other jurisdiction of
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(Commission
File
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(I.R.S.
Identification
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| incorporation)
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Number)
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Number)
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10 Burton Hills Boulevard,
Nashville, Tennessee 37215
(Address of principal executive
offices, including zip code)
Registrant’s telephone
number, including area code: (615) 263-3000
Not Applicable
(Former name or
former address, if changed since last report)
TABLE OF CONTENTS
ITEM 5. Other Events.
Corrections Corporation of America, a Maryland
corporation (the “Company”), is reissuing its consolidated financial statements
as of December 31, 2001 and 2000 and for the three years ended December 31, 2001
to include the audit report of Ernst & Young LLP (“Ernst & Young”)
on the Company’s consolidated financial statements as of December 31,
2001 and for the year then ended. After it replaced the Company’s previous
auditor, Arthur Andersen LLP, in May 2002, Ernst & Young re-audited these financial
statements due to reclassification requirements of discontinued operations under
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144 requires
that previously issued financial statements presented for comparative purposes,
be reclassified, if material, to reflect the application of provisions of SFAS 144.
In accordance with SFAS 144, the Company has reclassified the 2001 financial information
to present its discontinued operations. However, the Company believes: (i) the 1999
and 2000 financial statements are not comparable to the 2001 financial statements;
and (ii) the reclassification of its discontinued operations is not material in
those years; accordingly, the reclassification was not made to the 1999 and 2000
financial statements. Therefore, Ernst & Young did not re-audit the Company’s
consolidated financial statements for 2000 and 1999. The audit report of
Ernst & Young contains an unqualified opinion, as did the audit report of the
Company’s previous auditor. Ernst & Young’s audit did not cause any
restatement of the Company’s consolidated financial position or the consolidated
results of its operations, as previously filed as of and for the year ended December
31, 2001. The reissued consolidated financial statements include Note 24 for events
subsequent to December 31, 2001, as well as reclassifications of discontinued operations
in the related financial statements and notes.
TABLE OF CONTENTS
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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2
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Combined and Consolidated Financial
Statements of Corrections Corporation of America and Subsidiaries:
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Reports of Independent Auditors
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26
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Consolidated Balance Sheets as of December 31, 2001 and 2000
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28
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Combined and Consolidated Statements of Operations
for the years ended December 31, 2001, 2000 and 1999
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29
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Combined and Consolidated Statements of Cash
Flows for the years ended December 31, 2001, 2000 and 1999
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30
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Consolidated Statements of Stockholders’ Equity
for the years ended December 31, 2001, 2000 and 1999
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34
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Notes to the Combined and Consolidated Financial
Statements
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36
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Exhibits
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1
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read
in conjunction with the financial statements and notes thereto appearing elsewhere
in this report.
This current report on Form 8-K 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:
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fluctuations
in operating results because of changes in occupancy levels, competition, increases
in cost of operations, fluctuations in interest rates and risks of operations;
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the growth
in the privatization of the corrections and detention industry and the public acceptance
of our services;
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our ability
to obtain and maintain correctional facility management contracts, including as
the result of sufficient governmental appropriations, and the timing of the opening
of new facilities;
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changes
in government policy and in legislation and regulation of the corrections and detention
industry that adversely affect our business;
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tax related
risks, particularly with respect to our operation so as to preserve our ability
to qualify as a real estate investment trust, or REIT, for the year ended December
31, 1999; and
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general
economic and market conditions.
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Any or all of our forward-looking statements
in this report may turn out to be inaccurate. We have based these forward-looking
statements largely on our current expectations and projections about future events
and financial trends that we believe may affect our financial condition, results
of operations, business strategy and financial needs. They can be affected by inaccurate
assumptions we might make or by known or unknown risks, uncertainties and assumptions,
including the risks, uncertainties and assumptions described in risk factors disclosed
in detail in our annual report on Form 10-K for the fiscal year ended December 31,
2001, filed with the Securities and Exchange Commission (the “SEC”) on
March 22, 2002 (File No. 0-25245) (the “2001 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 undertake no obligation to publicly revise these forward-looking statements
to reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified
in their entirety by the cautionary statements contained in this report and in the
2001 Form 10-K.
OVERVIEW
The Company
As of December 31, 2001, we owned 39 correctional,
detention and juvenile facilities, three of which we leased to other operators,
and two facilities which are not yet in operation. We also had a leasehold interest
in a juvenile facility. As of December 31, 2001, we operated 64 facilities (including
36 facilities that we owned), with a total design capacity of approximately 61,000
beds in 21 states, the District of Columbia and Puerto Rico.
2
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, and Form 8-K reports 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 combined and consolidated financial
statements are prepared in conformity with accounting principles generally accepted
in the United States. As such, we are required to make certain estimates, judgments
and assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. A summary of our significant accounting policies
is described in Note 4 to the financial statements. 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:
Accounts receivable. As of December
31, 2001, accounts receivable included $15.7 million from the Commonwealth of Puerto
Rico, classified as current assets of discontinued operations due to the termination
in May 2002 of the contracts to manage the Ponce Adult Correctional Facility and
the Ponce Young Adult Correctional Facility, both located in Ponce, Puerto Rico,
as well as the termination in August 2002 of the contract to manage the Guayama
Correctional Center, located in Guayama, Puerto Rico. We currently believe that
we will collect these amounts due from the Commonwealth of Puerto Rico. While the
Commonwealth of Puerto Rico has historically been a slow payer of outstanding charges,
we do not believe that the termination of the management contracts has had or will
have any impact on the collectibility of the amounts outstanding. The Commonwealth
of Puerto Rico has not disputed any of the amounts outstanding, and has recently
acknowledged amounts due. Accordingly, no allowance for doubtful accounts has been
established for the accounts receivable balance due from the Commonwealth of Puerto
Rico. We can provide no assurance, however, as to whether or when we will collect
all or a portion of the amounts due from the Commonwealth of Puerto Rico. Non-payment
of remaining amounts due could have a material adverse impact on our financial position,
results of operations and cash flows.
Asset impairments. As of December
31, 2001, we had approximately $1.6 billion in long-lived assets. We evaluate the
recoverability of the carrying values of our long-lived assets, other than intangibles,
when events suggest that an impairment may have occurred. In these circumstances,
we utilize estimates of undiscounted cash flows to determine if an impairment exists.
If an impairment exists, it is measured as the amount by which the carrying amount
of the asset exceeds the estimated fair value of the asset.
Goodwill impairments. Effective
January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets,” or SFAS 142, which established
new accounting and reporting requirements for goodwill and other intangible assets.
Under SFAS 142, all goodwill amortization ceased effective January 1, 2002 (for
the year ended December 31, 2001 goodwill amortization was $7.6 million) and goodwill
attributable to each of our reporting units was tested for impairment by comparing
the fair value of each reporting unit with its carrying value. Fair value was determined
using a collaboration of various common valuation techniques, including market multiples,
discounted cash flows, and replacement
3
cost methods. These impairment tests are
required to be performed at adoption of SFAS 142 and at least annually thereafter.
On an ongoing basis (absent any impairment indicators), we expect to perform our
impairment tests during the fourth quarter, in connection with our annual budgeting
process.
Based on our initial impairment tests, we
recognized an impairment of $80.3 million to write-off the carrying value of goodwill
associated with our owned and managed facilities during the first quarter of 2002.
This goodwill was established in connection with the acquisition of Correctional
Management Services Corporation, a privately-held operating company subsequently
also known as Corrections Corporation of America, referred to herein as Operating
Company. The remaining goodwill, which is associated with the facilities we manage
but do not own, was deemed to be not impaired, and remains recorded on the balance
sheet. This remaining goodwill was established in connection with the acquisitions
of Prison Management Services, Inc., or PMSI, and Juvenile and Jail Facility Management
Services, Inc., or JJFMSI, both of which were privately-held service companies that
managed certain government-owned adult and juvenile prison and jail facilities.
The implied fair value of goodwill of the owned and managed reporting segment did
not support the carrying value of any goodwill, primarily due to its highly leveraged
capital structure. No impairment of goodwill allocated to the managed-only reporting
segment was deemed necessary, primarily because of the relatively minimal capital
expenditure requirements, and therefore indebtedness, in connection with obtaining
such management contracts. Under SFAS 142, the impairment recognized at adoption
of the new rules was reflected as a cumulative effect of accounting change in our
statement of operations for the first quarter of 2002. Impairment adjustments recognized
after adoption, if any, are required to be recognized as operating expenses.
Income taxes. As of December 31,
2001, we had approximately $150.5 million in deferred tax assets. Deferred
income taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Realization of the future tax benefits related to
deferred tax assets is dependent on many factors, including our ability to generate
taxable income within the net operating loss carryforward period. Since the change
in tax status in connection with the restructuring in 2000, and as of December 31,
2001, we have provided a valuation allowance to fully reserve the deferred tax assets
in accordance with Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes,” or SFAS 109. The valuation allowance was recognized based
on the weight of available evidence indicating that it was more likely than not
that the deferred tax assets would not be realized. This evidence primarily consisted
of, but was not limited to, recurring operating losses for federal tax purposes.
Our assessment of the valuation allowance
could change in the future based upon our actual and projected taxable income.
Removal of the valuation allowance in whole or in part would result in a non-cash
reduction in income tax expense during the period of removal. To the extent no
valuation allowance is established for our deferred tax assets, future financial
statements would reflect a provision for income taxes at the applicable federal
and state tax rates on income before taxes.
As further discussed in Note 24 to the financial
statements, on October 24, 2002, we entered into a definitive settlement with the
Internal Revenue Service, or the IRS, in connection with the IRS’s audit of
our predecessor’s 1997 federal income tax return. Under the terms of the settlement,
in consideration for the IRS’s final determinations with respect to the 1997
tax year, we have paid approximately $46.6 million in cash to satisfy federal taxes
and interest. As a result of this settlement, we will also owe approximately $7.6
million in state taxes and interest. Substantially all of these amounts will be
paid during the fourth quarter of 2002 with cash on hand.
Pursuant to the terms of the settlement,
the audit adjustments agreed to for the 1997 tax year will not trigger any additional
distribution requirements by us in order to preserve our status as a real estate
investment trust for federal income tax purposes for 1999. The adjustments will,
however, serve to increase our accumulated
4
earnings and profits in 2002 and therefore
may affect the taxability of dividends paid on our Series A and Series B Preferred
Stock in 2002 and later years.
Based on the terms of the settlement, the
amount previously reserved for this matter, and our current estimate of taxable
income for 2002, the settlement is not expected to result in either a material tax
benefit or tax expense for 2002. In addition, due to a change in tax law created
by the Job Creation and Worker Assistance Act of 2002 which was signed into law
in March 2002, the settlement will create an opportunity to utilize any 2002 tax
losses to claim a refund of a portion of the taxes paid.
The IRS has recently completed auditing
our federal tax return for the taxable year ended December 31, 2000. The IRS has
proposed the disallowance of a loss we claimed as the result of our forgiveness
in September 2000 of certain indebtedness of one of our former operating companies.
This finding is currently being protested with the Appeals Office of the IRS.
In the event that, after we seek all available remedies, the IRS prevails, we would
be required to pay the IRS in excess of $56.0 million in cash plus penalties and
interest. This adjustment would also substantially eliminate our net operating
loss carryforward. We believe that we have meritorious defenses of our positions.
We have not established a reserve for this matter. However, no assurance can be
given that the IRS will not make such an assessment and prevail in any such claim
against us.
Self-funded insurance reserves.
As of December 31, 2001, we had approximately $21.7 million in accrued liabilities
for employee health, workers’ compensation, and automobile insurance. We are
significantly self-insured for employee health, workers’ compensation, and
automobile liability insurance. As such, our insurance expense is largely dependent
on claims experience and our ability to control our claims. We have consistently
accrued the estimated liability for employee health based on our history of claims
experience and time lag between the incident date and the date the cost is reported
to us. We have accrued the estimated liability for workers’ compensation and
automobile insurance based on a third-party actuarial valuation of the outstanding
liabilities. These estimates could change in the future.
Legal reserves. As of December 31,
2001, we had approximately $24.1 million in accrued liabilities for litigation for
certain legal proceedings in which we are involved. We have accrued our estimate
of the probable costs for the resolution of these claims based on a range of potential
outcomes. In addition, we are subject to current and potential future legal proceedings
for which little or no accrual has been reflected because our current assessment
of the potential exposure is nominal. These estimates have been developed in consultation
with our General Counsel’s 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, however, that future cash
flows and results of operations could be materially affected by changes in our assumptions,
new developments, or by the effectiveness of our strategies.
LIQUIDITY AND CAPITAL RESOURCES
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. In
addition, we may incur capital expenditures to expand the design capacity of our
facilities in order to retain management contracts, or when the economics of an
expansion are compelling. In addition, with lender consent, we may acquire additional
correctional facilities that we believe have favorable investment returns and increase
value to our stockholders. We have financed, and intend to continue to finance,
the working capital and capital expenditure requirements with existing cash balances
and net cash provided by operations. We may also sell non-strategic assets and
apply the net proceeds to pay-down our outstanding indebtedness.
As of December 31, 2001, our liquidity was
provided by cash on hand of approximately $46.3 million and $50.0 million available
under a $50.0 million revolving credit facility, which was assumed in connection
with the Operating Company merger. As of December 31, 2001, we had a net working
capital deficiency of $760.4
5
million, due primarily to the classification of the
outstanding balance of $791.9 million under our senior secured bank credit facility,
referred to herein as the Old Senior Bank Credit Facility, which was scheduled to
mature on December 31, 2002, as current, along with the estimated negative fair
value of an interest rate swap agreement, which also was scheduled to mature on
December 31, 2002, of $13.6 million. However, as further described below, our liquidity
and working capital position were substantially improved as the result of the refinancing
of our senior indebtedness in May 2002. During the year ended December 31, 2001,
we generated $92.8 million in cash through operating activities, and expect this
amount to increase during 2002. We currently expect to be able to meet our cash
expenditure requirements for the year ended December 31, 2002, including payments
during the fourth quarter of 2002 of $54.2 million to satisfy the aforementioned
settlement with respect to the IRS’s audit of our predecessor’s 1997 federal
income tax return.
During the fourth quarter of 2000, as a
result of our financial condition existing at that time, including: (i) the pending
maturity of the loans under the Old Senior Bank Credit Facility; (ii) our negative
working capital position; and (iii) our highly leveraged capital structure, our
new management conducted strategic assessments; developed revised financial projections;
evaluated the utilization of existing facilities, projects under development and
excess land parcels; identified certain of these non-strategic assets for sale;
and identified various potential transactions that could improve our financial position.
During 2001, we were successful in repositioning
our capital structure for a comprehensive refinancing of our senior indebtedness,
including primarily the Old Senior Bank Credit Facility. We paid-down $189.0 million
in total debt through a combination of $138.7 million in cash generated from asset
sales and internally generated cash. We improved operating margins, increased occupancy
rates, and settled a number of significant outstanding legal matters on terms we
believe were favorable.
In May 2001, we completed a one-for-ten
reverse stock split of our common stock, which satisfied a condition of continued
listing of our common stock on the New York Stock Exchange. During December 2001,
we completed an amendment and restatement of our Old Senior Bank Credit Facility.
As part of the December 2001 amendment and restatement, the existing $269.4 million
revolving portion of the Old Senior Bank Credit Facility, which was to mature on
January 1, 2002, was replaced with a term loan of the same amount maturing on December
31, 2002, to coincide with the maturity of the other loans under the Old Senior
Bank Credit Facility. Pursuant to terms of the December 2001 amendment and restatement,
all loans under the Old Senior Bank Credit Facility accrued interest at a variable
rate of 5.5% over the London Interbank Offering Rate, or LIBOR, or 4.5% over the
base rate, at our option.
As a result of the December 2001 amendment
and restatement, certain financial and non-financial covenants of the Old Senior
Bank Credit Facility were amended, including the removal of prior restrictions on
our ability to pay cash dividends on shares of our issued and outstanding Series
A Preferred Stock. Under the terms of the December 2001 amendment and restatement,
we were permitted to pay quarterly dividends, when declared by the board of directors,
on the shares of Series A Preferred Stock, including all dividends in arrears.
On December 13, 2001, our board of directors declared a cash dividend on the shares
of Series A Preferred Stock for the fourth quarter of 2001, and for all five quarters
then unpaid and in arrears, payable on January 15, 2002 to the holders of record
of Series A Preferred Stock on December 31, 2001. As a result of the board’s
declaration, we paid an aggregate of $12.9 million to shareholders of the Series
A Preferred Stock in January 2002.
We believed, and continue to believe, that
a short-term extension of the revolving portion of our Old Senior Bank Credit Facility
was in our best interests for a longer-term financing strategy, particularly due
to difficult market conditions for the issuance of debt securities following the
terrorist attacks on September 11, 2001, and during the fourth quarter of 2001.
Additionally, we believed that certain terms of the amendment and restatement,
including primarily the removal of prior restrictions to pay cash dividends on our
shares of Series A Preferred Stock, including all dividends in arrears, would result
in an improvement to our credit ratings, thereby enhancing the terms of a more comprehensive
refinancing.
6
After completing the amendment and restatement
of the Old Senior Bank Credit Facility in December 2001, Moody’s Investors
Service upgraded the rating on our senior secured debt to “B2” from “B3”,
our senior unsecured debt to “B3” from “Caa1”, and our
preferred stock to “Caa2” from “Ca”.
On May 3, 2002, we completed a comprehensive
refinancing of our senior indebtedness through the refinancing of our Old Senior
Bank Credit Facility and the offering of $250.0 million aggregate principal amount
of 9.875% unsecured senior notes due 2009, referred to herein as the 9.875% Senior
Notes, in a private placement to a group of initial purchasers. The proceeds from
the offering of the 9.875% Senior Notes were used to repay a portion of amounts
outstanding under the Old Senior Bank Credit Facility, to redeem approximately $89.2
million of our existing $100.0 million 12% Senior Notes due 2006, referred to herein
as the 12% Senior Notes, pursuant to a tender offer and consent solicitation, and
to pay related fees and expenses. Upon the completion of the refinancing, Moody’s
Investors Service upgraded its rating of our senior secured debt to “B1”
from “B2”, our senior unsecured debt to “B2” from “B3”,
and our preferred stock to “Caa1” from “Caa2”, and Standard & Poor’s
upgraded our corporate credit rating and its rating of our senior
secured debt to “B+” from “B” and our senior unsecured debt
to “B-” from “CCC+”.
Interest on the 9.875% Senior Notes accrues
at a rate of 9.875% per year, and is payable semi-annually on May 1 and November
1 of each year, beginning November 1, 2002. The 9.875% Senior Notes mature on May
1, 2009. At any time before May 1, 2005, we may redeem up to 35% of the notes with
the net proceeds of certain equity offerings, as long as 65% of the aggregate principal
amount of the notes remains outstanding after the redemption. We may redeem all
or a portion of the 9.875% Senior Notes on or after May 1, 2006. Redemption prices
are set forth in the indenture governing the 9.875% Senior Notes. The 9.875% Senior
Notes are guaranteed on an unsecured basis by all of our domestic subsidiaries (other
than our Puerto Rican subsidiary).
The indenture governing the 9.875% Senior
Notes contains certain customary covenants that, subject to certain exceptions and
qualifications, restrict our ability to, among other things: make restricted payments;
incur additional debt or issue certain types of preferred stock; create or permit
to exist certain liens; consolidate, merge or transfer all or substantially all
of our assets; and enter into transactions with affiliates. In addition, if we
sell certain assets (and generally do not use the proceeds of such sales for certain
specified purposes) or experience specific kinds of changes in control, we must
offer to repurchase all or a portion of the 9.875% Senior Notes. The offer price
for the 9.875% Senior Notes in connection with an asset sale would be equal to 100%
of the aggregate principal amount of the notes repurchased plus accrued and unpaid
interest and liquidated damages, if any, on the notes repurchased to the date of
purchase. The offer price for the 9.875% Senior Notes in connection with a change
in control would be 101% of the aggregate principal amount of the notes repurchased
plus accrued and unpaid interest and liquidated damages, if any, on the notes repurchased
to the date of purchase. The 9.875% Senior Notes are also subject to certain cross-default
provisions with the terms of our other indebtedness.
As part of the refinancing, we obtained
a new $715.0 million senior secured bank credit facility, referred to herein as
the New Senior Bank Credit Facility, which replaced the Old Senior Bank Credit Facility.
Lehman Commercial Paper Inc. serves as administrative agent under the new facility,
which is comprised of a $75.0 million revolving loan with a term of approximately
four years, referred to herein as the Revolving Loan, a $75.0 million term loan
with a term of approximately four years, referred to herein as the Term Loan A Facility,
and a $565.0 million term loan with a term of approximately six years, referred
to herein as the Term Loan B Facility. All borrowings under the New Senior Bank
Credit Facility initially bear interest at a base rate plus 2.5%, or LIBOR plus
3.5%, at our option. The applicable margin for the Revolving Loan and the Term
Loan A Facility is subject to adjustment based on our leverage ratio. We are also
required to pay a commitment fee on the difference between committed amounts and
amounts actually utilized under the Revolving Loan equal to 0.50% per year subject
to adjustment based on our leverage ratio.
7
The Term Loan A Facility is repayable in
quarterly installments, which commenced on June 30, 2002, in an aggregate principal
amount for each year as follows: $15.0 million in year one, $18.0 million in year
two, $21.0 million in year three, and $21.0 million in year four. The Term Loan
B Facility is repayable in nominal quarterly installments of approximately $1.4
million, which commenced on June 30, 2002, for the first five years and in substantial
quarterly installments during the final year.
Prepayments of loans outstanding under the
New Senior Bank Credit Facility are permitted at any time without premium or penalty,
upon the giving of proper notice. In addition, we are required to prepay amounts
outstanding under the New Senior Bank Credit Facility in an amount equal to: (i)
50% of the net cash proceeds from any sale or issuance of our equity securities
or any equity securities of our subsidiaries, subject to certain exceptions; (ii)
100% of the net cash proceeds from any incurrence of additional indebtedness (excluding
certain permitted debt), subject to certain exceptions; (iii) 100% of the net cash
proceeds from any sale or other disposition by us, or any of our subsidiaries, of
any assets, subject to certain exclusions and reinvestment provisions and excluding
certain dispositions in the ordinary course of business; and (iv) 50% of our “excess
cash flow” (as such term is defined in the New Senior Bank Credit Facility)
for each fiscal year.
The credit agreement governing the New Senior
Bank Credit Facility requires us to meet certain financial covenants, including,
without limitation, a minimum fixed charge coverage ratio, a maximum leverage ratio
and a minimum interest coverage ratio. In addition, the New Senior Bank Credit
Facility contains certain covenants which, among other things, limit the incurrence
of additional indebtedness, investments, 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 Senior
Bank Credit Facility contains cross-default provisions with our other indebtedness.
The loans and other obligations under the
New Senior Bank Credit Facility are guaranteed by each of our domestic subsidiaries.
Our obligations under the New Senior Bank Credit Facility and the guarantees are
secured by: (i) a perfected first priority security interest in substantially all
of our tangible and intangible assets and substantially all of the tangible and
intangible assets of our subsidiaries; and (ii) a pledge of all of the capital stock
of our domestic subsidiaries and 65% of the capital stock of certain of our foreign
subsidiaries.
Pursuant to the terms of the aforementioned
tender offer and consent solicitation which expired on May 16, 2002, in connection
with the refinancing, in May 2002, we redeemed approximately $89.2 million in aggregate
principal amount of our 12% Senior Notes with proceeds from the issuance of the
9.875% Senior Notes. The notes were redeemed at a price of 110% of par, which included
a 3% consent payment, plus accrued and unpaid interest to the payment date. In
connection with the tender offer and consent solicitation, we received sufficient
consents and amended the indenture governing the 12% Senior Notes to delete substantially
all of the restrictive covenants and events of default contained therein. The amendment
became operative upon our repurchase of the 12% Senior Notes tendered in connection
with the consent.
We are required to pay interest and principal
upon maturity on the remaining 12% Senior Notes outstanding, in accordance with
the original terms of such notes.
In connection with the refinancing, our
operating subsidiary’s revolving credit facility with a $50.0 million capacity
was terminated. No amounts were outstanding on this facility at the time of its
termination.
In connection with the refinancing, we also
terminated an interest rate swap agreement at a price of approximately $8.8 million.
The swap agreement, which fixed LIBOR at 6.51% on outstanding balances of $325.0
million through its expiration on December 31, 2002, had been entered into in order
to satisfy a requirement of the Old Senior Bank Credit Facility. In addition, in
order to satisfy a requirement of the New Senior Bank Credit Facility, we purchased
an interest rate cap agreement, capping LIBOR at 5.0% on outstanding balances of
$200.0 million through the expiration of the cap agreement on May 20, 2004, for a
8
price of $1.0 million. The termination of
the swap agreement and the purchase of the cap agreement were funded with cash on hand.
As a result of the early extinguishment
of the Old Senior Bank Credit Facility and the redemption of substantially all of
our 12% Senior Notes, we recorded an extraordinary loss of approximately $36.7 million
during the second quarter of 2002, which included the write-off of existing deferred
loan costs, certain bank fees paid, premiums paid to redeem the 12% Senior Notes,
and certain other costs associated with the refinancing.
Operating Activities
Our net cash provided by operating activities
for the year ended December 31, 2001, was $92.8 million. This amount represents
net income for the year plus depreciation and amortization, changes in various components
of working capital and adjustments for various non-cash charges, including primarily
the change in fair value of the interest rate swap agreement. During 2001, we received
significant tax refunds of approximately $32.2 million, contributing to the net
cash provided by operating activities. These refunds, however, were partially offset
by the payment of $15.0 million during August 2001 for a full settlement of all
claims in a dispute regarding the termination of a securities purchase agreement
in 2000 related to our proposed corporate restructuring led by the Fortress/Blackstone
investment group.
Investing Activities
Our cash flow provided by investing activities
was $130.9 million for the year ended December 31, 2001, and was primarily attributable
to the proceeds received from the sales of the Mountain View Correctional Facility
on March 16, 2001, our interest in the Agecroft facility on April 10, 2001, the
Pamlico Correctional Facility, on June 28, 2001, and the Southern Nevada Women’s
Correctional Center on October 3, 2001.
Financing Activities
Our cash flow used in financing activities
was $198.3 million for the year ended December 31, 2001. Net payments on debt totaled
$189.0 million and primarily represents the net cash proceeds received from the
sale of the Mountain View Correctional Facility, our interest in the Agecroft facility,
the Pamlico Correctional Facility, and the Southern Nevada Women’s Correctional
Center that were immediately applied to amounts outstanding under the Old Senior
Bank Credit Facility. In addition, during June 2001 we paid-down a lump sum of
$35.0 million on the Old Senior Bank Credit Facility with cash on hand.
RESULTS OF OPERATIONS
Our results of operations are impacted by,
and the following table sets forth for the periods presented, 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.
9
|
|
|
Owned
and
Managed
|
|
Managed
Only
|
|
Leased
|
|
Incomplete
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities as of December 31, 2000
|
|
|
40
|
|
|
|
28
|
|
|
|
4
|
|
|
|
2
|
|
|
|
74
|
|
Sale of the Mountain View Correctional Facility
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Sale of Agecroft Properties, Inc., which owned
an interest in the Agecroft facility located in Salford, England.
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Sale of the Pamlico Correctional Facility
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Termination of the management contract for the
Brownfield Intermediate Sanction Facility
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Sale of the Southern Nevada Women’s Correctional
Center, and due to the amendment of the previous contract terms, continued management
of the facility
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities as of December 31, 2001
|
|
|
36
|
|
|
|
28
|
|
|
|
4
|
|
|
|
2
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously discussed, we do not believe
the comparison between the results of operations for the years ended December 31,
2001, 2000 and 1999 are meaningful. Please refer to Notes 3 and 4 to the financial
statements for further information on the lack of comparability of the results of
operations between the years.
Year Ended December 31, 2001
We generated net income available to common
stockholders of $5.7 million, or $0.23 per diluted share for the year ended December
31, 2001. Of this amount, loss from continuing operations was $0.08 per diluted
share, while income from discontinued operations was $0.31 per diluted share. Contributing
to the net income was a non-cash gain of $25.6 million related to the extinguishment
of a $26.1 million promissory note issued in connection with our federal stockholder
litigation settlement, as further discussed below under the caption “change
in fair value of derivative instruments.” Results also included the non-cash
effect of an $11.1 million charge associated with the accounting for interest rate
swap agreement required under prior terms of the Old 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, and 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 man-days during the period. A 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. During 2001, for all of
the facilities we owned or managed exclusive of those discontinued (see further
discussion below regarding discontinued operations), we generated $48.11 in revenue
per compensated man-day, and incurred $37.10 in operating expenses per compensated
man-day, resulting in an operating margin of 22.9%.
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
10
to construct or acquire facilities we own.
Additionally, correctional and detention facilities have a limited or no alternative
use. Therefore, if a management contract is terminated on a facility we own, we continue
to incur certain operating expenses, such as real estate taxes, utilities, and insurance,
that we would not incur if a management contract was terminated for a managed-only
facility. As a result, revenue per compensated man-day is typically higher for facilities
we own and manage than for managed-only facilities. Because we incur higher expenses,
such as repairs and maintenance, real estate taxes, and insurance, on the facilities
we own and manage, our cost structure for facilities we own and manage is also higher
than the cost structure for the managed-only facilities. Revenue per compensated
man-day for the facilities we own and manage was $53.63 for 2001. Revenue per compensated
man-day for the managed-only facilities was $39.54 for 2001. Operating expense
per compensated man-day for the facilities we own and manage was $40.20 for 2001.
Operating expense per compensated man-day for the managed-only facilities was $32.31
for 2001. Operating margins, therefore, for owned and managed facilities and managed-only
facilities were 25.0% and 18.3%, respectively.
Management and other revenue. Management
and other revenue consists of revenue earned from the operation and management of
adult and juvenile correctional and detention facilities we own or manage and from
our inmate transportation subsidiary, which, for the year ended December 31, 2001,
totaled $930.6 million. Occupancy for the facilities we operate was 88.4% for the
year ended December 31, 2001, including 82.6% for facilities we own and manage,
and 99.4% for our managed-only facilities.
During the first quarter of 2001, the State
of Georgia began filling two of our facilities that had been expanded during 2000
to accommodate an additional 524 beds at each facility, contributing to an increase
in management and other revenue at these facilities.
During the second quarter of 2001, we were
informed that our current contract with the District of Columbia to house its inmates
at the Northeast Ohio Correctional Center, which expired September 8, 2001, would
not be renewed due to a new law that mandated the Federal Bureau of Prisons, or
BOP, to assume jurisdiction of all District of Columbia offenders by the end of
2001. The Northeast Ohio Correctional Center is a 2,016-bed medium-security prison.
The District of Columbia began transferring inmates out of the facility during
the second quarter of 2001, and completed the process in July 2001. Accordingly,
substantially all employees at the facility have been terminated. Total management
and other revenue at this facility was approximately $6.4 million during 2001. The
related operating expenses at this facility were $12.6 million during 2001. Overall,
our occupancy decreased by approximately 1,300 inmates at our facilities as a result
of this mandate. We have engaged in discussions with the BOP regarding a sale of
the Northeast Ohio Correctional Center to the BOP, and are also continually exploring
opportunities to reopen the facility; however, there can be no assurance that we
will be able to reach agreements on a sale or to reopen this facility.
During the third quarter of 2001, due to
a short-term decline in the State of Wisconsin’s inmate population, the State
transferred approximately 700 inmates out of our Whiteville Correctional Facility,
located in Whiteville, Tennessee, to Wisconsin’s correctional system. Therefore,
management and other revenue declined at this facility during 2001. On October
28, 2002, we announced a lease of our Whiteville, Tennessee facility to Hardeman
County, Tennessee which has contracted with the State of Tennessee to manage up
to 1,536 inmates. We have contracted with Hardeman County to manage the inmates
housed in the Whiteville facility. This contract is expected to result in an increase
in management and other revenue at this facility beginning in the fourth quarter
of 2002.
In addition, on September 30, 2002, we announced
a contract award from the State of Wisconsin to house up to a total of 5,500 medium-security
Wisconsin inmates, although the State of Wisconsin is under no obligation to utilize
the maximum capacity under the contract. The new contract will replace an existing
contract with the State of Wisconsin effective December 22, 2002. We managed approximately
3,500 Wisconsin inmates at four of our facilities under the previous contract.
11
On May 30, 2002, we were awarded a contract
by the BOP to house approximately 1,500 federal detainees at our McRae Correctional
Facility located in McRae, Georgia. The three-year contract, awarded as part of
the Criminal Alien Requirement Phase II Solicitation, or CAR II, also provides for
seven one-year renewals. The McRae facility is substantially complete and unoccupied.
We could earn revenues of up to $109 million in the first three years of the contract.
The contract with the BOP guarantees at least 95% occupancy on a take-or-pay basis.
On November 20, 2002, we received a Notice to Proceed from the BOP to begin performance
of the contract on December 1, 2002. The Notice to Proceed serves as the last official
procedure in the federal contract award process. As a result, we began generating
revenue from the McRae Correctional Facility on December 1, 2002. We have incurred,
or expect to incur, a total of approximately $6 million of additional capital expenditures
in preparation of this facility for the operations pursuant to BOP specifications.
Prior to the operation of this facility under the CAR II contract, the facility
was unoccupied.
Operating expenses. Operating expenses
totaled $721.5 million for the year ended December 31, 2001. Operating expenses
consist of those expenses incurred in the operation and management of correctional
and detention facilities and other correctional facilities, and from our inmate
transportation subsidiary.
Salaries and benefits represent the most
significant component of operating expenses. During 2001, we incurred wage increases
due to tight labor markets, particularly for correctional officers. However, as
the unemployment rate has increased, we have seen an increase in the availability
of potential employees, providing some moderation to the trend of increasing salary
requirements. Nonetheless, the market for correctional officers has remained challenging.
In addition, ten of our facilities have contracts with the federal government requiring
that our wage and benefit rates comply with wage determination rates set forth,
and as adjusted from time to time, under the Service Contract Act of the U.S. Department
of Labor. Our contracts generally provide for reimbursement of a portion of the
increased costs resulting from wage determinations in the form of increased per-diems,
thereby mitigating the effect of increased salaries and benefits expenses at those
facilities. We may also be subject to adverse claims, or government audits, relating
to alleged violations of wage and hour laws applicable to us, which may result in
adjustments to amounts previously paid as wages and, potentially interest and/or
monetary penalties.
We also experienced a trend of increasing
insurance expense during 2001. Because we are significantly self-insured for employee
health, workers’ compensation, and automobile liability insurance, our insurance
expense is dependent on claims experience and our ability to control our claims
experience. Our insurance policies contain various deductibles and stop-loss amounts
intended to limit our exposure for individually significant occurrences. However,
the nature of our self-insurance policies provides little protection for a deterioration
in claims experience or increasing employee medical costs in general. We continue
to incur increasing insurance expense due to adverse claims experience primarily
resulting from rising healthcare costs throughout the country. We are developing
a strategy to improve the management of our future loss claims but can provide no
assurance that this strategy will be successful. Additionally, general liability
insurance costs have risen substantially since the terrorist attacks on September
11, 2001 and the costs of other types of insurance, such as directors and officers
insurance, are currently expected to increase due to several high profile business
failures and concerns about corporate governance and accounting in the marketplace.
Unanticipated additional insurance expenses resulting from adverse claims experience
or a continued increasing cost environment for general liability and other types
of insurance could result in increasing expenses in the future.
We were able to achieve reductions in food
expenses during 2001 through the renegotiation of food service contracts. In addition,
despite increasing medical costs nationwide, we were able to achieve a modest reduction
in medical expenses. We can provide no assurance, however, that we will continue
to achieve further expense reductions, or that we will not experience an increase
in such expenses in the future.
12
Rental revenue
Rental revenue was $5.7 million for the
year ended December 31, 2001, and was generated from leasing correctional and detention
facilities to governmental agencies and other private operators. On March 16, 2001,
we sold the Mountain View Correctional Facility, and on June 28, 2001, we sold the
Pamlico Correctional Facility, two facilities that had been leased to governmental
agencies. Therefore, no further rental revenue will be received for these facilities.
For the year ended December 31, 2001, rental revenue for these facilities totaled
$2.0 million.
General and administrative expense
For the year ended December 31, 2001, general
and administrative expenses totaled $34.6 million. General and administrative expenses
consist primarily of corporate management salaries and benefits, professional fees
and other administrative expenses.
Depreciation and amortization
For the year ended December 31, 2001, depreciation
and amortization expense totaled $53.3 million. Amortization expense for the year
ended December 31, 2001 includes approximately $7.6 million for goodwill that was
established in connection with the acquisitions of Operating Company on October
1, 2000 and the acquisitions on December 1, 2000 of PMSI and JJFMSI. Goodwill will
no longer be subject to amortization effective January 1, 2002, in accordance with
SFAS 142. Amortization expense during the year ended December 31, 2001 is also
net of a reduction to amortization expense of $8.6 million for the amortization
of a liability relating to contract values established in connection with the mergers
completed in 2000. Due to certain of these liabilities becoming fully amortized
during 2001, we currently expect the corresponding amortization reduction to decrease
during 2002.
Interest expense, net
Interest expense, net, is reported net of
interest income for the year ended December 31, 2001. Gross interest expense was
$133.7 million for the year ended December 31, 2001. Gross interest expense is
based on outstanding convertible subordinated notes payable balances, borrowings
under our Old Senior Bank Credit Facility, our operating subsidiary revolving credit
facility, our 12% Senior Notes, net settlements on an interest rate swap, and amortization
of loan costs and unused facility fees. The decrease in gross interest expense
from the prior year is primarily attributable to declining interest rates and lower
amounts outstanding under our Senior Bank Credit Facility. Based on our credit
ratings during 2001, from January 1, 2001 through September 30, 2001, the interest
rate applicable to our Old Senior Bank Credit Facility was 2.75% over the base rate
and 4.25% over LIBOR for revolving loans, and 3.0% over the base rate and 4.5% over
LIBOR for term loans. These rates increased 50 basis points (0.50%) on October
1, 2001 since, under terms of our Old Senior Bank Credit Facility, we had not prepaid
an aggregate of $200.0 million of the outstanding loans under the facility.
On December 7, 2001, pursuant to terms of
the December 2001 amendment and restatement of our Old Senior Bank Credit Facility,
the interest rate for all loans thereunder was adjusted to a variable rate of 5.5%
over LIBOR, or 4.5% over the base rate, at our option.
We currently expect to achieve significant
savings as a result of the comprehensive refinancing of our senior debt completed
during the second quarter of 2002, and due to the termination of the interest rate
swap agreement.
13
Gross interest income was $7.5 million for
year ended December 31, 2001. Gross interest income is earned on cash used to collateralize
letters of credit for certain construction projects, direct financing leases, notes
receivable and investments of cash and cash equivalents. On October 3, 2001, we
sold our Southern Nevada Women’s Correctional Facility, which had been accounted
for as a direct financing lease. Therefore, no further interest income will be
received on this lease. For the year ended December 31, 2001, interest income for
this lease totaled $0.9 million. Subsequent to the sale, we continue to manage
the facility pursuant to a contract with the State of Nevada.
Change in fair value of derivative
instruments
In accordance with Statement of Financial
Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities” referred to herein as SFAS 133, we have reflected in earnings the
change in the estimated fair value of our interest rate swap agreement during the
year ended December 31, 2001. We estimate the fair value of interest rate swap
agreement using option-pricing models that value the potential for interest rate
swap agreements to become in-the-money through changes in interest rates during
the remaining terms of the agreements. A negative fair value represents the estimated
amount we would have to pay to cancel the contract or transfer it to other parties.
Our swap agreement fixed LIBOR at 6.51%
(prior to the applicable spread) on outstanding balances of at least $325.0 million
through its expiration on December 31, 2002. As of December 31, 2001, due to a
reduction in interest rates since entering into the swap agreement, the interest
rate swap agreement had a negative fair value of approximately $13.6 million. This
negative fair value consisted of a transition adjustment of $5.0 million for the
reduction in the fair value of the interest rate swap agreement from its inception
through the adoption of SFAS 133 on January 1, 2001, and a reduction in the fair
value of the swap agreement of $8.6 million during the year ended December 31, 2001.
In accordance with SFAS 133, we have recorded an $11.1 million non-cash charge
for the change in fair value of the swap agreement for the year ended December 31,
2001, which includes $2.5 million for amortization of the transition adjustment.
The transition adjustment represents the fair value of the swap agreement as of
January 1, 2001, which was reflected as a cumulative effect of accounting change
included in other comprehensive income in the accompanying statement of stockholders’
equity. We were no longer required to maintain the existing interest rate
swap agreement due to the early extinguishment of the Old Senior Bank Credit Facility
in May 2002. During May 2002, we terminated the swap agreement prior to its expiration
at a price of approximately $8.8 million. In accordance with SFAS 133, we will
continue to amortize the unamortized portion of the transition adjustment as a non-cash
expense through December 31, 2002, the original expiration date.
Additionally, during the fourth quarter
of 2001, a $26.1 million promissory note was issued in connection with the final
settlement of the federal court portion of the stockholder litigation settlement,
as further described in Note 21 to the financial statements. Under terms of the
promissory note, the note and accrued interest became extinguished in January 2002
once the average closing price of the common stock met or exceeded a “termination
price” equal to $16.30 per share for fifteen consecutive trading days following
the issuance of such note. The terms of the note, which allow the principal balance
to fluctuate dependent on the trading price of our common stock, created a derivative
instrument that was valued and accounted for under the provisions of SFAS 133.
As a result of this extinguishment, we estimated the fair value of this derivative
to approximate the face amount of the note, resulting in an asset being recorded
in the fourth quarter of 2001. The derivative asset offsets the face amount of
the note in the consolidated balance sheet as of December 31, 2001.
While the state court portion of the stockholder
litigation settlement has also been settled, the payment of the settlement proceeds
to the state court plaintiffs has not yet been completed; however, the settlement
payment is expected to result in the issuance of approximately 0.3 million additional
shares of common stock and a $2.9 million subordinated promissory note, which may
also be extinguished if the average closing price of our common stock meets or exceeds
$16.30 per share for fifteen consecutive trading days following the note’s
issuance and prior to its maturity in 2009. Additionally, to the extent our common
stock price does not meet
14
the termination price, the note will be reduced by the
amount that the shares of common stock issued to the plaintiffs appreciate in value
in excess of $4.90 per share, based on the average trading price of the stock following
the date of the note’s issuance and prior to the maturity of the note. If
the remaining promissory note is issued under the current terms, in accordance with
SFAS 133, as amended, we will reflect in earnings the change in the estimated fair
value of the written option embedded in the promissory note from quarter to quarter.
Since we have reflected the maximum obligation of the contingency associated with
the state court portion of the stockholder litigation in the consolidated balance
sheet as of December 31, 2001, the issuance of the note is currently expected to
have a favorable impact on our consolidated financial position and results of operations
initially; thereafter, the financial statement impact will fluctuate based on changes
in our stock price. However, the impact cannot be determined until the promissory
note is issued and an estimated fair value of the derivative included in the promissory
note is determined. The note is currently expected to be issued during the fourth
quarter of 2002.
Income tax benefit
We generated an income tax benefit of approximately
$3.4 million for the year ended December 31, 2001, primarily due to the reduction
in our deferred tax liabilities.
As of December 31, 2001, our deferred tax
assets totaled approximately $150.5 million. Deferred income taxes reflect the net
tax effect of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Realization of the future tax benefits related to deferred tax assets is dependent
on many factors, including our ability to generate taxable income within the net
operating loss carryforward period. Since the change in tax status in connection
with the restructuring in 2000, and as of December 31, 2001, we have provided a
valuation allowance to reserve the deferred tax assets in accordance with SFAS 109.
The valuation allowance was recognized based on the weight of available evidence
indicating that it was more likely than not that the deferred tax assets would not
be realized. This evidence primarily consisted of, but was not limited to, recurring
operating losses for federal tax purposes.
Our assessment of the valuation allowance
could change in the future. Removal of the valuation allowance in whole or in part
would result in a non-cash reduction in income tax expense during the period of
removal. To the extent no reserve is established for our deferred tax assets, our
financial statements would reflect a provision for income taxes at the applicable
federal and state tax rates on income before taxes.
On March 9, 2002, the “Job Creation
and Worker Assistance Act of 2002” was signed into law. Among other changes,
the law extends the net operating loss carryback period to five years from two years
for net operating losses arising in tax years ending in 2001 and 2002, and allows
use of net operating loss carrybacks and carryforwards to offset 100% of the alternative
minimum taxable income. We experienced net operating losses during 2001 resulting
primarily from the sale of assets at prices below the tax basis of such assets.
Under terms of the new law, we utilized certain of our net operating losses to
offset taxable income generated in 1997 and 1996. As a result of this tax law change
in 2002, we reported an income tax benefit and claimed a refund of approximately
$32.2 million during the first quarter of 2002, which was received in April 2002.
Our taxable income for 1997 was increased
substantially in connection with the aforementioned settlement with the IRS with
respect to the audit of our predecessor’s 1997 federal income tax return.
The Job Creation and Worker Assistance Act of 2002 creates an opportunity to utilize
any 2002 tax losses, including deductions for state income taxes and interest associated
with the settlement, to claim a refund of a portion of the taxes to be paid in connection
with the settlement, since such losses can be carried back to offset taxable income
generated in 1997. We also plan to pursue additional tax strategies to maximize
the refund opportunity. However, we cannot currently estimate the potential refunds
resulting from these strategies, and can provide no assurance that these strategies
will come to fruition.
15
Income from discontinued operations,
net of taxes
In late 2001 and early 2002, we were provided
notice from the Commonwealth of Puerto Rico of its intention to terminate the management
contracts at the 500-bed multi-security Ponce Young Adult Correctional Facility
and the 1,000-bed medium-security Ponce Adult Correctional Facility, located in
Ponce, Puerto Rico, upon the expiration of the management contracts in February
2002. Attempts to negotiate continued operation of these facilities were unsuccessful.
As a result, the transition period to transfer operation of the facilities to the
Commonwealth of Puerto Rico ended May 4, 2002, at which time operation of the facilities
was transferred to the Commonwealth of Puerto Rico. Due to the transfer of operations
of these facilities to the Commonwealth of Puerto Rico on May 4, 2002, the operating
results of these facilities, net of taxes, were reported as discontinued operations
during 2001. During the year ended December 31, 2001, these facilities generated
total revenue of $22.6 million and operating expenses of $19.3 respectively. The
Company recorded a non-cash charge of approximately $1.8 million during the second
quarter of 2002 for the write-off of the carrying value of assets associated with
the terminated management contracts.
During the fourth quarter of 2001, we obtained
an extension of our management contract with the Commonwealth of Puerto Rico for
the operation of the 1,000-bed Guayama Correctional Center located in Guayama, Puerto
Rico, through December 2006. However, on May 7, 2002, we received notice from the
Commonwealth of Puerto Rico terminating our contract to manage this facility. As
a result of the termination of the management contract for the Guayama Correctional
Center, which occurred on August 6, 2002, the operating results of this facility,
net of taxes, were reported as discontinued operations during 2001. During the
year ended December 31, 2001, this facility generated total revenue of $21.1 million
and operating expenses of $12.7 million.
On June 28, 2002, we sold our interest in
a juvenile facility located in Dallas, Texas for approximately $4.3 million. The
facility, which was designed to accommodate 900 at-risk juveniles, was leased to
an independent third party operator pursuant to a lease expiring in 2008. Net proceeds
from the sale have been used for working capital purposes. During the year ended
December 31, 2001, rental income from this facility totaled $0.7 million.
For the year ended December 31, 2001, depreciation
and amortization, interest income, and income tax expense totaled $0.9 million,
$0.6 million, and $4.5 million, respectively, for these four facilities.
Year Ended December 31, 2000 Compared
to Year Ended December 31, 1999
Management revenue
Management revenue consisted of revenue
earned from the operation and management of adult and juvenile correctional and
detention facilities for the year ended December 31, 2000, totaling $182.5 million,
which, beginning as of October 1, 2000 and December 1, 2000, included management
revenue previously earned by Operating Company, PMSI and JJFMSI, respectively.
Also included was the management revenue earned by PMSI and JJFMSI, together referred
to herein as the service companies, from the operation and management of adult prisons
and jails and juvenile detention facilities on a combined basis for the period September
1, 2000 through November 30, 2000, totaling $79.3 million. As a REIT, we had no
management revenue in 1999.
Rental revenue
Net rental revenue was $40.9 million and
$270.1 million for the years ended December 31, 2000 and 1999, respectively, and
was generated from leasing correctional and detention facilities to Operating Company
(which are referred to herein as the Operating Company leases), governmental agencies
and other private operators. For the year ended December 31, 2000, we reserved
$213.3 million of the $244.3 million of gross
16
rental revenue due from Operating
Company through September 30, 2000 due to the uncertainty regarding the collectibility
of the payments. During September 2000, we forgave all unpaid rental payments due
from Operating Company as of August 31, 2000 (totaling $190.8 million). The forgiveness
did not impact our financial statements at that time as the amounts forgiven had
been previously reserved. The remaining $22.5 million in unpaid rentals from Operating
Company was fully reserved in September 2000. The Operating Company leases were
cancelled in the Operating Company merger.
For the year ended December 31, 1999, rental
revenue was $270.1 million and was generated primarily from leasing correctional
and detention facilities to Operating Company, as well as governmental and private
operators. During 1999, we began leasing five new facilities in addition to the
37 facilities leased at the beginning of the year. We recorded no reserves for
the year ended December 31, 1999, as all rental revenue was collected from lessees,
including Operating Company.
Licensing fees from affiliates
Licensing fees from affiliates were $7.6
million and $8.7 million for the years ended December 31, 2000 and 1999, respectively.
Licensing fees were earned as a result of a trade name use agreement between us
and Operating Company, which granted Operating Company the right to use the name
“Corrections Corporation of America” and derivatives thereof subject to
specified terms and conditions therein. The licensing fee was based upon gross
rental revenue of Operating Company, subject to a limitation based on our gross
revenue. All licensing fees were collected from Operating Company. The decrease
in licensing fees in 2000 compared with 1999 was due to the cancellation of the
trade name use agreement in connection with the Operating Company merger.
Operating expenses
Operating expenses included the operating
expenses of PMSI and JJFMSI on a combined basis for the period September 1, 2000
through November 30, 2000, totaling $64.5 million. Also included were the operating
expenses we incurred for the year ended December 31, 2000, totaling $152.8 million,
which, beginning as of October 1, 2000 and December 1, 2000, included the operating
expenses incurred by Operating Company and the service companies, respectively.
Operating expenses consisted of those expenses incurred in the operation and management
of prisons and other correctional facilities. Also included in operating expenses
were our realized losses on foreign currency transactions of $0.6 million for the
year ended December 31, 2000. These losses resulted from a detrimental fluctuation
in the foreign currency exchange rate upon the collection of certain receivables
denominated in British pounds. See “Unrealized foreign currency transaction
loss” for further discussion of these receivables.
General and administrative expense
For the year ended December 31, 2000 and
1999, general and administrative expenses were $45.5 million and $24.1 million,
respectively. During the fourth quarter of 1999, we entered into a series of agreements
concerning a proposed restructuring led by a group of institutional investors consisting
of an affiliate of Fortress Investment Group LLC and affiliates of The Blackstone
Group. In April 2000, the securities purchase agreement by and among the parties
was terminated when Fortress/Blackstone elected not to match the terms of a subsequent
proposal by Pacific Life Insurance Company. In June 2000, our securities purchase
agreement with Pacific Life was mutually terminated by the parties after Pacific
Life was unwilling to confirm that the June 2000 waiver and amendment to our Old
Senior Bank Credit Facility satisfied the terms of the agreement with Pacific Life.
In connection with the proposed restructuring transactions with Fortress/Blackstone
and Pacific Life and the completion of the restructuring, including the Operating
Company merger, we terminated the services of one of our financial advisors during
the third quarter of 2000. For the year ended December 31, 2000, we accrued expenses
of approximately $24.3 million in connection with existing and potential litigation
17
associated with the termination of the
aforementioned agreements. All disputes with these parties have since been settled.
General and administrative expenses incurred
by PMSI and JJFMSI on a combined basis for the period September 1, 2000 through
November 30, 2000 totaled $0.6 million. Additional general and administrative expenses
incurred for the year ended December 31, 2000 totaled $20.6 million, which, beginning
as of October 1, 2000 and December 1, 2000, included the general and administrative
expenses incurred by Operating Company and the service companies, respectively.
These additional general and administrative expenses consisted primarily of corporate
management salaries and benefits, professional fees and other administrative expenses.
Effective October 1, 2000, as a result of the Operating Company merger, corporate
management salaries and benefits also contained the former corporate employees of
Operating Company. Also included in these additional general and administrative
expenses were $2.0 million in severance payments to our former chief executive officer
and secretary and $1.3 million in severance payments to various other company employees.
During 1999, we were a party to various
litigation matters, including stockholder litigation and other legal matters. We
incurred legal expenses of $6.3 million during 1999 in relation to these matters.
Also included in 1999 was $3.9 million of expenses incurred for consulting and
legal advisory services in connection with the proposed restructuring. In addition,
as a result of our failure to declare, prior to December 31, 1999, and the failure
to distribute, prior to January 31, 2000, dividends sufficient to distribute 95%
of our taxable income for 1999, we were subject to excise taxes, of which $7.1 million
was accrued as of December 31, 1999.
Depreciation and amortization
For the year ended December 31, 2000 and
1999, depreciation and amortization expense was $59.8 million and $44.1 million,
respectively. The increase was a result of a greater number of correctional and
detention facilities in service during 2000 compared with 1999. Also included was
the depreciation and amortization expense for PMSI and JJFMSI from the operation
and management of adult prisons and jails and juvenile detention facilities on a
combined basis for the period September 1, 2000 through November 30, 2000, totaling
$3.9 million.
License fees to Operating Company
Licensing fees to Operating Company were
recognized under the terms of a trade name use agreement between Operating Company
and each of PMSI and JJFMSI, which were assumed as a result of the Operating Company
merger. Under the terms of the trade name use agreement, PMSI and JJFMSI were required
to pay to Operating Company 2.0% of gross management revenue for the use of the
CCA name and derivatives thereof. PMSI and JJFMSI incurred expenses of $0.5 million
under this agreement for the month of September 2000. The October and November
expenses incurred under this agreement were eliminated in combination, subsequent
to the Operating Company merger. The trade name use agreement was cancelled upon
the acquisitions of PMSI and JJFMSI.
Administrative services fee to Operating
Company
Operating Company and each of PMSI and JJFMSI
entered into an administrative services agreement whereby Operating Company would
charge a fee to manage and provide general and administrative services to each of
PMSI and JJFMSI. We assumed this agreement as a result of the Operating Company
merger. PMSI and JJFMSI recognized expense of $0.9 million under this agreement
for the month of September 2000. The October and November expenses incurred under
this agreement were eliminated in combination, subsequent to the Operating Company
merger. The administrative services agreement was cancelled upon the acquisitions
of PMSI and JJFMSI.
18
Write-off of amounts under lease arrangements
During 2000, we opened or expanded five
facilities that were operated and leased by Operating Company prior to the Operating
Company merger. Based on Operating Company’s financial condition, as well
as the proposed merger with Operating Company and the proposed termination of the
Operating Company leases in connection therewith, we wrote-off the accrued tenant
incentive fees due Operating Company in connection with opening or expanding the
five facilities, totaling $11.9 million for the year ended December 31, 2000. During
the fourth quarter of 2000, this accrual was applied in accordance with the purchase
method of accounting upon the merger with Operating Company.
For the year ended December 1999, we paid
tenant incentive fees of $68.6 million, with $2.9 million of those fees amortized
against rental revenues. During the fourth quarter of 1999, we undertook a plan
that contemplated merging with Operating Company and thereby eliminating the Operating
Company leases or amending the Operating Company leases to significantly reduce
the lease payments to be paid by Operating Company to us. Consequently, we determined
that remaining deferred tenant incentive fees at December 31, 1999 were not realizable
and wrote-off fees totaling $65.7 million.
Impairment losses
Statement of Financial Accounting Standards
No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of,” or SFAS 121, requires impairment losses to be recognized
for long-lived assets used in operations when indications of impairment are present
and the estimate of undiscounted future cash flows is not sufficient to recover
asset carrying amounts. Under terms of the June 2000 waiver and amendment to our
Old Senior Bank Credit Facility, we were obligated to complete the restructuring,
including the Operating Company merger, and complete the restructuring of management
through the appointment of a new chief executive officer and a new chief financial
officer. The restructuring also permitted the acquisitions of PMSI and JJFMSI.
During the third quarter of 2000, we named a new president and chief executive
officer, followed by the appointment of a new chief financial officer during the
fourth quarter of 2000. At our 2000 annual meeting of stockholders held during
the fourth quarter of 2000, our stockholders elected a newly constituted nine-member
board of directors, including six independent directors.
Following the completion of the Operating
Company merger and the acquisitions of PMSI and JJFMSI, during the fourth quarter
of 2000, after considering our financial condition, our new management developed
a strategic operating plan to improve our financial position, and developed revised
projections for 2001 to evaluate various potential transactions. Management also
conducted strategic assessments and evaluated our assets for impairment. Further,
management evaluated the utilization of existing facilities, projects under development,
excess land parcels, and identified certain of these non-strategic assets for sale.
In accordance with SFAS 121, we estimated
the undiscounted net cash flows for each of our properties and compared the sum
of those undiscounted net cash flows to our investment in each property. Through
this analyses, we determined that eight of our correctional and detention facilities
and the long-lived assets of the transportation business had been impaired. For
these properties, we reduced the carrying values of the underlying assets to their
estimated fair values, as determined based on anticipated future cash flows discounted
at rates commensurate with the risks involved. The resulting impairment loss totaled
$420.5 million.
During the fourth quarter of 2000, as part
of the strategic assessment, we committed to a plan of disposal for certain of our
long-lived assets. In accordance with SFAS 121, we recorded losses on these assets
based on the difference between the carrying value and the estimated net realizable
value of the assets. We estimated the net realizable values of certain facilities
and direct financing leases held for sale based on outstanding offers to purchase,
appraisals, as well as utilizing various financial models, including discounted
cash flow
19
analyses, less estimated costs to sell each
asset. The resulting impairment loss for these assets totaled $86.1 million.
Included in property and equipment were
costs associated with the development of potential facilities. Based on our strategic
assessment during the fourth quarter of 2000, management decided to abandon further
development of these projects and expense any amounts previously capitalized. The
resulting expense totaled $2.1 million.
During the third quarter of 2000, our management
determined either not to pursue further development or to reconsider the use of
certain parcels of property in California, Maryland and the District of Columbia.
Accordingly, we reduced the carrying values of the land to their estimated net
realizable value, resulting in an impairment loss totaling $19.2 million.
In December 1999, based on the poor financial
position of Operating Company, we determined that three of our correctional and
detention facilities located in the State of Kentucky and leased to Operating Company
were impaired. In accordance with SFAS 121, we reduced the carrying values of the
underlying assets to their estimated fair values, as determined based on anticipated
future cash flows discounted at rates commensurate with the risks involved. The
resulting impairment loss totaled $76.4 million.
Equity in earnings (loss) and amortization
of deferred gains, net
For the year ended December 31, 2000, equity
in losses and amortization of deferred gains, net, was $11.6 million, compared with
equity in earnings and amortization of deferred gains, net, of $3.6 million in 1999.
For the year ended December 31, 2000, we recognized equity in losses of PMSI and
JJFMSI of approximately $12,000 and $870,000, respectively through August 31, 2000.
In addition, we recognized equity in losses of Operating Company of approximately
$20.6 million. For 2000, the amortization of the deferred gain on the sales of
contracts to PMSI and JJFMSI was approximately $6.5 million and $3.3 million, respectively.
For the year ended December 31, 1999, we
recognized twelve months of equity in earnings of PMSI and JJFMSI of $4.7 million
and $7.5 million, respectively, and received distributions from PMSI and JJFMSI
of $11.0 million and $10.6 million, respectively. In addition, we recognized equity
in losses of Operating Company of $19.3 million. For 1999, the amortization of
the deferred gain on the sales of contracts to PMSI and JJFMSI was $7.1 million
and $3.6 million, respectively.
Interest expense, net
Interest expense, net, was reported net
of interest income and capitalized interest for the years ended December 31, 2000
and 1999. Gross interest expense was $145.0 million and $51.9 million for the years
ended December 31, 2000 and 1999, respectively. Gross interest expense was based
on outstanding convertible subordinated notes payable balances, borrowings under
our Old Senior Bank Credit Facility, our operating subsidiary revolving credit facility,
our 12% Senior Notes, and amortization of loan costs and unused facility fees.
Interest expense was reported net of capitalized interest on construction in progress
of $8.3 million and $37.7 million for the years ended December 31, 2000 and 1999,
respectively. The increase in gross interest expense related to: (i) higher average
debt balances outstanding, primarily related to our Old Senior Bank Credit Facility;
(ii) increased interest rates due to rising market rates, and increases in contractual
rates associated with our Old Senior Bank Credit Facility due to modifications to
the facility agreement in August 1999, the June 2000 waiver and amendment and reductions
to our credit rating; (iii) increased interest rates due to the accrual of default
interest on our Old Senior Bank Credit Facility and default and contingent interest
on the $40 million convertible notes during 2000; and (iv) the assumption of the
Operating Company revolving credit facility.
20
Gross interest income was $13.5 million
and $6.9 million for the years ended December 31, 2000 and 1999, respectively.
Gross interest income was earned on cash used to collateralize letters of credit
for certain construction projects, direct financing leases and investments of cash
and cash equivalents.
The increase in gross interest income in
2000 compared with 1999 was primarily due to interest earned on the direct financing
lease with Agecroft Prison Management, Ltd., or APM. During January 2000, we completed
construction, at a cost of approximately $89.4 million, of an 800-bed medium-security
prison in Salford, England and entered into a 25-year direct financing lease with
APM. This asset was included in “assets held for sale” on the combined
and consolidated balance sheet at December 31, 2000. On April 10, 2001, we sold
our interest in this facility.
Other income
Other income for the year ended December
31, 2000 totaled $3.1 million. In September 2000, we received approximately $4.5
million in final settlement of amounts held in escrow related to the 1998 acquisition
of the outstanding capital stock of U.S. Corrections Corporation. The $3.1 million
represented the proceeds, net of miscellaneous receivables arising from claims against
the escrow.
Loss on disposals of assets
We incurred a loss on sales of assets during
2000 and 1999, of approximately $1.7 million and $2.0 million, respectively. During
the fourth quarter of 2000, JJFMSI sold its 50% interest in CCA Australia resulting
in a $3.6 million loss. This loss was offset by a gain of $0.6 million resulting
from the sale of a correctional facility located in Kentucky, a gain of $1.6 million
on the sale of JJFMSI’s 50% interest in U.K. Detention Services Limited and
a loss of $0.3 million resulting from the abandonment of a project under development.
For the year ended December 31, 1999, we
incurred a loss of $1.6 million as a result of a settlement with the State of South
Carolina for property previously owned by our predecessor. Under the settlement,
we, as the successor by merger on December 31, 1998, received $6.5 million in three
installments expiring June 30, 2001 for the transferred assets. The net proceeds
were approximately $1.6 million less than the surrendered assets’ depreciated
book value. We received $3.5 million of the proceeds during 1999 and $1.5 million
during each of 2000 and 2001. In addition, we incurred a loss of $0.4 million resulting
from a sale of a newly constructed facility in Florida. We completed construction
on the facility in May 1999. In accordance with the terms of the management contract
between our predecessor and Polk County, Florida, Polk County exercised an option
to purchase the facility. We received net proceeds of $40.5 million.
Unrealized foreign currency transaction
loss
In connection with the construction and
development of the Agecroft facility, located in Salford, England, during the first
quarter of 2000, we entered into a 25-year property lease. We accounted for the
lease as a direct financing lease and recorded a receivable equal to the discounted
cash flows to be received over the lease term. We also extended a working capital
loan to the operator of this facility. These assets, along with various other short-term
receivables, were denominated in British pounds; consequently, we adjusted these
receivables to the current exchange rate at each balance sheet date, and recognized
the currency gain or loss in current period earnings. Due to negative fluctuations
in foreign currency exchange rates between the British pound and the U.S. dollar,
we recognized net unrealized foreign currency transaction losses of $8.1 million
for the year ended December 31, 2000. On April 10, 2001 we sold our interest in
the Agecroft facility.
21
Stockholder litigation settlement
In February 2001, we received court approval
of the revised terms of the definitive settlement agreements regarding the settlement
of all outstanding stockholder litigation against us and certain of our existing
and former directors and executive officers. Pursuant to the terms of the settlement,
we agreed to issue to the plaintiffs an aggregate of 4.7 million shares of common
stock, as adjusted for the reverse stock split in May 2001, and a subordinated promissory
note in the aggregate principal amount of $29.0 million.
As of December 31, 2000, we had accrued
the estimated obligation of the contingency associated with the stockholder litigation,
amounting to approximately $75.4 million.
Write-off of loan costs
As a result of an amendment to our Old Senior
Bank Credit Facility on August 4, 1999, we wrote-off loan costs of approximately
$9.0 million during the year ended December 31, 1999. Additionally, we paid approximately
$5.6 million to a financial advisor for a potential debt transaction, which was
written-off when the transaction was abandoned.
Income taxes
Prior to 1999, our predecessor operated
as a taxable subchapter C corporation. We elected to change our tax status from
a taxable corporation to a real estate investment trust effective with the filing
of our 1999 federal income tax return. As of December 31, 1998, our balance sheet
reflected $83.2 million in net deferred tax assets. In accordance with the provisions
of SFAS 109, we provided a provision for these deferred tax assets, excluding any
estimated tax liabilities required for prior tax periods, upon completion of the
1999 merger and the election to be taxed as a real estate investment trust. As
such, our results of operations reflected a provision for income taxes of $83.2
million for the year ended December 31, 1999. However, due to our tax status as
a real estate investment trust, we recorded no income tax provision or benefit related
to operations for the year ended December 31, 1999.
In connection with the restructuring, on
September 12, 2000, our stockholders approved an amendment to our charter to remove
provisions requiring us to elect to qualify and be taxed as a real estate investment
trust for federal income tax purposes effective January 1, 2000. As a result of
the amendment to our charter, we have been taxed as a taxable subchapter C corporation
beginning with our taxable year ended December 31, 2000. In accordance with the
provisions of SFAS 109, we were required to establish current and deferred tax assets
and liabilities in our financial statements in the period in which a change of tax
status occurred. As such, our benefit for income taxes for the year ended December
31, 2000 included the provision associated with establishing the deferred tax assets
and liabilities in connection with the change in tax status during the third quarter
of 2000, net of a valuation allowance applied to certain deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, we adopted SFAS
142, which establishes new accounting and reporting requirements for goodwill and
other intangible assets. Under SFAS 142, all goodwill amortization ceased effective
January 1, 2002 (for the year ended December 31, 2001 goodwill amortization was
$7.6 million) and goodwill attributable to each of our reporting units was tested
for impairment by comparing the fair value of each reporting unit with its carrying
value. Fair value was determined using a collaboration of various common valuation
techniques, including market multiples, discounted cash flows, and replacement cost
methods. These impairment tests are required to be performed at adoption of SFAS
142 and at least annually
22
thereafter. On an ongoing basis (absent any impairment
indicators), we expect to perform our impairment tests during our fourth quarter,
in connection with our annual budgeting process.
Based on our initial impairment tests, we
recognized an impairment of $80.3 million to write-off the carrying value of goodwill
associated with our owned and managed facilities during the first quarter of 2002.
This goodwill was established in connection with the acquisition of Operating Company.
The remaining goodwill, which is associated with the facilities we manage but do
not own, was deemed to be not impaired, and remains recorded on the balance sheet.
This remaining goodwill was established in connection with the acquisitions of
PMSI and JJFMSI. The implied fair value of goodwill of the owned and managed reporting
segment did not support the carrying value of any goodwill, primarily due to its
highly leveraged capital structure. No impairment of goodwill allocated to the
managed-only reporting segment was deemed necessary, primarily because of the relatively
minimal capital expenditure requirements, and therefore indebtedness, in connection
with obtaining such management contracts. Under SFAS 142, the impairment recognized
at adoption of the new rules was reflected as a cumulative effect of accounting
change in our statement of operations for the first quarter of 2002. Impairment
adjustments recognized after adoption, if any, are required to be recognized as
operating expenses.
In August 2001, the Financial Accounting
Standards Board, or FASB, issued Statement of Financial Accounting Standards No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
or SFAS 144. SFAS 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes SFAS 121, and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting
the Results of Operations – Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions,” or APB 30, for the disposal of a segment of a business (as previously
defined in that Opinion). SFAS 144 retains the fundamental provisions of SFAS 121
for recognizing and measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS 121. Unlike SFAS 121, however, an impairment
assessment under SFAS 144 will never result in a write-down of goodwill. Rather,
goodwill is evaluated for impairment under SFAS 142. SFAS 144 also broadens the
scope of defining discontinued operations. The provisions of SFAS 144 are effective
for financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. Under the provisions of SFAS 144,
the identification and classification of a facility as held for sale, or the termination
of any of our management contracts for a managed-only facility, by expiration or
otherwise, would result in the classification of the operating results of such facility,
net of taxes, as a discontinued operation, so long as the financial results can
be clearly identified, and so long as we do not have any significant continuing
involvement in the operations of the component after the disposal or termination
transaction. We adopted SFAS 144 on January 1, 2002.
Due to the sale of our interest in a juvenile
facility during the second quarter of 2002, as well as the termination of our management
contracts during the second quarter of 2002 for the Ponce Young Adult Correctional
Facility and the Ponce Adult Correctional Facility and the termination of our management
contract during the third quarter of 2002 for the Guayama Correctional Center, in
accordance with SFAS 144, the operations of these facilities, net of taxes, have
been reported as discontinued operations in our 2002 financial statements. In addition,
in accordance with SFAS 144, the operating results for these facilities for the
prior comparable periods presented, which consists of the year ended December 31,
2001, have also been reclassified as discontinued operations. Because the 1999
and 2000 financial statements are not comparable to the 2001 financial statements,
as further explained in Note 4 to the financial statements, and because the reclassification
of discontinued operations is not material in those years, the reclassification
was not made to the 1999 and 2000 financial statements.
In April 2002, the FASB issued Statement
of Financial Accounting Standards No. 145, “Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,”
or SFAS 145. SFAS 145 rescinds Statement of Financial Accounting Standards No.
4, “Reporting Gains and Losses
23
from Extinguishment of Debt,” or SFAS 4,
which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect. As a result, the criteria in APB 30 will now be used to classify those
gains and losses. SFAS 145 amends SFAS 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. SFAS 145 also makes technical
corrections to existing pronouncements. While those corrections are not substantive
in nature, in some instances, they may change accounting practice. The provisions
of SFAS 145 are effective for financial statements issued for fiscal years beginning
after May 15, 2002, and interim periods within those fiscal years.
During the second quarter of 2002, prior
to the required adoption of SFAS 145, we reported an extraordinary charge of approximately
$36.7 million associated with the refinancing of our senior debt in May 2002. Under
SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods that does not meet the criteria in APB 30 for classification
as an extraordinary item shall be reclassified. We plan to adopt SFAS 145 on January
1, 2003. Accordingly, in financial reporting periods after adoption, the extraordinary
charge reported in the second quarter of 2002 will be reclassified.
In June 2002, the FASB issued Statement
of Financial Accounting Standards No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities,” or SFAS 146. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring),” or Issue 94-3. SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the liability
is incurred. Under Issue 94-3, a liability for an exit cost as generally defined
in Issue 94-3 was recognized at the date of an entity’s commitment to an exit
plan. The provisions of SFAS 146 are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
Adoption of SFAS 146 is not expected to have a material impact on our financial
statements.
INFLATION
We do not believe that inflation has had
or will have a direct adverse effect on our operations. Many of our management
contracts include provisions for inflationary indexing, which mitigates an adverse
impact of inflation on net income. However, a substantial increase in personnel
costs, 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Our primary market risk exposure is to changes
in U.S. interest rates and fluctuations in foreign currency exchange rates between
the U.S. dollar and the British pound. We are exposed to market risk related to
our New Senior Bank Credit Facility and certain other indebtedness. The interest
on our New Senior Bank Credit Facility and such other indebtedness is subject to
fluctuations in the market. We were also exposed to market risk related to our
Old Senior Bank Credit Facility prior to its refinancing in May 2002. If the interest
rate for our outstanding indebtedness under our Old Senior Bank Credit Facility
was 100 basis points higher or lower during the year ended December 31, 2001 and
2000, our interest expense would have been increased or decreased by approximately
$5.5 million and $6.0 million, respectively, including the effects of our interest
rate swap arrangements discussed below.
As of December 31, 2001, we had outstanding
$100.0 million of senior notes with a fixed interest rate of 12.0%, $41.1 million
of convertible subordinated notes with a fixed interest rate of 10.0%, $30.0 million
of convertible subordinated notes with a fixed interest rate of 8.0%, $107.5 million
of series A preferred stock with a fixed dividend rate of 8.0% and $96.6 million
of series B preferred stock with a fixed dividend rate of
24
12.0%. Because the interest
and dividend rates with respect to these instruments are fixed, a hypothetical 10.0%
increase or decrease in market interest rates would not have a material impact on
our financial statements.
Our Old Senior Bank Credit Facility required
us to hedge $325.0 million of our floating rate debt on or before August 16, 1999.
We had entered into certain swap arrangements fixing LIBOR at 6.51% (prior to the
applicable spread) on outstanding balances of at least $325.0 million through December
31, 2002. The difference between the floating rate and the swap rate was recognized
in interest expense each period. The change in the fair value of the swap agreement
from period to period was reflected in earnings and was largely due to changing
interest rates and the reduction in the remaining life of the swap during the reporting
period.
In May 2002, we terminated the interest
rate swap agreement at a price of approximately $8.8 million. In addition, in order
to satisfy a requirement of the New Senior Bank Credit Facility, we purchased an
interest rate cap agreement, capping LIBOR at 5.0% (prior to the applicable spread)
on outstanding balances of $200.0 million through the expiration of the cap agreement
on May 20, 2004, for a price of $1.0 million.
We may, from time to time, invest our cash
in a variety of short-term financial instruments. These instruments generally consist
of highly liquid investments with original maturities at the date of purchase between
three and twelve months. While these investments are subject to interest rate risk
and will decline in value if market interest rates increase, a hypothetical 10%
increase or decrease in market interest rates would not materially affect the value
of these investments.
Our exposure to foreign currency exchange
rate risk relates to our construction, development and leasing of the Agecroft facility
located in Salford, England, which was sold in April 2001. We extended a working
capital loan to the operator of this facility, of which we own 50% through a wholly-owned
subsidiary. Such payments to us are denominated in British pounds rather than the
U.S. dollar. As a result, we bear the risk of fluctuations in the relative exchange
rate between the British pound and the U.S. dollar. At December 31, 2001, the receivables
due us and denominated in British pounds totaled 3.9 million British pounds. A
hypothetical 10% increase in the relative exchange rate would have resulted in an
increase of $0.6 million in the value of these receivables and a corresponding unrealized
foreign currency transaction gain, and a hypothetical 10% decrease in the relative
exchange rate would have resulted in a decrease of $0.6 million in the value of
these receivables and a corresponding unrealized foreign currency transaction loss.
25
Report of Independent Auditors
Stockholders
Corrections Corporation of America
We have audited the accompanying consolidated
balance sheet of Corrections Corporation of America and Subsidiaries as of December
31, 2001, and the related consolidated statements of operations, stockholders’
equity and cash flows for the year then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on these
financial statements based on our audit. The combined and consolidated financial
statements of Corrections Corporation of America and Subsidiaries as of December
31, 2001 and 2000, and the related combined and consolidated statements of operations,
cash flows and stockholders’ equity for each of the three years in the period
ended December 31, 2001, were audited by other auditors who have substantially ceased
operations, including providing auditing and accounting services to public companies.
Those auditors a) expressed an unqualified opinion, including an emphasis-of-matter
paragraph referring to the Company’s near-term debt maturities and management’s
plans to address the Company’s liquidity concerns and an explanatory
paragraph that disclosed the change in the Company’s method of accounting for
derivative financial instruments, on those financial statements in their report
dated February 11, 2002, except with respect to the matter discussed in the last
paragraph of Note 16 of those financial statements, as to which the date was March
9, 2002, and b) reported on such financial statements before the reclassification
adjustments included in the accompanying consolidated balance sheet as of December
31, 2001, and the related consolidated statement of operations for the year then
ended, required by Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment and Disposal of Long-Lived Assets, which the Company adopted
in fiscal year 2002.
We conducted our audit in accordance with
auditing standards generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for
our opinion.
As discussed in Note 24 to the consolidated
financial statements, during the second quarter of 2002, the Company completed a
comprehensive refinancing of its debt maturing in December 2002. This successful
refinancing significantly reduced the concerns that existed at December 31, 2001
regarding the Company’s ability to generate or obtain sufficient working capital
resources to satisfy its maturing debt obligations and address its liquidity issues.
Accordingly, we have not included an explanatory paragraph in our report regarding
the Company’s near-term debt maturities and liquidity concerns that existed
at December 31, 2001.
In our opinion, the 2001 financial statements
referred to above present fairly, in all material respects, the consolidated financial
position of Corrections Corporation of America and Subsidiaries at December 31,
2001, and the consolidated results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
As discussed in Note 17 to the consolidated
financial statements, the Company adopted Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, effective January 1, 2001.
/s/Ernst & Young LLP
Nashville, Tennessee
October 28, 2002,
except for paragraphs 12 and 13 of Note 24,
as to which the date is December 27,
2002
26
The below report is a copy of the report
previously issued by Arthur Andersen LLP in conjunction with its audits of Corrections
Corporation of America and Subsidiaries as of, and for the three-year period ended,
December 31, 2001. A copy of this report has been provided as required by the American
Institute of Certified Public Accountant’s Interpretation of Statement on Auditing
Standards No. 58, Reports on Audited Financial Statements, and guidance issued by
the Securities and Exchange Commission in response to the indictment of Arthur Andersen
LLP in March 2002. During 2002, Arthur Andersen LLP substantially ceased operations,
including providing auditing and accounting services to public companies, and, as
such, has not reissued this report. Additionally, Arthur Andersen LLP has not consented
to the use of this audit report. Accordingly, limitations may exist on a) investor’s
rights to sue Arthur Andersen LLP under Section 11 of the Securities Act
for false and misleading financial statements, if any, and the effect, if any, on
the due diligence defense of directors and officers, and b) investor’s
legal rights to sue and recover damages from Arthur Andersen LLP for material misstatements
or omissions, if any, in any registration statements and related prospectuses that
include, or incorporate by reference, financial statements previously audited by
Arthur Andersen LLP.
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To Corrections Corporation of America:
We have audited the accompanying consolidated
balance sheets of CORRECTIONS CORPORATION OF AMERICA (a Maryland corporation)
AND SUBSIDIARIES as of December 31, 2001 and 2000, and the related combined
and consolidated statements of operations, cash flows and stockholders’ equity
for each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
As discussed in Notes 2 and 15, as of December
31, 2001, the Company has $963.6 million of debt outstanding, including $791.9 million
outstanding under the Company’s senior bank credit facility, which matures
on December 31, 2002. Although management has developed plans for addressing the
December 31, 2002 debt maturity as discussed in Notes 2 and 15, there can be no
assurance that management’s plans will be successful and there can be no assurance
that the Company will be able to refinance or renew its debt obligations maturing
on December 31, 2002.
In our opinion, the combined and consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Corrections Corporation of America and subsidiaries as
of December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
As explained in Note 17, upon adoption of
a new accounting pronouncement effective January 1, 2001, the Company changed its
method of accounting for derivative financial instruments.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 11, 2002
(except with respect to the matter discussed
in the last paragraph of Note 16,
as to which the date is March 9, 2002)
27
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
December 30,
|
|
|
2001
|
|
|
2000
|
| |
|
|
|
|
| ASSETS
|
|
|
|
|
Cash and cash equivalents
|
$
|
46,307
|
|
|
$
|
20,889
|
|
Restricted cash
|
|
12,537
|
|
|
|
9,209
|
|
Accounts receivable, net of allowance of $729 and $1,486, respectively
|
|
128,353
|
|
|
|
132,306
|
|
Income tax receivable
|
|
568
|
|
|
|
32,662
|
|
Prepaid expenses and other current assets
|
|
12,651
|
|
|
|
18,726
|
|
Assets held for sale under contract
|
|
—
|
|
|
|
24,895
|
|
Current assets of discontinued operations
|
|
15,915
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
216,331
|
|
|
|
238,687
|
|
Property and equipment, net
|
|
1,566,218
|
|
|
|
1,615,130
|
|
Investment in direct financing leases
|
|
18,873
|
|
|
|
23,808
|
|
Assets held for sale
|
|
22,312
|
|
|
|
138,622
|
|
Goodwill
|
|
104,019
|
|
|
|
109,006
|
|
Other assets
|
|
36,593
|
|
|
|
51,739
|
|
Non-current assets of discontinued operations
|
|
6,934
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,971,280
|
|
|
$
|
2,176,992
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
143,345
|
|
|
$
|
243,312
|
|
Income tax payable
|
|
5,772
|
|
|
|
8,437
|
|
Distributions payable
|
|
15,853
|
|
|
|
9,156
|
|
Fair value of interest rate swap agreement
|
|
13,564
|
|
|
|
—
|
|
Current portion of long-term debt
|
|
792,009
|
|
|
|
14,594
|
|
Current liabilities of discontinued operations
|
|
6,177
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
976,720
|
|
|
|
275,499
|
|
Long-term debt, net of current portion
|
|
171,591
|
|
|
|
1,137,976
|
|
Deferred tax liabilities
|
|
56,511
|
|
|
|
56,450
|
|
Other liabilities
|
|
19,297
|
|
|
|
19,052
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
1,224,119
|
|
|
|
1,488,977
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Preferred stock - $0.01 par value; 50,000 shares authorized:
|
|
|
|
|
|
|
|
Series A - 4,300 shares issued and outstanding;
stated at liquidation preference of $25.00 per share
|
|
107,500
|
|
|
|
107,500
|
|
Series B - 3,948 and 3,297 shares issued and
outstanding at December 31, 2001 and 2000, respectively; stated at liquidation preference of $24.46 per share
|
|
96,566
|
|
|
|
80,642
|
|
Common stock - $0.01 par value; 80,000 and 400,000 shares
authorized; 27,921 and 235,395 shares issued and 27,920 and 235,383 shares
outstanding at December 31, 2001 and 2000, respectively
|
|
279
|
|
|
|
2,354
|
|
Additional paid-in capital
|
|
1,341,958
|
|
|
|
1,299,390
|
|
Deferred compensation
|
|
(3,153
|
)
|
|
|
(2,723
|
)
|
Retained deficit
|
|
(793,236
|
)
|
|
|
(798,906
|
)
|
Treasury stock, 1 and 12 shares, respectively, at cost
|
|
(242
|
)
|
|
|
(242
|
)
|
Accumulated other comprehensive loss
|
|
(2,511
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
747,161
|
|
|
|
688,015
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
$
|
1,971,280
|
|
|
$
|
2,176,992
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these combined and consolidated financial statements.
28
CORRECTIONS CORPORATION OF AMERICA AND
SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per
share amounts)
|
|
For the Years Ended
December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
Management and other
|
$
|
930,635
|
|
|
$
|
261,774
|
|
|
$
|
—
|
|
Rental
|
|
5,718
|
|
|
|
40,938
|
|
|
|
270,134
|
|
Licensing fees from affiliates
|
|
—
|
|
|
|
7,566
|
|
|
|
8,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936,353
|
|
|
|
310,278
|
|
|
|
278,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
721,468
|
|
|
|
217,315
|
|
|
|
—
|
|
General and administrative
|
|
34,568
|
|
|
|
45,463
|
|
|
|
24,125
|
|
Depreciation and amortization
|
|
53,279
|
|
|
|
59,799
|
|
|
|
44,062
|
|
Licensing fees to Operating Company
|
|
—
|
|
|
|
501
|
|
|
|
—
|
|
Administrative service fee to Operating Company
|
|
—
|
|
|
|
900
|
|
|
|
—
|
|
Write-off of amounts under lease arrangements
|
|
—
|
|
|
|
11,920
|
|
|
|
65,677
|
|
Impairment losses
|
|
—
|
|
|
|
527,919
|
|
|
|
76,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
809,315
|
|
|
|
863,817
|
|
|
|
210,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
127,038
|
|
|
|
(553,539
|
)
|
|
|
68,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (INCOME) EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
Equity (earnings) loss and amortization of deferred gain, net
|
|
358
|
|
|
|
11,638
|
|
|
|
(3,608
|
)
|
Interest expense, net
|
|
126,242
|
|
|
|
131,545
|
|
|
|
45,036
|
|
Other income
|
|
—
|
|
|
|
(3,099
|
)
|
|
|
—
|
|
Change in fair value of derivative instruments
|
|
(14,554
|
)
|
|
|
—
|
|
|
|
—
|
|
Loss on disposals of assets
|
|
74
|
|
|
|
1,733
|
|
|
|
1,995
|
|
Unrealized foreign currency transaction loss
|
|
219
|
|
|
|
8,147
|
|
|
|
—
|
|
Stockholder litigation settlements
|
|
—
|
|
|
|
75,406
|
|
|
|
—
|
|
Write-off of loan costs
|
|
—
|
|
|
|
—
|
|
|
|
14,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,339
|
|
|
|
225,370
|
|
|
|
57,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST
|
|
14,699
|
|
|
|
(778,909
|
)
|
|
|
10,546
|
|
Income tax (expense) benefit
|
|
3,358
|
|
|
|
48,002
|
|
|
|
(83,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST
|
|
18,057
|
|
|
|
(730,907
|
)
|
|
|
(72,654
|
)
|
Minority interest in net loss of PMSI and JJFMSI
|
|
—
|
|
|
|
125
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
18,057
|
|
|
|
(730,782
|
)
|
|
|
(72,654
|
)
|
Income from discontinued operations, net of taxes
|
|
7,637
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
25,694
|
|
|
|
(730,782
|
)
|
|
|
(72,654
|
)
|
Distributions to preferred stockholders
|
|
(20,024
|
)
|
|
|
(13,526
|
)
|
|
|
(8,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
|
$
|
5,670
|
|
|
$
|
(744,308
|
)
|
|
$
|
(81,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(0.08
|
)
|
|
$
|
(56.68
|
)
|
|
$
|
(7.06
|
)
|
Income from discontinued operations, net of taxes
|
|
0.31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
$
|
0.23
|
|
|
$
|
(56.68
|
)
|
|
$
|
(7.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these combined and consolidated financial statements.
29
CORRECTIONS CORPORATION OF AMERICA AND
SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
For the Years
Ended December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
25,694
|
|
|
$
|
(730,782
|
)
|
|
$
|
(72,654
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
54,135
|
|
|
|
59,799
|
|
|
|
44,062
|
|
Amortization of debt issuance costs and other non-cash interest
|
|
22,652
|
|
|
|
15,684
|
|
|
|
7,901
|
|
Deferred and other non-cash income taxes
|
|
(3,531
|
)
|
|
|
(13,767
|
)
|
|
|
83,200
|
|
Equity in (earnings) losses and amortization of deferred gain, net
|
|
358
|
|
|
|
11,638
|
|
|
|
(3,608
|
)
|
Write-off of amounts under lease arrangements
|
|
—
|
|
|
|
11,920
|
|
|
|
65,677
|
|
Write-off of loan costs
|
|
—
|
|
|
|
—
|
|
|
|
14,567
|
|
Unrealized foreign currency transaction loss
|
|
219
|
|
|
|
8,147
|
|
|
|
—
|
|
Other non-cash items
|
|
2,579
|
|
|
|
3,595
|
|
|
|
3,679
|
|
Loss on disposals of assets
|
|
74
|
|
|
|
1,733
|
|
|
|
1,995
|
|
Impairment losses
|
|
—
|
|
|
|
527,919
|
|
|
|
76,433
|
|
Change in fair value of derivative instruments
|
|
(14,554
|
)
|
|
|
—
|
|
|
|
—
|
|
Minority interest
|
|
—
|
|
|
|
(125
|
)
|
|
|
—
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, prepaid expenses and other assets
|
|
(6,657
|
)
|
|
|
(4,728
|
)
|
|
|
(2,732
|
)
|
Receivable from affiliates
|
|
—
|
|
|
|
28,864
|
|
|
|
(28,608
|
)
|
Income tax receivable
|
|
32,207
|
|
|
|
(32,662
|
)
|
|
|
(9,490
|
)
|
Accounts payable, accrued expenses and other liabilities
|
|
(22,002
|
)
|
|
|
68,527
|
|
|
|
(32,302
|
)
|
Payable to Operating Company
|
|
—
|
|
|
|
(2,325
|
)
|
|
|
(68,623
|
)
|
Income tax payable
|
|
1,587
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
92,761
|
|
|
|
(46,563
|
)
|
|
|
79,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Additions of property and equipment, net
|
|
(6,435
|
)
|
|
|
(78,663
|
)
|
|
|
(528,935
|
)
|
(Increase) decrease in restricted cash
|
|
(3,328
|
)
|
|
|
15,200
|
|
|
|
(7,221
|
)
|
Payments received on investments in affiliates
|
|
—
|
|
|
|
6,686
|
|
|
|
21,668
|
|
Issuance of note receivable
|
|
—
|
|
|
|
(529
|
)
|
|
|
(6,117
|
)
|
Proceeds from sale of assets and businesses
|
|
140,277
|
|
|
|
6,400
|
|
|
|
43,959
|
|
Increase in other assets
|
|
(1,443
|
)
|
|
|
—
|
|
|
|
3,536
|
|
Cash acquired in acquisitions
|
|
—
|
|
|
|
6,938
|
|
|
|
21,894
|
|
Payments received on direct financing leases and notes receivable
|
|
1,861
|
|
|
|
5,517
|
|
|
|
3,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
130,932
|
|
|
|
(38,451
|
)
|
|
|
(447,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments on) debt, net
|
|
(188,970
|
)
|
|
|
29,089
|
|
|
|
566,558
|
|
Payment of debt issuance costs
|
|
(7,012
|
)
|
|
|
(11,316
|
)
|
|
|
(59,619
|
)
|
Proceeds from issuance of common stock
|
|
—
|
|
|
|
—
|
|
|
|
131,977
|
|
Proceeds from exercise of stock options and warrants
|
|
—
|
|
|
|
—
|
|
|
|
166
|
|
Preferred stock issuance costs
|
|
(20
|
)
|
|
|
(403
|
)
|
|
|
—
|
|
Payment of dividends
|
|
(2,182
|
)
|
|
|
(4,586
|
)
|
|
|
(217,654
|
)
|
Cash paid for fractional shares
|
|
(91
|
)
|
|
|
(11
|
)
|
|
|
—
|
|
Purchase of treasury stock by PMSI and JJFMSI
|
|
—
|
|
|
|
(13,356
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
(198,275
|
)
|
|
|
(583
|
)
|
|
|
421,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
25,418
|
|
|
|
(85,597
|
)
|
|
|
53,352
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
20,889
|
|
|
|
106,486
|
|
|
|
31,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
$
|
46,307
|
|
|
$
|
20,889
|
|
|
$
|
84,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
30
| CORRECTIONS CORPORATION
OF AMERICA AND SUBSIDIARIES
|
| COMBINED AND CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
| (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Years Ended December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
|
1999
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest (net of amounts capitalized
of $0, $8,330 and $37,700 in 2001, 2000 and 1999, respectively)
|
$
|
104,438
|
|
|
$
|
132,798
|
|
|
$
|
28,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
$
|
3,014
|
|
|
$
|
2,453
|
|
|
$
|
9,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
The Company issued shares of Series B Preferred
Stock under the terms of the Company’s 2001 Series B Preferred Stock Restricted Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Series B
|
$
|
4,904
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additional paid-in capital
|
|
(2,869
|
)
|
|
|
—
|
|
|
|
—
|
|
Deferred compensation
|
|
(2,035
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company issued shares of common stock and a promissory
note payable in partial satisfaction of the stockholder litigation
discussed in Note 21, as adjusted for the reverse stock split:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
(69,408
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt
|
|
25,606
|
|
|
|
—
|
|
|
|
—
|
|
Common stock
|
|
187
|
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
43,615
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company issued Series B Preferred Stock in
lieu of cash distributions to the holders of
shares of Series B Preferred Stock on the applicable record date:
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payable
|
$
|
(11,070
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Preferred stock - Series B
|
|
11,070
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company completed construction of
a facility and entered into a direct financing lease:
|
|
|
|
|
|
|
|
|
|
|
|
Investment in direct financing lease
|
$
|
—
|
|
|
$
|
(89,426
|
)
|
|
$
|
—
|
|
Property and equipment
|
|
—
|
|
|
|
89,426
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company committed to
a plan of disposal for certain long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
$
|
—
|
|
|
$
|
(163,517
|
)
|
|
$
|
—
|
|
Investment in direct financing lease
|
|
—
|
|
|
|
85,722
|
|
|
|
—
|
|
Property and equipment
|
|
—
|
|
|
|
77,795
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company issued debt to satisfy accrued
default rate interest on a convertible note and to satisfy a payable for professional services:
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
—
|
|
|
$
|
2,014
|
|
|
$
|
—
|
|
Accounts payable and accrued expenses
|
|
—
|
|
|
|
(2,014
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
|
31
CORRECTIONS CORPORATION OF AMERICA AND
SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
|
|
For the Years Ended December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
Long-term debt was converted into common stock:
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,161
|
|
Long-term debt
|
|
—
|
|
|
|
—
|
|
|
|
(47,000
|
)
|
Common stock
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
Additional paid-in capital
|
|
—
|
|
|
|
—
|
|
|
|
45,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company issued a preferred
stock dividend to satisfy the REIT distribution requirements:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Series B
|
$
|
—
|
|
|
$
|
183,872
|
|
|
$
|
—
|
|
Additional paid-in capital
|
|
—
|
|
|
|
(183,872
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock was converted into common stock:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock - Series B
|
$
|
—
|
|
|
$
|
(105,471
|
)
|
|
$
|
—
|
|
Common stock
|
|
—
|
|
|
|
951
|
|
|
|
—
|
|
Additional paid-in capital
|
|
—
|
|
|
|
104,520
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company acquired the assets
and liabilities of Operating Company, PMSI and JJFMSI for stock:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
—
|
|
|
$
|
(133,667
|
)
|
|
$
|
—
|
|
Receivable from affiliate
|
|
—
|
|
|
|
9,027
|
|
|
|
—
|
|
Income tax receivable
|
|
—
|
|
|
|
(3,781
|
)
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
|
(903
|
)
|
|
|
—
|
|
Property and equipment, net
|
|
—
|
|
|
|
(38,475
|
)
|
|
|
—
|
|
Notes receivable
|
|
—
|
|
|
|
100,756
|
|
|
|
—
|
|
Goodwill
|
|
—
|
|
|
|
(110,596
|
)
|
|
|
—
|
|
Investment in affiliates
|
|
—
|
|
|
|
102,308
|
|
|
|
—
|
|
Deferred tax assets
|
|
—
|
|
|
|
37,246
|
|
|
|
—
|
|
Other assets
|
|
—
|
|
|
|
(11,767
|
)
|
|
|
—
|
|
Accounts payable and accrued expenses
|
|
—
|
|
|
|
103,769
|
|
|
|
—
|
|
Payable to Operating Company
|
|
—
|
|
|
|
(18,765
|
)
|
|
|
—
|
|
Distributions payable
|
|
—
|
|
|
|
31
|
|
|
|
—
|
|
Note payable to JJFMSI
|
|
—
|
|
|
|
4,000
|
|
|
|
—
|
|
Current portion of long-term debt
|
|
—
|
|
|
|
23,876
|
|
|
|
—
|
|
Deferred tax liabilities
|
|
—
|
|
|
|
2,600
|
|
|
|
—
|
|
Deferred gains on sales of contracts
|
|
—
|
|
|
|
(96,258
|
)
|
|
|
—
|
|
Other liabilities
|
|
—
|
|
|
|
25,525
|
|
|
|
—
|
|
Common stock
|
|
—
|
|
|
|
217
|
|
|
|
—
|
|
Additional paid-in capital
|
|
—
|
|
|
|
29,789
|
|
|
|
—
|
|
Deferred compensation
|
|
—
|
|
|
|
(2,884
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
22,048
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company acquired treasury stock and issued
common stock in connection with the exercise of stock options:
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
242
|
|
Treasury stock, at cost
|
|
—
|
|
|
|
—
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
32
CORRECTIONS CORPORATION
OF AMERICA AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
|
|
For the Years Ended December 31,
|
|
|
|
|
|
2001
|
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
The Company acquired Old Prison Realty’s assets and liabilities for stock:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
$
|
—
|
|
|
|
$
|
—
|
|
$
|
(17,188
|
)
|
Property and equipment, net
|
|
—
|
|
|
|
|
—
|
|
|
(1,223,370
|
)
|
Other assets
|
|
—
|
|
|
|
|
—
|
|
|
22,422
|
|
Accounts payable and accrued expenses
|
|
—
|
|
|
|
|
—
|
|
|
23,351
|
|
Deferred gains on sales of contracts
|
|
—
|
|
|
|
|
—
|
|
|
(125,751
|
)
|
Long-term debt
|
|
—
|
|
|
|
|
—
|
|
|
279,600
|
|
Distributions payable
|
|
—
|
|
|
|
|
—
|
|
|
2,150
|
|
Common stock
|
|
—
|
|
|
|
|
—
|
|
|
253
|
|
Preferred stock
|
|
—
|
|
|
|
|
—
|
|
|
107,500
|
|
Additional paid-in capital
|
|
—
|
|
|
|
|
—
|
|
|
952,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
$
|
21,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these combined and consolidated financial statements.
33
CORRECTIONS CORPORATION OF
AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands)
|
|
Series A
Preferred
Stock
|
|
Series B
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Deferred
Compensation
|
|
Retained
Earnings
(Deficit)
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 1998
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
398,493
|
|
|
$
|
—
|
|
|
$
|
52,693
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
451,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Old Prison Realty
|
|
107,500
|
|
|
|
—
|
|
|
|
253
|
|
|
|
952,927
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,060,680
|
|
Effect of election of
status as a real estate investment trust
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
52,693
|
|
|
|
—
|
|
|
|
(52,693
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
|
|
131,898
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
131,977
|
|
Issuance of restricted stock
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
468
|
|
|
|
(293
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175
|
|
Stock options exercised
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
406
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(242
|
)
|
|
|
—
|
|
|
|
166
|
|
Conversion of long-term debt
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
45,789
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,839
|
|
Shares issued to trustees
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125
|
|
Compensation expense
related to deferred stock awards and stock options
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
229
|
|
|
|
202
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
431
|
|
Net loss
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(83,200
|
)
|
|
|
—
|
|
|
|
10,546
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(72,654
|
)
|
Distributions to stockholders
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(152,510
|
)
|
|
|
—
|
|
|
|
(65,144
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(217,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 1999
|
$
|
107,500
|
|
|
$
|
—
|
|
|
$
|
1,184
|
|
|
$
|
1,347,318
|
|
|
$
|
(91
|
)
|
|
$
|
(54,598
|
)
|
|
$
|
(242
|
)
|
|
$
|
—
|
|
|
$
|
1,401,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Operating Company
|
|
—
|
|
|
|
—
|
|
|
|
188
|
|
|
|
28,580
|
|
|
|
(1,646
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,122
|
|
Acquisition of PMSI
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
|
|
537
|
|
|
|
(550
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Acquisition of JJFSMI
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
|
|
672
|
|
|
|
(688
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Distribution to common stockholders
|
|
—
|
|
|
|
183,872
|
|
|
|
—
|
|
|
|
(184,275
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(403
|
)
|
Conversion of series B
preferred stock into common stock, net
|
|
—
|
|
|
|
(105,482
|
)
|
|
|
951
|
|
|
|
104,520
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
Compensation expense
related to deferred stock awards and stock options
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2,043
|
|
|
|
171
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,216
|
|
Forfeiture of restricted stock
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(81
|
)
|
|
|
81
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Shares issued to trustees
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76
|
|
Dividends on preferred stock
|
|
—
|
|
|
|
2,252
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,526
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,274
|
)
|
Net loss
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(730,782
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(730,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2000
|
$
|
107,500
|
|
|
$
|
80,642
|
|
|
$
|
2,354
|
|
|
$
|
1,299,390
|
|
|
$
|
(2,723
|
)
|
|
$
|
(798,906
|
)
|
|
$
|
(242
|
)
|
|
$
|
—
|
|
|
$
|
688,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
34
CORRECTIONS CORPORATION OF
AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(in thousands)
(Continued)
|
|
Series A
Preferred
Stock
|
|
Series B
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Deferred
Compensation
|
|
Retained
Earnings
(Deficit)
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2000
|
$
|
107,500
|
|
|
$
|
80,642
|
|
|
$
|
2,354
|
|
|
$
|
1,299,390
|
|
|
$
|
(2,723
|
)
|
|
$
|
(798,906
|
)
|
|
$
|
(242
|
)
|
|
$
|
—
|
|
|
$
|
688,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,694
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,694
|
|
Cumulative effect of accounting change
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,023
|
)
|
|
|
(5,023
|
)
|
Amortization of transition adjustment
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,512
|
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,694
|
|
|
|
—
|
|
|
|
(2,511
|
)
|
|
|
23,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to preferred stockholders
|
|
—
|
|
|
|
11,070
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,024
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,954
|
)
|
Issuance of common stock under terms of
stockholder litigation
|
|
—
|
|
|
|
—
|
|
|
|
187
|
|
|
|
43,615
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,802
|
|
Amortization of deferred compensation
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
1,305
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,305
|
|
Restricted stock issuances, net of forfeitures
|
|
—
|
|
|
|
4,904
|
|
|
|
—
|
|
|
|
(3,179
|
)
|
|
|
(1,735
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
Reverse stock split
|
|
—
|
|
|
|
—
|
|
|
|
(2,265
|
)
|
|
|
2,240
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25
|
)
|
Other
|
|
—
|
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
(105
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2001
|
$
|
107,500
|
|
|
$
|
96,566
|
|
|
$
|
279
|
|
|
$
|
1,341,958
|
|
|
$
|
(3,153
|
)
|
|
$
|
(793,236
|
)
|
|
$
|
(242
|
)
|
|
$
|
(2,511
|
)
|
|
$
|
747,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these combined and consolidated financial statements.
35
CORRECTIONS CORPORATION
OF AMERICA AND SUBSIDIARIES
NOTES TO COMBINED AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000
AND 1999
| 1.
|
ORGANIZATION
AND OPERATIONS
|
|
|
|
|
|
As of December
31, 2001, the Company owned 39 correctional, detention and juvenile facilities,
three of which the Company leased to other operators, and two additional facilities
which are not yet in operation. The Company also had a leasehold interest in a
juvenile facility. At December 31, 2001, the Company operated 64 facilities, including
36 facilities that it owned, with a total design capacity of approximately 61,000
beds in 21 states, the District of Columbia and Puerto Rico. See Note 24 for further
discussion of management contract terminations subsequent to December 31, 2001.
|
|
|
|
|
|
The Company
specializes in owning, operating and managing prisons and other correctional facilities
and providing inmate residential and prisoner transportation services for governmental
agencies. In addition to providing the fundamental residential services relating
to inmates, the Company’s facilities offer a variety of rehabilitation and
educational programs, including basic education, religious services, life skills
and employment training and substance abuse treatment. These services are intended
to help reduce recidivism and to prepare inmates for their successful reentry into
society upon their release. The Company also provides health care (including medical,
dental and psychiatric services), food services and work and recreational programs.
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The Company’s
website address is www.correctionscorp.com. The Company makes its
Form 10-K, Form 10-Q, and Form 8-K reports 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”).
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Background
and Formation Transactions
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Corrections
Corporation of America (together with its subsidiaries, the “Company”),
a Maryland corporation formerly known as Prison Realty Trust, Inc. (“New Prison
Realty”), commenced operations as Prison Realty Corporation on January 1, 1999,
following its mergers with each of the former Corrections Corporation of America,
a Tennessee corporation (“Old CCA”), on December 31, 1998 and CCA Prison
Realty Trust, a Maryland real estate investment trust (“Old Prison Realty”),
on January 1, 1999 (such mergers referred to collectively herein as the “1999
Merger”).
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Prior to
the 1999 Merger, Old Prison Realty had been a publicly traded entity operating as
a real estate investment trust, or REIT, primarily in the business of owning and
leasing prison facilities to private prison management companies and certain government
entities. Prior to the 1999 Merger, Old CCA was also a publicly traded entity primarily
in the business of owning, operating and managing prisons on behalf of government
entities (as discussed further herein). Additionally, Old CCA had been Old Prison
Realty’s primary tenant.
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Immediately
prior to the 1999 Merger, Old CCA sold all of the issued and outstanding capital
stock of certain wholly-owned corporate subsidiaries of Old CCA, certain management
contracts and certain other non-real estate assets related thereto, to a newly formed
entity, Correctional Management Services Corporation, a privately-held Tennessee
corporation (“Operating
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Company”). Also immediately prior to the 1999
Merger, Old CCA sold certain management contracts and other assets and liabilities
relating to government owned adult facilities to Prison Management Services, LLC
(subsequently merged with Prison Management Services, Inc.) and sold certain management
contracts and other assets and liabilities relating to government owned jails and
juvenile facilities to Juvenile and Jail Facility Management Services, LLC (subsequently
merged with Juvenile and Jail Facility Management Services, Inc.). Refer to Note
3 for a more detailed discussion of these transactions occurring immediately prior
to the 1999 Merger.
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Effective
January 1, 1999, New Prison Realty elected to qualify as a REIT for federal income
tax purposes commencing with its taxable year ended December 31, 1999. Also effective
January 1, 1999, New Prison Realty entered into lease agreements and other agreements
with Operating Company, whereby Operating Company would lease the substantial majority
of New Prison Realty’s facilities and Operating Company would provide certain
services to New Prison Realty. Refer to Note 6 for a more complete discussion of
New Prison Realty’s historical relationship with Operating Company.
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During
2000, the Company completed a comprehensive restructuring (the “Restructuring”).
As part of the Restructuring, Operating Company was merged with and into
a wholly-owned subsidiary of the Company on October 1, 2000 (the “Operating
Company Merger”). Immediately prior to the Operating Company Merger, Operating
Company leased from New Prison Realty 35 correctional and detention facilities.
Also in connection with the Restructuring, the Company amended its charter to,
among other things, remove provisions relating to the Company’s operation and
qualification as a REIT for federal income tax purposes commencing with its 2000
taxable year and change its name to “Corrections Corporation of America.”
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From December
31, 1998 until December 1, 2000, the Company owned 100% of the non-voting common
stock of Prison Management Services, Inc. (“PMSI”) and Juvenile and Jail
Facility Management Services, Inc. (“JJFMSI”), both of which were privately-held
service companies which managed certain government-owned prison and jail facilities
under the “Corrections Corporation of America” name (together, the “Service
Companies”). The Company was entitled to receive 95% of each company’s
net income, as defined, as dividends on such shares, while other outside shareholders
and the wardens at the individual facilities owned 100% of the voting common stock
of PMSI and JJFMSI, entitling those voting stockholders to receive the remaining
5% of each company’s net income, as defined, as dividends on such shares.
During September 2000, wholly-owned subsidiaries of PMSI and JJFMSI entered into
separate transactions with each of PMSI’s and JJFMSI’s respective non-management,
outside shareholders to reacquire all of the outstanding voting stock of their non-management,
outside shareholders, representing 85% of the outstanding voting stock of each entity
for cash payments of $8.3 million and $5.1 million, respectively.
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On December
1, 2000, the Company completed the acquisitions of PMSI and JJFMSI. PMSI provided
adult prison facility management services to government agencies pursuant to management
contracts with state governmental agencies and authorities in the United States
and Puerto Rico. Immediately prior to the acquisition date, PMSI had contracts
to manage 11 correctional and detention facilities. JJFMSI provided juvenile and
jail facility management services to government agencies pursuant to management
contracts with federal, state and local government agencies and authorities in the
United States and Puerto Rico and provided adult prison facility management services
to certain international authorities in Australia and the United Kingdom. Immediately
prior to the acquisition date, JJFMSI had contracts to manage 17 correctional and
detention facilities.
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Operations
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Prior to
the 1999 Merger, Old CCA operated and managed prisons and other correctional and
detention facilities and provided prisoner transportation services for governmental
agencies. Old CCA also provided a full range of related services to governmental
agencies, including managing, financing, developing, designing and constructing
new correctional and detention facilities and redesigning and renovating older facilities.
Following the completion of the 1999 Merger and through September 30, 2000, New
Prison Realty specialized in acquiring, developing, owning and leasing correctional
and detention facilities. Following the completion of the 1999 Merger and through
September 30, 2000, Operating Company was a separately owned private prison management
company that operated, managed and leased the substantial majority of facilities
owned by New Prison Realty. As a result of the 1999 Merger and certain contractual
relationships existing between New Prison Realty and Operating Company, New Prison
Realty was dependent on Operating Company for a significant source of its income.
In addition, New Prison Realty paid Operating Company for services rendered to
New Prison Realty in the development of its correctional and detention facilities.
As a result of liquidity issues facing Operating Company and New Prison Realty,
the parties amended certain of the contractual agreements between New Prison Realty
and Operating Company during 2000. For a more complete description of these amendments,
see Note 6.
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As a result
of the acquisition of Operating Company on October 1, 2000 and the acquisitions
of PMSI and JJFMSI on December 1, 2000, the Company now specializes in owning, operating
and managing prisons and other correctional facilities and providing inmate residential
and prisoner transportation services for governmental agencies. In addition to
providing the fundamental residential services relating to inmates, the Company’s
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 help reduce recidivism and to prepare
inmates for their successful reentry into society upon their release. The Company
also provides health care (including medical, dental and psychiatric services),
food services and work and recreational programs.
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| 2.
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FINANCIAL
DEVELOPMENTS
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After completion
of the first quarter of 1999, the first quarter in which operations were conducted
in the structure after the 1999 Merger, management of the Company and management
of Operating Company determined that Operating Company had not performed as well
as projected for several reasons: occupancy rates at its facilities were lower than
in 1998; operating expenses were higher as a percentage of revenue than in 1998;
and certain aspects of the Operating Company Leases (as defined in Note 6) adversely
affected Operating Company. As a result, in May 1999, the Company and Operating
Company amended certain of the agreements between them to provide Operating Company
with additional cash flow. See Note 6 for further discussion of these amendments.
The objective of these changes was to allow Operating Company to be able to continue
to make its full lease payments, to allow the Company to continue to make dividend
payments to its stockholders and to provide time for Operating Company to improve
its operations so that it might ultimately perform as projected and be able to make
its full lease payments to the Company.
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However,
after these changes were announced, a chain of events occurred which adversely affected
both the Company and Operating Company. The Company’s stock price fell dramatically,
resulting in the commencement of stockholder litigation against the Company and
its former directors and officers. These events made it more difficult to raise
capital. A lower stock price meant that the Company had more restricted access
to equity capital, and the uncertainties caused by the falling
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stock price made
it much more difficult to obtain debt financing. As described in Note 21, the stockholder
lawsuits were settled in 2001.
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In order
to address its liquidity constraints, during the summer of 1999, the Company increased
its credit facility (the “Senior Bank Credit Facility,” as also defined
in Note 15) from $650.0 million to $1.0 billion. One of the financing requirements
in connection with this increase required that the Company raise $100.0 million
in equity and Operating Company raise $25.0 million in equity in order for the Company
to make the distributions in cash that would be necessary to enable the Company
to qualify as a REIT with respect to its 1999 taxable year. See Note 15 for a further
discussion of the Company’s Senior Bank Credit Facility.
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In a further
attempt to address the capital and liquidity constraints facing the Company and
Operating Company, as well as concerns regarding the corporate structure and management
of the Company, management elected to pursue strategic alternatives for the Company,
including a restructuring led by a group of institutional investors consisting of
an affiliate of Fortress Investment Group LLC and affiliates of The Blackstone Group
(“Fortress/Blackstone”). Shortly after announcing the proposal led by
Fortress/Blackstone, the Company received an unsolicited proposal from Pacific Life
Insurance Company (“Pacific Life”). Fortress/Blackstone elected not to
match the terms of the proposal from Pacific Life. Consequently, the securities
purchase agreement with Fortress/Blackstone was terminated, and the Company entered
into an agreement with Pacific Life. The Pacific Life securities purchase agreement
was mutually terminated by the parties after Pacific Life was unwilling to confirm
that a waiver and amendment of the Senior Bank Credit Facility obtained in June
2000 satisfied the terms of the agreement with Pacific Life. The Company also terminated
the services of one of its financial advisors. See Note 21 for further information
regarding the Company’s 2001 settlement of disputes arising from its previous
agreements with Fortress/Blackstone, Pacific Life, and the Company’s financial
advisor.
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Consequently,
the Company determined to pursue a comprehensive restructuring without a third-party
equity investment, and approved a series of agreements providing for the comprehensive
restructuring of the Company (the “Restructuring”). As further discussed
in Note 15, the Restructuring included obtaining amendments to, and a waiver of
existing defaults under, the Company’s Senior Bank Credit Facility in June
2000 (the “June 2000 Waiver and Amendment”). The June 2000 Waiver and
Amendment resulted from the financial condition of the Company and Operating Company,
the transactions undertaken by the Company and Operating Company in an attempt to
resolve the liquidity issues of the Company and Operating Company, and the previously
announced restructuring transactions. In obtaining the June 2000 Waiver and Amendment,
the Company agreed to complete certain transactions which were incorporated as covenants
to the June 2000 Waiver and Amendment. Pursuant to these requirements, the Company
was obligated to complete the Restructuring, including the Operating Company Merger,
as further discussed in Note 3; the amendment of its charter to remove the requirements
that it elect to be taxed as a REIT commencing with its 2000 taxable year, as further
discussed in Note 16; the restructuring of management; and the distribution of shares
of Series B Cumulative Convertible Preferred Stock, $0.01 par value per share (the
“Series B Preferred Stock”), in satisfaction of the Company’s remaining
1999 REIT distribution requirement, as further discussed in Notes 14 and 19. As
further discussed in Note 3, the June 2000 Waiver and Amendment also permitted the
acquisitions of PMSI and JJFMSI. The Restructuring provided for a simplified corporate
and financial structure while eliminating conflicts arising out of the landlord-tenant
and debtor-creditor relationship that existed between the Company and Operating
Company.
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In order
to address existing and potential events of default under the Company’s convertible
subordinated notes resulting from the Company’s financial condition and as
a result of the proposed
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restructurings, during
the second quarter of 2000, the
Company obtained waivers and amendments to the provisions of the note purchase agreements
governing the notes, as further discussed in Note 15. In order to address existing
and potential events of default under the Operating Company’s revolving credit
facility resulting from the financial condition of Operating Company and certain
restructuring transactions, during the first quarter of 2000, Operating Company
obtained a waiver of events of default, as further discussed in Note 15.
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During
the third quarter of 2000, the Company named a new president and chief executive
officer, followed by a new chief financial officer in the fourth quarter. At the
Company’s 2000 annual meeting of stockholders held during the fourth quarter
of 2000, the Company’s stockholders elected a newly constituted board of directors
of the Company, including a majority of independent directors. During 2001, one
of these directors resigned from the board of directors, while two additional directors
were appointed to the board of directors, resulting in a ten-member board.
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Following
the completion of the Operating Company Merger and the acquisitions of PMSI and
JJFMSI, during the fourth quarter of 2000, the Company’s new management conducted
strategic assessments; developed a strategic operating plan to improve the Company’s
financial position; developed revised projections for 2001; and evaluated
the utilization of existing facilities, projects under development, excess land
parcels, and identified certain of these non-strategic assets for sale. As a result
of these assessments, the Company recorded non-cash impairment losses totaling $508.7
million, as further discussed in Note 8.
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As further
discussed in Note 15, during the fourth quarter of 2000, the Company obtained a
consent and amendment to its Senior Bank Credit Facility to replace existing financial
covenants. During the first quarter of 2001, the Company also obtained amendments
to the Senior Bank Credit Facility, as further discussed in Note 15, to modify the
financial covenants to take into consideration any loss of EBITDA, or earnings before
interest, taxes, depreciation and amortization, as further defined in the terms
of the Senior Bank Credit Facility, that may result from certain asset dispositions
during 2001 and subsequent periods and to permit the issuance of indebtedness in
partial satisfaction of its obligations in the stockholder litigation settlement.
Also, during the first quarter of 2001, the Company amended the provisions to the
note purchase agreement governing its $30.0 million convertible subordinated notes
to replace previously existing financial covenants, as further discussed in Note
15, in order to remove existing defaults and attempt to remain in compliance during
2001 and subsequent periods.
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Additionally,
the Company also has certain non-financial covenants which must be met in order
to remain in compliance with its debt agreements. For example, the Company’s
Senior Bank Credit Facility contained a non-financial covenant requiring the Company
to consummate the securitization of lease payments (or other similar transaction)
with respect to the Company’s Agecroft facility located in Salford, England.
On April 10, 2001, the Company consummated the Agecroft transaction through the
sale of all of the issued and outstanding capital stock of Agecroft Properties,
Inc., a wholly-owned subsidiary of the Company, thereby fulfilling the Company’s
covenant requirements with respect to the Agecroft transaction.
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The Senior
Bank Credit Facility also contained a non-financial covenant requiring the Company
to provide the lenders with audited financial statements within 90 days of the Company’s
fiscal year end, subject to an additional five-day grace period. Due to
the Company’s attempts to close the Agecroft transaction discussed above, the
Company did not provide the audited financial statements within the required time
period. However, the Company obtained a waiver from the lenders under the Senior
Bank Credit Facility of this financial reporting requirement. This waiver also
cured the resulting cross-default under the Company’s $41.1 million convertible
subordinated notes.
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Additional
non-financial covenants, among others, included a requirement to use commercially
reasonable efforts to (i) raise $100.0 million through equity or asset sales (excluding
the securitization of lease payments or other similar transaction with respect to
the Agecroft facility) on or before June 30, 2001, and (ii) register shares into
which the $41.1 million convertible subordinated notes are convertible. The Company
had considered a distribution of rights to purchase common or preferred stock to
the Company’s existing stockholders, or an equity investment in the Company
from an outside investor. However, the Company determined that it was not commercially
reasonable to issue additional equity or debt securities, other than those securities
for which the Company had already contractually agreed to issue, including primarily
the issuance of shares of the Company’s common stock in connection with the
settlement of the Company’s stockholder litigation, as more fully discussed
in Note 21. Further, as a result of the Company’s restructuring during the
third and fourth quarters of 2000, prior to the completion of the audit of the Company’s
2000 financial statements and the filing of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2000 with the SEC on April 17, 2001,
the Company was unable to provide the SEC with the requisite financial information
required to be included in a registration statement. Therefore, even if the Company
had been able to negotiate a public or private sale of its equity securities on
commercially reasonable terms, the Company’s inability to obtain an effective
registration statement with respect to such securities prior to April 17, 2001 would
have effectively prohibited any such transaction. Moreover, the terms of any private
sale of the Company’s equity securities likely would have included a requirement
that the Company register with the SEC the resale of the Company’s securities
issued to a private purchaser thereby also making it impossible to complete any
private issuance of its securities. Due to the fact that the Company would have
been unable to obtain an effective registration statement, and therefore, would
have been unable to effect any public issuance of its securities (or any private
sale that included the right of resale), any actions prior to April 17, 2001 to
complete a capital raising event through the sale of equity or debt securities would
have been futile.
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Although
the Company would technically have been able to file a registration statement with
the SEC following April 17, 2001, the Company believes that various market factors,
including the depressed market price of the Company’s common stock immediately
preceding April 17, 2001, the pending reverse stock split required to maintain the
Company’s continued New York Stock Exchange (“NYSE”) listing, and
the uncertainty regarding the Company’s maturity of the revolving loans under
the Senior Bank Credit Facility, made the issuance of additional equity or debt
securities commercially unreasonable.
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Because
the issuance of additional equity or debt securities was deemed unreasonable, the
Company determined that the sale of assets represented the most effective means
by which the Company could satisfy the covenant. During the first and second quarters
of 2001, the Company completed the sale of its Mountain View Correctional Facility
for approximately $24.9 million and its Pamlico Correctional Facility for approximately
$24.0 million, respectively. During the fourth quarter of 2001, the Company completed
the sale of its Southern Nevada Women’s Correctional Facility for approximately
$24.1 million, and was actively pursuing the sales of additional assets. See Note
9 for further discussion of these sales. As a result of the foregoing, the Company
believes it demonstrated commercially reasonable efforts to complete the $100.0
million capital raising event as of June 30, 2001. Under terms of the December
2001 Amendment and Restatement to the Senior Bank Credit Facility, as defined in
Note 15, the Company’s obligation to complete the capital raising event was
removed.
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Following
the filing of the Company’s Form 10-K in April 2001, the Company commenced
negotiations with MDP Ventures IV LLC and affiliated purchasers (collectively,
“MDP”), the holders of the Company’s $41.1 million convertible subordinated
notes, with respect to an
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amendment to the registration rights agreement to defer
the Company’s obligations to use its best efforts to file and maintain the
registration statement to register the shares into which the $41.1 million convertible
notes are convertible. MDP later informed the Company that it would not complete
such an amendment. As a result, the Company completed and filed a shelf registration
statement with the SEC on September 13, 2001, which became effective on September
26, 2001, in compliance with this obligation.
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The revolving
loan portion of the Senior Bank Credit Facility was to mature on January 1, 2002.
As part of management’s strategic operating plan to improve the Company’s
financial position, the Company committed to a plan of disposal for certain long-lived
assets. During 2001, the Company received net proceeds of approximately $138.7
million through the sale of such assets. During 2001, the Company paid-down $189.0
million in total debt through a combination of cash generated from asset sales and
internally generated cash. Additionally, assets with an aggregate carrying value
of $22.3 million were held for sale as of December 31, 2001, although a substantial
portion of these assets were reclassified during 2002 to assets held for use when
the Company was unable to achieve acceptable sales prices, as further described
in Note 24. The Company may also pursue the sale of additional assets; however,
there can be no assurance that any sales will be completed. The Company expects
to use anticipated proceeds from any such future asset sales to pay-down additional
amounts outstanding under the Senior Bank Credit Facility.
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The Company
believes that utilizing sale proceeds to pay-down debt and the generation of $138.6
million of operating income during 2001 has improved its leverage ratios and overall
financial position, which has improved its ability to renew and refinance maturing
indebtedness.
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As further
discussed in Note 15, in December 2001, the Company completed an amendment and restatement
of its existing Senior Bank Credit Facility (the “December 2001 Amendment and
Restatement”). As part of the December 2001 Amendment and Restatement, the
existing $269.4 million revolving portion of the Senior Bank Credit Facility, which
was scheduled to mature on January 1, 2002, was replaced with a term loan of the
same amount maturing on December 31, 2002, to coincide with the maturity of the
other loans under the Senior Bank Credit Facility.
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The Company
believed, and continues to believe, that a short-term extension of the revolving
portion of the Senior Bank Credit Facility was in its best interests for a longer-term
financing strategy, particularly due to difficult market conditions for the issuance
of debt securities following the terrorist attacks on September 11, 2001, and during
the fourth quarter of 2001. Additionally, the Company believed that certain terms
of the December 2001 Amendment and Restatement, including primarily the removal
of prior restrictions to pay cash dividends on shares of its Series A Preferred
Stock, including all dividends in arrears, as further discussed in Notes 14 and
19, resulted in an improvement to its credit ratings, enhancing the terms of a more
comprehensive refinancing. Further, the Company believed that the successful pursuit
of additional transactions that would not be completed by January 1, 2002, such
as the sale of additional assets and the contract award from the Federal Bureau
of Prisons (“BOP”) for 1,500 inmates under the BOP’s Criminal Alien
Requirement Phase II Solicitation, or CAR II, would improve the terms of a more
comprehensive refinancing.
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Management
has prepared financial projections for 2002, which indicate the Company will continue
to remain compliant with its debt covenants. In addition, management continues
to pursue additional asset sales and new contract awards. Based upon these additional
factors, management began pursuing alternatives to refinance the Senior Bank Credit
Facility scheduled to mature December 31, 2002. The Company completed a refinancing
of the Senior Bank Credit Facility
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during May 2002. See further discussion of the
comprehensive refinancing of its senior indebtedness in Note 24.
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Due to
certain cross-default provisions contained in certain of the Company’s debt
instruments (as further discussed in Note 15), if the Company were to be in default
under the Senior Bank Credit Facility and if the lenders under the Senior Bank Credit
Facility elected to exercise their rights to accelerate the Company’s obligations
under the Senior Bank Credit Facility, such events could result in the acceleration
of all or a portion of the outstanding principal amount of the Company’s $100.0
million senior notes or the Company’s aggregate $70.0 million convertible subordinated
notes, which would have a material adverse effect on the Company’s liquidity
and financial position. Additionally, under the Company’s $40.0 million convertible
subordinated notes, even if the lenders under the Senior Bank Credit Facility did
not elect to exercise their acceleration rights upon a default under the Senior
Bank Credit Facility permitting acceleration, the holders of the $40.0 million convertible
subordinated notes could require the Company to repurchase such notes. The Company
does not have sufficient working capital to satisfy its debt obligations in the
event of an acceleration of all or a substantial portion of the Company’s outstanding
indebtedness.
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| 3.
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MERGER
TRANSACTIONS
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The 1999 Merger
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On December
31, 1998, immediately prior to the 1999 Merger, Old CCA sold to Operating Company
all of the issued and outstanding capital stock of certain wholly-owned corporate
subsidiaries of Old CCA, certain management contracts and certain other assets and
liabilities, and the Company and Operating Company entered into a series of agreements
as more fully described in Note 6. In exchange, Old CCA received a $137.0 million
promissory note payable by Operating Company (the “CCA Note”) and 100%
of the non-voting common stock of Operating Company. The non-voting common stock
represented a 9.5% economic interest in Operating Company and was valued at the
implied fair market value of $4.8 million. The Company succeeded to these interests
as a result of the 1999 Merger. The sale to Operating Company generated a deferred
gain of $63.3 million. See Note 6 for discussion of the accounting for the CCA
Note, the deferred gain and for discussion of other relationships between the Company
and Operating Company.
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On December
31, 1998, immediately prior to the 1999 Merger, Old CCA sold to a newly-created
company, Prison Management Services, LLC (“PMS, LLC”), certain management contracts
and certain other assets and liabilities relating to government-owned adult prison
facilities. In exchange, Old CCA received 100% of the non-voting membership interest
in PMS, LLC, valued at the implied fair market value of $67.1 million. On January
1, 1999, PMS, LLC merged with PMSI and all PMS, LLC membership interests were converted
into a similar class of stock in PMSI. The Company succeeded to this ownership
interest as a result of the 1999 Merger. The sale to PMSI generated a deferred
gain of $35.4 million.
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On December
31, 1998, immediately prior to the 1999 Merger, Old CCA sold to a newly-created
company, Juvenile and Jail Facility Management Services, LLC (“JJFMS, LLC”), certain
management contracts and certain other assets and liabilities relating to government-owned
jails and juvenile facilities, as well as Old CCA’s international operations.
In exchange, Old CCA received 100% of the non-voting membership interest in JJFMS,
LLC valued at the implied fair market value of $55.9 million. On January 1, 1999,
JJFMS, LLC merged with JJFMSI and all JJFMS, LLC membership interests were converted
into a similar class of stock in JJFMSI. The Company succeeded to this ownership
interest as a result of the 1999 Merger. The sale to JJFMSI generated a deferred
gain of $18.0 million.
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On
December 31, 1998, Old CCA merged with and into New Prison Realty. In the 1999 Merger, each share
of Old CCA’s common stock was converted into the right to receive 0.875 share of New Prison
Realty’s common stock. On January 1, 1999, Old Prison Realty merged with and into New Prison Realty
in the 1999 Merger. In the 1999 Merger, Old Prison Realty shareholders received 1.0 share of common
stock or 8.0% Series A Cumulative Preferred Stock (“Series A Preferred Stock”) of the
Company in exchange for each Old Prison Realty common share or 8.0% Series A Cumulative Preferred Share.
The
first step of the 1999 Merger was accounted for as a reverse acquisition of New Prison Realty
by Old CCA, with the second step of the 1999 Merger representing an acquisition of Old Prison
Realty by New Prison Realty. As such, Old CCA’s assets and liabilities have been carried forward
at historical cost, and the provisions of reverse acquisition accounting prescribe that Old CCA’s
historical financial statements be presented as the Company’s historical financial statements prior to
January 1, 1999. The historical equity section of the financial statements and earnings per share
have been retroactively restated to reflect the Company’s equity structure, including the exchange
ratio and the effects of the differences in par values of the respective companies’ common stock.
However, Old Prison Realty’s assets and liabilities acquired in the second step of the 1999 Merger
have been recorded at their estimated fair market value, as required by Accounting Principles Board
Opinion No. 16, “Business Combinations” (“APB 16”).
The
2000 Operating Company Merger and Restructuring Transactions
In
order to address liquidity and capital constraints, the Company entered into a series of
agreements providing for the comprehensive restructuring of the Company. As a part of this
Restructuring, the Company entered into an agreement and plan of merger with Operating
Company, dated as of June 30, 2000, providing for the Operating Company Merger.
Effective
October 1, 2000, New Prison Realty and Operating Company completed the Operating
Company Merger in accordance with an agreement and plan of merger, after New Prison Realty’s
stockholders approved the agreement and plan of merger on September 12, 2000. In connection
with the completion of the Operating Company Merger, New Prison Realty amended its charter to,
among other things:
|
|
•
|
remove provisions
relating to its qualification as a REIT for federal income tax purposes commencing with
its 2000 taxable year,
|
|
|
|
|
•
|
change its name
to “Corrections Corporation of America,” and
|
|
|
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•
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increase the
amount of its authorized capital stock.
|
Following
the completion of the Operating Company Merger, Operating Company ceased to exist,
and the Company and its wholly-owned subsidiary began operating collectively under the “Corrections
Corporation of America” name. Pursuant to the terms of the agreement and plan of
merger, the Company issued approximately 0.8 million shares (as adjusted for the reverse stock split
in May 2001) of its common stock valued at approximately $10.6 million to the holders of
Operating Company’s voting common stock at the time of the completion of the Operating
Company Merger.
On
October 1, 2000, immediately prior to the completion of the Operating Company Merger, the
Company purchased all of the shares of Operating Company’s voting common stock held by the
Baron Asset Fund (“Baron”) and Sodexho Alliance S.A., a French société anonyme
(“Sodexho”), the holders of approximately 34% of the outstanding common stock of Operating
Company, for an
44
aggregate
of $16.0 million in non-cash consideration, consisting of an aggregate of approximately
1.1 million shares of the Company’s common stock. In addition, the Company issued to Baron
warrants to purchase approximately 142,000 shares of the Company’s common stock at an exercise
price of $0.01 per share and warrants to purchase approximately 71,000 shares of the Company’s
common stock at an exercise price of $14.10 per share in consideration for Baron’s consent to the
Operating Company Merger. The warrants issued to Baron were valued at approximately $2.2
million. In addition, in the Operating Company Merger, the Company assumed the obligation to
issue up to approximately 75,000 shares of its common stock, at an exercise price of $33.30 per
share, pursuant to the exercise of warrants to purchase common stock previously issued by
Operating Company. The number of common shares and per share amounts described above have
been retroactively restated to reflect the reduction in common shares and corresponding increase in
the per share amounts resulting from the reverse stock split in May 2001, as further discussed in
Note 5.
Also
on October 1, 2000, immediately prior to the Operating Company Merger, the Company
purchased an aggregate of 100,000 shares of Operating Company’s voting common stock for
$200,000 cash from D. Robert Crants, III and Michael W. Devlin, former executive officers and
directors of the Company, pursuant to the terms of severance agreements between the Company and
Messrs. Crants, III and Devlin. The cash proceeds from the purchase of the shares of Operating
Company’s voting common stock from Messrs. Crants, III and Devlin were used to immediately
repay a like portion of amounts outstanding under loans previously granted to Messrs. Crants, III
and Devlin by the Company. The Company also purchased 300,000 shares of Operating Company’s
voting common stock held by Doctor R. Crants, the former chief executive officer of the Company
and Operating Company, for $600,000 cash. Under the original terms of the severance agreements
between the Company and each of Messrs. Crants, III and Devlin, Operating Company was to make
a $300,000 payment for the purchase of a portion of the shares of Operating Company’s voting
common stock originally held by Messrs. Crants, III and Devlin on December 31, 1999. However,
as a result of restrictions on Operating Company’s ability to purchase these shares, the rights and
obligations were assigned to and assumed by Doctor R. Crants. In connection with this assignment,
Mr. Crants received a loan in the aggregate principal amount of $600,000 from PMSI, the proceeds
of which were used to purchase the 300,000 shares of Operating Company’s voting common stock
owned by Messrs. Crants, III and Devlin. The cash proceeds from the purchase by the Company of
the shares of Operating Company’s voting common stock from Mr. Crants were used to
immediately repay the $600,000 loan previously granted to Mr. Crants by PMSI.
The
Operating Company Merger was accounted for using the purchase method of accounting as
prescribed by APB 16. Accordingly, the aggregate purchase price of $75.3 million was allocated to
the assets purchased and liabilities assumed (identifiable intangibles included a workforce asset of
approximately $1.6 million, a contract acquisition costs asset of approximately $1.5 million and a
contract values liability of approximately $26.1 million) based upon the estimated fair value at the
date of acquisition. The aggregate purchase price consisted of the value of the Company’s common
stock and warrants issued in the transaction, the Company’s net carrying amount of the CCA Note
as of the date of acquisition (which has been extinguished), the Company’s net carrying amount of
deferred gains and receivables/payables between the Company and Operating Company as of the
date of acquisition, and capitalized merger costs. The excess of the aggregate purchase price over
the assets purchased and liabilities assumed of $87.0 million was reflected as goodwill. See Note 4
regarding amortization of the Company’s intangibles.
As
a result of the Restructuring, all existing Operating Company Leases, the Tenant Incentive
Agreement, the Trade Name Use Agreement, the Right to Purchase Agreement, the Services
Agreement and the Business Development Agreement (each as defined in Note 6) were cancelled.
45
In
addition, all outstanding shares of Operating Company’s non-voting common stock, all of which
shares were owned by the Company, were cancelled in the Operating Company Merger.
In
connection with the Restructuring, in September 2000 a wholly-owned subsidiary of PMSI
purchased 85% of the outstanding voting common stock of PMSI which was held by Privatized
Management Services Investors, LLC, an outside entity controlled by a director of PMSI and
members of the director’s family, for a cash purchase price of $8.0 million. In addition, PMSI and
its wholly-owned subsidiary paid the chief manager of Privatized Management Services Investors,
LLC $150,000 as compensation for expenses incurred in connection with the transaction, as well as
$125,000 in consideration for the chief manager’s agreement not to engage in a business
competitive to the business of PMSI for a period of one year following the completion of the
transaction. Also in connection with the Restructuring, in September 2000 a wholly-owned
subsidiary of JJFMSI purchased 85% of the outstanding voting common stock of JJFMSI which
was held by Correctional Services Investors, LLC, an outside entity controlled by a director of
JJFMSI, for a cash purchase price of $4.8 million. In addition, JJFMSI and its wholly-owned
subsidiary paid the chief manager of Correctional Services Investors, LLC $250,000 for expenses
incurred in connection with the transaction.
As a
result of the acquisitions of PMSI and JJFMSI on December 1, 2000, all shares of PMSI and
JJFMSI voting and non-voting common stock held by the Company and certain subsidiaries of
PMSI and JJFMSI were cancelled. In connection with the acquisition of PMSI, the Company
issued approximately 128,000 shares of its common stock (as adjusted for the reverse stock split in
May 2001) valued at approximately $0.6 million to the wardens of the correctional and detention
facilities operated by PMSI who were the remaining shareholders of PMSI. Shares of the
Company’s common stock owned by the PMSI wardens are subject to vesting and forfeiture
provisions under a restricted stock plan. In connection with the acquisition of JJFMSI, the
Company issued approximately 160,000 shares of its common stock (as adjusted for the reverse
stock split in May 2001) valued at approximately $0.7 million to the wardens of the correctional and
detention facilities operated by JJFMSI who were the remaining shareholders of JJFMSI. Shares of
the Company’s common stock owned by the JJFMSI wardens are subject to vesting and forfeiture
provisions under a restricted stock plan.
The
acquisition of PMSI was accounted for using the purchase method of accounting as prescribed
by APB 16. Accordingly, the aggregate purchase price of $43.2 million was allocated to the assets
purchased and liabilities assumed (identifiable intangibles included a workforce asset of
approximately $0.5 million, a contract acquisition costs asset of approximately $0.7 million and a
contract values asset of approximately $4.0 million) based upon the estimated fair value at the date
of acquisition. The aggregate purchase price consisted of the net carrying amount of the Company’s
investment in PMSI less the Company’s net carrying amount of deferred gains and
receivables/payables between the Company and PMSI as of the date of acquisition, and capitalized
merger costs. The excess of the aggregate purchase price over the assets purchased and liabilities
assumed of $12.2 million was reflected as goodwill. See Note 4 regarding amortization of the
Company’s intangibles.
The
acquisition of JJFMSI was also accounted for using the purchase method of accounting as
prescribed by APB 16. Accordingly, the aggregate purchase price of $38.2 million was allocated to
the assets purchased and liabilities assumed (identifiable intangibles included a workforce asset of
approximately $0.5 million, a contract acquisition costs asset of approximately $0.5 million and a
contract values liability of approximately $3.1 million) based upon the estimated fair value at the
date of acquisition. The aggregate purchase price consisted of the net carrying amount of the
Company’s investment in JJFMSI less the Company’s net carrying amount of deferred gains and
46
receivables/payables
between the Company and JJFMSI as of the date of acquisition, and
capitalized merger costs. The excess of the aggregate purchase price over the assets purchased and
liabilities assumed of $11.4 million was reflected as goodwill. See Note 4 regarding amortization of
the Company’s intangibles.
As
a part of the Restructuring, CCA (UK) Limited, a company incorporated in England and Wales
(“CCA UK”) and a wholly-owned subsidiary of JJFMSI, sold its 50% ownership interest in two
international subsidiaries, Corrections Corporation of Australia Pty. Ltd., an Australian corporation
(“CCA Australia”), and U.K. Detention Services Limited, a company incorporated in England and
Wales (“UKDS”), to Sodexho on November 30, 2000 and December 7, 2000, respectively, for an
aggregate cash purchase price of $6.4 million. Sodexho already owned the remaining 50% interest
in each of CCA Australia and UKDS. The purchase price of $6.4 million included $5.0 million for
the purchase of UKDS and $1.4 million for the purchase of CCA Australia. JJFMSI’s book basis in
UKDS was $3.4 million, which resulted in a $1.6 million gain in the fourth quarter of 2000.
JJFMSI’s book basis in CCA Australia was $5.0 million, which resulted in a $3.6 million loss,
which was recognized as a loss on sale of assets during the third quarter of 2000. In connection
with the sale of CCA UK’s interest in CCA Australia and UKDS to Sodexho, Sodexho granted
JJFMSI an option to repurchase a 25% interest in each entity at any time prior to September 11,
2002 for aggregate cash consideration of $4.0 million if such option is exercised on or before
February 11, 2002, and for aggregate cash consideration of $4.2 million if such option is exercised
after February 11, 2002 but prior to September 11, 2002. These options were terminated during the
second quarter of 2001.
The
following unaudited pro forma operating information presents a summary of comparable results
of combined operations of the Company, Operating Company, PMSI and JJFMSI for the years
ended December 31, 2000 and 1999 as if the Operating Company Merger and acquisitions of PMSI
and JJFMSI had collectively occurred as of the beginning of the periods presented. The unaudited
information includes the dilutive effects of the Company’s common stock issued in the Operating
Company Merger and the acquisitions of PMSI and JJFMSI as well as the amortization of the
intangibles recorded in the Operating Company Merger and the acquisition of PMSI and JJFMSI,
but excludes: (i) transactions or the effects of transactions between the Company, Operating
Company, PMSI and JJFMSI including rental payments, licensing fees, administrative service fees
and tenant incentive fees; (ii) the Company’s write-off of amounts under lease arrangements; (iii)
the Company’s recognition of deferred gains on sales of contracts; (iv) the Company’s
recognition of equity in earnings or losses of Operating Company, PMSI and JJFMSI; (v) non-recurring
merger costs expensed by the Company; (vi) strategic investor fees expensed by the Company; (vii) excise
taxes accrued by the Company in 1999 related to its status as a REIT; and (viii) the Company’s
provisions for changes in tax status in both 1999 and 2000. The per share amounts have also been
retroactively restated to reflect the one-for-ten reverse stock split of the Company’s common stock
in May 2001. The unaudited pro forma operating information is presented for comparison purposes
only and does not purport to represent what the Company’s results of operations actually would
have been had the Operating Company Merger and acquisitions of PMSI and JJFMSI, in fact,
collectively occurred at the beginning of the periods presented.
47
|
|
|
Pro Forma
for the Year Ended
December 31,
|
|
|
|
|
|
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
(in
thousands, except per share data)
|
Revenue
|
|
$
|
891,680
|
|
|
$
|
782,335
|
|
Operating loss
|
|
$
|
(481,026
|
)
|
|
$
|
(10,167
|
)
|
Net loss available to common stockholders
|
|
$
|
(578,174
|
)
|
|
$
|
(57,844
|
)
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(39.04
|
)
|
|
$
|
(4.23
|
)
|
Diluted
|
|
$
|
(39.04
|
)
|
|
$
|
(4.23
|
)
|
The
unaudited pro forma information presented above does not include adjustments to reflect the
dilutive effects of the fourth quarter of 2000 conversion of the Company’s Series B Preferred Stock
into approximately 9.5 million shares of the Company’s common stock (as adjusted for the reverse
stock split in May 2001) as if those conversions occurred at the beginning of the periods presented.
Additionally, the unaudited pro forma information does not include the dilutive effects of the
Company’s potentially issuable common shares such as convertible debt and equity securities,
options and warrants as the provisions of Statement of Financial Accounting Standards No.
128, “Earnings Per Share” (“SFAS 128”) prohibit the inclusion of the effects of
potentially issuable shares in periods that a company reports losses from continuing operations. The
unaudited pro forma information also does not include the dilutive effects of the issuance of an
aggregate of approximately 4.7 million shares of the Company’s common stock (as adjusted for the
reverse stock split in May 2001) in connection with the settlement of the Company’s stockholder
litigation.
4. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
combined and consolidated financial statements include the accounts of the Company on a
consolidated basis with its wholly-owned subsidiaries as of and for each period presented. The
Company’s results of operations for 1999 reflect the operating results of the Company as a REIT.
Management believes the comparison between 2001 and 2000, and between 2000 and prior years is
not meaningful because the 2000 financial condition, results of operations and cash flows reflect the
operation of the Company as a subchapter C corporation, which, for the period from January 1,
2000 through September 30, 2000, included real estate activities between the Company and
Operating Company during a period of severe liquidity problems, and as of October 1, 2000, also
includes the operations of the correctional and detention facilities previously leased to and managed
by Operating Company. In addition, the Company’s financial condition, results of operations and
cash flows as of and for the year ended December 31, 2000 also include the operations of the
Service Companies as of December 1, 2000 (acquisition date) on a consolidated basis. For the
period January 1, 2000 through August 31, 2000, the investments in the Service Companies were
accounted for and were presented under the equity method of accounting. For the period from
September 1, 2000 through November 30, 2000, the investments in the Service Companies were
accounted for on a combined basis due to the repurchase by the wholly-owned subsidiaries of the
Service Companies of the non-management, outside stockholders’ equity interest in the Service
Companies during September 2000. The resulting increase in the Company’s assets and liabilities
as of September 1, 2000 as a result of combining the balance sheets of PMSI and JJFMSI has been
treated as a non-cash transaction in the accompanying combined statement of cash flows for the
year ended December 31, 2000, with the September 1, 2000 combined cash balances of PMSI and
JJFMSI ($22.0 million) included in “cash and cash equivalents, beginning of year.” Consistent
with the Company’s previous financial statement presentations, the Company has presented its
economic
48
interests
in each of PMSI and JJFMSI under the equity method for all periods prior to September 1,
2000. All material intercompany transactions and balances have been eliminated in combining the
consolidated financial statements of the Company and its wholly-owned subsidiaries with the
respective financial statements of PMSI and JJFMSI.
Although
the Company’s consolidated results of operations and cash flows presented in the
accompanying 2000 financial statements are presented on a combined basis with the results of
operations and cash flows of PMSI and JJFMSI for the period from September 1, 2000 through
November 30, 2000, the Company did not control the assets and liabilities of either PMSI or
JJFMSI. Additionally, the Company was only entitled to receive dividends on its non-voting
common stock upon declaration by the respective boards of directors of PMSI and JJFMSI.
For
the entire year 2001, the Company’s consolidated results of operations and cash flows reflect
the results of the Company as a business specializing in owning, operating and managing prisons
and other correctional facilities and providing prisoner transportation services for governmental
agencies.
Cash
and Cash Equivalents
The
Company considers all liquid debt instruments with a maturity of three months or less at the
time of purchase to be cash equivalents.
Restricted
Cash
Restricted
cash at December 31, 2001 was $12.5 million, of which $7.0 million represents cash
collateral for a guarantee agreement and $5.5 represents cash collateral for outstanding letters of
credit. Restricted cash at December 31, 2000 was $9.2 million, of which $7.0 million represents
cash collateral for a guarantee agreement and $2.2 million represents cash collateral for outstanding
letters of credit.
Property
and Equipment
Property
and equipment is carried at cost. Assets acquired by the Company in conjunction with
acquisitions are recorded at estimated fair market value in accordance with the purchase method of
accounting prescribed by APB 16. Betterments, renewals and extraordinary repairs that extend the
life of an asset are capitalized; other repair and maintenance costs are expensed. Interest is
capitalized to the asset to which it relates in connection with the construction of major facilities.
The cost and accumulated depreciation applicable to assets retired are removed from the accounts
and the gain or loss on disposition is recognized in income. Depreciation is computed over the
estimated useful lives of depreciable assets using the straight-line method. Useful lives for property
and equipment are as follows:
Land improvements
|
|
5 - 20 years
|
Buildings and improvements
|
|
5 - 50 years
|
Equipment
|
|
3 - 5 years
|
Office furniture and fixtures
|
|
5 years
|
Assets
Held for Sale
Assets
held for sale are carried at the lower of cost or estimated fair value less estimated cost to sell.
Depreciation is suspended during the period held for sale.
49
Intangible
Assets
Intangible
assets primarily include goodwill, value of workforce, contract acquisition costs, and
contract values established in connection with certain business combinations. Goodwill represents
the cost in excess of the net assets of businesses acquired. Goodwill is amortized into amortization
expense over fifteen years using the straight-line method. However, as further discussed under
recent accounting pronouncements herein, goodwill will no longer be subject to amortization
beginning January 1, 2002. Value of workforce, contract acquisition costs (both included in other
non-current assets in the accompanying consolidated balance sheets) and contract values (included
in other non-current liabilities in the accompanying consolidated balance sheets) represent the
estimated fair values of the identifiable intangibles acquired in the Operating Company Merger and
in the acquisitions of the Service Companies. Value of workforce is amortized into amortization
expense over estimated useful lives ranging from 23 to 38 months using the straight-line method.
Contract acquisition costs and contract values are generally amortized into amortization expense
using the interest method over the lives of the related management contracts acquired, which range
from three to 227 months. The Company evaluates the realizability of the carrying value of its
intangible assets when events suggest that an impairment may have occurred. The Company
determines if a potential impairment of intangible assets exists based on the estimated undiscounted
value of expected future operating cash flows in relation to the carrying values. The Company does
not believe that impairments of intangible assets have occurred. As further discussed under recent
accounting pronouncements herein, effective January 1, 2002, the Company will test goodwill for
impairment using a fair-value based approach. The Company also periodically evaluates whether
changes have occurred that would require revision of the remaining estimated useful lives of
intangible assets.
Accounting
for the Impairment of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of” (“SFAS 121”), the
Company evaluates the recoverability of the carrying values of its long-lived assets, other than
intangibles, when events suggest that an impairment may have occurred. In these circumstances,
the Company utilizes estimates of undiscounted cash flows to determine if an impairment exists. If
an impairment exists, it is measured as the amount by which the carrying amount of the asset
exceeds the estimated fair value of the asset. See Note 8 for discussion of impairment of long-lived
assets.
Investment
in Direct Financing Leases
Investment
in direct financing leases represents the portion of the Company’s management contracts
with certain governmental agencies that represent capitalized lease payments on buildings and
equipment. The leases are accounted for using the financing method and, accordingly, the
minimum lease payments to be received over the term of the leases less unearned income are
capitalized as the Company’s investments in the leases. Unearned income is recognized as income
over the term of the leases using the interest method.
Investment
in Affiliates
Investments
in affiliates that are equal to or less than 50%-owned over which the Company cannot
exercise significant influence are accounted for using the equity method of accounting. For the
period from January 1, 1999 through August 31, 2000, the investments in the Service Companies
were accounted for under the equity method of accounting. For the period from September 1, 2000
50
through
November 30, 2000, the investments in the Service Companies are presented on a
combined basis due to the repurchase by the wholly-owned subsidiaries of the Service Companies
of the non-management, outside stockholders’ equity interest in the Service Companies during
September 2000.
Debt
Issuance Costs
Debt
issuance costs, which are included in other assets in the consolidated balance sheets, are
amortized into interest expense on a straight-line basis, which is not materially different than the
interest method, over the term of the related debt.
Deferred
Gains on Sales of Contracts
Deferred
gains on sales of contracts were generated as a result of the sale of certain management
contracts to Operating Company, PMSI and JJFMSI. The Company previously amortized these
deferred gains into income in accordance with SEC Staff Accounting Bulletin No. 81, “Gain
Recognition on the Sale of a Business or Operating Asset to a Highly Leveraged Entity.” The
deferred gain from the sale to Operating Company was to be amortized concurrently with the
receipt of the principal payments on the CCA Note, over a six-year period beginning December 31,
2003. As of the date of the Operating Company Merger, the Company had not recognized any of
the deferred gain from the sale to Operating Company. The deferred gains from the sales to PMSI
and JJFMSI had been amortized over a five-year period commencing January 1, 1999, which
represented the average remaining lives of the contracts sold to PMSI and JJFMSI, plus any
contractual renewal options. Effective with the Operating Company Merger and the acquisitions of
PMSI and JJFMSI, the Company applied the unamortized balances of the deferred gains on sales of
contracts in accordance with the purchase method of accounting under APB 16.
Management
and Other Revenue
The
Company maintains contracts with certain governmental entities to manage their facilities for
fixed per diem rates or monthly fixed rates. The Company also maintains contracts with various
federal, state and local governmental entities for the housing of inmates in company-owned
facilities at fixed per diem rates. These contracts usually contain expiration dates with renewal
options ranging from annual to multi-year renewals. Most of these contracts have current terms that
require renewal every two to five years. Additionally, most facility management contracts contain
clauses which allow the government agency to terminate a contract without cause, and are generally
subject to legislative appropriations. The Company expects to renew these contracts for periods
consistent with the remaining renewal options allowed by the contracts or other reasonable
extensions; however, no assurance can be given that such renewals will be obtained. Fixed monthly
rate revenue is recorded in the month earned and fixed per diem revenue is recorded based on the
per diem rate multiplied by the number of inmates housed during the respective period. The
Company recognizes any additional management service revenues when earned. Certain of the
government agencies also have the authority to audit and investigate the Company’s contracts with
them. For contracts that actually or effectively provide for certain reimbursement of expenses, if
the agency determines that the Company has improperly allocated costs to a specific contract, the
Company may not be reimbursed for those costs and could be required to refund the amount of any
such costs that have been reimbursed.
51
Rental
Revenue
Rental
revenues are recognized based on the terms of the Company’s leases. Tenant incentive fees
paid to lessees, including Operating Company prior to the Operating Company Merger, have been
deferred and amortized as a reduction of rental revenue over the term of related leases. During
1999, due to Operating Company’s financial condition, as well as the proposed merger with
Operating Company and the proposed termination of the Operating Company Leases in connection
therewith, the Company wrote-off the tenant incentive fees due to Operating Company, totaling
$65.7 million for the year ended December 31, 1999. During the fourth quarter of 2000, this
accrual was applied in accordance with the purchase method of accounting upon the merger with
Operating Company. Tenant incentive fees due to Operating Company during 2000 totaling $11.9
million were expensed as incurred.
Self-funded
Insurance Reserves
The
Company is significantly self-insured for employee health, workers’ compensation, and
automobile liability insurance. As such, the Company’s insurance expense is largely dependent on
claims experience and the Company’s ability to control its claims experience. The Company has
consistently accrued the estimated liability for employee health based on its history of claims
experience and time lag between the incident date and the date the cost is reported to the Company.
The Company has accrued the estimated liability for workers’ compensation and automobile
insurance based on a third-party actuarial valuation of the outstanding liabilities. These estimates
could change in the future.
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
the Company to record deferred income taxes for the tax effect of differences between book and tax
bases of its assets and liabilities. For the year ended December 31, 1999, the Company elected to
qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). As a result,
the Company was generally not subject to income tax on its taxable income at corporate rates to the
extent it distributed annually at least 95% of its taxable income to its shareholders and complied
with certain other requirements. Accordingly, no provision was made for income taxes in the
accompanying 1999 consolidated financial statements. The Company’s election of REIT status for
the taxable year ended December 31, 1999 is subject to review by the Internal Revenue Service
(“IRS”), generally for a period of three years from the date of filing of its 1999 tax return. In
connection with the Restructuring, on September 12, 2000, the Company’s stockholders approved
an amendment to the Company’s charter to remove provisions requiring the Company to elect to
qualify and be taxed as a REIT for federal income tax purposes effective January 1, 2000. The
Company has been taxed as a taxable subchapter C corporation beginning with its taxable year
ended December 31, 2000.
Prior
to the 1999 Merger, Old CCA operated as a taxable corporation for federal income tax
purposes since its inception. Subsequent to the 1999 Merger the Company elected to change its tax
status to a REIT effective with the filing of its 1999 federal income tax return. Although the
Company recorded a provision for income taxes during 1999 reflecting the removal of net deferred
tax assets on the Company’s balance sheet as of December 31, 1998, as a REIT, the Company was
not subject to federal income taxes, so long as the Company continued to qualify as a REIT under
the Code. Therefore, no income tax provision was incurred, nor benefit realized, relating to the
Company’s operations for the year ended December 31, 1999. However, in order to qualify as a
52
REIT,
the Company was required to distribute the accumulated earnings and profits of Old CCA.
See Note 14 for further information. In connection with the Restructuring, the Company’s
stockholders approved an amendment to the Company’s charter to, among other things, remove
provisions relating to the Company’s operation and qualification as a REIT for federal income tax
purposes commencing with its taxable year ended December 31, 2000. The Company recognized
an income tax provision during the third quarter of 2000 for establishing net deferred tax liabilities
in connection with the change in tax status, net of a valuation allowance applied to certain deferred
tax assets. The Company expects to continue to operate as a taxable corporation in future years.
As
further described in Note 16, as of December 31, 2001, the Company’s deferred tax assets
totaled approximately $150.5 million. Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Realization of the future tax benefits related to
deferred tax assets is dependent on many factors, including the Company’s ability to generate
taxable income within the net operating loss carryforward period. Since the change in tax status in
connection with the Restructuring in 2000, and as of December 31, 2001, the Company has
provided a valuation allowance to reserve the deferred tax assets in accordance with SFAS 109.
The valuation allowance was recognized based on the weight of available evidence indicating that it
was more likely than not that the deferred tax assets would not be realized. This evidence primarily
consisted of, but was not limited to, recurring operating losses for federal tax purposes.
The
Company’s assessment of the valuation allowance could change in the future. Removal of the
valuation allowance in whole or in part would result in a non-cash reduction in income tax expense
during the period of removal. To the extent no reserve is established for the Company’s deferred
tax assets, the financial statements would reflect a provision for income taxes at the applicable
federal and state tax rates on income before taxes.
Foreign
Currency Transactions
During
2000, a wholly-owned subsidiary of the Company entered into a 25-year property lease with
Agecroft Prison Management, Ltd. (“APM”) in connection with the construction and development
of the Company’s Agecroft facility, located in Salford, England. The Company also extended a
working capital loan to the operator of this facility. These assets along with various other shortterm
receivables are denominated in British pounds; consequently, the Company adjusts these
receivables to the current exchange rate at each balance sheet date and recognizes the unrealized
currency gain or loss in current period earnings. Realized foreign currency gains or losses are
recognized in operating expenses as payments are received. On April 10, 2001, the Company sold
its interest in the Agecroft facility. However, the Company retained its 50% interest in APM, which
has a management contract for the Agecroft facility. The Company retained and will continue to
record foreign currency transaction gains and losses on the working capital loan.
Fair
Value of Derivative and Financial Instruments
Derivative
Instruments
The
Company may enter into derivative financial instrument transactions in order to mitigate its
interest rate risk on a related financial instrument. The Company accounts for these derivative
financial instruments in accordance with Statement of Financial Accounting Standards No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”),
which became effective January 1, 2001. SFAS 133, as amended, requires that changes in a
derivative’s fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. The
53
Company has entered into an interest rate
swap agreement on $325.0 million of floating rate debt on the Senior Bank Credit
Facility. The Company did not meet the hedge accounting criteria for the interest
rate swap agreement. The Company estimates the fair value of its interest rate
swap agreements using option-pricing models that value the potential for interest
rate swap agreements to become in-the-money through changes in interest rates during
the remaining term of the agreements. A negative fair value represents the estimated
amount the Company would have to pay to cancel the contract or transfer it to other
parties.
At December 31, 2001, the Company also had
a derivative instrument associated with the issuance of a $26.1 million promissory
note due in 2009. The terms of the note, which allow the principal balance to fluctuate
dependent on the trading price of the Company’s common stock, create a derivative
instrument that is accounted for under the provisions of SFAS 133. As a result
of the extinguishment of the note in full in January 2002, management estimated
the fair value of this derivative to approximate the face amount of the note. The
derivative asset offsets the face amount of the note in the consolidated balance
sheet as of December 31, 2001.
Financial Instruments
To meet the reporting requirements of Statement
of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial
Instruments” (“SFAS 107”), the Company calculates the estimated fair value of financial
instruments using quoted market prices of similar instruments or discounted cash
flow techniques. At December 31, 2001 and 2000, there were no differences between
the carrying amounts and the estimated fair values of the Company’s financial
instruments, other than as follows (in thousands):
|
|
December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Investment in direct financing leases
|
$
|
19,340
|
|
|
$
|
22,317
|
|
|
$
|
24,877
|
|
|
$
|
17,541
|
|
Debt
|
$
|
(963,600
|
)
|
|
$
|
(974,039
|
)
|
|
$
|
(1,152,570
|
)
|
|
$
|
(844,334
|
)
|
Interest rate swap agreement
|
$
|
(13,564
|
)
|
|
$
|
(13,564
|
)
|
|
$
|
—
|
|
|
$
|
(5,023
|
)
|
Use of Estimates in Preparation of Financial
Statements
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets and liabilities,
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risks
The Company’s credit risks relate primarily
to cash and cash equivalents, restricted cash, accounts receivable and investment
in direct financing leases. Cash and cash equivalents and restricted cash are primarily
held in bank accounts and overnight investments. The Company’s accounts receivable
and investment in direct financing leases represent amounts due primarily from governmental
agencies. The Company’s financial instruments are subject to the possibility
of loss in carrying value as a result of either the failure of other parties to
perform according to their contractual obligations or changes in market prices that
make the instruments less valuable.
54
Approximately 93% of the Company’s
revenue for the year ended December 31, 2001 relates to amounts earned under federal,
state and local government management contracts. Approximately 29% and 58% of the
Company’s revenue was from federal and state governments, respectively, for
the year ended December 31, 2001. Management revenue from the BOP represents approximately
13% of total revenue for 2001. No other customer generated more than 10% of total
revenue.
Comprehensive Income
Statement of Financial Accounting Standards
No. 130, “Reporting Comprehensive Income” establishes standards for reporting
and displaying comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income encompasses all changes in stockholders’
equity except those arising from transactions with stockholders.
The Company reports comprehensive income
in the consolidated statements of stockholders’ equity. Comprehensive income
(loss) was equivalent to the Company’s reported net income (loss) for the years
ended December 31, 2000 and 1999.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards
Board (the “FASB”) issued Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).
SFAS 142 addresses accounting and reporting standards for acquired goodwill and
other intangible assets and supersedes Accounting Principles Board Opinion No.
17, “Intangible Assets”. Under SFAS 142, goodwill and intangible assets
with indefinite useful lives will no longer be subject to amortization, but instead
will be tested for impairment at least annually using a fair-value-based approach.
The impairment loss is the amount, if any, by which the implied fair value of goodwill
and intangible assets with indefinite useful lives is less than their carrying amounts
and is recognized in earnings. SFAS 142 also requires companies to disclose information
about the changes in the carrying amount of goodwill, the carrying amount of intangible
assets by major intangible asset class for those assets subject to amortization
and those not subject to amortization, and the estimated intangible asset amortization
expense for the next five years. As of December 31, 2001, the Company had $104.0
million of goodwill, net of accumulated amortization of $9.1 million reflected on
the accompanying balance sheet associated with the Operating Company Merger and
the acquisitions of the Service Companies completed during the fourth quarter of
2000. The Company does not have any intangible assets with indefinite useful lives.
Amortization of goodwill for the year ended December 31, 2001 was $7.6 million.
Provisions of SFAS 142 are required to be
applied starting with fiscal years beginning after December 15, 2001. Because goodwill
and some intangible assets will no longer be amortized, the reported amounts of
goodwill and some intangible assets (as well as total assets) will not decrease
at the same time and in the same manner as under previous standards. There may
be more volatility in reported income than under previous standards because impairment
losses may occur irregularly and in varying amounts. Effective January 1, 2002,
the Company adopted SFAS 144. The impairment losses recognized due to the initial
application of SFAS 142 resulting from a transitional impairment test applied as
of January 1, 2002, were reported as a cumulative effect of a change in accounting
principle in the Company’s statement of operations during the first quarter
of 2002. See Note 24 for further discussion related to the impairment losses recognized
in the first quarter of 2002.
55
In August 2001, the FASB issued Statement
of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS 121, and the accounting and reporting provisions of APB
Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions”, for the disposal of a segment of a business
(as previously defined in that Opinion). SFAS 144 retains the fundamental provisions
of SFAS 121 for recognizing and measuring impairment losses on long-lived assets
held for use and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS 121. Unlike SFAS 121, however,
an impairment assessment under SFAS 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS 142. The provisions of
SFAS 144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years. The Company
adopted SFAS 144 on January 1, 2002. See Note 24 for further discussion related
to the adoption of SFAS 144.
In April 2002, the FASB issued Statement
of Financial Accounting Standards No. 145, “Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,”
referred to herein as SFAS 145. SFAS 145 rescinds Statement of Financial Accounting
Standards No. 4, “Reporting Gains and Losses from Extinguishment of Debt”
(“SFAS 4”), which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of the related income tax effect. As a result, the criteria in APB 30 will now be
used to classify those gains and losses. SFAS 145 amends SFAS 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
SFAS 145 also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change accounting
practice. The provisions of SFAS 145 are effective for financial statements issued
for fiscal years beginning after May 15, 2002, and interim periods within those
fiscal years.
During the second quarter of 2002 and as
further described in Note 24, prior to the required adoption of SFAS 145, the Company
reported an extraordinary charge of approximately $36.7 million associated with
the refinancing of the Company’s senior debt in May 2002. Under SFAS 145,
any gain or loss on extinguishment of debt that was classified as an extraordinary
item in prior periods that does not meet the criteria in APB 30 for classification
as an extraordinary item shall be reclassified. The Company plans to adopt SFAS
145 on January 1, 2003. Accordingly, in financial reporting periods after adoption,
the extraordinary charge reported in the second quarter of 2002 will be reclassified.
In June 2002, the FASB issued Statement
of Financial Accounting Standards No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)” (“Issue 94-3”). SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
as generally defined in Issue 94-3 was recognized at the date of an entity’s
commitment to an exit plan. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with early application
encouraged. Adoption of SFAS 146 is not expected to have a material impact on the
Company’s financial statements.
56
Reclassifications
Merger transaction expenses totaling $24.2
million for the year ended December 31, 2000, have been reclassified to general
and administrative expense to conform with the 2001 presentation. Lease expenses
totaling $2.4 million for the year ended December 31, 2000 have been reclassified
to operating expenses to conform with the 2001 presentation.
5. REVERSE STOCK SPLIT
At the Company’s 2000 annual meeting
of stockholders held in December 2000, the holders of the Company’s common
stock approved a reverse stock split of the Company’s common stock at a ratio
to be determined by the board of directors of the Company of not less than one-for-ten
and not to exceed one-for-twenty. The board of directors subsequently approved
a reverse stock split of the Company’s common stock at a ratio of one-for-ten,
which was effective May 18, 2001.
As a result of the reverse stock split,
every ten shares of the Company’s common stock issued and outstanding immediately
prior to the reverse stock split has been reclassified and changed into one fully
paid and nonassessable share of the Company’s common stock. The Company paid
its registered common stockholders cash in lieu of issuing fractional shares in
the reverse stock split at a post reverse-split rate of $8.60 per share, totaling
approximately $15,000. The number of common shares and per share amounts have been
retroactively restated in the accompanying financial statements and these notes
to the financial statements to reflect the reduction in common shares and corresponding
increase in the per share amounts resulting from the reverse stock split. In conjunction
with the reverse stock split, during the second quarter of 2001, the Company amended
its charter to reduce the number of shares of common stock which the Company was
authorized to issue to 80.0 million shares (on a post-reverse stock split basis)
from 400.0 million shares (on pre-reverse stock split basis). As of December 31,
2001, the Company had 27.9 million shares of common stock issued and outstanding
(on a post-reverse stock split basis).
6. HISTORICAL RELATIONSHIP WITH
OPERATING COMPANY
Operating Company was a private prison management
company that operated, managed and leased the substantial majority of facilities
owned by the Company from January 1, 1999 through September 30, 2000. As a result
of the 1999 Merger and certain contractual relationships existing between the Company
and Operating Company, the Company was dependent on Operating Company for a significant
source of its income. In addition, the Company was obligated to pay Operating Company
tenant incentive fees and fees for services rendered to the Company in the development
of its correctional and detention facilities. As of September 30, 2000 (immediately
prior to the Operating Company Merger), Operating Company leased 37 of the 46 operating
facilities owned by the Company.
CCA Note
As discussed in Note 3, the Company succeeded
to the CCA Note as a result of the 1999 Merger. Interest on the CCA Note was payable
annually at an interest rate of 12%. Principal was due in six equal annual installments
of approximately $22.8 million beginning December 31, 2003. Ten percent of the
outstanding principal of the CCA Note was personally guaranteed by the Company’s
former chief executive officer, who also served as the chief executive officer and
a member of the board of directors of Operating Company. As of December 31, 1999,
the first scheduled payment of interest, totaling approximately $16.4 million, on
the CCA Note was unpaid. Pursuant to the terms of the CCA Note, Operating Company
was required to make the payment on December 31,
57
1999; however, pursuant to the
terms of a subordination agreement, dated as of March 1, 1999, by and between the
Company and the agent of Operating Company’s revolving credit facility, Operating
Company was prohibited from making the scheduled interest payment on the CCA Note
when Operating Company was not in compliance with certain financial covenants under
the facility. Pursuant to the terms of the subordination agreement between the
Company and the agent of Operating Company’s revolving credit facility, the
Company was prohibited from accelerating payment of the principal amount of the
CCA Note or taking any other action to enforce its rights under the provisions of
the CCA Note for so long as Operating Company’s revolving credit facility remained
outstanding. The Company fully reserved the $16.4 million of interest accrued under
the terms of the CCA Note during 1999.
On September 29, 2000, the Company and Operating
Company entered into agreements pursuant to which the Company forgave interest due
under the CCA Note. The Company forgave $27.4 million of interest accrued under
the terms of the CCA Note from January 1, 1999 to August 31, 2000, all of which
had been fully reserved. The Company also fully reserved the $1.4 million of interest
accrued for the month of September 2000. In connection with the Operating Company
Merger, the CCA Note was assumed by the Company’s wholly-owned subsidiary on
October 1, 2000. The CCA Note has since been extinguished.
Deferred Gain on Sale to Operating Company
The sale to Operating Company as part of
the 1999 Merger generated a deferred gain of $63.3 million. No amortization of
the Operating Company deferred gain occurred during the year ended December 31,
1999 or during the period from January 1, 2000 through September 30, 2000. Effective
with the Operating Company Merger on October 1, 2000, the Company applied the unamortized
balance of the deferred gain on sales of contracts in accordance with the purchase
method of accounting under APB 16.
Operating Company Leases
In order for New Prison Realty to qualify
as a REIT, New Prison Realty’s income generally could not include income from
the operation and management of correctional and detention facilities, including
those facilities operated and managed by Old CCA. Accordingly, immediately prior
to the 1999 Merger, the non-real estate assets of Old CCA, including all management
contracts, were sold to Operating Company and the Service Companies. On January
1, 1999, immediately after the 1999 Merger, all existing leases between Old CCA
and Old Prison Realty were cancelled. Following the 1999 Merger, a substantial
majority of the correctional and detention facilities acquired by New Prison Realty
in the 1999 Merger were leased to Operating Company pursuant to the Operating Company
Leases. The terms of the Operating Company Leases were for twelve years and could
be extended at fair market rates for three additional five-year periods upon the
mutual agreement of the Company and Operating Company.
As of December 31, 1999, the annual base
rent with respect to each facility was subject to increase each year in an amount
equal to the lesser of: (i) 4% of the annualized yearly rental payment with respect
to such facility or (ii) 10% of the excess of Operating Company’s aggregate
gross management revenues for the prior year over a base amount of $325.0 million.
For the years ended December 31, 2000 and
1999, the Company recognized rental revenue from Operating Company of $31.0 million
and $263.5 million, respectively, all of which was collected by the Company as discussed
below.
58
During the month ended December 31, 1999,
and the nine months ended September 30, 2000, due to Operating Company’s liquidity
position, Operating Company failed to make timely rental payments under the terms
of the Operating Company Leases. As of December 31, 1999, approximately $24.9 million
of rents due from Operating Company to the Company were unpaid. The terms of the
Operating Company Leases provided that rental payments were due and payable on December
25, 1999. During 2000, Operating Company paid the $24.9 million of lease payments
related to 1999 and $31.0 million of lease payments related to 2000. For the nine
months ended September 30, 2000, the Company recognized rental revenue from Operating
Company of $244.3 million and recorded a reserve of $213.3 million, resulting in
recognition of net rental revenue from Operating Company of $31.0 million. The
reserve was recorded due to the uncertainty regarding the collectibility of the
revenue. In June 2000, the Operating Company Leases were amended to defer, with
interest, rental payments originally due during the period from January 1, 2000
to September 2000, with the exception of certain installment payments. Through
September 30, 2000, the Company accrued and fully reserved $8.0 million of interest
due to the Company on unpaid rental payments. On September 29, 2000, the Company
and Operating Company entered into agreements pursuant to which the Company forgave
all unpaid rental payments, plus accrued interest, due and payable from Operating
Company through August 31, 2000, including $190.8 million due under the Operating
Company Leases and $7.9 million of interest due on the unpaid rental payments.
The Company also fully reserved the $22.5 million of rental payments due for the
month of September 2000. The Company cancelled the Operating Company Leases in
connection with the Operating Company Merger.
Tenant Incentive Arrangement
On May 4, 1999, the Company and Operating
Company entered into an amended and restated tenant incentive agreement (the “Amended
and Restated Tenant Incentive Agreement”), effective as of January 1, 1999, providing
for (i) a tenant incentive fee of up to $4,000 per bed payable with respect to all
future facilities developed and facilitated by Operating Company, as well as certain
other facilities which, although operational on January 1, 1999, had not achieved
full occupancy, and (ii) an $840 per bed allowance for all beds in operation at
the beginning of January 1999, approximately 21,500 beds, that were not subject
to the tenant allowance in the first quarter of 1999. The amount of the amended
tenant incentive fee included an allowance for rental payments to be paid by Operating
Company prior to the facility reaching stabilized occupancy. The term of the Amended
and Restated Tenant Incentive Agreement was four years, unless extended upon the
written agreement of the Company and Operating Company. The incentive fees with
Operating Company were deferred and were to be amortized as a reduction to rental
revenue over the respective lease term.
For the year ended December 1999, the Company
paid tenant incentive fees of $68.6 million, with $2.9 million of those fees amortized
against rental revenue. During the fourth quarter of 1999, the Company undertook
a plan that contemplated either merging with Operating Company and thereby eliminating
the Operating Company Leases or amending the Operating Company Leases to reduce
the lease payments to be paid by Operating Company to the Company during 2000.
Consequently, the Company determined that the remaining deferred tenant incentive
fees under the existing lease arrangements at December 31, 1999 were not realizable
and wrote-off fees totaling $65.7 million.
During the nine months ended September 30,
2000, the Company opened two facilities and expanded three facilities that were
operated and leased by Operating Company. The Company expensed the tenant incentive
fees due Operating Company in 2000, totaling $11.9 million, but made no payments
to Operating Company in 2000 with respect to the Amended and Restated Tenant Incentive
Agreement. On June 9, 2000, Operating Company and the Company amended the
59
Amended
and Restated Tenant Incentive Agreement to defer, with interest, payments to Operating
Company by the Company pursuant to this agreement. At September 30, 2000, $11.9
million of payments under the Amended and Restated Tenant Incentive Agreement, plus
$0.7 million of interest payments, were accrued but unpaid under the original terms
of this agreement. This agreement was cancelled in connection with the Operating
Company Merger on October 1, 2000, and the unpaid amounts due under this agreement,
plus accrued interest, were applied in accordance with the purchase method of accounting
under APB 16.
Trade Name Use Agreement
In connection with the 1999 Merger, Old
CCA entered into a trade name use agreement with Operating Company (the “Trade Name
Use Agreement”). Under the Trade Name Use Agreement, which had a term of ten years,
Old CCA granted to Operating Company the right to use the name “Corrections Corporation
of America” and derivatives thereof, subject to specified terms and conditions therein.
The Company succeeded to this interest as a result of the 1999 Merger. In consideration
for such right under the terms of the Trade Name Use Agreement, Operating Company
was to pay a licensing fee equal to (i) 2.75% of the gross revenue of Operating
Company for the first three years, (ii) 3.25% of Operating Company’s gross
revenue for the following two years, and (iii) 3.625% of Operating Company’s
gross revenue for the remaining term, provided that after completion of the 1999
Merger the amount of such fee could not exceed (a) 2.75% of the gross revenue of
the Company for the first three years, (b) 3.5% of the Company’s gross revenue
for the following two years, and (c) 3.875% of the Company’s gross revenue
for the remaining term.
For the years ended December 31, 2000 and
1999, the Company recognized income of $7.6 million and $8.7 million, respectively,
from Operating Company under the terms of the Trade Name Use Agreement, all of which
was collected. This agreement was cancelled in connection with the Operating Company
Merger.
Right to Purchase Agreement
On January 1, 1999, immediately after the
1999 Merger, the Company and Operating Company entered into a Right to Purchase
Agreement (the “Right to Purchase Agreement”) pursuant to which Operating Company
granted to the Company a right to acquire, and lease back to Operating Company at
fair market rental rates, any correctional or detention facility acquired or developed
and owned by Operating Company in the future for a period of ten years following
the date inmates are first received at such facility. The initial annual rental
rate on such facilities was to be the fair market rental rate as determined by the
Company and Operating Company. Additionally, Operating Company granted the Company
a right of first refusal to acquire any Operating Company-owned correctional or
detention facility should Operating Company receive an acceptable third party offer
to acquire any such facility. The Company did not purchase any assets from Operating
Company under the Right to Purchase Agreement, which was cancelled in connection
with the Operating Company Merger.
Services Agreement
On January 1, 1999, immediately after the
1999 Merger, the Company entered into a services agreement (the “Services Agreement”)
with Operating Company pursuant to which Operating Company agreed to serve as a
facilitator of the construction and development of additional facilities on behalf
of the Company for a term of five years from the date of the Services Agreement.
In such capacity, Operating Company agreed to perform, at the direction of the
Company, such services as were customarily needed in the construction and development
of correctional and detention
60
facilities, including services related to construction
of the facilities, project bidding, project design and governmental relations.
In consideration for the performance of such services by Operating Company, the
Company agreed to pay a fee equal to 5% of the total capital expenditures (excluding
the incentive fee discussed below and the 5% fee herein referred to) incurred in
connection with the construction and development of a facility, plus an amount equal
to approximately $560 per bed for facility preparation services provided by Operating
Company prior to the date on which inmates are first received at such facility.
The board of directors of the Company subsequently authorized payments, and pursuant
to an amended and restated services agreement, dated as of March 5, 1999 (the “Amended
and Restated Services Agreement”), the Company agreed to pay up to an additional
5% of the total capital expenditures (as determined above) to Operating Company
if additional services were requested by the Company. A majority of the Company’s
development projects during 1999 and 2000 were subject to a fee totaling
10%.
Costs incurred by the Company under the
Amended and Restated Services Agreement were capitalized as part of the facilities’
development cost. Costs incurred under the Amended and Restated Services
Agreement and capitalized as part of the facilities’ development cost totaled
$41.6 million for the year ended December 31, 1999, and $5.6 million for the nine
months ended September 30, 2000.
On June 9, 2000, Operating Company and the
Company amended the Amended and Restated Services Agreement to defer, with interest,
payments to Operating Company by the Company pursuant to this agreement. At September
30, 2000, $5.6 million of payments under the Amended and Restated Services Agreement,
plus $0.3 million of interest payments, were accrued but unpaid under the original
terms of this agreement. This agreement was cancelled in connection with the Operating
Company Merger and the unpaid amounts due under the agreement, plus accrued interest,
were applied in accordance with the purchase method of accounting under APB 16.
Business Development Agreement
On May 4, 1999, the Company entered into
a four year business development agreement (the “Business Development Agreement”)
with Operating Company, which provided that Operating Company would perform, at
the direction of the Company, services designed to assist the Company in identifying
and obtaining new business. Pursuant to the agreement, the Company agreed to pay
to Operating Company a total fee equal to 4.5% of the total capital expenditures
(excluding the amount of the tenant incentive fee and the services fee discussed
above as well as the 4.5% fee) incurred in connection with the construction and
development of each new facility, or the construction and development of an addition
to an existing facility, for which Operating Company performed business development
services.
Costs incurred by the Company under the
Business Development Agreement were capitalized as part of the facilities’
development cost. Costs incurred under the Business Development Agreement and capitalized
as part of the facilities’ development cost totaled $15.0 million for the year
ended December 31, 1999. No costs were incurred under the Business Development
Agreement during 2000. On June 9, 2000, Operating Company and the Company amended
this agreement to defer, with interest, any payments to Operating Company by the
Company pursuant to this agreement. This agreement was cancelled in connection
with the Operating Company Merger.
7. PROPERTY AND EQUIPMENT
At December 31, 2001, the Company owned
43 real estate properties, including 39 correctional, detention and juvenile facilities,
three of which the Company leases to other operators, two
61
corporate office buildings,
and two correctional and detention facilities under construction. Two of the 39
correctional and detention facilities the Company owns were substantially idle at
December 31, 2001. Additionally, at December 31, 2001, the Company managed 28 correctional
and detention facilities owned by government agencies and sub-leased an alternative
educational facility for at-risk juveniles. Two of the properties owned by the
Company were held for sale and were classified as such on the accompanying balance
sheet as of December 31, 2001. Management contracts for three of the 28 correctional
and detention facilities owned by government agencies were terminated during 2002.
Also, the sub-leased alternative educational facility was sold during 2002. Accordingly,
the costs of the property and equipment at these facilities were excluded from the
table below and were included in assets of discontinued operations on the accompanying
balance sheet. See Note 24 for further discussion of contract terminations subsequent
to December 31, 2001.
Property and equipment, at cost, consists
of the following:
|
|
December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
(in thousands)
|
| Land and improvements
|
$
|
30,899
|
|
|
$
|
25,651
|
|
| Buildings and
improvements
|
|
1,516,336
|
|
|
|
1,523,560
|
|
| Equipment
|
|
29,357
|
|
|
|
27,455
|
|
| Office furniture
and fixtures
|
|
20,792
|
|
|
|
20,270
|
|
| Construction
in progress
|
|
101,220
|
|
|
|
99,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,698,604
|
|
|
|
1,696,352
|
|
| Less: Accumulated
depreciation
|
|
(132,386
|
)
|
|
|
(81,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,566,218
|
|
|
$
|
1,615,130
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $52.5 million,
$57.2 million and $44.1 million for the years ended December 31, 2001, 2000 and
1999, respectively.
Pursuant to the 1999 Merger, the Company
acquired all of the assets and liabilities of Old Prison Realty on January 1, 1999,
including 23 leased facilities and one real estate property under construction.
The real estate properties acquired by the Company in conjunction with the acquisition
of Old Prison Realty were recorded at estimated fair market value in accordance
with the purchase method of accounting prescribed by APB 16, resulting in a $1.2
billion increase to real estate properties at January 1, 1999.
As of December 31, 2001, nine of the facilities
owned by the Company are subject to options that allow various governmental agencies
to purchase those facilities. In addition, two of the facilities are constructed
on land that the Company leases from governmental agencies under ground leases.
Under the terms of those ground leases, the facilities become the property of the
governmental agencies upon expiration of the ground leases. The Company depreciates
these two properties over the term of the ground lease.
The Company’s property and equipment,
along with all other tangible and intangible assets of the Company, are pledged
as collateral on the Company’s Senior Bank Credit Facility. See discussion
of the Senior Bank Credit Facility in Note 15.
62
8. IMPAIRMENT LOSSES AND ASSETS
HELD FOR SALE
As of December 31, 2001, the Company was
holding for sale numerous assets, including six parcels of land, one correctional
facility leased to a governmental agency, and one correctional facility leased to
a private operator, with an aggregate book value of approximately $22.3 million.
Additionally, the Company has had discussions with various parties regarding the
potential sale of additional assets. The Company expects to use the net proceeds
from any such sales to repay outstanding indebtedness. However, there can be no
assurance that the Company will complete any such sales.
SFAS 121 requires impairment losses to be
recognized for long-lived assets used in operations when indications of impairment
are present and the estimate of undiscounted future cash flows is not sufficient
to recover asset carrying amounts. Under terms of the June 2000 Waiver and Amendment,
the Company was obligated to complete the Restructuring, including the Operating
Company Merger, and complete the restructuring of management through the appointment
of a new chief executive officer and a new chief financial officer. The June 2000
Waiver and Amendment also permitted the acquisitions of PMSI and JJFMSI in connection
with the Restructuring. During the third quarter of 2000, the Company named a new
president and chief executive officer, followed by the appointment of a new chief
financial officer during the fourth quarter. At the Company’s 2000 annual
meeting of stockholders held during the fourth quarter of 2000, the Company’s
stockholders elected a newly constituted board of directors of the Company, including
a majority of independent directors.
Following the completion of the Operating
Company Merger and the acquisitions of PMSI and JJFMSI, during the fourth quarter
of 2000, after considering the Company’s financial condition, the Company’s
new management developed a strategic operating plan to improve the Company’s
financial position and developed revised projections for 2001 to evaluate various
potential transactions. Management also conducted strategic assessments and evaluated
the Company’s assets for impairment. Further, the Company evaluated the utilization
of existing facilities, projects under development, and excess land parcels, and
identified certain of these non-strategic assets for sale.
In accordance with SFAS 121, the Company
estimated the undiscounted net cash flows for each of its properties and compared
the sum of those undiscounted net cash flows to the Company’s investment in
each property. Through its analyses, the Company determined that eight of its correctional
and detention facilities and the long-lived assets of the transportation business
had been impaired. For these properties, the Company reduced the carrying values
of the underlying assets to their estimated fair values, as determined based on
anticipated future cash flows discounted at rates commensurate with the risks involved.
The resulting impairment loss totaled $420.5 million.
During the fourth quarter of 2000, as part
of the strategic assessment, the Company’s management committed to a plan of
disposal for certain long-lived assets of the Company. In accordance with SFAS
121, the Company recorded losses on these assets based on the difference between
the carrying value and the estimated net realizable value of the assets. The Company
estimated the net realizable values of certain facilities and direct financing leases
held for sale based on outstanding offers to purchase and appraisals, as well as
by utilizing various financial models, including discounted cash flow analyses,
less estimated costs to sell each asset. The resulting impairment loss for these
assets totaled $86.1 million.
Included in property and equipment were
costs associated with the development of potential facilities. Based on the Company’s
strategic assessment during the fourth quarter of 2000,
63
management decided
to abandon further development of these projects and expense any amounts previously
capitalized. The resulting expense totaled $2.1 million.
During the third quarter of 2000, the Company’s
management determined either not to pursue further development or to reconsider
the use of certain parcels of property in California, Maryland and the District
of Columbia. Accordingly, the Company reduced the carrying values of the land to
their estimated net realizable value, resulting in an impairment loss totaling $19.2
million.
In December 1999, based on the poor financial
position of the Operating Company, the Company determined that three of its correctional
and detention facilities located in the state of Kentucky and leased to Operating
Company were impaired. In accordance with SFAS 121, the Company reduced the carrying
values of the underlying assets to their estimated fair values, as determined based
on anticipated future cash flows discounted at rates commensurate with the risks
involved. The resulting impairment loss totaled $76.4 million.
9. ACQUISITIONS AND DIVESTITURES
In April 1999, the Company purchased the
Eden Detention Center in Eden, Texas for $28.1 million. Prior to the Operating
Company Merger, the facility had been leased to Operating Company under lease terms
substantially similar to the Operating Company Leases.
In June 1999, the Company incurred a loss
of $1.6 million as a result of a settlement with the State of South Carolina for
property previously owned by Old CCA. Under the settlement, the Company, as the
successor to Old CCA, received $6.5 million in three installments by June 30, 2001
for the transferred assets. The net proceeds were approximately $1.6 million less
than the surrendered assets’ depreciated book value.
In December 1999, the Company incurred a
loss of $0.4 million resulting from a sale of a newly constructed facility in Florida.
Construction on the facility was completed by the Company in May 1999. In accordance
with the terms of the management contract between Old CCA and Polk County, Florida,
Polk County exercised an option to purchase the facility. Net proceeds of $40.5
million were received by the Company.
During 2000, the contract to manage one
of the Company’s facilities located in Kentucky expired and was not renewed.
Subsequent to the non-renewal of the contract, the Company sold the facility for
a net sales price of approximately $1.0 million, resulting in a gain on sale of
approximately $0.6 million during 2000, after writing-down the carrying value of
this asset by $7.1 million in 1999. Also, during 2000, Operating Company and the
contracting party mutually agreed to cancel the management contracts on two facilities
located in North Carolina. In March 2001, the Company sold one of these facilities,
the Mountain View Correctional Facility, located in Spruce Pine, North Carolina,
which was classified as held for sale under contract as of December 31, 2000, for
a net sales price of approximately $24.9 million. On June 28, 2001, the Company
sold the other of these facilities, the Pamlico Correctional Facility, located in
Bayboro, North Carolina, which was classified as held for sale as of December 31,
2000, for a net sales price of approximately $24.0 million. The net proceeds from
both of these sales were used to pay-down a like portion of amounts outstanding
under the Company’s Senior Bank Credit Facility.
On April 10, 2001, the Company sold its
interest in the Agecroft facility, located in Salford, England, which was classified
as held for sale as of December 31, 2000, for a net sales price of approximately
$65.7 million through the sale of all the issued and outstanding capital stock of
Agecroft Properties, Inc., a wholly-owned subsidiary of the Company. The net proceeds
from the
64
sale were used to pay-down a
like portion of amounts outstanding under
the Senior Bank Credit Facility.
On October 3, 2001, the Company sold its
Southern Nevada Women’s Correctional Facility, a facility located in Las Vegas,
Nevada, which was classified as held for sale during the second quarter of 2001,
for a net sales price of approximately $24.1 million. The net proceeds were used
to pay-down a like portion of amounts outstanding under the Senior Bank Credit Facility.
Subsequent to the sale, the Company continues to manage the facility pursuant to
a contract with the State of Nevada.
As of December 31, 2001, the Company was
holding for sale two additional correctional facilities and various parcels of undeveloped
land with an aggregate carrying value of $22.3 million. A substantial portion of
these assets were reclassified during 2002 to assets held for use when the Company
was unable to achieve acceptable sales prices, as further described in Note 24.
10. INVESTMENTS IN AFFILIATES
In connection with the 1999 Merger, Old
CCA received 100% of the non-voting common stock in each of PMSI and JJFMSI, valued
at the implied fair market values of $67.1 million and $55.9 million, respectively.
The Company succeeded to these interests as a result of the 1999 Merger. The Company’s
ownership of the non-voting common stock of PMSI and JJFMSI entitled the
Company to receive, when and if declared by the boards of directors of the respective
companies, 95% of the net income, as defined, of each company as cash dividends.
Dividends were cumulative if not declared. For the years ended December 31, 2000
and 1999, the Company received cash dividends from PMSI totaling approximately $4.4
million and $11.0 million, respectively. For the years ended December 31, 2000
and 1999, the Company received cash dividends from JJFMSI totaling approximately
$2.3 million and $10.6 million, respectively.
The following operating information presents
a combined summary of the results of operations of PMSI and JJFMSI for the period
January 1, 2000 through November 30, 2000 and for the year ended December 31, 1999
(in thousands):
|
|
January 1, 2000 -
November 30, 2000
|
|
Year ended
December 31, 1999
|
|
|
|
|
|
Revenue
|
$
|
279,228
|
|
|
$
|
288,289
|
|
Net income (loss) before taxes
|
$
|
(588
|
)
|
|
$
|
12,851
|
|
During 2000 and prior to the acquisition
of PMSI and JJFMSI on December 1, 2000, PMSI and JJFMSI (collectively) recorded
approximately $27.3 million in charges related to agreements with the Company and
Operating Company. Of these charges, approximately $5.4 million were fees paid
under a trade name use agreement, approximately $9.9 million were fees paid under
an administrative service agreement and approximately $12.0 million were fees paid
under an indemnification agreement with the Company.
Under the terms of the indemnification agreements
with the Company, effective September 29, 2000, each of PMSI and JJFMSI agreed to
pay the Company $6.0 million in exchange for full indemnity by the Company for any
and all liabilities incurred by PMSI and JJFMSI in connection with the settlement
or disposition of litigation known as Prison Acquisition Company, LLC v. Prison
Realty Trust, Inc., et al. described in Note 21 herein. The combined and consolidated
results of operations of the Company were unaffected by the indemnification agreements.
65
As previously discussed in Note 4, the combined
and consolidated financial statements reflect the results of operations of PMSI
and JJFMSI under the equity method of accounting from January 1, 1999 through August
31, 2000, on a combined basis from September 1, 2000 through November 30, 2000,
and consolidated for the month of December 2000.
As discussed in Note 3, the Company’s
9.5% non-voting interest in Operating Company had been recorded in the 1999 Merger
at its implied value of $4.8 million. In accordance with the provisions of APB
18, the Company applied the recognized equity in losses of Operating Company of
$19.3 million for the year ended December 31, 1999, first to reduce the Company’s
recorded investment in Operating Company of $4.8 million to zero and then
to reduce the carrying value of the CCA Note by the amount of the recognized equity
in losses in excess of $4.8 million. The Company’s recognized equity in losses
related to its investment in Operating Company for the nine months ended September
30, 2000 of $20.6 million were applied to reduce the carrying value of the CCA Note.
For the years ended December 31, 2000 and
1999, equity in earnings (losses) and amortization of deferred gains were approximately
$11.6 million in losses and $3.6 million in earnings, respectively. For the year
ended December 31, 2000, the Company recognized equity in losses of PMSI and JJFMSI
of approximately $12,000 and $870,000, respectively. In addition, for the year
ended December 31, 2000, the Company recognized equity in losses of Operating Company
of approximately $20.6 million. For 2000, the amortization of the deferred gain
on the sales of contracts to PMSI and JJFMSI was approximately $6.5 million and
$3.3 million, respectively. For the year ended December 31, 1999, the Company recognized
equity in earnings of PMSI and JJFMSI of approximately $4.7 million and $7.5 million,
respectively. In addition, for the year ended December 31, 1999, the Company recognized
equity in losses of Operating Company of approximately $19.3 million. For 1999,
the amortization of the deferred gain on the sales of contracts to PMSI and JJFMSI
was approximately $7.1 million and $3.6 million, respectively.
For the year ended December 31, 2001, equity
in loss was approximately $0.4 million. The loss resulted from the Company’s
interest in APM, an entity holding the management contract for the Agecroft facility
under a 25-year prison management contract with an agency of the U.K. government.
Agecroft, located in Salford, England, was previously constructed and owned by
a wholly-owned subsidiary of the Company, which was sold in April 2001, as further
discussed in Note 9. As discussed in Note 4, the Company has extended a working
capital loan to APM, which totaled $5.6 million, including accrued interest, as
of December 31, 2001.
11. INVESTMENT IN DIRECT FINANCING
LEASES
At December 31, 2001, the Company’s
investment in a direct financing lease represents net receivables under a building
and equipment lease between the Company and a governmental agency.
A schedule of future minimum rentals to
be received under the direct financing lease in years subsequent to December 31,
2001, is as follows (in thousands):
66
2002
|
|
$
|
2,793
|
|
2003
|
|
|
2,793
|
|
2004
|
|
|
2,793
|
|
2005
|
|
|
2,793
|
|
2006
|
|
|
2,793
|
|
Thereafter
|
|
|
28,621
|
|
|
|
|
|
|
|
Total minimum obligation
|
|
|
42,586
|
|
Less unearned interest income
|
|
|
(23,246
|
)
|
Less current portion of direct financing lease
|
|
|
(467
|
)
|
|
|
|
|
|
|
Investment in direct financing leases
|
|
$
|
18,873
|
|
|
|
|
|
|
|
As discussed in Note 8, during the fourth
quarter of 2000, the Company’s management committed to a plan of disposal for
certain long-lived assets of the Company, including the Agecroft facility and the
D.C. Correctional Treatment Facility, both previously classified as investments
in direct financing leases. The Company estimated the fair values of these direct
financing leases held for sale based on outstanding offers to purchase and discounted
cash flow analyses. These direct financing leases, with estimated net realizable
values totaling $85.7 million at December 31, 2000, were classified on the consolidated
balance sheet as assets held for sale as of December 31, 2000. The investment in
the D.C. Correctional Treatment Facility was reclassified to an investment in direct
financing lease during 2001 from assets held for sale because the Company was unable
to achieve an acceptable sales price. Also during 2001, the Company identified
the direct financing lease of Southern Nevada Women’s Correctional Facility
as a non-strategic asset and entered into discussions with a potential buyer of
this facility. During 2001, the Company sold its interest in the Agecroft facility
and Southern Nevada Women’s Correctional Facility, as further discussed in
Note 9.
During the years ended December 31, 2001,
2000 and 1999, the Company recorded interest income of $4.3 million, $10.1 million,
and $3.4 million, respectively, under all direct financing leases.
12. OTHER ASSETS
Other assets consist of the following (in
thousands):
|
|
December 31,
|
|
|
|
|
|
2001
|
2000
|
|
|
|
|
Debt issuance costs, less accumulated
amortization of $40,698 and $21,502
|
$
|
24,915
|
|
$
|
37,099
|
|
Notes receivable
|
|
6,271
|
|
|
6,703
|
|
Value of workforce, net
|
|
1,132
|
|
|
2,425
|
|
Contract acquisition costs, net
|
|
905
|
|
|
2,190
|
|
Deposits
|
|
2,680
|
|
|
1,630
|
|
Other
|
|
690
|
|
|
1,692
|
|
|
|
|
|
|
|
|
|
$
|
36,593
|
|
$
|
51,739
|
|
|
|
|
|
|
|
|
67
13. ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
Accounts payable and accrued expenses consist
of the following (in thousands):
|
|
December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
|
|
|
|
Stockholder litigation settlements
|
$
|
5,998
|
|
|
$
|
75,406
|
|
Other accrued litigation
|
|
18,082
|
|
|
|
41,114
|
|
Trade accounts payable
|
|
15,036
|
|
|
|
26,356
|
|
Accrued salaries and wages
|
|
19,145
|
|
|
|
14,183
|
|
Accrued workers’ compensation
|
|
15,117
|
|
|
|
12,508
|
|
Accrued property taxes
|
|
14,578
|
|
|
|
13,638
|
|
Accrued interest
|
|
12,392
|
|
|
|
5,765
|
|
Other
|
|
42,997
|
|
|
|
54,342
|
|
|
|
|
|
|
|
|
|
|
$
|
143,345
|
|
|
$
|
243,312
|
|
|
|
|
|
|
|
|
|
14. DISTRIBUTIONS TO STOCKHOLDERS
On March 22, 2000, the board of directors
of the Company declared a quarterly dividend on the Company’s Series A Preferred
Stock of $0.50 per share to preferred stockholders of record on March 31, 2000.
These dividends were paid on April 17, 2000. In connection with the June 2000
Waiver and Amendment, the Company was prohibited from declaring or paying any further
dividends with respect to its outstanding Series A Preferred Stock until such time
as the Company raised at least $100.0 million in equity. Dividends with respect
to the Series A Preferred Stock continued to accrue under the terms of the Company’s
charter until such time as payment of such dividends was permitted under
the terms of the Senior Bank Credit Facility. Under the terms of the Company’s
charter, in the event dividends are unpaid and in arrears for six or more quarterly
periods, the holders of the Series A Preferred Stock have the right to vote for
the election of two additional directors to the board of directors. During the
third quarter of 2001, the Company received a consent and waiver from its lenders
under the Senior Bank Credit Facility, which allowed the Company’s board of
directors to declare a cash dividend on September 28, 2001. As a result of the
board’s declaration, the holders of the Company’s Series A Preferred Stock
received $0.50 on October 15, 2001 for every share of the Series A Preferred Stock
they held on the record date. Approximately $2.2 million was paid on October 15,
2001, as a result of this dividend.
As further discussed in Note 15, on December
7, 2001, the Company completed an amendment and restatement of its existing Senior
Bank Credit Facility. As a result of the December 2001 Amendment and Restatement,
certain financial and non-financial covenants were amended, including the removal
of prior restrictions on the Company’s ability to pay cash dividends on shares
of its issued and outstanding Series A Preferred Stock. Under the terms of the
December 2001 Amendment and Restatement, the Company is permitted to pay quarterly
dividends, when declared by the board of directors, on the shares of its issued
and outstanding Series A Preferred Stock, including all dividends in arrears. Following
the December 2001 Amendment and Restatement, on December 13, 2001, the Company’s
board of directors declared a cash dividend on the Series A Preferred Stock for
the fourth quarter of 2001 and for the five quarters in arrears, payable on January
15, 2002. As a result of the board’s declaration, the holders of the Company’s
Series A Preferred Stock received $3.00 for every share of Series A Preferred
Stock they held on the record date. The dividend was based on a dividend rate of
8% per annum of the stock’s stated value of $25.00 per share. Approximately
$12.9 million was paid on January 15, 2002, as a result of this dividend, which
was accrued as of December 31, 2001.
68
Under the terms of the Company’s charter,
as in effect prior to the Restructuring, the Company was required to elect to be
taxed as a REIT for federal income tax purposes for its taxable year ended December
31, 1999. The Company, as a REIT, could not complete any taxable year with accumulated
earnings and profits from a taxable corporation. Accordingly, the Company was required
to distribute Old CCA’s earnings and profits to which it succeeded in the 1999
Merger (the “Accumulated Earnings and Profits”). For the year ended December
31, 1999, the Company made approximately $217.7 million of distributions related
to its common stock and Series A Preferred Stock. Because the Company’s Accumulated
Earnings and Profits were approximately $152.5 million, and the Company’s distributions
were deemed to have been paid first from those Accumulated Earnings and Profits,
the Company met the above-described distribution requirements. In addition to distributing
its Accumulated Earnings and Profits, the Company, in order to qualify for taxation
as a REIT with respect to its 1999 taxable year, was required to distribute 95.0%
of its taxable income for 1999. The Company believes that this distribution requirement
was satisfied by its distribution of shares of the Company’s Series B Preferred
Stock, as discussed below.
On September 22, 2000, the Company issued
approximately 5.9 million shares of its Series B Preferred Stock in connection with
its remaining 1999 REIT distribution requirement. The distribution was made to
the Company’s common stockholders of record on September 14, 2000, who received
five shares of Series B Preferred Stock for every 100 shares of the Company’s
common stock held on the record date. The Company paid its common stockholders
approximately $15,000 in cash in lieu of issuing fractional shares of Series B Preferred
Stock. On November 13, 2000, the Company issued approximately 1.6 million additional
shares of Series B Preferred Stock in satisfaction of this REIT distribution requirement.
This distribution was made to the Company’s common stockholders of record
on November 6, 2000, who received one share of Series B Preferred Stock for every
100 shares of the Company’s common stock held on the record date. The Company
also paid its common stockholders approximately $15,000 in cash in lieu of issuing
fractional shares of Series B Preferred Stock in the second distribution.
The Company recorded the issuance of the
Series B Preferred Stock at its stated value of $24.46 per share, or a total of
$183.9 million. The Company has determined the distribution made on September 22,
2000 amounted to a taxable distribution by the Company of approximately $107.6 million.
The Company has also determined that the distribution made on November 13, 2000
amounted to a taxable distribution by the Company of approximately $20.4 million.
Common stockholders who received shares of Series B Preferred Stock in the distribution
generally were required to include the taxable value of the distribution in ordinary
income. Refer to Note 19 for a more complete description of the terms of Series
B Preferred Stock.
On December 13, 2000, the Company’s
board of directors declared a paid-in-kind dividend on the shares of Series B Preferred
Stock for the period from September 22, 2000 (the original date of issuance) through
December 31, 2000, payable on January 2, 2001, to the holders of record of the Company’s
Series B Preferred Stock on December 22, 2000. As a result of the board’s declaration,
the holders of the Company’s Series B Preferred Stock were
entitled to receive approximately 3.3 shares of Series B Preferred Stock for every
100 shares of Series B Preferred Stock held by them on the record date. The number
of shares to be issued as the dividend was based on a dividend rate of 12.0% per
annum of the stock’s stated value ($24.46 per share).
Quarterly distributions and the resulting
tax classification for common stock distributions are as follows for the years ended
December 31, 2001, 2000 and 1999:
69
|
Declaration Date
|
Record
Date
|
|
Payment
Date
|
|
Distribution Per
Share
|
|
Ordinary Income
|
|
Return of
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 03/04/99
|
|
03/19/99
|
|
|
|
03/31/99
|
|
|
$
|
0.60
|
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
| 05/11/99
|
|
06/18/99
|
|
|
|
06/30/99
|
|
|
$
|
0.60
|
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
| 08/27/99
|
|
09/17/99
|
|
|
|
09/30/99
|
|
|
$
|
0.60
|
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
Quarterly distributions and the resulting
tax classification for the Series A Preferred Stock distributions are as follows
for the years ended December 31, 2001, 2000 and 1999:
| Declaration Date
|
Record
Date
|
|
Payment
Date
|
|
Distribution Per
Share
|
Ordinary Income
|
|
Return of
Capital
|
|
|
|
|
|
|
|
|
|
| 03/04/99
|
|
03/31/99
|
|
|
|
04/15/99
|
|
|
$
|
0.50
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
| 05/11/99
|
|
06/30/99
|
|
|
|
07/15/99
|
|
|
$
|
0.50
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
| 08/27/99
|
|
09/30/99
|
|
|
|
10/15/99
|
|
|
$
|
0.50
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
| 12/22/99
|
|
12/31/99
|
|
|
|
01/15/00
|
|
|
$
|
0.50
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
| 03/22/00
|
|
03/31/00
|
|
|
|
04/17/00
|
|
|
$
|
0.50
|
|
|
100.0
|
%
|
|
|
0.0
|
%
|
| 09/28/01
|
|
10/05/01
|
|
|
|
10/15/01
|
|
|
$
|
0.50
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
| 12/13/01
|
|
12/31/01
|
|
|
|
01/15/02
|
|
|
$
|
3.00
|
|
|
(A
|
)
|
|
|
(A
|
)
|
Quarterly distributions and the resulting
tax classification for the Series B Preferred Stock distributions are as follows
for the year ended December 31, 2001 and 2000:
| Declaration Date
|
Record
Date
|
|
Payment
Date
|
|
Fair Market
Value Per
Share
|
|
Ordinary Income
|
|
Return of
Capital
|
|
|
|
|
|
|
|
|
|
|
|
| 12/13/00
|
|
12/22/00
|
|
|
|
01/02/01
|
|
|
$
|
6.85
|
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
| 03/13/01
|
|
03/19/01
|
|
|
|
04/02/01
|
|
|
$
|
9.20
|
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
| 06/11/01
|
|
06/19/01
|
|
|
|
07/02/01
|
|
|
$
|
14.00
|
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
| 09/07/01
|
|
09/17/01
|
|
|
|
10/01/01
|
|
|
$
|
14.83
|
|
|
|
0.0
|
%
|
|
|
100.0
|
%
|
| 12/11/01
|
|
12/21/01
|
|
|
|
01/02/02
|
|
|
$
|
19.55
|
|
|
|
(A
|
)
|
|
|
(A
|
)
|
(A) – Will be determined based on the extent
the Company has current or accumulated earnings and profits in 2002.
70
15. DEBT
Debt consists of the following:
|
|
December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
(in
thousands)
|
$1.0 Billion Senior Bank Credit Facility:
|
|
|
|
|
|
|
|
Revolving loans, with unpaid balance due
January 1, 2002, interest payable periodically at variable interest rates
(10.92% at December 31, 2000), replaced with term loans during 2001.
|
$
|
—
|
|
|
$
|
382,532
|
|
Term loans, quarterly principal payments
of $1.5 million through September 30, 2001, at which time the quarterly
principal payment was increased to $2.2 million with unpaid balance due December 31,
2002, interest payable periodically at variable interest rates. The
interest rate was 7.41% and 11.01% at December 31, 2001 and 2000, respectively.
|
|
791,906
|
|
|
|
589,750
|
|
|
|
|
|
|
|
|
|
Total outstanding under Senior Bank Credit Facility
|
|
791,906
|
|
|
|
972,282
|
|
Senior Notes, principal due at maturity
in June 2006, interest payable semi- annually at 12%.
|
|
100,000
|
|
|
|
100,000
|
|
10.0% Convertible Subordinated Notes,
principal due at maturity in December 2008, interest payable semi-annually at
9.5% through June 30, 2000, at which time the rate was increased to 10.0%.
|
|
40,000
|
|
|
|
40,000
|
|
8.0% Convertible Subordinated Notes, principal due at
maturity in February 2005 with call provisions beginning in February 2003, interest payable
quarterly at 7.5% through June 30, 2000, at which time the rate was increased to 8.0%.
|
|
30,000
|
|
|
|
30,000
|
|
$50.0 Million Revolving Credit Facility, with
unpaid balance due at maturity in December 2002, interest payable at prime plus 2.25%. The
interest rate was 7.0% and 11.75% at December 31, 2001 and 2000, respectively.
|
|
—
|
|
|
|
7,601
|
|
10.0% Convertible Subordinated Notes, principal
due at maturity in December 2003, interest payable semi-annually at 10.0%.
|
|
1,114
|
|
|
|
1,114
|
|
Other
|
|
580
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
963,600
|
|
|
|
1,152,570
|
|
Less: Current portion of long-term debt
|
|
(792,009
|
)
|
|
|
(14,594
|
)
|
|
|
|
|
|
|
|
|
|
$
|
171,591
|
|
|
$
|
1,137,976
|
|
|
|
|
|
|
|
|
|
Senior Bank Credit Facility
Original Credit Facility. On January
1, 1999, in connection with the completion of the 1999 Merger, the Company obtained
a $650.0 million secured credit facility (the “Credit Facility”) from
NationsBank, N.A., as Administrative Agent, and several U.S. and non-U.S. banks.
The Credit Facility included up to a maximum of $250.0 million in tranche B term
loans and $400.0 million in revolving loans, including a $150.0 million subfacility
for letters of credit. The term loans required quarterly principal payments of
$625,000 throughout the term of the loans with the remaining balance maturing on
December 31, 2002. The revolving loans were scheduled to mature January 1, 2002.
Interest rates, unused commitment fees and letter of credit fees on the Credit
Facility were subject to change based on the Company’s senior debt rating.
71
Senior Bank Credit Facility. On
August 4, 1999, the Company completed an amendment and restatement of the Credit
Facility (the “Senior Bank Credit Facility”) increasing amounts available
to the Company to $1.0 billion through the addition of a $350.0 million tranche
C term loan, payable in equal quarterly installments of $875,000 through September
30, 2002, with the balance to be paid in full on December 31, 2002. Under the Senior
Bank Credit Facility, Lehman Commercial Paper Inc. (“Lehman”) became the
administrative agent.
The Senior Bank Credit Facility bore interest
at variable rates of interest based on a spread over an applicable base rate or
the London Interbank Offering Rate (“LIBOR”) (as elected by the Company),
which spread was determined by reference to the Company’s credit rating.
Prior to the June 2000 Waiver and Amendment, the spread for the revolving loans
ranged from 0.5% to 2.25% for base rate loans and from 2.0% to 3.75% for LIBOR rate
loans. Prior to the June 2000 Waiver and Amendment, the spread for term loans ranged
from 2.25% to 2.5% for base rate loans and from 3.75% to 4.0% for LIBOR rate loans.
During the first quarter of 2000, the ratings
on the Company’s bank indebtedness, senior unsecured indebtedness and Series
A Preferred Stock were lowered. As a result of these reductions, the interest rate
applicable to outstanding amounts under the Senior Bank Credit Facility for revolving
loans was increased by 0.5%, to 1.5% over the base rate and to 3.0% over the LIBOR
rate; the spread for term loans remained unchanged at 2.5% for base rate loans and
4.0% for LIBOR rate loans. The rating on the Company’s indebtedness was also
lowered during the second quarter of 2000, although no interest rate increase was
attributable to this rating adjustment.
June 2000 Waiver and Amendment. Following
the approval of the requisite senior lenders under the Senior Bank Credit
Facility, the Company, certain of its wholly-owned subsidiaries, various lenders
and Lehman, as administrative agent, executed the June 2000 Waiver and Amendment,
dated as of June 9, 2000. Upon effectiveness, the June 2000 Waiver and Amendment
waived or addressed all then existing events of default under the provisions of
the Senior Bank Credit Facility that resulted from: (i) the financial condition
of the Company and Operating Company; (ii) the transactions undertaken by the Company
and Operating Company in an attempt to resolve the liquidity issues of the Company
and Operating Company; and (iii) previously announced restructuring transactions.
As a result of the then existing defaults, the Company was subject to the default
rate of interest, or 2.0% higher than the rates discussed above, effective from
January 25, 2000 until June 9, 2000. The June 2000 Waiver and Amendment also contained
certain amendments to the Senior Bank Credit Facility, including the replacement
of existing financial covenants contained in the Senior Bank Credit Facility applicable
to the Company with new financial ratios following completion of the Restructuring.
As a result of the June 2000 Waiver and Amendment, the Company began monthly interest
payments on outstanding amounts under the Senior Bank Credit Facility beginning
July 2000.
In obtaining the June 2000 Waiver and Amendment,
the Company agreed to complete certain transactions which were incorporated as covenants
in the June 2000 Waiver and Amendment. Pursuant to these requirements, the Company
was obligated to complete the Restructuring, including: (i) the Operating Company
Merger; (ii) the amendment of its charter to remove the requirements that it elect
to be taxed as a REIT commencing with its 2000 taxable year; (iii) the restructuring
of management; and (iv) the distribution of shares of Series B Preferred Stock in
satisfaction of the Company’s remaining 1999 REIT distribution requirement.
The June 2000 Waiver and Amendment also amended the terms of the Senior Bank Credit
Facility to permit (i) the amendment of the Operating Company Leases and the other
contractual arrangements between the Company and Operating Company, and (ii) the
merger of each of PMSI and JJFMSI with the Company, upon terms and conditions specified
in the June 2000 Waiver and Amendment.
72
The June 2000 Waiver and Amendment prohibited:
(i) the Company from settling its then outstanding stockholder litigation for cash
amounts not otherwise fully covered by the Company’s existing directors’
and officers’ liability insurance policies; (ii) the declaration and payment
of dividends with respect to the Company’s currently outstanding Series A Preferred
Stock prior to the receipt of net cash proceeds of at least $100.0 million from
the issuance of additional shares of common or preferred stock; and (iii) Operating
Company from amending or refinancing its revolving credit facility on terms and
conditions less favorable than Operating Company’s then existing revolving
credit facility. The June 2000 Waiver and Amendment also required the Company to
complete the securitization of lease payments (or other similar transaction) with
respect to the Company’s Agecroft facility on or prior to February 28, 2001,
although such deadline was extended (as described herein).
As a result of the June 2000 Waiver and
Amendment, the Company was generally required to use the net cash proceeds received
by the Company from certain transactions, including the following transactions,
to repay outstanding indebtedness under the Senior Bank Credit Facility:
| •
|
any disposition
of real estate assets; and
|
|
|
|
| •
|
the sale-leaseback
of the Company’s headquarters.
|
The Company was also required to apply a
designated portion of its “excess cash flow,” as such term was defined
in the June 2000 Waiver and Amendment, to the prepayment of outstanding indebtedness
under the Senior Bank Credit Facility.
As a result of the June 2000 Waiver and
Amendment, the interest rate spreads applicable to outstanding borrowings under
the Senior Bank Credit Facility were increased by 0.5%. As a result, the range
of the spread for the revolving loans became 1.0% to 2.75% for base rate loans and
2.5% to 4.25% for LIBOR rate loans. The resulting range of the spread for the term
loans became 2.75% to 3.0% for base rate loans and 4.25% to 4.5% for LIBOR rate
loans. Based on the Company’s credit rating at that time, the range of the
spread for revolving loans was 2.75% for base rate loans and 4.25% for LIBOR rate
loans, while the range of the spread for term loans was 3.0% for base rate loans
and 4.5% for LIBOR rate loans.
November 2000 Consent and Amendment. During
the third and fourth quarters of 2000, the Company was not in compliance
with certain applicable financial covenants contained in the Company’s Senior
Bank Credit Facility, including: (i) debt service coverage ratio; (ii) interest
coverage ratio; (iii) leverage ratio; and (iv) net worth. In November 2000, the
Company obtained the consent of the requisite percentage of the senior lenders (the
“November 2000 Consent and Amendment”) to replace previously existing
financial covenants with amended financial covenants, each defined in the November
2000 Consent and Amendment:
| •
|
total leverage
ratio;
|
|
|
|
| •
|
interest
coverage ratio;
|
|
|
|
| •
|
fixed charge
coverage ratio;
|
|
|
|
| •
|
ratio of
total indebtedness to total capitalization;
|
|
|
|
| •
|
minimum
EBIDTA; and
|
|
|
|
| •
|
total beds
occupied ratio.
|
73
The November 2000 Consent and Amendment
further provided that the Company would be required to use commercially reasonable
efforts to complete a “capital raising event” on or before June 30, 2001.
A “capital raising event” was defined in the November 2000 Consent and
Amendment as any combination of the following transactions, which together would
result in net cash proceeds to the Company of $100.0 million:
| •
|
an offering
of the Company’s common stock through the distribution of rights to the Company’s
existing stockholders;
|
|
|
|
| •
|
any other
offering of the Company’s common stock or certain types of the Company’s
preferred stock;
|
|
|
|
| •
|
issuances
by the Company of unsecured, subordinated indebtedness providing for in-kind payments
of principal and interest until repayment of the Senior Bank Credit Facility;
|
|
|
|
| •
|
certain
types of asset sales by the Company, including the sale-leaseback of the Company’s
headquarters, but excluding the securitization of lease payments (or other
similar transaction) with respect to the Agecroft facility.
|
The November 2000 Consent and Amendment
also contained limitations upon the use of proceeds obtained from the completion
of such “capital raising events.” The requirements relating to “capital raising
events” contained in the November 2000 Consent and Amendment replaced the requirement
contained in the Senior Bank Credit Facility that the Company use commercially reasonable
efforts to consummate a rights offering on or before December 31, 2000.
The Company had considered a distribution
of rights to purchase common or preferred stock to the Company’s existing stockholders,
or an equity investment in the Company from an outside investor. However, the Company
determined that it was not commercially reasonable to issue additional equity or
debt securities, other than those securities for which the Company had already contractually
agreed to issue, including primarily the issuance of shares of the Company’s
common stock in connection with the settlement of the Company’s stockholder
litigation, as more fully discussed in Note 21. Further, as a result of the Company’s
restructuring during the third and fourth quarters of 2000, prior to the
completion of the audit of the Company’s 2000 financial statements and the
filing of the Company’s Annual Report on Form 10-K for the year ended December
31, 2000 with the SEC on April 17, 2001, the Company was unable to provide the SEC
with the requisite financial information required to be included in a registration
statement. Therefore, even if the Company had been able to negotiate a public or
private sale of its equity securities on commercially reasonable terms, the Company’s
inability to obtain an effective SEC registration statement with respect
to such securities prior to April 17, 2001 would have effectively prohibited any
such transaction. Moreover, the terms of any private sale of the Company’s
equity securities likely would have included a requirement that the Company register
with the SEC the resale of the Company’s securities issued to a private purchaser
thereby also making it impossible to complete any private issuance of its securities.
Due to the fact that the Company would have been unable to obtain an effective registration
statement, and therefore, would have been unable to make any public issuance of
its securities (or any private sale that included the right of resale), any actions
prior to April 17, 2001 to complete a capital raising event through the sale of
equity or debt securities would have been futile.
Although the Company would have technically
been able to file a registration statement with the SEC following April 17, 2001,
the Company believes that various market factors, including the depressed market
price of the Company’s common stock immediately preceding April 17, 2001, the
pending reverse stock split required to maintain the Company’s continued NYSE
listing, and the
74
uncertainty regarding the Company’s maturity of the revolving
loans under the Senior Bank Credit Facility, made the issuance of additional equity
or debt securities commercially unreasonable.
Because the issuance of additional equity
or debt securities was deemed unreasonable, the Company determined that the sale
of assets represented the most effective means by which the Company could satisfy
the covenant. During the first and second quarters of 2001, the Company completed
the sale of its Mountain View Correctional Facility for approximately $24.9 million
and its Pamlico Correctional Facility for approximately $24.0 million, respectively.
During the fourth quarter of 2001, the Company completed the sale of its Southern
Nevada Women’s Correctional Facility for approximately $24.1 million and was
actively pursuing the sales of additional assets. As a result of the foregoing,
the Company believes it demonstrated commercially reasonable efforts to complete
the $100.0 million capital raising event as of June 30, 2001. Under terms of the
December 2001 Amendment and Restatement, further described below, the Company’s
obligation to complete the capital raising event was removed.
The maturities of the loans under the Senior
Bank Credit Facility remained unchanged as a result of the November 2000 Consent
and Amendment. No event of default was declared due to the amendment of the financial
covenants obtained in connection with the November 2000 Consent and Amendment.
As a result of the November 2000 Consent and Amendment, the interest rate applicable
to the Company’s Senior Bank Credit Facility remained unchanged from the rate
stipulated in the June 2000 Waiver and Amendment. This applicable rate, however,
was subject to (i) an increase of 25 basis points (0.25%) on July 1, 2001 if the
Company had not prepaid $100.0 million of the outstanding loans under the Senior
Bank Credit Facility, and (ii) an increase of 50 basis points (0.50%) on October
1, 2001 if the Company had not prepaid an aggregate of $200.0 million of the loans
under the Senior Bank Credit Facility.
The Company satisfied the condition to prepay,
prior to July 1, 2001, $100.0 million of outstanding loans under the Senior Bank
Credit Facility through the application of proceeds from the sale of the Mountain
View Correctional Facility, the Pamlico Correctional Facility and the completion
of the Agecroft transaction, and through the lump sum pay-down of $35.0 million
of outstanding loans under the Senior Bank Credit Facility with cash on hand. Although
the Company applied additional proceeds from the sale of the Southern Nevada Women’s
Correctional Facility to further pay-down the Senior Bank Credit Facility,
the Company did not satisfy the condition to prepay, prior to October 1, 2001, $200.0
million of outstanding loans under the Senior Bank Credit Facility. As a result,
the interest rates under the Senior Bank Credit Facility were increased by 0.50%
until the Senior Bank Credit Facility was amended and restated in December 2001,
as further discussed below.
Amendments in 2001. In January 2001,
the requisite percentage of the Company’s senior lenders under the Senior Bank
Credit Facility consented to the Company’s issuance of a promissory note (described
in Note 21) in partial satisfaction of its requirements under the definitive settlement
agreements relating to the Company’s then-outstanding stockholder litigation
(the “January 2001 Consent and Amendment”). The January 2001 Consent
and Amendment also modified certain provisions of the Senior Bank Credit Facility
to permit the issuance of the promissory note.
In March 2001, the Company obtained an amendment
to the Senior Bank Credit Facility which: (i) changed the date the securitization
of lease payments (or other similar transaction) with respect to the Company’s
Agecroft facility was required to be consummated from February 28, 2001 to March
31, 2001; (ii) modified the calculation of EBITDA used in calculating the total
leverage ratio, to take into effect any loss of EBITDA that may result from certain
asset dispositions, and (iii)
75
modified the minimum EBITDA covenant to permit a reduction
by the amount of EBITDA that certain asset dispositions had generated.
The securitization of lease payments (or
other similar transaction) with respect to the Company’s Agecroft facility
did not close by the required date. However, the covenant allowed for a 30 day
grace period during which the lenders under the Senior Bank Credit Facility could
not exercise their rights to declare an event of default. On April 10, 2001, prior
to the expiration of the grace period, the Company consummated the Agecroft transaction
through the sale of all of the issued and outstanding capital stock of Agecroft
Properties, Inc., a wholly-owned subsidiary of the Company, and used the net proceeds
to pay-down the Senior Bank Credit Facility, thereby fulfilling the Company’s
covenant requirements with respect to the Agecroft transaction.
The Senior Bank Credit Facility also contained
a covenant requiring the Company to provide the lenders with audited financial statements
within 90 days of the Company’s fiscal year-end, subject to an additional five-day
grace period. Due to the Company’s attempts to close the Agecroft transaction,
the Company did not provide the audited financial statements within the required
time period. However, the Company obtained a waiver from the lenders under the
Senior Bank Credit Facility of this financial reporting requirement. This waiver
also cured the resulting cross-default under the Company’s $41.1 million convertible
subordinated notes. During the third quarter of 2001, the Company also obtained
waivers from the lenders under the Senior Bank Credit Facility to permit the settlement
of the Fortress/Blackstone litigation, as further described in Note 21, and to pay
a one-time dividend with respect to the Series A Preferred Stock, which was paid
on October 15, 2001 as discussed in Note 14.
December 2001 Amendment and Restatement.
During December 2001, the Company completed an amendment and restatement of
the Senior Bank Credit Facility (the “December 2001 Amendment and Restatement”).
As part of the December 2001 Amendment and Restatement, the existing $269.4
million revolving portion of the Senior Bank Credit Facility, which was to mature
on January 1, 2002, was replaced with a term loan of the same amount maturing on
December 31, 2002, to coincide with the maturity of other term loans under the Senior
Bank Credit Facility.
Pursuant to terms of the December 2001 Amendment
and Restatement, all loans under the Senior Bank Credit Facility bore interest at
a variable rate of 5.5% over LIBOR, or 4.5% over the base rate, at the Company’s
option, through June 30, 2002. Following June 30, 2002, the applicable interest
rate for all loans under the Senior Bank Credit Facility was scheduled to increase
to 6.5% over LIBOR, or 5.5% over the base rate, at the Company’s option. In
the event the Company was unable to refinance the entire Senior Bank Credit Facility
prior to July 1, 2002, the Company would also be required to pay the lenders under
the Senior Bank Credit Facility an additional fee equal to 1.0% of the amounts then
outstanding under the Senior Bank Credit Facility.
As a result of the December 2001 Amendment
and Restatement, certain financial and non-financial covenants were amended, including
the removal of prior restrictions on the Company’s ability to pay cash dividends
on shares of the Company’s issued and outstanding Series A Preferred Stock,
including all dividends in arrears. Subsequent to December 31, 2001, the Company
paid $12.9 million to shareholders of Series A Preferred Stock. See Note 14 for
further discussion of distributions to stockholders.
The Company completed a refinancing of the
Senior Bank Credit Facility during May 2002. See further discussion of the comprehensive
refinancing in Note 24.
76
During 1999, the Company incurred costs
of $59.2 million in consummating the Credit Facility and the Senior Bank Credit
Facility transactions, including $41.2 million related to the amendment and restatement.
The Company wrote-off $9.0 million of expenses related to the Credit Facility upon
completion of the amendment and restatement, in addition to $5.6 million of other
debt financing costs written-off in 1999. During 2000 the Company incurred and
capitalized approximately $9.0 million in consummating the June 2000 Waiver and
Amendment, and $0.5 million for the November 2000 Consent and Amendment. During
2001, the Company incurred and capitalized approximately $5.8 million in consummating
the 2001 December Amendment and Restatement.
In accordance with the terms of the Senior
Bank Credit Facility, the Company entered into certain swap arrangements guaranteeing
that it will not pay an index rate greater than 6.51% on outstanding balances of
at least $325.0 million through December 31, 2002. The effect of these arrangements
is recognized in interest expense and in the change in fair value of derivative
instruments, as further described in Note 17. In connection with the completion
of the comprehensive refinancing of the Senior Bank Credit Facility during May 2002,
the Company terminated the swap agreement. See further discussion of the termination
of the swap agreement in Note 24.
$100.0 Million Senior Notes
On June 11, 1999, the Company completed
its offering of $100.0 million aggregate principal amount of 12% Senior Notes due
2006 (the “12% Senior Notes”). Interest on the 12% Senior Notes is paid semi-annually
in arrears, and the 12% Senior Notes have a seven year non-callable term due June
1, 2006. Net proceeds from the offering were approximately $95.0 million, after
deducting expenses payable by the Company in connection with the offering. The
Company used the net proceeds from the sale of the 12% Senior Notes for general
corporate purposes and to repay revolving bank borrowings under the Senior Bank
Credit Facility. At any time prior to June 1, 2002, the Company may, at its option,
on any one or more occasions redeem up to 35% of the aggregate principal at a redemption
price equal to 112% of the principal amount thereof, with the proceeds of one or
more equity offerings, subject to certain restrictions. See Note 24 for further
discussion of a redemption of a substantial portion of the 12% Senior Notes in connection
with the comprehensive refinancing.
The Company has made all required interest
payments under the terms of the Senior Notes, and currently believes it is in compliance
with all of its covenants. The indenture governing the 12% Senior Notes contains
cross-default provisions, as further discussed below.
$41.1 Million Convertible Subordinated
Notes
On January 29, 1999, the Company issued
$20.0 million of convertible subordinated notes due December 2008, with interest
payable semi-annually at 9.5%. This issuance constituted the second tranche of
a commitment by the Company to issue an aggregate of $40.0 million of convertible
subordinated notes, with the first $20.0 million tranche issued in December 1998
under substantially similar terms. The convertible subordinated notes (the “$40.0
Million Convertible Subordinated Notes”) require that the Company revise the
conversion price as a result of the payment of a dividend or the issuance of stock
or convertible securities below market price. Additionally, the notes are non-callable
but are redeemable on or following January 1, 2005, at a redemption price equal
to 100% of the principal amount thereof.
During the first and second quarters of
2000, certain existing or potential events of default arose under the provisions
of the note purchase agreement relating to the $40.0 Million Convertible Subordinated
Notes as a result of the Company’s financial condition and a “change of control”
77
arising from the Company’s execution of
certain securities purchase agreements
with respect to the proposed restructuring. This “change of control” gave rise
to the right of MDP, the holder of the notes, to require the Company to
repurchase the notes at a price of 105% of the aggregate principal amount of such
notes within 45 days after the provision of written notice by such holders to the
Company. In addition, the Company’s defaults under the provisions of the note
purchase agreement gave rise to the right of the holders of such notes to require
the Company to pay an applicable default rate of interest of 20.0%. In addition
to the default rate of interest, as a result of the events of default, the Company
is obligated, under the original terms of the $40.0 Million Convertible Subordinated
Notes, to pay the holders of the notes contingent interest sufficient to permit
the holders to receive a 15.0% rate of return (increased by 0.5%, as further discussed
below), excluding the effect of the default rate of interest, on the $40.0 million
principal amount. The contingent interest is payable upon each of December 31, 2003
and upon repayment of the notes, unless the holders of the notes elect to convert
the notes into the Company’s common stock under the terms of the note purchase
agreement or unless the price of the Company’s common stock meets or exceeds
a “target price” as defined in the note purchase agreement. Such contingent
interest was retroactive to the date of issuance of the notes. The contingent interest
accrual as of December 31, 2001 amounted to $8.7 million.
In order to address the events of default
discussed above, on June 30, 2000, the Company and MDP executed a waiver and amendment
to the provisions of the note purchase agreement governing the notes. This waiver
and amendment provided for a waiver of all existing events of default under the
provisions of the note purchase agreement. In addition, the waiver and amendment
to the note purchase agreement amended the economic terms of the notes to increase
the applicable interest rate of the notes by 0.5% per annum from 9.5% to 10.0%,
and adjusted the conversion price of the notes to a price equal to 125% of the average
high and low sales price of the Company’s common stock on the NYSE for a period
of 20 trading days immediately following the earlier of (i) October 31, 2000 or
(ii) the closing date of the Operating Company Merger. The waiver and amendment
also increased the contingent interest rate to 15.5% retroactive to the date of
issuance of the notes. In addition, the waiver and amendment to the note purchase
agreement provided for the replacement of financial ratios applicable to the Company.
The conversion price for the notes has been established at $11.90 (as adjusted
for the reverse-stock split in May 2001), subject to adjustment in the future upon
the occurrence of certain events, including the payment of dividends and the issuance
of stock at below market prices by the Company. Under the terms of the waiver and
amendment, the distribution of the Company’s Series B Preferred Stock during
the fourth quarter of 2000 did not cause an adjustment to the conversion price of
the notes. In addition, the Company does not believe that the distribution of shares
of the Company’s common stock in connection with the settlement of all outstanding
stockholder litigation against the Company, as further discussed in Note 21, will
cause an adjustment to the conversion price of the notes. MDP, however, has indicated
its belief that such an adjustment is required. At an adjusted conversion price
of $11.90 (as adjusted for the reverse stock split in May 2001), the $40.0 Million
Convertible Subordinated Notes are convertible into approximately 3.4 million shares
(as adjusted for the reverse stock split in May 2001) of the Company’s common
stock.
In connection with the waiver and amendment
to the note purchase agreement, the Company issued additional convertible subordinated
notes containing substantially similar terms in the aggregate principal amount of
$1.1 million (collectively with the $40.0 Million Convertible Subordinated Notes,
the “$41.1 Million Convertible Subordinated Notes”), which amount represented
all interest owed at the default rate of interest through June 30, 2000. These
additional notes were convertible, at an adjusted conversion price of $11.90 (as
adjusted for the reverse-stock split in May 2001), into an additional 0.1 million
shares (as adjusted for the reverse-stock split in May 2001) of the Company’s
common stock. After giving consideration to the issuance of these additional notes,
the
78
Company has made all required interest
payments under the $40.0 Million Convertible
Subordinated Notes. On January 14, 2002, MDP converted the $1.1 million convertible
subordinated notes into approximately 0.1 million shares of common stock.
Under the terms of the registration rights
agreement between the Company and the holders of the $41.1 Million Convertible Subordinated
Notes, the Company is required to use its best efforts to file and maintain with
the SEC an effective shelf registration statement covering the future sale by the
holders of the shares of common stock to be used upon conversion of the notes.
As a result of the completion of the Restructuring, as previously discussed herein,
the Company was unable to file such a registration statement with the SEC prior
to the filing of the Company’s 2000 Form 10-K with the SEC on April 17, 2001.
Following the filing of the Company’s Form 10-K, the Company commenced negotiations
with MDP with respect to an amendment to the registration rights agreement to defer
the Company’s obligations to use its best efforts to file and maintain the
registration statement. MDP later informed the Company that it would not complete
such an amendment. As a result, the Company completed and filed a shelf registration
statement with the SEC on September 13, 2001, which became effective September 26,
2001, in compliance with this obligation.
The Company currently believes it is in
compliance with all covenants under the provisions of the $40.0 Million Convertible
Subordinated Notes, as amended. There can be no assurance, however, that the Company
will be able to remain in compliance with all covenants under the provisions of
the $40.0 Million Convertible Subordinated Notes. The provisions of the note purchase
agreement governing the $40.0 Million Convertible Subordinated Notes contain cross-default
provisions as further discussed below.
$30.0 Million Convertible Subordinated
Notes
The Company’s $30.0 million convertible
subordinated notes due February 2005 (the “$30.0 Million Convertible Subordinated
Notes”), which were issued to PMI Mezzanine Fund, L.P. (“PMI”) on
December 31, 1998, require that the Company revise the conversion price as a result
of the payment of a dividend or the issuance of stock or convertible securities
below market price.
Certain existing or potential events of
default arose under the provisions of the note purchase agreement relating to the
Company’s $30.0 Million Convertible Subordinated Notes as a result of the Company’s
financial condition and as a result of the Restructuring. However, on June
30, 2000, the Company and PMI executed a waiver and amendment to the provisions
of the note purchase agreement governing the notes. This waiver and amendment provided
for a waiver of all existing events of default under the revisions of the note purchase
agreement. In addition, the waiver and amendment to the note purchase agreement
amended the economic terms of the notes to increase the applicable interest rate
of the notes by 0.5% per annum, from 7.5% to 8.0%, and adjusted the conversion price
of the notes to a price equal to 125% of the average closing price of the Company’s common
stock on the NYSE for a period of 30 trading days immediately following
the earlier of (i) October 31, 2000 or (ii) the closing date of the Operating Company
Merger. In addition, the waiver and amendment to the note purchase agreement provided
for the replacement of financial ratios applicable to the Company.
The conversion price for the notes has been
established at $10.68 (as adjusted for the reverse stock split in May 2001), subject
to adjustment in the future upon the occurrence of certain events, including the
payment of dividends and the issuance of stock at below market prices by the Company.
Under the terms of the waiver and amendment, the distribution of the Company’s
Series B Preferred Stock during the fourth quarter of 2000 did not cause an adjustment
to the conversion
79
price of the notes. However, the distribution of shares of the
Company’s common stock in connection with the settlement of all outstanding
stockholder litigation against the Company, as further discussed in Note 21, will
cause an adjustment to the conversion price of the notes in an amount to be determined
at the time shares of the Company’s common stock are distributed pursuant to
the settlement. However, the ultimate adjustment to the conversion ratio will depend
on the number of shares of the Company’s common stock outstanding on the date
of issuance of the shares pursuant to the stockholder litigation settlement. In
addition, since all of the shares have not been issued simultaneously, multiple
adjustments to the conversion ratio will be required. The Company currently estimates
that the $30.0 Million Convertible Subordinated Notes will be convertible into approximately
3.4 million shares (as adjusted for the reverse stock split in May 2001) of the
Company’s common stock once all of the shares under the stockholder litigation
settlement have been issued.
At any time after February 28, 2004, the
Company may require the holder of the notes to convert all or a portion of the principal
amount of the indebtedness into shares of common stock if, at such time, the current
market price of the common stock has equaled or exceeded 150% of the conversion
price for 45 consecutive trading days.
At December 31, 2000, the Company was in
default under the terms of the note purchase agreement governing the $30.0 Million
Convertible Subordinated Notes. The default related to the Company’s failure
to comply with the total leverage ratio financial covenant. However, in March 2001,
the Company and PMI executed a waiver and amendment to the provisions of the note
purchase agreement governing the notes. This waiver and amendment provided for
a waiver of all existing events of default under the provisions of the note purchase
agreement and amended the financial covenants applicable to the Company.
The Company has made all required interest
payments under the $30.0 Million Convertible Subordinated Notes. The Company currently
believes it is in compliance with all covenants under the provisions of the $30.0
Million Convertible Subordinated Notes, as amended. There can be no assurance,
however, that the Company will be able to remain in compliance with all of the covenants
under the provisions of the $30.0 Million Convertible Subordinated Notes. The provisions
of the note purchase agreement governing the $30.0 Million Convertible Subordinated
Notes contain cross-default provisions as further discussed below.
$50.0 Million Revolving Credit Facility
On September 15, 2000, Operating Company
entered into a $50.0 million revolving credit facility with Lehman (the “Operating
Company Revolving Credit Facility”). This facility, which bore interest at
an applicable prime rate, plus 2.25%, was secured by the accounts receivable and
all other assets of Operating Company. This facility, which was scheduled to mature
on December 31, 2002, was assumed by a wholly-owned subsidiary of the Company in
connection with the Operating Company Merger. As of December 31, 2001, the Company
had no outstanding balance on the facility.
In connection with the comprehensive refinancing
completed in May 2002, the Operating Company Revolving Credit Facility was terminated.
See further discussion of the comprehensive refinancing in Note 24.
80
Other Debt Transactions
At December 31, 2001 and 2000, the
Company had $5.5 million and $2.2 million in letters of credit, respectively. The letters of credit were issued to
secure the Company’s workers’ compensation insurance policy, performance bonds and utility deposits. The
Company is required to maintain cash collateral for the letters of credit.
The Company capitalized interest
of $8.3 million and $37.7 million in 2000 and 1999, respectively. No interest was capitalized during 2001.
Debt maturities for the next five
years and thereafter are (in thousands):
2002
|
|
$
|
792,009
|
|
2003
|
|
|
1,228
|
|
2004
|
|
|
126
|
|
2005
|
|
|
30,139
|
|
2006
|
|
|
100,098
|
|
Thereafter
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
$
|
963,600
|
|
|
|
|
|
|
|
The above debt maturities do not
reflect the comprehensive refinancing completed in May 2002. See Note 24.
Cross-default Provisions
The provisions of the Company’s
debt agreements related to the Senior Bank Credit Facility, the $40.0 Million Convertible Subordinated Notes, the
$30.0 Million Convertible Subordinated Notes and the Senior Notes contain certain cross-default provisions. Any events of
default under the Senior Bank Credit Facility which give rise to the ability of the lenders under the Senior Bank Credit
Facility to exercise their acceleration rights result in an event of default under the Company’s $40.0 Million
Convertible Subordinated Notes. Any events of default under the Senior Bank Credit Facility that results in the
lenders’ actual acceleration of amounts outstanding thereunder also result in an event of default under the
Company’s $30.0 Million Convertible Subordinated Notes and the 12% Senior Notes. Additionally, any events of default
under the $40.0 Million Convertible Subordinated Notes, the $30.0 Million Convertible Subordinated Notes and the 12% Senior
Notes which give rise to the ability of the holders of such indebtedness to exercise their acceleration rights also result
in an event of default under the Senior Bank Credit Facility.
If the Company were to be in default
under the Senior Bank Credit Facility, and if the lenders under the Senior Bank Credit Facility elected to exercise their
rights to accelerate the Company’s obligations under the Senior Bank Credit Facility, such events could result in the
acceleration of all or a portion of the Company’s $40.0 Million Convertible Subordinated Notes, the $30.0 Million
Convertible Subordinated Notes and the 12% Senior Notes, which would have a material adverse effect on the Company’s
liquidity and financial position. Additionally, under the Company’s $40.0 Million Convertible Subordinated Notes, even
if the lenders under the Senior Bank Credit Facility did not exercise their acceleration rights, the holders of the $40.0
Million Convertible Subordinated Notes could require the Company to repurchase such notes upon an event of default under the
Senior Bank Credit Facility permitting acceleration. The Company does not have sufficient working capital to satisfy its
debt obligations in the event of an acceleration of all or a substantial portion of the Company’s outstanding
indebtedness.
81
16. INCOME TAXES
Prior to 1999, Old CCA, the
Company’s predecessor by merger, operated as a taxable subchapter C corporation. The Company elected to change its tax
status from a taxable corporation to a REIT effective with the filing of its 1999 federal income tax return. As of December
31, 1998, the Company’s balance sheet reflected $83.2 million in net deferred tax assets. In accordance with the
provisions of SFAS 109, the Company provided a provision for these deferred tax assets, excluding any estimated tax
liabilities required for prior tax periods, upon completion of the 1999 Merger and the election to be taxed as a REIT. As
such, the Company’s results of operations reflect a provision for income taxes of $83.2 million for the year ended
December 31, 1999. However, due to New Prison Realty’s tax status as a REIT, New Prison Realty recorded no income tax
provision or benefit related to operations for the year ended December 31, 1999.
In connection with the
Restructuring, on September 12, 2000 the Company’s stockholders approved an amendment to the Company’s charter to
remove provisions requiring the Company to elect to qualify and be taxed as a REIT for federal income tax purposes effective
January 1, 2000. As a result of the amendment to the Company’s charter, the Company is taxed as a taxable subchapter C
corporation beginning with its taxable year ended December 31, 2000. In accordance with the provisions of SFAS 109, the
Company was required to establish current and deferred tax assets and liabilities in its financial statements in the period
in which a change of tax status occurs. As such, the Company’s benefit for income taxes for the year ended December 31,
2000 includes the provision associated with establishing the deferred tax assets and liabilities in connection with the
change in tax status during the third quarter of 2000, net of a valuation allowance applied to certain deferred tax
assets.
The provision (benefit) for income
taxes of continuing operations is comprised of the following components (in thousands):
|
|
|
For the years ended December 31,
|
|
|
|
|
|
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
Current provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(26,593
|
)
|
|
$
|
—
|
|
State
|
|
|
173
|
|
|
|
586
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
|
(26,007
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,169
|
)
|
|
|
(19,739
|
)
|
|
|
74,664
|
|
State
|
|
|
(362
|
)
|
|
|
(2,256
|
)
|
|
|
8,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,531
|
)
|
|
|
(21,995
|
)
|
|
|
83,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(3,358
|
)
|
|
$
|
(48,002
|
)
|
|
$
|
83,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
Significant components of the
Company’s deferred tax assets and liabilities as of December 31, 2001 and 2000, are as follows (in thousands):
|
|
|
2001
|
|
2000
|
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Asset reserves and liabilities not yet deductible for tax
|
|
$
|
17,333
|
|
|
$
|
24,894
|
|
Less valuation allowance
|
|
|
(17,333
|
)
|
|
|
(24,894
|
)
|
|
|
|
|
|
|
|
|
|
|
Net total current deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Asset reserves and liabilities not yet deductible for tax
|
|
$
|
10,394
|
|
|
$
|
4,634
|
|
Tax over book basis of certain assets
|
|
|
21,799
|
|
|
|
41,923
|
|
Net operating loss carryforwards
|
|
|
82,369
|
|
|
|
56,115
|
|
Other
|
|
|
18,632
|
|
|
|
8,743
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred tax assets
|
|
|
133,194
|
|
|
|
111,415
|
|
Less valuation allowance
|
|
|
(133,194
|
)
|
|
|
(111,415
|
)
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Book over tax basis of certain assets
|
|
|
4,975
|
|
|
|
6,556
|
|
Basis difference in sale of investment
|
|
|
49,839
|
|
|
|
49,839
|
|
Other
|
|
|
1,697
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred tax liabilities
|
|
|
56,511
|
|
|
|
56,450
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax liabilities
|
|
$
|
56,511
|
|
|
$
|
56,450
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the
net tax effects 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 Company’s ability to generate taxable income within the net
operating loss carryforward period. Management has considered these factors in assessing the valuation allowance for
financial reporting purposes. In accordance with SFAS 109, the Company has provided a valuation allowance to reserve the
deferred tax assets. At December 31, 2001, the Company had U.S. net operating loss carryforwards for income tax purposes of
approximately $201.4 million and state net operating loss carryforwards of approximately $199.9 million. The carryforward
period begins expiring in 2009.
A reconciliation of the income tax
expense (benefit) at the statutory income tax rate and the effective tax rate as a percentage of pretax income (loss)
from continuing operations for the years ended December 31, 2001 and 2000 is as follows:
|
|
|
2001
|
|
2000
|
|
|
|
|
|
|
Statutory federal rate
|
|
|
35.0
|
|
%
|
|
|
|
(35.0
|
)
|
%
|
|
State taxes, net of federal tax benefit
|
|
|
4.0
|
|
|
|
|
|
(4.0
|
)
|
|
|
Change in tax status
|
|
|
—
|
|
|
|
|
|
12.5
|
|
|
|
Permanent differences (primarily related to stockholder litigation and sale of
a subsidiary)
|
|
|
(94.1
|
)
|
|
|
|
|
5.9
|
|
|
|
Change in valuation allowance
|
|
|
31.1
|
|
|
|
|
|
12.2
|
|
|
|
Other items, net
|
|
|
1.2
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22.8
|
)
|
%
|
|
|
|
(6.2
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
On March 9, 2002, the “Job
Creation and Worker Assistance Act of 2002” was signed into law. Among other changes, the law extends the net
operating loss carryback period to five years from two years for net operating losses arising in tax years ending in
2001 and 2002, and allows use of net operating loss carrybacks and carryforwards to offset 100% of the alternative
minimum taxable income. The Company experienced net operating losses during 2001 resulting primarily from the sale of
assets at prices below the tax basis of such assets. Under terms of the new law, the Company will be able to utilize
certain net operating losses to offset taxable income generated in 1997 and 1996. As a result of this tax law change
in 2002, the Company was due an income tax refund of approximately $32.2 million, which was reflected as an income tax
benefit during the first quarter of 2002.
17. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS 133, as amended, establishes
accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS 133, as amended, requires that changes in a
derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met.
SFAS 133, as amended, was issued in June 1998, and was effective for fiscal quarters of fiscal years beginning after
June 15, 2000. The Company adopted SFAS 133, as amended, effective January 1, 2001. The Company’s derivative
instruments include an interest rate swap agreement and a written option embedded in an 8.0%, $26.1 million promissory
note due in 2009, issued December 31, 2001, in conjunction with the settlement in federal court of a series of
stockholder lawsuits against the Company and certain of its existing and former directors and executive officers, as
further discussed in Note 21. Upon issuance, the Company’s derivative instruments will also include a written option
embedded in an 8.0%, $2.9 million promissory note due in 2009, expected to be issued in conjunction with the issuance of
shares of common stock to plaintiffs arising from the state court portion of the stockholder litigation settlement. The
issuance of these shares, and consequently the promissory note, is expected to occur during the fourth quarter of 2002.
In accordance with the terms of
the Senior Bank Credit Facility, the Company entered into certain swap arrangements in order to hedge the variable
interest rate associated with portions of the debt. The swap arrangements fix LIBOR at 6.51% (prior to the applicable
spread) on outstanding balances of at least $325.0 million through December 31, 2002. The difference between the
floating rate and the swap rate is recognized in interest expense.
The Company did not meet the hedge
accounting criteria for the interest rate swap agreement under SFAS 133, as amended, and has reflected in earnings the
change in the estimated fair value of the interest rate swap agreement. As of December 31, 2001, due to a reduction in
interest rates since entering into the swap agreement, the interest rate swap agreement had a negative fair value of $13.6
million. This negative fair value consists of a transition adjustment of $5.0 million for the reduction in the fair value of
the interest rate swap agreement from its inception through the adoption of SFAS 133 on January 1, 2001 reflected in other
comprehensive income (loss) effective January 1, 2001 and a decrease in the fair value of the swap agreement of $8.6 million
reflected in earnings for the year ended December 31, 2001.
In accordance with SFAS 133, as
amended, the Company recorded an $11.1 million non-cash charge for the change in fair value of the interest rate swap
agreement for the year ended December 31, 2001, which includes $2.5 million for amortization of the transition adjustment.
84
The unamortized transition adjustment
at December 31, 2001 of $2.5 million is expected to be included in earnings as a non-cash charge, along with a
corresponding increase to stockholders’ equity through accumulated comprehensive income,
over the remaining term of the swap agreement.
In connection with the completion of
the comprehensive refinancing of the Senior Bank Credit Facility during May 2002, the Company terminated the swap agreement.
See further discussion of the termination of the swap agreement in Note 24.
On December 31, 2001, approximately
2.8 million shares of the Company’s common stock were issued, along with a $26.1 million promissory note, in conjunction
with the final settlement of the federal court portion of the stockholder litigation settlement. Under the terms of the
promissory note, the note and accrued interest became extinguished in January 2002 once the average closing price of the
common stock exceeded a “termination price” equal to $16.30 per share for fifteen consecutive trading days following
the issuance of such note. The terms of the note, which allow the principal balance to fluctuate dependent on the trading
price of the Company’s common stock, created a derivative instrument that was valued and accounted for under the
provisions of SFAS 133. As a result of the extinguishment of the note in January 2002, management estimated the fair value
of this derivative to approximate the face amount of the note, resulting in an asset being recorded in the fourth quarter
of 2001. The derivative asset offsets the face amount of the note in the consolidated balance sheet as of December 31, 2001.
While the state court portion of the
stockholder litigation settlement has also been settled, the payment of the settlement proceeds to the state court
plaintiffs has not yet been completed; however, the settlement payment is expected to result in the issuance of
approximately 0.3 million additional shares of the Company’s common stock and a $2.9 million subordinated promissory
note, which may also be extinguished if the average closing price of the Company’s common stock meets or exceeds $16.30
per share for fifteen consecutive trading days following the note’s issuance and prior to its maturity in 2009.
Additionally, to the extent the Company’s common stock price does not meet the termination price, the note will be
reduced by the amount that the shares of common stock issued to the plaintiffs appreciate in value in excess of $4.90 per
share, based on the average trading price of the stock following the date of the note’s issuance and prior to the
maturity of the note. If the remaining promissory note is issued under the current terms, in accordance with SFAS 133, as
amended, the Company will reflect in earnings the change in the estimated fair value of the written option embedded in the
promissory note from quarter to quarter. Since the Company has reflected the maximum obligation of the contingency
associated with the state court portion of the stockholder litigation in the accompanying consolidated balance sheet as of
December 31, 2001, the issuance of the note is currently expected to have a favorable impact on the Company’s
consolidated financial position and results of operations initially; thereafter, the financial statement impact will
fluctuate based on changes in the Company’s stock price. However, the impact cannot be determined until the promissory
note is issued and an estimated fair value of the derivative included in the promissory note is determined.
18. EARNINGS (LOSS) PER SHARE
In accordance with SFAS 128, basic
earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the year. Diluted earnings per share reflects the potential dilution that could
85
occur if securities
or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. For the Company, diluted earnings per share is computed by
dividing net income (loss) available to common stockholders, as adjusted, by the weighted average number of common shares
after considering the additional dilution related to convertible subordinated notes, shares to be issued under the
settlement terms of the Company’s stockholder litigation, restricted common stock plans, and stock options and
warrants.
The numerator and denominator of
the basic earnings per share computation and the numerator and denominator of the diluted earnings per share computation
are as follows (in thousands, except per share data, which has also been adjusted for the reverse stock split in May
2001):
|
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
NUMERATOR
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations and after preferred stock distributions
|
|
$
|
(1,967
|
)
|
|
$
|
(744,308
|
)
|
|
$
|
(81,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
24,380
|
|
|
|
13,132
|
|
|
|
11,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
(56.68
|
)
|
|
$
|
(7.06
|
)
|
Income from discontinued operations, net of taxes
|
|
|
0.31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
0.23
|
|
|
$
|
(56.68
|
)
|
|
$
|
(7.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
2001, the Company’s convertible subordinated notes were convertible into 6.8 million shares of common stock (as
adjusted for the reverse stock split in May 2001), using the if-converted method. The Company’s restricted stock,
stock options, and warrants were convertible into 0.6 million shares for the year ended December 31, 2001, using the
treasury stock method. These incremental shares were excluded from the computation of diluted earnings per share for the
year ended December 31, 2001, as the effect of their inclusion was anti-dilutive.
For the year ended December 31,
2001, 3.4 million shares of common stock were contingently issuable under terms of the settlement agreement of all formerly
existing stockholder litigation against the Company and certain of its existing and former directors and executive officers
completed during the first quarter of 2001. These contingently issuable shares were excluded from the computation of diluted
earnings per share for the year ended December 31, 2001, as the effect of their inclusion was anti-dilutive. All of these
shares, with the exception of approximately 0.3 million shares, were issued during 2001.
For the years ended December 31,
2000 and 1999, the Company’s stock options and warrants were convertible into 0.1 million shares of common stock (as
adjusted for the reverse stock split in May 2001), using the treasury stock method. For the years ended December 31, 2000
and 1999, the Company’s convertible subordinated notes were convertible into 6.3 million and 0.3 million shares of
common stock, respectively (as adjusted for the reverse stock split in May 2001), using the if-converted method. These
incremental shares were excluded from the
86
computation of diluted earnings per share for the years ended December 31, 2000
and 1999 as the effect of their inclusion was anti-dilutive.
19. STOCKHOLDERS’ EQUITY
Common Stock
On January 11, 1999, the Company
filed a Registration Statement on Form S-3 to register an aggregate of $1.5 billion in value of its common stock, preferred
stock, common stock rights, warrants and debt securities for sale to the public (the “Shelf Registration
Statement”). Proceeds from sales under the Shelf Registration Statement were to be used for general corporate purposes,
including the acquisition and development of correctional and detention facilities. During 1999, the Company issued and sold
approximately 6.7 million shares of its common stock under the Shelf Registration Statement, resulting in net proceeds to
the Company of approximately $120.0 million. The Shelf Registration Statement is not available for further use by the
Company.
On May 7, 1999, the Company
registered 10.0 million shares of the Company’s common stock for issuance under the Company’s Dividend
Reinvestment and Stock Purchase Plan (the “DRSPP”). The DRSPP provided a method of investing cash dividends in,
and making optional monthly cash purchases of, the Company’s common stock, at prices reflecting a discount between 0%
and 5% from the market price of the common stock on the NYSE. During 1999, the Company issued approximately 1.3 million
shares under the DRSPP, with substantially all of these shares issued under the DRSPP’s optional cash feature,
resulting in proceeds of $12.3 million. The Company has suspended the DRSPP.
At the Company’s 2000 annual
meeting of stockholders held in December 2000, the holders of the Company’s common stock approved a reverse stock
split of the Company’s common stock at a ratio to be determined by the board of directors of the Company of not less
than one-for-ten and not to exceed one-for-twenty. The board of directors subsequently approved a reverse stock split of the
Company’s common stock at a ratio of one-for-ten, which was effective May 18, 2001.
As a result of the reverse stock
split, every ten shares of the Company’s common stock issued and outstanding immediately prior to the reverse stock
split has been reclassified and changed into one fully paid and nonassessable share of the Company’s common stock. The
Company paid its registered common stockholders cash in lieu of issuing fractional shares in the reverse stock split at a
post reverse-split rate of $8.60 per share, totaling approximately $15,000. The number of common shares and per share
amounts have been retroactively restated in the accompanying financial statements and these notes to the financial
statements to reflect the reduction in common shares and corresponding increase in the per share amounts resulting from the
reverse stock split. In conjunction with the reverse stock split, during the second quarter of 2001, the Company amended its
charter to reduce the number of shares of common stock which the Company was authorized to issue to 80.0 million shares (on
a post-reverse stock split basis) from 400.0 million shares (on a pre-reverse stock split basis). As of December 31, 2001,
the Company had 27.9 million shares of common stock issued and outstanding (on a post-reverse stock split basis).
During 1995, Old CCA authorized the
issuance of 29,500 shares of common stock (as adjusted for the reverse stock split in May
2001) to certain key employees as a deferred stock award. The
87
award was to fully
vest ten years from the date of grant based on continuous employment with the Company. The Company had been expensing
the $3.7 million of awards over the ten-year vesting period. Due to the resignation or termination of these employees,
these shares (along with an additional 23,500 shares issued pursuant to an adjustment resulting from the issuance and
subsequent conversion of shares of the Series B preferred stock as discussed below) became fully vested; therefore the
Company expensed the unamortized portion of the award, totaling approximately $1.8 million, during 2000.
Series A Preferred Stock
Upon its formation in 1998, the Company
authorized 20.0 million shares of $0.01 par value preferred stock, of which 4.3 million shares are designated as Series A
Preferred Stock.
As discussed in Note 3, in connection
with the 1999 Merger, Old Prison Realty shareholders received one share of Series A Preferred Stock of the Company in
exchange for each Old Prison Realty Series A Cumulative Preferred Share. Consequently, the Company issued 4.3 million shares
of its Series A Preferred Stock on January 1, 1999. The shares of the Company’s Series A Preferred Stock are redeemable
at any time by the Company on or after January 30, 2003 at $25.00 per share, plus dividends accrued and unpaid to the
redemption date. Shares of the Company’s Series A Preferred Stock have no stated maturity, sinking fund provision or
mandatory redemption and are not convertible into any other securities of the Company. Dividends on shares of the
Company’s Series A Preferred Stock are cumulative from the date of original issue of such shares and are payable
quarterly in arrears on the fifteenth day of January, April, July and October of each year, to shareholders of record on the
last day of March, June, September and December of each year, respectively, at a fixed annual rate of 8.0%.
As discussed in Notes 14 and 15, in
connection with the June 2000 Waiver and Amendment, the Company was prohibited from declaring or paying any dividends with
respect to the Series A Preferred Stock until such time as the Company had raised at least $100.0 million in equity. As a
result, the Company had not declared or paid any dividends on its shares of Series A Preferred Stock since the first quarter
of 2000. Dividends continued to accrue under the terms of the Company’s charter until the Company received a consent
and waiver from its lenders under the Senior Bank Credit Facility in September 2001, which allowed the Company’s board
of directors to declare a one-time dividend on the issued and outstanding Series A Preferred Stock, which was paid on
October 15, 2001.
In connection with the December 2001
Amendment and Restatement of the Senior Bank Credit Facility, certain financial and non-financial covenants were amended,
including the removal of prior restrictions on the Company’s ability to pay cash dividends on shares of its issued and
outstanding Series A Preferred Stock. Under the terms of the December 2001 Amendment and Restatement, the Company is
permitted to pay quarterly dividends on the shares of its issued and outstanding Series A Preferred Stock, including all
dividend in arrears. See Note 14 for further information on distributions on the Company’s shares of Series A Preferred
Stock.
Series B Preferred Stock
In order to satisfy the REIT
distribution requirements with respect to its 1999 taxable year, during 2000 the Company authorized
an additional 30.0 million shares of $0.01 par value preferred stock, designated
12.0 million shares of such preferred stock as Series B Preferred
88
Stock and subsequently
issued approximately 7.5 million shares to holders of the Company’s common stock as a stock dividend.
The shares of Series B Preferred
Stock issued by the Company provide for cumulative dividends payable at a rate of 12% per year of the stock’s stated
value of $24.46. The dividends are payable quarterly in arrears, in additional shares of Series B Preferred Stock through
the third quarter of 2003, and in cash thereafter, provided that all accrued and unpaid cash dividends have been made on the
Company’s Series A Preferred Stock. The shares of the Series B Preferred Stock are callable by the Company, at a price
per share equal to the stated value of $24.46, plus any accrued dividends, at any time after six months following the later
of (i) three years following the date of issuance or (ii) the 91st day following the redemption of the Company’s 12%
Senior Notes. The shares of Series B Preferred Stock were convertible into shares of the Company’s common stock
during two conversion periods: (i) from October 2, 2000 to October 13, 2000; and (ii) from December 7, 2000 to December 20,
2000, at a conversion price based on the average closing price of the Company’s common stock on the NYSE during the 10
trading days prior to the first day of the applicable conversion period, provided, however, that the conversion price used
to determine the number of shares of the Company’s common stock issuable upon conversion of the Series B Preferred
Stock could not be less than $1.00. The number of shares of the Company’s common stock that were issued upon the
conversion of each share of Series B Preferred Stock was calculated by dividing the stated price ($24.46), plus accrued and
unpaid dividends as of the date of conversion of each share of Series B Preferred Stock, by the conversion price established
for the conversion period.
Approximately 1.3 million shares of
Series B Preferred Stock issued by the Company on September 22, 2000 were converted during the first conversion period in
October 2000, resulting in the issuance of approximately 2.2 million shares of the Company’s common stock (as adjusted
for the reverse stock split in May 2001). The conversion price for the initial conversion period was established at
$1.48.
Approximately 2.9 million shares of
Series B Preferred Stock issued by the Company on November 13, 2000 were converted during the second conversion period in
December 2000, resulting in the issuance of approximately 7.3 million shares of the Company’s common stock (as adjusted
for the reverse stock split in May 2001). The conversion price for the second conversion period was established at $1.00.
The shares of Series B Preferred Stock currently outstanding, as well as any additional shares issued as dividends, are not
and will not be convertible into shares of the Company’s common stock.
During 2001, the Company issued
452,000 shares of Series B Preferred Stock in satisfaction of the regular quarterly distributions. Additionally, as of
December 31, 2001, the Company has accrued approximately $3.0 million of distributions on Series B Preferred Stock. See Note
14 for further information on distributions on the Company’s shares of Series B Preferred Stock.
During 2001, the Company issued
0.2 million shares of Series B Preferred Stock under two Series B Preferred Stock restricted stock plans (the “Series
B Restricted Stock Plans”), which were valued at $2.0 million on the date of the award. The restricted shares of Series
B Preferred Stock were granted to certain of the Company’s key employees and wardens. Under the terms of Series B
Restricted Stock Plans, the shares in the key employee plan vest in equal intervals over a three-year period expiring in May
2004, while the shares in the warden plan vest all at one time
89
in May 2004. During the year ended
December 31, 2001, the Company expensed $0.4 million, net of forfeitures, relating to the Series B Restricted Stock Plans.
Stock Warrants
In connection with the Operating
Company Merger, the Company issued warrants for approximately 213,000 shares (as adjusted for the reverse stock split in
May 2001) of the Company’s common stock to acquire the voting common stock of Operating Company. The warrants issued
allow the holder to purchase approximately 142,000 shares of the Company’s common stock at an exercise price of $0.01
per share (as adjusted for the reverse stock split in May 2001) and approximately 71,000 shares of the Company’s common
stock at an exercise price of $14.10 per share (as adjusted for the reverse stock split in May 2001). These warrants expire
September 29, 2005. Also in connection with the Operating Company Merger, the Company assumed the obligation to issue up to
approximately 75,000 shares of its common stock, at a price of $33.30 per share (as adjusted for the reverse stock split in
May 2001), through their expiration date on December 31, 2008.
Treasury Stock
Treasury stock was recorded in 1999
related to the cashless exercise of stock options.
Stock Option Plans
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 Company’s 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
granted to employees generally range from one 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.
In connection with the 1999 Merger, all options outstanding at December 31, 1998
to purchase Old CCA common stock and all options outstanding at January 1, 1999
to purchase Old Prison Realty common stock, were converted into options to purchase
shares of the Company’s common stock, after giving effect to the exchange ratio
and carryover of the vesting and other relevant terms. Options granted under Old
CCA’s stock option plans are exercisable after the later of two years from
the date of employment or one year after the date of grant until ten years after
the date of grant. Options granted under Old Prison Realty’s stock option
plans were granted with terms similar to the terms of the Company’s plans.
During the fourth quarter of 2000, pursuant
to anti-dilution provisions under the Company’s equity incentive plans, an
automatic adjustment of approximately 0.6 million stock options (as adjusted for
the reverse stock split in May 2001) was issued to existing optionees as a result
of the dilutive effect of the issuance of the Series B Preferred Stock, as further
discussed in Note 14 and above. In accordance with Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees,” the Company
also adjusted the exercise prices of existing and newly issued options such that
the automatic adjustment resulted in no accounting consequence to the Company’s
financial statements. All references in this Note 19 to the number and prices of
options still outstanding have been retroactively restated to reflect the increased
number of
90
options resulting from the automatic adjustment. The number and prices
of options have also been retroactively restated to reflect the one-for-ten reverse
stock split in May 2001.
Stock option transactions relating to the Company’s incentive and nonqualified
stock option plans are summarized below (in thousands, except exercise prices):
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
average exercise
|
|
|
|
options
|
|
price per option
|
|
|
|
|
|
|
Outstanding at December 31, 1998
|
|
|
434
|
|
|
$
|
103.88
|
|
Old Prison Realty options
|
|
|
307
|
|
|
$
|
91.29
|
|
Granted
|
|
|
100
|
|
|
$
|
79.38
|
|
Exercised
|
|
|
(36
|
)
|
|
$
|
11.23
|
|
Cancelled
|
|
|
(197
|
)
|
|
$
|
96.43
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 1999
|
|
|
608
|
|
|
$
|
101.49
|
|
Granted
|
|
|
552
|
|
|
$
|
16.52
|
|
Cancelled
|
|
|
(181
|
)
|
|
$
|
96.00
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2000
|
|
|
979
|
|
|
$
|
54.54
|
|
Granted
|
|
|
1,613
|
|
|
$
|
8.84
|
|
Cancelled
|
|
|
(160
|
)
|
|
$
|
37.05
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2001
|
|
|
2,432
|
|
|
$
|
25.30
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options
granted during 2001, 2000 and 1999 was $7.05, $8.10, and $15.40 per option, respectively,
based on the estimated fair value using the Black-Scholes option-pricing model.
Stock options outstanding at December 31, 2001, are summarized below:
|
|
|
Options
|
|
|
|
Weighted
|
|
|
|
|
|
outstanding at
|
|
Options
|
|
average
|
|
|
|
|
|
December 31,
|
|
exercisable at
|
|
remaining
|
|
Weighted
|
|
|
|
2001
|
|
December 31,
|
|
contractual life
|
|
average exercise
|
| Exercise Price
|
|
(in thousands)
|
|
2001
|
|
in years
|
|
price
|
|
|
|
|
|
|
|
|
|
$
|
8.75 – 9.96
|
|
|
|
1,771
|
|
|
|
335
|
|
|
|
9.19
|
|
|
$
|
9.47
|
|
$
|
11.20 – 19.91
|
|
|
|
178
|
|
|
|
52
|
|
|
|
8.23
|
|
|
$
|
13.68
|
|
$
|
23.00 – 79.41
|
|
|
|
173
|
|
|
|
48
|
|
|
|
7.67
|
|
|
$
|
60.70
|
|
$
|
83.07 – 117.78
|
|
|
|
173
|
|
|
|
173
|
|
|
|
5.45
|
|
|
$
|
92.17
|
|
$
|
121.76 – 159.31
|
|
|
|
137
|
|
|
|
137
|
|
|
|
5.49
|
|
|
$
|
145.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,432
|
|
|
|
745
|
|
|
|
8.54
|
|
|
$
|
57.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the Company’s 2000 annual meeting of stockholders held in December 2000, the Company obtained
the approval of an amendment
to the Company’s 1997 Employee Share Incentive Plan to increase the number
of shares of common stock available for issuance thereunder from 130,000 to 1.5
million and the adoption of the Company’s 2000 Equity Incentive Plan, pursuant
to which the Company will reserve 2.5 million in shares of the Company’s common
stock for issuance thereunder. These changes were made in order to provide the
Company with adequate means to retain and attract quality directors, officers and
key employees through the granting of equity incentives. The number of shares available
for issuance under each of the plans has been adjusted to reflect the one-for-ten
reverse stock split discussed above.
91
The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation” (“SFAS 123”) and accounts for stock-based
compensation using the intrinsic value method as prescribed in Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees.” As
a result, no compensation cost has been recognized for the Company’s stock
option plans under the criteria established by SFAS 123. Had compensation cost
for the stock option plans been determined based on the fair value of the options
at the grant date for awards in 2001, 2000 and 1999 consistent with the provisions
of SFAS 123, the Company’s net income (loss) available to common stockholders
and per share amounts would have been reduced to the pro forma amounts indicated
below for the years ended December 31 (amounts in thousands except per share data):
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
As Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations and after preferred stock distributions
|
|
$
|
(1,967
|
)
|
|
$
|
(744,308
|
)
|
|
$
|
(81,254
|
)
|
Income from discontinued operations, net of taxes
|
|
|
7,637
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
5,670
|
|
|
$
|
(744,308
|
)
|
|
$
|
(81,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations and after preferred stock distributions
|
|
$
|
(6,203
|
)
|
|
$
|
(745,598
|
)
|
|
$
|
(84,252
|
)
|
Income from discontinued operations, net of taxes
|
|
|
7,637
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
1,434
|
|
|
$
|
(745,598
|
)
|
|
$
|
(84,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
(56.68
|
)
|
|
$
|
(7.06
|
)
|
Income from discontinued operations, net of taxes
|
|
|
0.31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
0.23
|
|
|
$
|
(56.68
|
)
|
|
$
|
(7.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.25
|
)
|
|
$
|
(56.78
|
)
|
|
$
|
(7.32
|
)
|
Income from discontinued operations, net of taxes
|
|
|
0.31
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) available to common stockholders
|
|
$
|
0.06
|
|
|
$
|
(56.78
|
)
|
|
$
|
(7.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of applying SFAS 123 for disclosing
compensation costs under such pronouncement may not be representative of the effects
on reported net income (loss) available to common stockholders for future years.
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:
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
9.0
|
%
|
Expected stock price volatility
|
|
|
89.4
|
%
|
|
|
112.5
|
%
|
|
|
49.1
|
%
|
Risk-free interest rate
|
|
|
4.8
|
%
|
|
|
5.3
|
%
|
|
|
5.4
|
%
|
Expected life of options
|
|
|
7 years
|
|
|
|
7 years
|
|
|
|
10 years
|
|
92
Retirement Plans
On December 28, 1998, Operating
Company adopted a 401(k) plan (the “Plan”). In connection with the Operating
Company Merger, the Company assumed all benefits and obligations of the Plan. All
employees of the Company are eligible to participate upon reaching age 18 and completing
one year of qualified service. Employees may elect to defer from 1% to 15% of their
compensation. The provisions of the Plan provide for employer matching discretionary
contributions currently equal to 100% of the employee’s contributions up to
4% of the employee’s compensation. Additionally, the Company also makes a
basic contribution on behalf of each eligible employee, equal to 2% of the employee’s
compensation for the first year of eligibility, and 1% of the employee’s
compensation for each year of eligibility following. The Company’s contributions
become 40% vested after four years of service and 100% vested after five years of
service. The Company’s board of directors has discretion in establishing the
amount of the Company’s matching and basic contributions, which amounted to
$5.7 million and $0.8 million during the year ended December 31, 2001 and 2000,
respectively.
During 2001, the Company elected to amend the Plan, effective January 1, 2002. The Company’s vesting
schedule was changed so that, effective January 1, 2002, employer contributions and investment earnings
or losses thereon become vested 20% after two years of service, 40% after three
years of service, 80% after four years of service, and 100% after five or more years
of service. The maximum employee compensation deferral was also increased to 20%
of the employee’s compensation.
20. RELATED PARTY TRANSACTIONS
The Company paid
$0.1 million in 2000 to a former member of Operating Company’s board of directors for consulting services
related to various contractual relationships.
The Company and Operating
Company paid $0.6 million to a company that is majority-owned by an individual that was a member of
the Old CCA board of directors for services rendered during 2000.
The Company paid $26.5 million
in each of 2000 and 1999, to a construction company that is owned by a former member of the
Company’s board of directors, for services rendered in the construction of
facilities.
In 2000, the Company and
Operating Company paid $0.2 million to a former member of the Company’s board of directors for
ongoing consulting services. The Company did not make payments to this individual
during 2001 or 1999 other than board of director fees in 1999.
21. COMMITMENTS AND CONTINGENCIES
Litigation
During the first quarter of
2001, the Company obtained final court approval of the settlements of the following outstanding consolidated
federal and state class action and derivative stockholder lawsuits brought against
the Company and certain of its former directors and executive officers: (i)
In re: Prison Realty Securities Litigation; (ii) In re: Old CCA Securities
Litigation; (iii) John Neiger, on behalf of himself and all others similarly
situated v. Doctor Crants, Robert Crants
93
and Prison Realty Trust, Inc.; (iv) Dasburg, S.A., on behalf of itself and all others similarly
situated v. Corrections Corporation of America, Doctor R. Crants, Thomas W. Beasley, Charles A. Blanchette,
and David L. Myers; (v) Wanstrath v. Crants, et al.; and (vi) Bernstein
v. Prison Realty Trust, Inc. The final terms of the settlement agreements provide
for the “global” settlement of all such outstanding stockholder litigation
against the Company brought as the result of, among other things, agreements entered
into by the Company and Operating Company in May 1999 to increase payments made
by the Company to Operating Company under the terms of certain agreements, as well
as transactions relating to the proposed corporate restructurings led by the Fortress/Blackstone
investment group and Pacific Life Insurance Company. Pursuant to the terms of the
settlements, the Company agreed to issue or pay to the plaintiffs (and their respective
legal counsel) in the actions: (i) an aggregate of 4.7 million shares of the Company’s
common stock (as adjusted for the reverse stock split in May 2001); (ii)
a subordinated promissory note in the aggregate principal amount of $29.0 million;
and (iii) approximately $47.5 million in cash payable solely from the proceeds of
certain insurance policies.
Pursuant to the terms of
the settlement agreements, the promissory note would be due January 2, 2009, and accrue interest
at a rate of 8.0% per year. Pursuant to the terms of the settlements, the note
and accrued interest may be extinguished if the Company’s common stock price
meets or exceeds a “termination price” equal to $16.30 per share for any
fifteen consecutive trading days following the note’s issuance and prior to
the maturity date of the note. Additionally, to the extent the Company’s common
stock price does not meet the termination price, the note will be reduced by the
amount that the shares of common stock issued to the plaintiffs appreciate in value
in excess of $4.90 per share, based on the average trading price of the stock following
the date of the note’s issuance and prior to the maturity of the note. The
Company accrued the estimated obligation of approximately $75.4 million associated
with the stockholder litigation during the third quarter of 2000.
During March and April 2001, the
Company issued approximately 1.6 million shares of common stock, as adjusted for the reverse
stock split, under the settlement to the plaintiffs’ counsel in the actions.
Additionally, during the fourth quarter of 2001, the Company issued approximately
2.8 million shares of common stock, as adjusted for the reverse stock split, along
with a $26.1 million promissory note, in conjunction with the final settlement of
the federal court portion of the stockholder litigation settlement. Under the terms
of the promissory note, the note was extinguished in full in January 2002 as the
result of the average closing price of the Company’s common stock meeting or
exceeding a price of $16.30 per share for fifteen consecutive trading days following
the issuance of the note, as discussed further in Note 17. While the state court
portion of the stockholder litigation settlement has also been settled, the payment
of the settlement proceeds to the state court plaintiffs has not yet been completed;
however, the settlement payment is expected to result in the issuance of approximately
310,000 additional shares of common stock and a $2.9 million subordinated promissory
note, which may also be extinguished if the average closing price of the common
stock meets or exceeds $16.30 per share for fifteen consecutive trading days following
the issuance of such note and prior to its maturity in 2009.
On June 9, 2000, a complaint
captioned Prison Acquisition Company, L.L.C. v. Prison Realty Trust, Inc., Correction Corporation
of America, Prison Management Services, Inc. and Juvenile and Jail Facility Management
Services, Inc. was filed in federal court in the United States District Court for
the Southern District of New York to recover fees allegedly owed the plaintiff as
a result of the termination of a securities purchase agreement related to the Company’s
94
proposed corporate
restructuring led by the Fortress/Blackstone investment
group. The complaint alleged that the defendants failed to pay amounts allegedly
due under the securities purchase agreement and asked for compensatory damages of
approximately $24.0 million consisting of various fees, expenses and other relief.
During August 2001, the Company and plaintiffs entered into a definitive agreement
to settle this litigation. Under terms of the agreement, the Company made a cash
payment of $15.0 million to the plaintiffs in full settlement of all claims. During
2000, the Company recorded an accrual reflecting the estimated liability of this
matter.
On September 14, 1998, a complaint
captioned Thomas Horn, Ferman Heaton, Ricky Estes, and Charles Combs, individually and on
behalf of the U.S. Corrections Corporation Employee Stock Ownership Plan and its
participants v. Robert B. McQueen, Milton Thompson, the U.S. Corrections Corporation
Employee Stock Ownership Plan, U.S. Corrections Corporation, and Corrections Corporation
of America was filed in the U.S. District Court for the Western District of Kentucky
alleging numerous violations of the Employee Retirement Income Security Act, including
but not limited to a failure to manage the assets of the U.S. Corrections Corporation
Employee Stock Ownership Plan (the “ESOP”) in the sole interest of the
participants, purchasing assets without undertaking adequate investigation of the
investment, overpayment for employer securities, failure to resolve conflicts of
interest, lending money between the ESOP and employer, allowing the ESOP to borrow
money other than for the acquisition of employer securities, failure to make adequate,
independent and reasoned investigation into the prudence and advisability of certain
transactions, and otherwise. The plaintiffs were seeking damages in excess of $30.0
million plus prejudgment interest and attorneys’ fees. The Company has entered
into a definitive agreement with the plaintiffs to settle their claims against the
Company, which was approved by the court during the second quarter of 2002. During
2000, the Company recorded an accrual reflecting the estimated liability of this
matter.
Commencing in late 1997 and through 1998,
Old CCA became subject to approximately sixteen separate suits in federal district
court in the state of South Carolina claiming the abuse and mistreatment of certain
juveniles housed in the Columbia Training Center, a South Carolina juvenile detention
facility formerly operated by Old CCA. These suits claim unspecified compensatory
and punitive damages, as well as certain statutory costs. One of these suits, captioned
William Pacetti v. Corrections Corporation of America, went to trial in late
November 2000, and in December 2000 the jury returned a verdict awarding the plaintiff
in the action $125,000 in compensatory damages, $3.0 million in punitive damages,
and attorneys’ fees. However, during the second quarter of 2001, the Company
reached an agreement in principle with all plaintiffs to settle their asserted and
unasserted claims against the Company, and the Company subsequently executed a definitive
settlement agreement which was approved by the court, with the full settlement funded
by insurance.
In February 2000, a complaint was filed
in federal court in the United States District Court for the Western District of
Texas against the Company’s inmate transportation subsidiary, TransCor America,
LLC (“TransCor”). The lawsuit, captioned Cheryl Schoenfeld v. TransCor
America, Inc., et al., alleges that two former employees of TransCor sexually
assaulted plaintiff Schoenfeld during her transportation to a facility in Texas
in late 1999. An additional individual, Annette Jones, has also joined the suit
as a plaintiff, alleging that she was also mistreated by the two former employees
during the same trip. On May 20, 2002, TransCor entered into definitive agreement
to settle the litigation. Pursuant to the terms of the settlement agreement, the
parties
95
settled all claims with a
confidential cash payment made to the plaintiffs
in the litigation, the majority of which was funded by insurance proceeds.
In addition to the above legal
matters, the nature of the Company’s business results in claims and litigation alleging
that the Company is liable for damages arising from the conduct of its employees
or others. In the opinion of management, other than the outstanding litigation
discussed above, there are no pending legal proceedings that would have a material
effect on the consolidated financial position, results of operations or cash flows
of the Company for which the Company has not established adequate reserves.
Insurance Contingencies
Each of the Company’s 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 within the deductible amounts.
Income Tax Contingencies
In connection with the 1999
Merger, the Company assumed the tax obligations of Old CCA. The IRS has completed field audits
of Old CCA’s federal tax returns for the taxable years ended December 31, 1998
and 1997, and has also completed auditing the Company’s federal tax return
for the taxable year ended December 31, 2000.
The IRS agent’s report related to 1998
and 1997 included a determination by the IRS to increase taxable income by approximately
$120.0 million. The Company appealed the IRS’s findings with the Appeals Office
of the IRS. On October 24, 2002 the Company entered into a definitive settlement
agreement with the IRS in connection with the IRS’s audit of Old CCA’s
1997 federal income tax return. See further discussion of the settlement in Note
24.
The Company is continuing to appeal the
IRS’s findings with respect to the IRS’s audit of Old CCA’s 1998
federal income tax return. The Company does not currently expect, however, that
the resolution of the 1998 audit will have a material adverse effect on the Company’s
liquidity or results of operations.
In connection with the
IRS’s audit of the Company’s 2000 federal income tax return, the IRS has proposed the disallowance
of a loss the Company claimed as the result of its forgiveness in September 2000
of certain indebtedness of one of its former operating companies. This finding
is currently being protested with the Appeals Office of the IRS. In the event that,
after the Company seeks all available remedies, the IRS prevails, the Company would
be required to pay the IRS in excess of $56.0 million in cash plus penalties and
interest. This adjustment would also substantially eliminate the Company’s
net operating loss carryforward. The Company believes that it has meritorious defenses
of its positions. The Company has not established a reserve for this matter. However,
no assurance can be given that the IRS will not make such an assessment and prevail
in any such claim against the Company.
96
Guarantees
In connection with the bond issuance of
a governmental entity for which the Company currently provides management services
at a correctional facility, the Company is obligated, under a debt service deficits
agreement, to pay the trustee of the bond’s trust indenture (the “Trustee”)
amounts necessary to pay any debt service deficits consisting of principal and interest
requirements (outstanding principal balance of $64.2 million at December 31, 2001
plus future interest payments). In the event the State of Tennessee, which is currently
utilizing the facility, 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 and 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 December 31, 2001, the outstanding principal balance of the bonds exceeded the
purchase price option by $13.2 million. The Company also maintains a restricted
cash account of approximately $7.0 million as collateral against a guarantee it
has provided for a forward purchase agreement related to the above bond issuance.
Employment and
Severance Agreements
On July 28, 2000, Doctor R. Crants was terminated
as the chief executive officer of the Company and from all positions with the Company
and Operating Company. Under certain employment and severance agreements, Mr. Crants
will continue to receive his salary and health, life and disability insurance benefits
until 2003 and was vested immediately in 14,000 shares of the Company’s common
stock (as adjusted for the reverse stock split in May 2001) previously granted as
part of a deferred stock award. The compensation expense related to these benefits,
totaling $0.7 million in cash and $1.2 million in non-cash charges representing
the unamortized portion of the deferred stock award, was recognized during the third
quarter of 2000. The unamortized portion was based on the trading price of the
common stock of Old CCA, as of the date of grant, which occurred in the fourth quarter
of 1995.
The Company also currently has employment
agreements with several executive officers which provide for the payment of certain
severance amounts upon an event of termination or change of control, as further
defined in the agreements.
Other Commitments
The Company received an invoice, dated October
25, 2000, from Merrill Lynch & Co. for $8.1 million for services as the Company’s
financial advisor in connection with the Restructuring. Prior to their termination
in the third quarter of 2000, Merrill Lynch served as a financial advisor to the
Company and its board of directors in connection with the Restructuring. Merrill
Lynch claimed that the merger between Operating Company and the Company constituted
a “restructuring transaction,” which Merrill Lynch further contended triggered
certain fees under engagement letters allegedly entered into between Merrill Lynch
and the Company and Merrill Lynch and Operating Company management, respectively.
In July 2001, Merrill Lynch agreed to accept payment of $3.0 million in three $1.0
million installment payments over a one year period in full and complete satisfaction
of the invoice. As of December 31, 2001, the Company had paid $2.0 million to Merrill
Lynch in connection with the satisfaction of this obligation. The
97
remaining $1.0 million owed to Merrill Lynch has been accrued in the accompanying balance sheet
as of December 31, 2001, and was paid in full during 2002.
22. SEGMENT REPORTING
As of December 31, 2001, the
Company owned and managed 36 correctional and detention facilities, and managed 28 correctional
and detention facilities it does not own. During the second quarter of 2001, management
began viewing the Company’s operating results in two segments: owned and managed
correctional and detention facilities and managed-only correctional and detention
facilities. The accounting policies of the segments are the same as those described
in Note 4. Owned and managed facilities include the operating results of those
facilities owned and managed by the Company. Managed-only facilities include the
operating results of those facilities owned by a third party and managed by the
Company. The Company measures the operating performance of each facility within
the above two segments, without differentiation, based on facility contribution.
The Company defines facility contribution as a facility’s operating income
or loss from operations before interest, taxes, depreciation and amortization. Since
each of the Company’s facilities within the two operating segments exhibit
similar economic characteristics, provide similar services to governmental agencies,
and operate under a similar set of operating procedures and regulatory guidelines,
the facilities within the identified segments have been aggregated and reported
as one operating segment.
The revenue and facility
contribution for the reportable segments and a reconciliation to the Company’s operating income
(loss) is as follows for the three years ended December 31, 2001, 2000 and 1999
(dollars in thousands). Intangible assets are not included in each segment’s
reportable assets and the amortization of intangible assets is not included in the
determination of the segment’s facility contribution:
98
|
|
For the Years Ended December 31,
|
|
|
|
|
|
2001
|
|
2000
|
|
1999
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed
|
$
|
619,652
|
|
|
$
|
149,984
|
|
|
$
|
—
|
|
|
Managed-only
|
|
294,226
|
|
|
|
108,409
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management revenue
|
|
913,878
|
|
|
|
258,393
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed
|
|
464,392
|
|
|
|
121,752
|
|
|
|
—
|
|
|
Managed-only
|
|
240,415
|
|
|
|
90,047
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
704,807
|
|
|
|
211,799
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed
|
|
155,260
|
|
|
|
28,232
|
|
|
|
—
|
|
|
Managed-only
|
|
53,811
|
|
|
|
18,362
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total facility contribution
|
|
209,071
|
|
|
|
46,594
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and other revenue
|
|
22,475
|
|
|
|
51,885
|
|
|
|
278,833
|
|
|
Other operating expense
|
|
(16,661
|
)
|
|
|
(5,516
|
)
|
|
|
—
|
|
|
General and administrative expense
|
|
(34,568
|
)
|
|
|
(45,463
|
)
|
|
|
(24,125
|
)
|
|
Depreciation and amortization
|
|
(53,279
|
)
|
|
|
(59,799
|
)
|
|
|
(44,062
|
)
|
|
Licensing fees to Operating Company
|
|
—
|
|
|
|
(501
|
)
|
|
|
—
|
|
|
Administrative service fee to Operating Company
|
|
—
|
|
|
|
(900
|
)
|
|
|
—
|
|
|
Write-off of amounts under lease arrangements
|
|
—
|
|
|
|
(11,920
|
)
|
|
|
(65,677
|
)
|
|
Impairment losses
|
|
—
|
|
|
|
(527,919
|
)
|
|
|
(76,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
$
|
127,038
|
|
|
$
|
(553,539
|
)
|
|
$
|
68,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001
|
|
December 31, 2000
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Owned and managed
|
$
|
1,597,697
|
|
$
|
1,564,279
|
|
Managed-only
|
|
68,197
|
|
|
84,397
|
|
Corporate and other
|
|
282,537
|
|
|
528,316
|
|
Discontinued operations
|
|
22,849
|
|
|
—
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,971,280
|
|
$
|
2,176,992
|
|
|
|
|
|
|
|
23. SELECTED QUARTERLY FINANCIAL
INFORMATION (UNAUDITED)
Selected
quarterly financial information for each of the quarters in the years ended December 31, 2001 and
2000 is as follows (in thousands, except per share data):
99
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2001
|
|
2001
|
|
|
2001
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
229,564
|
|
|
$
|
234,636
|
|
|
$
|
236,767
|
|
|
$
|
235,386
|
|
|
Operating income
|
$
|
31,634
|
|
|
$
|
32,255
|
|
|
$
|
32,531
|
|
|
$
|
30,618
|
|
|
Income (loss) from continuing
operations
|
$
|
(8,350
|
)
|
|
$
|
(774
|
)
|
|
$
|
(2,565
|
)
|
|
$
|
29,746
|
|
|
Income from discontinued
operations – net of taxes
|
$
|
3,043
|
|
|
$
|
1,288
|
|
|
$
|
2,001
|
|
|
$
|
1,305
|
|
|
Net income (loss) available
to common stockholders
|
$
|
(10,128
|
)
|
|
$
|
(4,466
|
)
|
|
$
|
(5,678
|
)
|
|
$
|
25,942
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
$
|
(0.56
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
1.00
|
|
|
Income from discontinued
operations, net of taxes
|
|
0.13
|
|
|
|
0.05
|
|
|
|
0.08
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available
to common stockholders
|
$
|
(0.43
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(0.56
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
0.76
|
|
|
Income from discontinued
operations, net of taxes
|
|
0.13
|
|
|
|
0.05
|
|
|
|
0.08
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) available
to common stockholders
|
$
|
(0.43
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2000
|
|
2000
|
|
2000
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
14,036
|
|
|
$
|
14,132
|
|
|
$
|
43,854
|
|
|
$
|
238,256
|
|
|
Operating loss
|
$
|
(5,424
|
)
|
|
$
|
(35,888
|
)
|
|
$
|
(26,700
|
)
|
|
$
|
(485,527
|
)
|
|
Net loss
|
$
|
(33,751
|
)
|
|
$
|
(79,405
|
)
|
|
$
|
(258,488
|
)
|
|
$
|
(359,138
|
)
|
|
Net loss available to
common stockholders
|
$
|
(35,901
|
)
|
|
$
|
(81,555
|
)
|
|
$
|
(261,072
|
)
|
|
$
|
(365,780
|
)
|
|
Net loss per common share – basic
|
$
|
(3.03
|
)
|
|
$
|
(6.89
|
)
|
|
$
|
(22.04
|
)
|
|
$
|
(21.55
|
)
|
|
Net loss per common
share – diluted
|
$
|
(3.03
|
)
|
|
$
|
(6.89
|
)
|
|
$
|
(22.04
|
)
|
|
$
|
(21.55
|
)
|
Fluctuations
in net income (loss), net income (loss) available to common stockholders and per share amounts
during 2001, were principally due to changes in the estimated fair value of derivative instruments.
Fluctuations in net loss, net loss available to common stockholders and per share amounts during
2000 were principally due to impairment losses and stockholder litigation charges. Refer to Note 4
for a further discussion of the comparability of results of operations between 2001 and 2000, and
Note 2 and Note 8 for a further discussion of transactions regarding stockholder litigation
charges, impairment losses and other transactions having a significant impact on operations during
2000.
24. SUBSEQUENT EVENTS
Goodwill
Impairment
As discussed above
in Note 4, effective January 1, 2002 the Company adopted Statement of Financial Accounting Standards No.
142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which establishes new
accounting and reporting requirements for goodwill and other intangible assets. Under SFAS 142, all
goodwill amortization ceased effective January 1, 2002 (for the year ended December 31, 2001 goodwill
amortization was $7.6 million) and goodwill attributable to
100
each of the
Company’s reporting units was tested for impairment by comparing the fair value of each
reporting unit with its carrying value. Fair value was determined using a collaboration of various
common valuation techniques, including market multiples, discounted cash flows, and replacement
cost methods. These impairment tests are required to be performed at adoption of SFAS 142 and at
least annually thereafter. On an ongoing basis (absent any impairment indicators), the Company
expects to perform its impairment tests during the fourth quarter, in connection with the annual
budgeting process.
Based on the
Company’s initial impairment tests, the Company recognized an impairment of $80.3 million to
write-off the carrying value of goodwill associated with the Company’s owned and managed
facilities during the first quarter of 2002. This goodwill was established in connection with the
acquisition of Operating Company. The remaining goodwill, which is associated with the facilities
the Company manages but does not own, was deemed to be not impaired, and remains recorded on the
balance sheet. This remaining goodwill was established in connection with the acquisitions of PMSI
and JJFMSI. The implied fair value of goodwill of the owned and managed reporting segment did not
support the carrying value of any goodwill, primarily due to its highly leveraged capital
structure. No impairment of goodwill allocated to the managed-only reporting segment was deemed
necessary, primarily because of the relatively minimal capital expenditure requirements, and
therefore indebtedness, in connection with obtaining such management contracts. Under SFAS 142, the
impairment recognized at adoption of the new rules was reflected as a cumulative effect of
accounting change in the Company’s statement of operations for the first quarter of 2002.
Impairment adjustments recognized after adoption, if any, are required to be recognized as
operating expenses.
Discontinued Operations
In August
2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived assets and
supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of” (“SFAS 121”), and the
accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB
30”), for the disposal of a segment of a business (as previously defined in that Opinion).
SFAS 144 retains the fundamental provisions of SFAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while
also resolving significant implementation issues associated with SFAS 121. Unlike SFAS 121,
however, an impairment assessment under SFAS 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS 142. SFAS 144 also broadens the scope of
defining discontinued operations. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. Under the provisions of SFAS 144, the identification and classification of a
facility as held for sale, or the termination of any of the Company’s management contracts for
a managed-only facility, by expiration or otherwise, would result in the classification of the
operating results of such facility, net of taxes, as a discontinued operation, so long as the
financial results can be clearly identified, and so long as the Company does not have any
significant continuing involvement in the operations of the component after the disposal or
termination transaction. The Company adopted SFAS 144 on January 1, 2002.
101
Due to the
sale of the Company’s interest in a juvenile facility during the second quarter of 2002, the
termination of the Company’s management contracts during the second quarter of 2002 for the
Ponce Young Adult Correctional Facility and the Ponce Adult Correctional Facility, and the
termination of the Company’s management contract during the third quarter of 2002 for the
Guayama Correctional Center, in accordance with SFAS 144, the operations of these facilities, net
of taxes, have been reported as discontinued operations on the Company’s statements of
operations for the year ended December 31, 2001. Operations of these facilities were not reported
as discontinued operations for the years ended December 31, 2000 and 1999, as the operations of
these facilities, in total, were not material to the financial statements for 2000 and 1999, and
because the Company does not believe the 1999 and 2000 financial statements are comparable to the
2001 financial statements, as further explained in Note 4.
In late 2001
and early 2002, the Company was provided notice from the Commonwealth of Puerto Rico of its
intention to terminate the management contracts at the Ponce Young Adult Correctional Facility and
the Ponce Adult Correctional Facility, upon the expiration of the management contracts in February
2002. Attempts to negotiate continued operation of these facilities were unsuccessful. As a
result, the transition period to transfer operation of the facilities to the Commonwealth of Puerto
Rico ended May 4, 2002, at which time operation of the facilities was transferred to the
Commonwealth of Puerto Rico. The Company recorded a non-cash charge of approximately $1.8 million
during the second quarter of 2002 for the write-off of the carrying value of assets associated with
the terminated management contracts.
During the
fourth quarter of 2001, the Company obtained an extension of its management contract with the
Commonwealth of Puerto Rico for the operation of the Guayama Correctional Center located in
Guayama, Puerto Rico, through December 2006. However, on May 7, 2002, the Company received notice
from the Commonwealth of Puerto Rico terminating the Company’s contract to manage this
facility. Termination of the management contract for the Guayama Correctional Center occurred on
August 6, 2002.
On June 28,
2002, the Company sold its interest in a juvenile facility located in Dallas, Texas for
approximately $4.3 million. The facility was leased to Community Education Partners pursuant to a
lease expiring in 2008. Net proceeds from the sale have been used for working capital purposes.
The following
table summarizes the results of operations for these facilities for the year ended December 31,
2001 (amounts in thousands):
102
|
|
For the Year
Ended
|
|
|
December 31, 2001
|
|
|
|
|
REVENUE:
|
|
|
|
|
Managed-only
|
$
|
43,725
|
|
|
Rental
|
|
713
|
|
|
|
|
|
|
|
|
|
44,438
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
Managed-only
|
|
32,053
|
|
|
Depreciation and amortization
|
|
856
|
|
|
|
|
|
|
|
|
|
32,909
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
11,529
|
|
|
|
|
|
|
| OTHER INCOME:
|
|
|
|
|
Interest income
|
|
602
|
|
|
|
|
|
|
| INCOME BEFORE INCOME TAXES
|
|
12,131
|
|
|
Income tax expense
|
|
(4,494
|
)
|
|
|
|
|
|
|
INCOME FROM
DISCONTINUED OPERATIONS, NET OF TAXES
|
$
|
7,637
|
|
|
|
|
|
|
The assets
and liabilities of the discontinued operations presented in the accompanying consolidated
balance sheets are as follows (amounts in thousands):
|
|
December 31, 2001
|
|
|
|
|
ASSETS
|
|
Accounts receivable
|
$
|
15,725
|
Prepaid expenses and other current assets
|
|
190
|
|
|
|
|
Total current assets
|
|
15,915
|
Property and equipment, net
|
|
6,934
|
|
|
|
Total assets
|
$
|
22,849
|
|
|
|
|
LIABILITIES
|
|
|
Accounts payable and accrued expenses
|
$
|
1,812
|
Income tax payable
|
|
4,365
|
|
|
|
|
Total current liabilities
|
$
|
6,177
|
|
|
|
|
Comprehensive Refinancing
On May 3,
2002, the Company completed a comprehensive refinancing (the “Refinancing”) of its senior
indebtedness through the refinancing of its then existing senior bank credit facility (the“Old
Senior Bank Credit Facility”) and the offering of $250.0 million aggregate principal
amount of 9.875% unsecured senior notes due 2009 (the “9.875% Senior Notes”) in a private
placement to a group of initial purchasers. The proceeds of the offering of the 9.875% Senior
Notes were used to repay a portion of amounts outstanding under the Old Senior Bank Credit
Facility, to redeem approximately $89.2 million of the Company’s existing 12% Senior Notes
pursuant to a
103
tender offer
and consent solicitation more fully described below, and to pay related fees and expenses.
$250.0
Million 9.875% Senior Notes. Interest on the 9.875% Senior Notes accrues at a rate of 9.875%
per year, and is payable semi-annually on May 1 and November 1 of each year, beginning November 1,
2002. The 9.875% Senior Notes mature on May 1, 2009. At any time before May 1, 2005, the Company
may redeem up to 35% of the notes with the net proceeds of certain equity offerings, as long as 65%
of the aggregate principal amount of the notes remains outstanding after the redemption. The
Company may redeem all or a portion of the 9.875% Senior Notes on or after May 1, 2006. Redemption
prices are set forth in the indenture governing the 9.875% Senior Notes. The 9.875% Senior Notes
are guaranteed on an unsecured basis by all of the Company’s domestic subsidiaries (other than
the Company’s Puerto Rican subsidiary).
In connection
with the registration with the SEC of the 9.875% Senior Notes, the Company transferred the real
property and related assets of the Company (as the parent corporation) to certain of its
subsidiaries effected on December 27, 2002. Accordingly, the Company (as the parent corporation to
its subsidiaries) has no independent assets or operations (as defined under Rule 3-10(f) of
Regulation S-X). As a result of this transfer, assets with an aggregate net book value of
approximately $1.6 billion are no longer directly available to the parent corporation to satisfy
the obligations under the 9.875% Senior Notes. Instead, the parent corporation must rely on
distributions of the subsidiaries to satisfy its obligations under the 9.875% Senior Notes,
although all of the parent corporation’s subsidiaries, including the subsidiaries to which the
assets were transferred, have provided full and unconditional guarantees of the 9.875% Senior
Notes. Each of the Company’s subsidiaries guaranteeing the 9.875% Senior Notes are
wholly-owned subsidiaries of the Company; the subsidiary guarantees are full and unconditional and
are joint and several obligations of the guarantors; and all non-guarantor subsidiaries are minor
(as defined in Rule 3-10(h)(6) of Regulation S-X).
As of
December 31, 2001, neither the Company nor any of its subsidiary guarantors had any material or
significant restrictions on the Company’s ability to obtain funds from its subsidiaries by
dividend or loan or to transfer assets from such subsidiaries. Subsequent to December 31, 2001,
and including as the result of the asset transfer effected on December 27, 2002, neither the
Company nor any of its subsidiary guarantors has any material or significant restrictions on the
Company’s ability to obtain funds from its subsidiaries by dividend or loan or to transfer
assets from such subsidiaries.
The indenture
governing the 9.875% Senior Notes contains certain customary covenants that, subject to certain
exceptions and qualifications, restrict the Company’s ability to, among other things: make
restricted payments; incur additional debt or issue certain types of preferred stock; create or
permit to exist certain liens; consolidate, merge or transfer all or substantially all of the
Company’s assets; and enter into transactions with affiliates. In addition, if the Company
sells certain assets (and generally does not use the proceeds of such sales for certain specified
purposes) or experiences specific kinds of changes in control, the Company must offer to repurchase
all or a portion of the 9.875% Senior Notes. The offer price for the 9.875% Senior Notes in
connection with an asset sale would be equal to 100% of the aggregate principal amount of the notes
repurchased plus accrued and unpaid interest and liquidated damages, if any, on the notes
repurchased to the date of purchase. The offer price for the 9.875% Senior Notes in connection
with a change in control would be 101% of the aggregate principal amount of the notes repurchased,
plus accrued and unpaid interest and liquidated damages, if any, on the notes
104
repurchased
to the date of purchase. The 9.875% Senior Notes are also subject to certain cross-default
provisions with the terms of the Company’s other indebtedness.
Pursuant to
the terms and conditions of a Registration Rights Agreement by and among the Company, the
Company’s subsidiary guarantors, and the initial purchasers, dated as of May 3, 2002, on July
18, 2002, the Company and the Company’s subsidiary guarantors filed a registration statement
with the Securities and Exchange Commission (the “SEC”) relating to an offer to exchange
the 9.875% Senior Notes and related guarantees for publicly tradable notes and guarantees on
substantially identical terms. The Registration Rights Agreement requires that the Company cause
the registration statement to be declared effective by the SEC within 180 days from the date of the
original issuance of the 9.875% Senior Notes. In the event that the registration statement has not
been declared effective by the SEC before October 31, 2002, the Company will be required to pay
liquidated damages to the current holders of the notes, at an initial rate for the first 90-day
period of $0.05 per week per $1,000 principal amount of the 9.875% Senior Notes. This initial rate
will increase by $0.05 per week per $1,000 principal amount of the 9.875% Senior Notes for each
subsequent 90-day period up to a maximum aggregate rate of $0.50 per week. Once the registration
statement is declared effective and the exchange offer is commenced, the Company will be relieved
of its obligation to pay liquidated damages for so long as it remains compliant with the other
terms of the Registration Rights Agreement. The Company continues to pursue an effective
registration statement, but can provide no assurance as to when and if it will be declared
effective.
New Senior
Bank Credit Facility. As part of the Refinancing, the Company obtained a new $715.0 million
senior secured bank credit facility (the “New Senior Bank Credit Facility”), which
replaced the Old Senior Bank Credit Facility. Lehman Commercial Paper Inc. serves as
administrative agent under the new facility, which is comprised of a $75.0 million revolving loan
with a term of approximately four years (the “Revolving Loan”), a $75.0 million term loan
with a term of approximately four years (the “Term Loan A Facility”), and a $565.0
million term loan with a term of approximately six years (the “Term Loan B Facility”).
All borrowings under the New Senior Bank Credit Facility initially bear interest at a base rate
plus 2.5%, or LIBOR plus 3.5%, at the Company’s option. The applicable margin for the
Revolving Loan and the Term Loan A Facility is subject to adjustment based on the Company’s
leverage ratio. The Company is also required to pay a commitment fee on the difference between
committed amounts and amounts actually utilized under the Revolving Loan equal to 0.50% per year
subject to adjustment based on the Company’s leverage ratio.
The Revolving
Loan, which currently has no amounts outstanding, will be used by the Company for working capital
and general corporate needs.
The Term Loan
A Facility and the Term Loan B Facility are repayable in quarterly installments in an aggregate
principal amount for each year as set forth below (in thousands):
105
|
|
|
Term
|
|
Term
|
|
|
|
|
|
|
Loan A Facility
|
|
Loan B Facility
|
|
Total
|
|
|
|
|
|
|
|
|
| 2002
|
|
$
|
11,250
|
|
$
|
4,237
|
|
$
|
15,487
|
| 2003
|
|
|
17,250
|
|
|
5,650
|
|
|
22,900
|
| 2004
|
|
|
20,250
|
|
|
5,650
|
|
|
25,900
|
| 2005
|
|
|
21,000
|
|
|
5,650
|
|
|
26,650
|
| 2006
|
|
|
5,250
|
|
|
5,650
|
|
|
10,900
|
| 2007
|
|
|
—
|
|
|
377,138
|
|
|
377,138
|
| 2008
|
|
|
—
|
|
|
161,025
|
|
|
161,025
|
|
|
|
|
|
|
|
|
|
|
|
| Total
|
|
$
|
75,000
|
|
$
|
565,000
|
|
|
$640,000
|
|
|
|
|
|
|
|
|
|
|
|
Prepayments
of loans outstanding under the New Senior Bank Credit Facility are permitted at any time without
premium or penalty, upon the giving of proper notice. In addition, the Company is required to
prepay amounts outstanding under the New Senior Bank Credit Facility in an amount equal to: (i) 50%
of the net cash proceeds from any sale or issuance of equity securities by the Company or any of
the Company’s subsidiaries, subject to certain exceptions; (ii) 100% of the net cash proceeds
from any incurrence of additional indebtedness (excluding certain permitted debt), subject to
certain exceptions; (iii) 100% of the net cash proceeds from any sale or other disposition by the
Company, or any of the Company’s subsidiaries, of any assets, subject to certain exclusions
and reinvestment provisions and excluding certain dispositions in the ordinary course of business;
and (iv) 50% of the Company’s “excess cash flow” (as such term is defined in the New
Senior Bank Credit Facility) for each fiscal year.
The credit
agreement governing the New Senior Bank Credit Facility requires the Company to meet certain
financial covenants, including, without limitation, a minimum fixed charge coverage ratio, a
maximum leverage ratio and a minimum interest coverage ratio. In addition, the New Senior Bank
Credit Facility contains certain covenants which, among other things, limit the incurrence of
additional indebtedness, investments, 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 Senior Bank Credit Facility is subject to
certain cross-default provisions with terms of the Company’s other indebtedness.
In connection
with the refinancing, we terminated an interest rate swap agreement at a price of approximately
$8.8 million. The swap agreement, which fixed LIBOR at 6.51% on outstanding balances of $325.0
million through its expiration on December 31, 2002, had been entered into in order to satisfy a
requirement of the Old Senior Bank Credit Facility. In addition, in order to satisfy a requirement
of the New Senior Bank Credit Facility, we purchased an interest rate cap agreement, capping LIBOR
at 5.0% on outstanding balances of $200.0 million through the expiration of the cap agreement on
May 20, 2004, for a price of $1.0 million. The termination of the swap agreement and the purchase
of the cap agreement were funded with cash on hand.
The loans and
other obligations under the New Senior Bank Credit Facility are guaranteed by each of the
Company’s domestic subsidiaries. The Company’s obligations under the New Senior Bank
Credit Facility and the guarantees are secured by: (i) a perfected first priority security interest
in substantially all of the Company’s tangible and intangible assets and substantially all of
the tangible and intangible assets of the Company’s subsidiaries; and (ii) a pledge of all of
the capital stock of the Company’s domestic subsidiaries and 65% of the capital stock of
certain of the Company’s foreign subsidiaries.
106
Tender
Offer and Consent Solicitation for $100.0 Million 12% Senior Notes. Pursuant to the terms of a
tender offer and consent solicitation which expired on May 16, 2002, in connection with the
Refinancing, in May 2002, the Company redeemed approximately $89.2 million in aggregate principal
amount of its 12% Senior Notes with proceeds from the issuance of the 9.875% Senior Notes. The
notes were redeemed at a price of 110% of par, which included a 3% consent payment, plus accrued
and unpaid interest to the payment date. In connection with the tender offer and consent
solicitation, the Company received sufficient consents and amended the indenture governing the 12%
Senior Notes to delete substantially all of the restrictive covenants and events of default
contained therein. The amendment became operative upon the Company’s purchase of the 12%
Senior Notes tendered in connection with the consent.
The Company
is required to pay interest semi-annually and principal upon maturity on the remaining 12% Senior
Notes outstanding, in accordance with the original terms of such notes.
Operating
Company Revolving Credit Facility. In connection with the Refinancing, the Operating Company
Revolving Credit Facility was terminated. No amounts were outstanding on this facility at the time
of the Refinancing.
As a result
of the early extinguishment of the Old Senior Bank Credit Facility and the redemption of
substantially all of the Company’s 12% Senior Notes, the Company recorded an extraordinary
loss of approximately $36.7 million during the second quarter of 2002, which included the write-off
of existing deferred loan costs, certain bank fees paid, premiums paid to redeem the 12% Senior
Notes, and certain other costs associated with the Refinancing.
Conversion
of $1.1 Million Convertible Subordinated Notes
In connection
with the June 2000 waiver and amendment to the note purchase agreement relating to the
Company’s $40.0 Million Convertible Subordinated Notes, as further described in Note 15, the
Company issued additional convertible subordinated notes to MDP containing substantially similar
terms in the aggregate principal amount of $1.1 million, which amount represented all interest owed
at the default rate of interest through June 30, 2000. These additional notes were convertible, at
an adjusted conversion price of $11.90, into shares of the Company’s common stock. On January
14, 2002, MDP converted the $1.1 million convertible subordinated notes into approximately 94,000
shares of common stock.
Settlement
with IRS Regarding 1997 Federal Tax Return
In connection
with the 1999 Merger, the Company assumed the tax obligations of Old CCA. The IRS has completed
field audits of Old CCA’s federal tax returns for the taxable years ended December 31, 1998
and 1997, and has also completed auditing the Company’s federal tax return for the taxable
year ended December 31, 2000.
The IRS
agent’s report related to 1998 and 1997 included a determination by the IRS to increase
taxable income by approximately $120.0 million. The Company appealed the IRS’s findings with
the Appeals Office of the IRS. On October 24, 2002 the Company entered into a definitive
settlement agreement with the IRS in connection with the IRS’s audit of Old CCA’s 1997
federal income tax return. Under the terms of the settlement, in consideration for the IRS’s
final determinations with respect to the 1997 tax year, the Company expects to pay approximately
107
$46.6 million
in cash to satisfy federal taxes and interest. As a result of this settlement, the Company will
also owe approximately $7.6 million in state taxes and interest. Substantially all of these
amounts will be paid during the fourth quarter of 2002 with cash on hand. As of September 30,
2002, the Company had cash and cash equivalents of approximately $101.8 million.
Pursuant to
the terms of the settlement, the audit adjustments agreed to for the 1997 tax year will not trigger
any additional distribution requirements by the Company in order to preserve the Company’s
status as a real estate investment trust for federal income tax purposes for 1999. The adjustments
will, however, serve to increase the Company’s accumulated earnings and profits in 2002 and
therefore may affect the taxability of dividends paid by the Company on its Series A and Series B
Preferred Stock in 2002 and later years.
Based on the
terms of the settlement, the amount previously reserved for this matter, and the Company’s
current estimates of taxable income for 2002, the settlement is not expected to result in either a
material tax benefit or tax expense to the Company for 2002. In addition, due to the Job Creation
and Worker Assistance Act of 2002, the settlement will create an opportunity for the Company to
utilize any 2002 tax losses to claim a refund of a portion of the taxes paid.
The Company
is continuing to appeal the IRS’s findings with respect to the IRS’s audit of Old
CCA’s 1998 federal income tax return and the Company’s 2000 federal income tax return.
Facility Operations
As described
in Note 8, during the fourth quarter of 2000, the Company’s management committed to a plan of
disposal for certain long-lived assets of the Company, including the Leo Chesney Correctional
Center (“Leo Chesney”), located in Live Oak, California, and the Queensgate Correctional
Facility (“Queensgate”), located in Cincinnati, Ohio. These facilities are currently
leased to third party operators. The facilities, with estimated net realizable values totaling
$20.6 million at December 31, 2001, were classified on the consolidated balance sheet as assets
held for sale as of December 31, 2001. During the first quarter of 2002, these facilities were
reclassified to assets held for use because the Company was unable to achieve acceptable sales
prices.
During the
fourth quarter of 2001, management committed to a plan to terminate a management contract at the
Southwest Indiana Regional Youth Village, located in Vincennes, Indiana. During the first quarter
of 2002, the Company entered into a mutual agreement with Children and Family Services Corporation
(“CFSC”) to terminate the Company’s management contract at Southwest Indiana
Regional Youth Village, effective April 1, 2002, prior to the contract’s expiration date in
2004. In connection with the mutual agreement to terminate the management contract, CFSC also paid
in full an outstanding note receivable totaling approximately $0.7 million, which was previously
considered uncollectible and was fully reserved. The reserve was therefore reversed during the
first quarter of 2002.
On May 30,
2002, the Company was awarded a contract by the BOP to house approximately 1,500 federal detainees
at the Company’s McRae Correctional Facility located in McRae, Georgia. The three-year
contract, awarded as part of the Criminal Alien Requirement Phase II
108
Solicitation,
or CAR II, also provides for seven one-year renewals. The contract guarantees at least 95%
occupancy on a take-or-pay basis. The Company could earn revenues of up to $109 million in the
first three years of the contract, and expects to incur approximately $6 million of capital
expenditures to prepare this facility for operations pursuant to BOP specifications. The facility
is expected to be fully operational late in the fourth quarter of 2002.
On June 28,
2002, the Company received notice from the Mississippi Department of Corrections terminating its
contract to manage the Delta Correctional Facility located in Greenwood, Mississippi, due to the
non-appropriation of funds. The Company ceased operations of the facility during October of 2002.
However, the State of Mississippi has agreed to expand the management contract at the Wilkinson
County Correctional Facility to accommodate an additional 100 inmates. As a result, the results of
operations of the Delta Correctional Facility are not reported in discontinued operations. These
events are not expected to have a material impact on the Company’s financial statements.
On September
30, 2002, the Company announced a contract award from the State of Wisconsin to house up to a total
of 5,500 medium-security Wisconsin inmates. The new contract will replace an existing contract
between the Company and the State of Wisconsin effective December 22, 2002. The Company currently
manages approximately 3,500 Wisconsin inmates under the existing contract.
On October
28, 2002, the Company announced a lease of its Whiteville, Tennessee facility to Hardeman County,
Tennessee which has contracted with the State of Tennessee to manage up to 1,536 inmates. The
Company has contracted with Hardeman County to manage the inmates housed in the Whiteville facility.
109
ITEM 7(c). Exhibits.
The following
exhibits are filed as part of this Current Report:
| Exhibit
|
|
|
| Number
|
|
Description of Exhibits
|
|
|
|
| 23.1
|
|
Consent of Ernst & Young LLP.
|
|
|
|
|
| 99.1
|
|
Certification of the
Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
| 99.2
|
|
Certification of the Company’s Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
110
SIGNATURES
Pursuant to
the requirements of the Securities Exchange Act of 1934, as amended, the undersigned Registrant has
duly caused this Current Report on Form 8-K to be signed on its behalf by the undersigned hereunto
duly authorized.
| Date: December 27, 2002
|
CORRECTIONS CORPORATION OF AMERICA
|
|
|
|
|
|
|
By:
|
/s/ Irving E. Lingo, Jr.
|
|
|
|
|
|
|
Its:
|
Executive Vice President, Chief Financial Officer,
|
|
|
|
Assistant Secretary and Principal Accounting Officer
|
111
EXHIBIT INDEX
| Exhibit
|
|
|
| Number
|
|
Description of Exhibits
|
|
|
|
| 23.1
|
|
Consent of Ernst & Young LLP.
|
|
|
|
|
| 99.1
|
|
Certification of the
Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
| 99.2
|
|
Certification of the
Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|