Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-16109
CORRECTIONS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
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MARYLAND
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62-1763875 |
(State or other jurisdiction of
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(I.R.S. Employer Identification Number) |
incorporation or organization) |
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10 BURTON HILLS BLVD., NASHVILLE, TENNESSEE 37215
(Address and zip code of principal executive offices)
(615) 263-3000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x
Indicate the number of shares outstanding of each class of Common Stock as of November 4, 2008:
Shares of Common Stock, $0.01 par value per share: 125,702,097 shares outstanding.
CORRECTIONS CORPORATION OF AMERICA
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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September 30, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Cash and cash equivalents |
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$ |
28,736 |
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$ |
57,968 |
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Accounts receivable, net of allowance of $3,059 and $3,914, respectively |
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242,574 |
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241,116 |
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Deferred tax assets |
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14,789 |
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12,250 |
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Prepaid expenses and other current assets |
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20,700 |
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21,133 |
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Assets held for sale |
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7,581 |
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Current assets of discontinued operations |
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175 |
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615 |
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Total current assets |
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306,974 |
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340,663 |
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Property and equipment, net |
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2,456,949 |
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2,086,980 |
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Restricted cash |
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6,669 |
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6,511 |
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Investment in direct financing lease |
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13,698 |
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14,503 |
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Goodwill |
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13,672 |
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13,672 |
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Other assets |
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21,907 |
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23,411 |
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Total assets |
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$ |
2,819,869 |
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$ |
2,485,740 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Accounts payable and accrued expenses |
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$ |
219,021 |
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$ |
212,749 |
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Income taxes payable |
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8,905 |
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964 |
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Current portion of long-term debt |
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290 |
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290 |
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Current liabilities of discontinued operations |
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566 |
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728 |
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Total current liabilities |
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228,782 |
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214,731 |
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Long-term debt, net of current portion |
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1,155,460 |
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975,677 |
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Deferred tax liabilities |
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42,884 |
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34,271 |
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Other liabilities |
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39,505 |
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39,086 |
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Total liabilities |
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1,466,631 |
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1,263,765 |
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Commitments and contingencies |
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Common stock $0.01 par value; 300,000 shares authorized; 125,597 and
124,472 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively |
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1,256 |
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1,245 |
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Additional paid-in capital |
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1,589,572 |
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1,568,736 |
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Retained deficit |
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(237,590 |
) |
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(348,006 |
) |
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Total stockholders equity |
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1,353,238 |
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1,221,975 |
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Total liabilities and stockholders equity |
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$ |
2,819,869 |
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$ |
2,485,740 |
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The accompanying notes are an integral part of these consolidated financial statements.
1
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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REVENUE: |
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Management and other |
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$ |
410,664 |
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$ |
377,069 |
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$ |
1,193,530 |
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$ |
1,085,158 |
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Rental |
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1,221 |
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1,187 |
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3,617 |
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3,375 |
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411,885 |
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378,256 |
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1,197,147 |
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1,088,533 |
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EXPENSES: |
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Operating |
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292,599 |
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273,450 |
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850,220 |
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778,937 |
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General and administrative |
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20,866 |
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18,362 |
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60,222 |
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54,497 |
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Depreciation and amortization |
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23,564 |
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20,074 |
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67,152 |
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57,272 |
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337,029 |
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311,886 |
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977,594 |
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890,706 |
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OPERATING INCOME |
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74,856 |
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66,370 |
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219,553 |
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197,827 |
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OTHER EXPENSES (INCOME): |
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Interest expense, net |
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15,087 |
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13,249 |
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42,671 |
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40,838 |
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Other income |
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(360 |
) |
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(200 |
) |
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(356 |
) |
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(281 |
) |
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14,727 |
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13,049 |
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42,315 |
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40,557 |
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INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
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60,129 |
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53,321 |
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177,238 |
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157,270 |
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Income tax expense |
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(22,038 |
) |
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(20,170 |
) |
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(66,765 |
) |
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(59,275 |
) |
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INCOME FROM CONTINUING OPERATIONS |
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38,091 |
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33,151 |
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110,473 |
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97,995 |
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Income (loss) from discontinued operations, net of tax |
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(200 |
) |
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104 |
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(57 |
) |
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432 |
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NET INCOME |
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$ |
37,891 |
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$ |
33,255 |
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$ |
110,416 |
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$ |
98,427 |
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BASIC EARNINGS PER SHARE: |
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Income from continuing operations |
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$ |
0.30 |
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$ |
0.27 |
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$ |
0.89 |
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$ |
0.81 |
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Income (loss) from discontinued operations, net of taxes |
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Net income |
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$ |
0.30 |
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$ |
0.27 |
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$ |
0.89 |
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$ |
0.81 |
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DILUTED EARNINGS PER SHARE: |
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Income from continuing operations |
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$ |
0.30 |
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$ |
0.26 |
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$ |
0.87 |
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$ |
0.79 |
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Income (loss) from discontinued operations, net of taxes |
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Net income |
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$ |
0.30 |
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$ |
0.26 |
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$ |
0.87 |
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$ |
0.79 |
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The accompanying notes are an integral part of these consolidated financial statements.
2
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
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For the Nine Months |
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Ended September 30, |
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2008 |
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2007 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
110,416 |
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$ |
98,427 |
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Adjustments to reconcile net income to net cash provided by operating
activities: |
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Depreciation and amortization |
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67,152 |
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|
57,272 |
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Amortization of debt issuance costs and other non-cash interest |
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2,900 |
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2,972 |
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Deferred income taxes |
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4,924 |
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4,697 |
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Income tax benefit of equity compensation |
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|
(8,800 |
) |
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|
(17,672 |
) |
Other income |
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|
(356 |
) |
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(281 |
) |
Non-cash equity compensation |
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|
7,205 |
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5,369 |
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Other non-cash items |
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|
674 |
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|
223 |
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Changes in assets and liabilities, net: |
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Accounts receivable, prepaid expenses and other assets |
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(499 |
) |
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|
22,648 |
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Accounts payable, accrued expenses and other liabilities |
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|
22,518 |
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|
22,823 |
|
Income taxes payable |
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16,741 |
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18,362 |
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Net cash provided by operating activities |
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222,875 |
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|
214,840 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Expenditures for facility development and expansions |
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(423,423 |
) |
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(161,645 |
) |
Expenditures for other capital improvements |
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(23,118 |
) |
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(32,442 |
) |
Decrease in restricted cash |
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5,641 |
|
Proceeds from sale of investments |
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|
10,000 |
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Purchases of investments |
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(3,205 |
) |
Proceeds from sale of assets |
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85 |
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48 |
|
Increase in other assets |
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83 |
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(967 |
) |
Payments received on direct financing leases and notes receivable |
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|
713 |
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|
631 |
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Net cash used in investing activities |
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(445,660 |
) |
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(181,939 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of debt |
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223,500 |
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Principal repayments of debt |
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(43,500 |
) |
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Payment of debt issuance costs |
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|
(89 |
) |
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Income tax benefit of equity compensation |
|
|
8,800 |
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|
17,672 |
|
Purchase and retirement of common stock |
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|
(3,367 |
) |
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|
(3,579 |
) |
Proceeds from exercise of stock options and warrants |
|
|
8,209 |
|
|
|
13,328 |
|
|
|
|
|
|
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|
Net cash provided by financing activities |
|
|
193,553 |
|
|
|
27,421 |
|
|
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|
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(29,232 |
) |
|
|
60,322 |
|
|
|
|
|
|
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|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
57,968 |
|
|
|
29,121 |
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CASH AND CASH EQUIVALENTS, end of period |
|
$ |
28,736 |
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$ |
89,443 |
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|
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest (net of amounts capitalized of $11,282 and $4,788
in 2008 and 2007, respectively) |
|
$ |
42,008 |
|
|
$ |
46,269 |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
39,474 |
|
|
$ |
31,331 |
|
|
|
|
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|
The accompanying notes are an integral part of these consolidated financial statements.
3
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(UNAUDITED AND AMOUNTS IN THOUSANDS)
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Common Stock |
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Additional |
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Paid-in |
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Retained |
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Shares |
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Par Value |
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Capital |
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Deficit |
|
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Total |
|
Balance as of
December 31, 2007 |
|
|
124,472 |
|
|
$ |
1,245 |
|
|
$ |
1,568,736 |
|
|
$ |
(348,006 |
) |
|
$ |
1,221,975 |
|
|
|
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|
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Comprehensive income: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,416 |
|
|
|
110,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,416 |
|
|
|
110,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
1 |
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of common stock |
|
|
(126 |
) |
|
|
(1 |
) |
|
|
(3,366 |
) |
|
|
|
|
|
|
(3,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation, net of
forfeitures |
|
|
(29 |
) |
|
|
|
|
|
|
4,397 |
|
|
|
|
|
|
|
4,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit of equity
compensation |
|
|
|
|
|
|
|
|
|
|
8,800 |
|
|
|
|
|
|
|
8,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation
expense |
|
|
|
|
|
|
|
|
|
|
2,789 |
|
|
|
|
|
|
|
2,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grant |
|
|
279 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
1,000 |
|
|
|
10 |
|
|
|
8,199 |
|
|
|
|
|
|
|
8,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2008 |
|
|
125,597 |
|
|
$ |
1,256 |
|
|
$ |
1,589,572 |
|
|
$ |
(237,590 |
) |
|
$ |
1,353,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED AND AMOUNTS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
Par |
|
|
Paid-in |
|
|
Retained |
|
|
|
|
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
Balance as of
December 31, 2006 |
|
|
122,084 |
|
|
$ |
1,221 |
|
|
$ |
1,527,608 |
|
|
$ |
(479,148 |
) |
|
$ |
1,049,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,427 |
|
|
|
98,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,427 |
|
|
|
98,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
1 |
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of common stock |
|
|
(130 |
) |
|
|
(1 |
) |
|
|
(3,578 |
) |
|
|
|
|
|
|
(3,579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation, net of
forfeitures |
|
|
(123 |
) |
|
|
(1 |
) |
|
|
3,717 |
|
|
|
|
|
|
|
3,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit of equity
compensation |
|
|
|
|
|
|
|
|
|
|
17,672 |
|
|
|
|
|
|
|
17,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation
expense |
|
|
|
|
|
|
|
|
|
|
1,634 |
|
|
|
|
|
|
|
1,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised |
|
|
75 |
|
|
|
1 |
|
|
|
832 |
|
|
|
|
|
|
|
833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grant |
|
|
312 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
1,832 |
|
|
|
18 |
|
|
|
12,477 |
|
|
|
|
|
|
|
12,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of
accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,231 |
) |
|
|
(2,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2007 |
|
|
124,051 |
|
|
$ |
1,241 |
|
|
$ |
1,560,378 |
|
|
$ |
(382,952 |
) |
|
$ |
1,178,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
1. ORGANIZATION AND OPERATIONS
As of September 30, 2008, Corrections Corporation of America, a Maryland corporation
(together with its subsidiaries, the Company), owned 45 correctional, detention and
juvenile facilities, three of which are leased to other operators. As of September 30, 2008,
the Company operated 65 facilities, including 42 facilities that it owned, located in 19
states and the District of Columbia. The Company is also constructing an additional
2,232-bed facility in Adams County, Mississippi that is expected to be completed in the
fourth quarter of 2008, a 3,060-bed facility in Eloy, Arizona that is expected to be
completed in the first quarter of 2009, and a 2,040-bed facility in Trousdale County,
Tennessee that is expected to be completed in the first quarter of 2010. Further, during the
second quarter of 2008 the Company was awarded a contract by the Office of Federal Detention
Trustee to design, build, and operate a new correctional facility in Pahrump, Nevada, which
is currently expected to be completed during the second quarter of 2010.
The Company specializes in owning, operating and managing prisons and other correctional
facilities and providing inmate residential and prisoner transportation services for
governmental agencies. In addition to providing the fundamental residential services
relating to inmates, the Companys facilities offer a variety of rehabilitation and
educational programs, including basic education, religious services, life skills and
employment training, and substance abuse treatment. These services are intended to reduce
recidivism and to prepare inmates for their successful re-entry into society upon their
release. The Company also provides health care (including medical, dental and psychiatric
services), food services and work and recreational programs.
The Companys website address is www.correctionscorp.com. The Company makes its Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
Section 16 reports under the Securities Exchange Act of 1934, as amended, available on its
website, free of charge, as soon as reasonably practicable after these reports are filed with
or furnished to the Securities and Exchange Commission (the SEC).
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements have been prepared by
the Company and, in the opinion of management, reflect all normal recurring adjustments
necessary for a fair presentation of results for the unaudited interim periods presented.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have been condensed
or omitted. The results of operations for the interim period are not necessarily indicative
of the results to be obtained for the full
6
fiscal year. Reference is made to the audited financial statements of the Company included
in its Annual Report on Form 10-K as of and for the year ended December 31, 2007 (the 2007
Form 10-K) with respect to certain significant accounting and financial reporting policies
as well as other pertinent information of the Company.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $13.7 million as of September 30, 2008 and December 31, 2007 and was associated
with the facilities the Company manages but does not own. This goodwill was established in
connection with the acquisitions of two service companies during 2000.
The components of the Companys amortized intangible assets and liabilities are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Contract acquisition costs |
|
$ |
873 |
|
|
$ |
(860 |
) |
|
$ |
873 |
|
|
$ |
(859 |
) |
Contract values |
|
|
(35,688 |
) |
|
|
28,875 |
|
|
|
(35,688 |
) |
|
|
25,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(34,815 |
) |
|
$ |
28,015 |
|
|
$ |
(34,815 |
) |
|
$ |
25,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract acquisition costs are included in other non-current assets, and
contract values are included in other non-current liabilities in the accompanying balance
sheets. Contract values are amortized using the interest method. Amortization income, net
of amortization expense, for intangible assets and liabilities during the three months ended
September 30, 2008 and 2007 was $1.2 million and $1.1 million, respectively, while
amortization income, net of amortization expense, for intangible assets and liabilities
during the nine months ended September 30, 2008 and 2007 was $3.5 million and $3.4 million,
respectively. Interest expense associated with the amortization of contract values for the
three months ended September 30, 2008 and 2007 was $0.2 million and $0.3 million,
respectively, while interest expense associated with the amortization of contract values for
the nine months ended September 30, 2008 and 2007 was $0.6 million and $0.9 million,
respectively. Estimated amortization income, net of amortization expense, for the remainder
of 2008 and the five succeeding fiscal years is as follows (in thousands):
|
|
|
|
|
2008 (remainder) |
|
$ |
1,166 |
|
2009 |
|
|
3,204 |
|
2010 |
|
|
2,534 |
|
2011 |
|
|
134 |
|
2012 |
|
|
134 |
|
2013 |
|
|
134 |
|
7
4. DISCONTINUED OPERATIONS
In November 2007, the Company accepted an unsolicited offer to sell a facility located in
Houston, Texas and leased to a third-party operator. In accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), the Company classified the $7.6 million net book value of
the facility as held for sale as of December 31, 2007. During February 2008, at the request
of the operator the Company agreed to extend the proposed closing date and fix the sales
price through June 30, 2008. During the second quarter of 2008, the third-party operator
elected not to purchase the facility and instead signed a new lease for the facility
effective July 1, 2008. As a result, the Company has reclassified the facility previously
classified as held for sale as an asset to be held and used and the asset is now reported in
property and equipment in the accompanying consolidated balance sheet. Further, in
accordance with SFAS 144, the Company reclassified the results of operations of this facility
to be included in income from continuing operations for all periods presented.
As a result of Shelby Countys evolving relationship with the Tennessee Department of
Childrens Services (DCS) whereby the DCS prefers to oversee the juveniles at facilities
under DCS control, the Company ceased operations of the 200-bed Shelby Training Center
located in Memphis, Tennessee in August 2008. The Company reclassified the results of
operations, net of taxes, and the assets and liabilities of this facility, excluding property
and equipment, as discontinued operations upon termination of the management contract during
the third quarter of 2008 for all periods presented. The property and equipment of this
facility will continue to be reported as continuing operations, as the Company retained
ownership of the building and equipment.
The following table summarizes the results of operations for this facility for the three and
nine months ended September 30, 2008 and 2007 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and Managed |
|
$ |
161 |
|
|
$ |
1,664 |
|
|
$ |
3,269 |
|
|
$ |
5,072 |
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and Managed |
|
|
476 |
|
|
|
1,496 |
|
|
|
3,354 |
|
|
|
4,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
(315 |
) |
|
|
168 |
|
|
|
(85 |
) |
|
|
694 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED
OPERATIONS BEFORE INCOME TAXES |
|
|
(315 |
) |
|
|
168 |
|
|
|
(83 |
) |
|
|
694 |
|
Income tax (expense) benefit |
|
|
115 |
|
|
|
(64 |
) |
|
|
26 |
|
|
|
(262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS, NET
OF TAXES |
|
$ |
(200 |
) |
|
$ |
104 |
|
|
$ |
(57 |
) |
|
$ |
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
In addition to the foregoing, during 2006 and 2005, the Company transferred
management of two facilities it did not own to other operators. The Company did not operate
either of these facilities, and therefore there were no results of operations, during the
three and nine months ended September 30, 2008 and 2007. The assets and liabilities of these
two facilities, along with those associated with the management contract with the DCS at the
Shelby Training Center, presented in the accompanying consolidated balance sheets are as
follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
158 |
|
|
|
606 |
|
Prepaid expenses and other current assets |
|
|
17 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
175 |
|
|
$ |
615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
566 |
|
|
$ |
728 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
566 |
|
|
$ |
728 |
|
|
|
|
|
|
|
|
In May 2008, the Company notified the Bay County Commission of its intention to
exercise the Companys option to terminate the operational management contract for the
1,150-bed Bay County Jail and Annex in Panama City, Florida, effective October 9, 2008. The
Company currently expects to reclassify the results of operations, net of taxes, and the
assets and liabilities of this facility as discontinued operations upon termination of
operations in the fourth quarter of 2008 for all periods presented. The termination of the
management contract is not expected to have a material effect on the Companys financial
statements.
Pursuant to a re-bid of the management contracts, during September 2008, the Company was
notified by the Texas Department of Criminal Justice (TDCJ) of its intent to transfer the
management of the 500-bed B.M. Moore Correctional Center in Overton, Texas and the 518-bed
Diboll Correctional Center in Diboll, Texas to another operator, upon the expiration of the
management contracts on January 16, 2009. Both of these facilities are owned by the TDCJ.
The Company currently expects to reclassify the results of operations, net of taxes, and the
assets and liabilities of these two facilities as discontinued operations upon termination of
operations in the first quarter of 2009 for all periods presented. The termination of the
management contracts is not expected to have a material effect on the Companys financial
statements.
9
5. DEBT
Debt outstanding as of September 30, 2008 and December 31, 2007 consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Revolving Credit Facility, principal due at maturity in December
2012; interest payable periodically at variable interest rates. |
|
$ |
180,000 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
7.5% Senior Notes, principal due at maturity in May 2011;
interest payable semi-annually in May and November at 7.5%. |
|
|
250,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
7.5% Senior Notes, principal due at maturity in May 2011;
interest payable semi-annually in May and November at 7.5%.
These notes were issued with a $2.3 million premium, of which
$0.8 million and $1.0 million was unamortized at September 30,
2008 and December 31, 2007, respectively. |
|
|
200,750 |
|
|
|
200,967 |
|
|
|
|
|
|
|
|
|
|
6.25% Senior Notes, principal due at maturity in March 2013;
interest payable semi-annually in March and September at 6.25%. |
|
|
375,000 |
|
|
|
375,000 |
|
|
|
|
|
|
|
|
|
|
6.75% Senior Notes, principal due at maturity in January 2014;
interest payable semi-annually in January and July at 6.75%. |
|
|
150,000 |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
1,155,750 |
|
|
|
975,967 |
|
Less: Current portion of long-term debt |
|
|
(290 |
) |
|
|
(290 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,155,460 |
|
|
$ |
975,677 |
|
|
|
|
|
|
|
|
Revolving Credit Facility. During December 2007, the Company entered into a new $450.0
million senior secured revolving credit facility (the New Revolving Credit Facility)
arranged by Banc of America Securities LLC and Wachovia Capital Markets, LLC. The New
Revolving Credit Facility replaced the Companys previous $250.0 million senior secured
Revolving Credit Facility. The New Revolving Credit Facility will be utilized to fund
development projects in anticipation of increasing demand by existing and potential new
customers, as well as for working capital, capital expenditures and general corporate
purposes. The Company capitalized approximately $1.9 million during the fourth quarter of
2007 for the costs related to the issuance of the New Revolving Credit Facility in accordance
with EITF 98-14, Debtors Accounting for Changes in Line-of-Credit or Revolving-Debt
Arrangements.
The New Revolving Credit Facility has an aggregate principal capacity of $450.0 million and
matures in December 2012. At the Companys option, interest on outstanding borrowings will
be based on either a base rate plus a margin ranging from 0.00% to 0.50% or a London
Interbank Offered Rate (LIBOR) plus a margin ranging from 0.75% to 1.50%. The applicable
margins are subject to adjustments based on the Companys leverage ratio. Based on the
Companys current leverage ratio, loans under the New Revolving Credit Facility currently
bear interest at the base rate plus a margin of 0.00% or at LIBOR plus a margin of 0.75%. As
of September 30, 2008, the Company had $180.0 million of outstanding borrowings under the New
Revolving Credit Facility as well as $32.8 million in letters of credit outstanding.
10
The New Revolving Credit Facility has a $20.0 million sublimit for swing line loans and a
$100.0 million sublimit for the issuance of standby letters of credit. The Company has an
option to increase the availability under the New Revolving Credit Facility by up to $300.0
million (consisting of revolving credit, term loans, or a combination of the two) subject to,
among other things, the receipt of commitments for the increased amount.
None of the banks providing commitments under the New Revolving Credit Facility have failed
to fund borrowings the Company has requested. However, no assurance can be provided that all of
the banks in the lending group will continue to operate as a going concern in the future. If
any of the banks in the lending group were to fail, it is possible that the capacity under
the New Revolving Credit Facility would be reduced.
The New Revolving Credit Facility is secured by a pledge of all of the capital stock of the
Companys domestic subsidiaries, 65% of the capital stock of the Companys foreign
subsidiaries, all of the Companys accounts receivable, and all of the Companys deposit
accounts.
The New Revolving Credit Facility requires the Company to meet certain financial covenants,
including, without limitation, a maximum total leverage ratio, a maximum secured leverage
ratio, and a minimum interest coverage ratio. As of September 30, 2008, the Company was in
compliance with all such covenants. In addition, the New Revolving Credit Facility contains
certain covenants which, among other things, limit both the incurrence of additional
indebtedness, investments, payment of dividends, transactions with affiliates, asset sales,
acquisitions, capital expenditures, mergers and consolidations, prepayments and modifications
of other indebtedness, liens and encumbrances and other matters customarily restricted in
such agreements. In addition, the New Revolving Credit Facility is subject to certain
cross-default provisions with terms of the Companys other indebtedness.
$250 Million 7.5% Senior Notes. Interest on the $250.0 million aggregate principal amount of
the Companys 7.5% unsecured senior notes issued in May 2003 (the $250 Million 7.5% Senior
Notes) accrues at the stated rate and is payable semi-annually on May 1 and November 1 of
each year. The $250 Million 7.5% Senior Notes are scheduled to mature on May 1, 2011. The
Company may currently redeem all or a portion of the notes at redemption prices as set forth
in the indenture governing the $250 Million 7.5% Senior Notes. The $250 Million 7.5% Senior
Notes are guaranteed on an unsecured basis by all of the Companys domestic subsidiaries.
$200 Million 7.5% Senior Notes. Interest on the $200.0 million aggregate principal amount of
the Companys 7.5% unsecured senior notes issued in August 2003 (the $200 Million 7.5%
Senior Notes) accrues at the stated rate and is payable semi-annually on May 1 and November
1 of each year. However, the notes were issued at a price of 101.125% of the principal
amount of the notes, resulting in a premium of $2.25 million, which is amortized as a
reduction to interest expense over the term of the notes. The $200 Million 7.5% Senior Notes
were issued under the existing indenture and supplemental indenture governing the $250
Million 7.5% Senior Notes.
11
$375 Million 6.25% Senior Notes. Interest on the $375.0 million aggregate principal amount
of the Companys 6.25% unsecured senior notes issued in March 2005 (the 6.25% Senior Notes)
accrues at the stated rate and is payable on March 15 and September 15 of each year. The
6.25% Senior Notes are scheduled to mature on March 15, 2013. The Company may redeem all or
a portion of the notes on or after March 15, 2009. Redemption prices are set forth in the
indenture governing the 6.25% Senior Notes.
$150 Million 6.75% Senior Notes. Interest on the $150.0 million aggregate principal amount
of the Companys 6.75% unsecured senior notes issued in January 2006 (the 6.75% Senior
Notes) accrues at the stated rate and is payable on January 31 and July 31 of each year.
The 6.75% Senior Notes are scheduled to mature on January 31, 2014. At any time on or before
January 31, 2009, the Company may redeem up to 35% of the notes with the net proceeds of
certain equity offerings, as long as 65% of the aggregate principal amount of the notes
remains outstanding after the redemption. The Company may redeem all or a portion of the
notes on or after January 31, 2010. Redemption prices are set forth in the indenture
governing the 6.75% Senior Notes.
6. STOCKHOLDERS EQUITY
Restricted Stock
During the first nine months of 2008, the Company issued 279,000 shares of restricted
common stock to the Companys employees, with an aggregate fair value of $7.5 million,
including 218,000 restricted shares to employees whose compensation is charged to general and
administrative expense and 61,000 restricted shares to employees whose compensation is
charged to operating expense. During 2007, the Company issued 312,000 shares of restricted
common stock to certain of the Companys employees, with an aggregate fair value of $8.3
million, including 254,000 restricted shares to employees whose compensation is charged to
general and administrative expense and 58,000 shares to employees whose compensation is
charged to operating expense.
The Company established performance-based vesting conditions on the restricted stock awarded
to the Companys officers and executive officers. Unless earlier vested under the terms of
the restricted stock, shares issued to officers and executive officers are subject to vesting
over a three-year period based upon the satisfaction of certain performance criteria. No
more than one-third of such shares may vest in the first performance period; however, the
performance criteria are cumulative for the three-year period. Unless earlier vested under
the terms of the restricted stock, the shares of restricted stock issued to the other
employees of the Company vest after three years of continuous service.
During the three months ended September 30, 2008, the Company expensed $1.5 million, net of
forfeitures, relating to restricted common stock ($0.3 million of which was recorded in
operating expenses and $1.2 million of which was recorded in general and administrative
expenses). During the three months ended September 30, 2007, the Company expensed $1.2
million, net of forfeitures, relating to restricted common stock
12
($0.3 million of which was recorded in operating expenses and $0.9 million of which was
recorded in general and administrative expenses).
During the nine months ended September 30, 2008, the Company expensed $4.4 million, net of
forfeitures, relating to restricted common stock ($0.9 million of which was recorded in
operating expenses and $3.5 million of which was recorded in general and administrative
expenses). During the nine months ended September 30, 2007, the Company expensed $3.7
million, net of forfeitures, relating to restricted common stock ($0.7 million of which was
recorded in operating expenses and $3.0 million of which was recorded in general and
administrative expenses). As of September 30, 2008, 742,000 shares of restricted stock
remained outstanding and subject to vesting.
Stock Options
During the nine months ended September 30, 2008, the Company issued to its directors,
officers, and executive officers options to purchase 671,000 shares of common stock with an
aggregate fair value of $5.1 million, with a weighted average exercise price of $26.61 per
share. During 2007, the Company issued to its officers, executive officers, and non-employee
directors options to purchase 567,000 shares of common stock with an aggregate fair value of
$4.9 million, with a weighted average exercise price of $27.28 per share. The Company
estimates the fair value of stock options using the Black-Scholes option pricing model.
Unless earlier vested under their terms, one third of the stock options issued to the
Companys executive officers vest on the anniversary of the grant date over a three-year
period while one fourth of the stock options issued to the Companys other officers vest on
the anniversary of the grant date over a four-year period.
During the three months ended September 30, 2008 and 2007, the Company expensed $1.0 million
and $0.7 million, net of forfeitures, relating to its outstanding stock options. During the
nine months ended September 30, 2008 and 2007, the Company expensed $2.8 million and $1.6
million, net of forfeitures, relating to its outstanding stock options. As of September 30,
2008, options to purchase 4.8 million shares of common stock were outstanding with a weighted
average exercise price of $14.14.
Stock Warrants
On August 8, 2007, 75,000 warrants were exercised at a price of $11.10 per share. The holder
of such warrants elected to satisfy the cost of the warrants using a net share settlement
method, resulting in the issuance of 48,000 shares of stock by the Company. As of September
30, 2008, warrants to purchase approximately 150,000 shares of the Companys common stock at
a price of $11.10 per share remained outstanding and expire on December 31, 2008. On October
23, 2008, the holder of these warrants elected to exercise the warrants using a net share
settlement method, resulting in the issuance of 77,000 shares of stock by the Company.
7. EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No.
128, Earnings Per Share, basic earnings per share is computed by
dividing net income by the
13
weighted average number of common shares outstanding during the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. For the Company, diluted
earnings per share is computed by dividing net income as adjusted, by the weighted average
number of common shares after considering the additional dilution related to restricted
common stock plans and stock options and warrants.
A reconciliation of the numerator and denominator of the basic earnings per share computation
to the numerator and denominator of the diluted earnings per share computation is as follows
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
NUMERATOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
38,091 |
|
|
$ |
33,151 |
|
|
$ |
110,473 |
|
|
$ |
97,995 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
(200 |
) |
|
|
104 |
|
|
|
(57 |
) |
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,891 |
|
|
$ |
33,255 |
|
|
$ |
110,416 |
|
|
$ |
98,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
38,091 |
|
|
$ |
33,151 |
|
|
$ |
110,473 |
|
|
$ |
97,995 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
(200 |
) |
|
|
104 |
|
|
|
(57 |
) |
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income |
|
$ |
37,891 |
|
|
$ |
33,255 |
|
|
$ |
110,416 |
|
|
$ |
98,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
124,696 |
|
|
|
122,939 |
|
|
|
124,366 |
|
|
|
122,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
124,696 |
|
|
|
122,939 |
|
|
|
124,366 |
|
|
|
122,269 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants |
|
|
1,596 |
|
|
|
2,307 |
|
|
|
1,722 |
|
|
|
2,605 |
|
Restricted stock-based compensation |
|
|
255 |
|
|
|
385 |
|
|
|
214 |
|
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and assumed conversions |
|
|
126,547 |
|
|
|
125,631 |
|
|
|
126,302 |
|
|
|
125,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.30 |
|
|
$ |
0.27 |
|
|
$ |
0.89 |
|
|
$ |
0.81 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.30 |
|
|
$ |
0.27 |
|
|
$ |
0.89 |
|
|
$ |
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.30 |
|
|
$ |
0.26 |
|
|
$ |
0.87 |
|
|
$ |
0.79 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.30 |
|
|
$ |
0.26 |
|
|
$ |
0.87 |
|
|
$ |
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
General. The nature of the Companys business results in claims and litigation alleging that
it is liable for damages arising from the conduct of its employees, inmates or others. The
nature of such claims includes, but is not limited to, claims arising from
14
employee or inmate misconduct, medical malpractice, employment matters, property loss,
contractual claims, and personal injury or other damages resulting from contact with the
Companys facilities, personnel or inmates, including damages arising from an inmates escape
or from a disturbance or riot at a facility. The Company maintains insurance to cover many
of these claims, which may mitigate the risk that any single claim would have a material
effect on the Companys consolidated financial position, results of operations, or cash
flows, provided the claim is one for which coverage is available. The combination of
self-insured retentions and deductible amounts means that, in the aggregate, the Company is
subject to substantial self-insurance risk.
The Company records litigation reserves related to certain matters for which it is probable
that a loss has been incurred and the range of such loss can be estimated. Based upon
managements review of the potential claims and outstanding litigation and based upon
managements experience and history of estimating losses, management believes a loss in
excess of amounts already recognized would not be material to the Companys financial
statements. In the opinion of management, there are no pending legal proceedings that would
have a material effect on the Companys consolidated financial position, results of
operations, or cash flows. Any receivable for insurance recoveries is recorded separately
from the corresponding litigation reserve, and only if recovery is determined to be probable.
Adversarial proceedings and litigation are, however, subject to inherent uncertainties, and
unfavorable decisions and rulings could occur which could have a material adverse impact on
the Companys consolidated financial position, results of operations, or cash flows for the
period in which such decisions or rulings occur, or future periods. Expenses associated with
legal proceedings may also fluctuate from quarter to quarter based on changes in the
Companys assumptions, new developments, or by the effectiveness of the Companys litigation
and settlement strategies.
Guarantees
Hardeman County Correctional Facilities Corporation (HCCFC) is a nonprofit, mutual benefit
corporation organized under the Tennessee Nonprofit Corporation Act to purchase, construct,
improve, equip, finance, own and manage a detention facility located in Hardeman County,
Tennessee. HCCFC was created as an instrumentality of Hardeman County to implement the
Countys incarceration agreement with the state of Tennessee to house certain inmates.
During 1997, HCCFC issued $72.7 million of revenue bonds, which were primarily used for the
construction of a 2,016-bed medium security correctional facility. In addition, HCCFC
entered into a construction and management agreement with the Company in order to assure the
timely and coordinated acquisition, construction, development, marketing and operation of the
correctional facility.
HCCFC leases the correctional facility to Hardeman County in exchange for all revenue from
the operation of the facility. HCCFC has, in turn, entered into a management agreement with
the Company for the correctional facility.
In connection with the issuance of the revenue bonds, the Company is obligated, under a debt
service deficit agreement, to pay the trustee of the bonds trust indenture (the
15
Trustee) amounts necessary to pay any debt service deficits consisting of principal and
interest requirements (outstanding principal balance of $45.3 million at September 30, 2008
plus future interest payments). In the event the state of Tennessee, which is currently
utilizing the facility to house certain inmates, exercises its option to purchase the
correctional facility, the Company is also obligated to pay the difference between principal
and interest owed on the bonds on the date set for the redemption of the bonds and amounts
paid by the state of Tennessee for the facility plus all other funds on deposit with the
Trustee and available for redemption of the bonds. Ownership of the facility reverts to the
state of Tennessee in 2017 at no cost. Therefore, the Company does not currently believe the
state of Tennessee will exercise its option to purchase the facility. At September 30, 2008,
the outstanding principal balance of the bonds exceeded the purchase price option by $11.3
million.
9. 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.
Deferred income taxes reflect the available net operating losses and the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Realization
of the future tax benefits related to deferred tax assets is dependent on many factors,
including the Companys past earnings history, expected future earnings, the character
and jurisdiction of such earnings, unsettled circumstances that, if unfavorably
resolved, would adversely affect utilization of its deferred tax assets, carryback and
carryforward periods, and tax strategies that could potentially enhance the likelihood
of realization of a deferred tax asset.
The Companys effective tax rate was approximately 36.7% and 37.7% during the three and
nine months ended September 30, 2008, respectively, compared with approximately 37.8% and
37.7% during the same periods in the prior year. The Companys overall effective tax rate is
estimated based on the Companys current projection of taxable income and could change in the
future as a result of changes in these estimates, the implementation of tax strategies,
changes in federal or state tax rates, changes in tax laws, or changes in state apportionment
factors, as well as changes in the valuation allowance applied to the Companys deferred tax
assets that are based primarily on the amount of state net operating losses and tax credits
that could expire unused.
Income Tax Contingencies
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), which is an interpretation of SFAS
109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a
tax return. The guidance prescribed in FIN 48 establishes a recognition threshold of more
likely than not that a tax position will be sustained upon examination.
16
The measurement attribute of FIN 48 requires that a tax position be measured at the largest
amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Upon adoption of FIN 48 on January 1, 2007, the Company recognized a $2.2 million increase in
the liability for uncertain tax positions net of certain benefits associated with state net
operating losses, which was recorded as an adjustment to the January 1, 2007 balance of
retained earnings. The Company has a $6.4 million liability recorded for uncertain tax
positions as of September 30, 2008, included in other non-current liabilities in the
accompanying balance sheet. The Company recognizes interest and penalties related to
unrecognized tax positions in income tax expense. The total amount of unrecognized tax
positions that, if recognized, would affect the effective tax rate is $5.7 million. The
Company does not currently anticipate that the total amount of unrecognized tax positions
will significantly increase or decrease in the next twelve months.
During the third quarter of 2008, the Company was notified that the Internal Revenue Service
would commence an audit of the Companys federal income tax return for the year ended
December 31, 2006. The audit has just recently begun and, therefore, it is too early to
predict the outcome of the audit.
10. SEGMENT REPORTING
As of September 30, 2008, the Company owned and managed 42
correctional and detention facilities, and managed 23 correctional and
detention facilities it did not own. Management views the Companys
operating results in two reportable segments: (1) owned and managed
correctional and detention facilities and (2) managed-only
correctional and detention facilities. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies in the notes to consolidated financial
statements included in the Companys 2007 Form 10-K. Owned and
managed facilities include the operating results of those facilities
placed into service that were owned and managed by the Company.
Managed-only facilities include the operating results of those
facilities owned by a third party and managed by the Company. The
Company measures the operating performance of each facility within the
above two reportable segments, without differentiation, based on
facility contribution. The Company defines facility contribution as a
facilitys operating income or loss from operations before interest,
taxes, depreciation and amortization. Since each of the Companys
facilities within the two reportable segments exhibit similar economic
characteristics, provide similar services to governmental agencies,
and operate under a similar set of operating procedures and regulatory
guidelines, the facilities within the identified segments have been
aggregated and reported as one reportable segment.
The revenue and facility contribution for the reportable segments and
a reconciliation to the Companys operating income is as follows for
the three and nine months ended September 30, 2008 and 2007 (dollars
in thousands):
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed |
|
$ |
314,351 |
|
|
$ |
279,542 |
|
|
$ |
908,543 |
|
|
$ |
803,875 |
|
Managed-only |
|
|
94,744 |
|
|
|
93,167 |
|
|
|
279,195 |
|
|
|
269,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management revenue |
|
|
409,095 |
|
|
|
372,709 |
|
|
|
1,187,738 |
|
|
|
1,073,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed |
|
|
206,210 |
|
|
|
185,489 |
|
|
|
590,433 |
|
|
|
530,252 |
|
Managed-only |
|
|
82,082 |
|
|
|
80,635 |
|
|
|
243,344 |
|
|
|
230,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
288,292 |
|
|
|
266,124 |
|
|
|
833,777 |
|
|
|
760,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility contribution: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed |
|
|
108,141 |
|
|
|
94,053 |
|
|
|
318,110 |
|
|
|
273,623 |
|
Managed-only |
|
|
12,662 |
|
|
|
12,532 |
|
|
|
35,851 |
|
|
|
38,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total facility contribution |
|
|
120,803 |
|
|
|
106,585 |
|
|
|
353,961 |
|
|
|
312,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and other revenue |
|
|
2,790 |
|
|
|
5,547 |
|
|
|
9,409 |
|
|
|
15,285 |
|
Other operating expense |
|
|
(4,307 |
) |
|
|
(7,326 |
) |
|
|
(16,443 |
) |
|
|
(18,200 |
) |
General and administrative |
|
|
(20,866 |
) |
|
|
(18,362 |
) |
|
|
(60,222 |
) |
|
|
(54,497 |
) |
Depreciation and amortization |
|
|
(23,564 |
) |
|
|
(20,074 |
) |
|
|
(67,152 |
) |
|
|
(57,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
74,856 |
|
|
$ |
66,370 |
|
|
$ |
219,553 |
|
|
$ |
197,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes capital expenditures for the reportable segments for
the three and nine months ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and managed |
|
$ |
108,136 |
|
|
$ |
105,413 |
|
|
$ |
422,694 |
|
|
$ |
208,392 |
|
Managed-only |
|
|
893 |
|
|
|
4,008 |
|
|
|
3,644 |
|
|
|
8,152 |
|
Corporate and other |
|
|
2,455 |
|
|
|
3,559 |
|
|
|
8,203 |
|
|
|
14,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
111,484 |
|
|
$ |
112,980 |
|
|
$ |
434,541 |
|
|
$ |
230,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets for the reportable segments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Owned and managed |
|
$ |
2,542,569 |
|
|
$ |
2,161,332 |
|
Managed-only |
|
|
115,425 |
|
|
|
121,599 |
|
Corporate and other |
|
|
161,700 |
|
|
|
202,194 |
|
Discounted operations |
|
|
175 |
|
|
|
615 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,819,869 |
|
|
$ |
2,485,740 |
|
|
|
|
|
|
|
|
18
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in this report.
This quarterly report on Form 10-Q contains statements as to our beliefs and expectations of the
outcome of future events that are forward-looking statements as defined within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements other than statements of current
or historical fact contained herein, including statements regarding our future financial position,
business strategy, budgets, projected costs and plans, and objectives of management for future
operations, are forward-looking statements. The words anticipate, believe, continue,
estimate, expect, intend, may, plan, projects, will, and similar expressions, as they
relate to us, are intended to identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ
materially from the statements made. These include, but are not limited to, the risks and
uncertainties associated with:
|
|
|
fluctuations in operating results because of changes in occupancy levels, competition,
increases in cost of operations, fluctuations in interest rates, and risks of operations; |
|
|
|
|
changes in the privatization of the corrections and detention industry and the public
acceptance of our services; |
|
|
|
|
our ability to obtain and maintain correctional facility management contracts,
including as the result of sufficient governmental appropriations, inmate disturbances,
and the timing of the opening of new facilities and the commencement of new management
contracts as well as our ability to utilize current available beds and new capacity as
development and expansion projects are completed; |
|
|
|
|
increases in costs to develop or expand correctional facilities that exceed original
estimates, or the inability to complete such projects on schedule as a result of various
factors, many of which are beyond our control, such as weather, labor conditions, and
material shortages, resulting in increased construction costs; |
|
|
|
|
changes in governmental policy and in legislation and regulation of the corrections and
detention industry that adversely affect our business including, but not limited to,
judicial challenges regarding the transfer of California inmates to out-of-state private
correctional facilities; |
|
|
|
|
the availability of debt and equity financing on terms that are favorable to us; and |
|
|
|
|
general economic and market conditions. |
Any or all of our forward-looking statements in this quarterly report may turn out to be
inaccurate. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial
condition, results of operations, business strategy and financial needs. They can be affected by
inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions,
including the risks, uncertainties and assumptions described in Risk Factors disclosed in detail
in our annual report on Form 10-K for the fiscal year ended December 31, 2007, filed with the
Securities and Exchange Commission (the SEC) on February 27, 2008 (File No. 001-16109) (the 2007
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
19
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 2007 Form 10-K.
OVERVIEW
The Company
As of September 30, 2008, we owned 45 correctional, detention and juvenile facilities, three of
which we leased to other operators. As of September 30, 2008, we operated 65 facilities, including
42 facilities that we owned, with a total design capacity of approximately 82,000 beds in 19 states
and the District of Columbia. We are also constructing an additional 2,232-bed facility in Adams
County, Mississippi that is expected to be completed in the fourth quarter of 2008, a 3,060-bed
facility in Eloy, Arizona that is expected to be completed in the first quarter of 2009, and a
2,040-bed facility in Trousdale County, Tennessee that is expected to be completed in the first
quarter of 2010. Further, during the second quarter of 2008 we were awarded a contract by the
Office of Federal Detention Trustee to design, build, and operate a new correctional facility in
Pahrump, Nevada, which is currently expected to be completed during the second quarter of 2010.
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 educational programs, including basic education, religious
services, life skills and employment training and substance abuse treatment. These services are
intended to reduce recidivism and to prepare inmates for their successful re-entry into society
upon their release. 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 Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and Section 16 reports under the Securities
Exchange Act of 1934, as amended (the Exchange Act), available on our website, free of charge, as
soon as reasonably practicable after these reports are filed with or furnished to the SEC.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements in this report are prepared in conformity with accounting
principles generally accepted in the United States. As such, we are required to make certain
estimates, judgments, and assumptions that we believe are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. A summary of our significant accounting policies is described in our 2007 Form
10-K. The significant accounting policies and estimates which we believe are the most critical to
aid in fully understanding and evaluating our reported financial results include the following:
Asset impairments. As of September 30, 2008, we had $2.5 billion in property and equipment. We
evaluate the recoverability of the carrying values of our long-lived assets,
20
other than goodwill, when events suggest that an impairment may have occurred. Such events
primarily include, but are not limited to, the termination of a management contract or a
significant decrease in inmate populations within a correctional facility we own or manage. In
these circumstances, we utilize estimates of undiscounted cash flows to determine if an impairment
exists. If an impairment exists, it is measured as the amount by which the carrying amount of the
asset exceeds the estimated fair value of the asset.
Goodwill impairments. As of September 30, 2008, we had $13.7 million of goodwill. We evaluate the
carrying value of goodwill during the fourth quarter of each year, in connection with our annual
budgeting process, and whenever circumstances indicate the carrying value of goodwill may not be
recoverable. Such circumstances primarily include, but are not limited to, the termination of a
management contract or a significant decrease in inmate populations within a reporting unit. We
test for impairment by comparing the fair value of each reporting unit with its carrying value.
Fair value is determined using a collaboration of various common valuation techniques, including
market multiples, discounted cash flows, and replacement cost methods. Each of these techniques
requires considerable judgment and estimations which could change in the future.
Income taxes. Income taxes are accounted for under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 generally
requires us to record deferred income taxes for the tax effect of differences between book and tax
bases of our assets and liabilities.
Deferred income taxes reflect the available net operating losses and the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Realization of the future tax
benefits related to deferred tax assets is dependent on many factors, including our past earnings
history, expected future earnings, the character and jurisdiction of such earnings, unsettled
circumstances that, if unfavorably resolved, would adversely affect utilization of our deferred tax
assets, carryback and carryforward periods, and tax strategies that could potentially enhance the
likelihood of realization of a deferred tax asset.
We have approximately $6.1 million in net operating losses applicable to various states that we
expect to carry forward in future years to offset taxable income in such states. Accordingly, we
have a valuation allowance of $1.2 million for the estimated amount of the net operating losses
that will expire unused, in addition to a $5.6 million valuation allowance related to state tax
credits that are also expected to expire unused. Although our estimate of future taxable income is
based on current assumptions that we believe to be reasonable, our assumptions may prove inaccurate
and could change in the future, which could result in the expiration of additional net operating
losses or credits. We would be required to establish a valuation allowance at such time that we no
longer expected to utilize these net operating losses or credits, which could result in a material
impact on our results of operations in the future.
Self-funded insurance reserves. As of September 30, 2008, we had $35.5 million in accrued
liabilities for employee health, workers compensation, and automobile insurance claims. We are
significantly self-insured for employee health, workers compensation, and automobile liability
insurance claims. As such, our insurance expense is largely dependent on claims experience and our
ability to control our claims. We have consistently accrued the estimated liability for employee
health insurance claims based on our history of claims
21
experience and the time lag between the incident date and the date the cost is paid by us. We have
accrued the estimated liability for workers compensation and automobile insurance claims based on
a third-party actuarial valuation of the outstanding liabilities, discounted to the net present
value of the outstanding liabilities. These estimates could change in the future. It is possible
that future cash flows and results of operations could be materially affected by changes in our
assumptions, new developments, or by the effectiveness of our strategies.
Legal reserves. As of September 30, 2008, we had $15.4 million in accrued liabilities related to
certain legal proceedings in which we are involved. We have accrued our estimate of the probable
costs for the resolution of these claims based on a range of potential outcomes. In addition, we
are subject to current and potential future legal proceedings for which little or no accrual has
been reflected because our current assessment of the potential exposure is nominal. These
estimates have been developed in consultation with our General Counsels office and, as
appropriate, outside counsel handling these matters, and are based upon an analysis of potential
results, assuming a combination of litigation and settlement strategies. It is possible that
future cash flows and results of operations could be materially affected by changes in our
assumptions, new developments, or by the effectiveness of our strategies.
RESULTS OF OPERATIONS
Our results of operations are impacted by the number of facilities we owned and managed, the number
of facilities we managed but did not own, the number of facilities we leased to other operators,
and the facilities we owned that were not yet in operation. The following table sets forth the
changes in the number of facilities operated for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
and |
|
|
Managed |
|
|
|
|
|
|
|
|
|
Date |
|
|
Managed |
|
|
Only |
|
|
Leased |
|
|
Total |
|
Facilities as of December 31, 2006 |
|
|
|
|
|
|
40 |
|
|
|
25 |
|
|
|
3 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of the management
contract for the Liberty County
Jail/Juvenile Center |
|
January 2007 |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Completion of construction of the
Saguaro Correctional
Facility |
|
June 2007 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities as of December 31, 2007 |
|
|
|
|
|
|
41 |
|
|
|
24 |
|
|
|
3 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activation of 1,020 beds at the
La Palma Correctional Center |
|
July 2008 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Expiration of the management
contract for the Camino Nuevo
Correctional Center |
|
August 2008 |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities as of September 30, 2008 |
|
|
|
|
|
|
42 |
|
|
|
23 |
|
|
|
3 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our results of operations are also impacted by the number of beds created as a result of
expansion projects completed at facilities we own or at facilities we manage but do not own. The
following table sets forth the number of beds placed into service since January 1, 2007 as a result
of facility expansion projects:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
Expansion |
|
Owned or |
Facility |
|
Quarter Completed |
|
Beds |
|
Managed-Only |
Citrus County Detention Facility
|
|
First quarter 2007
|
|
|
360 |
|
|
Managed-Only |
|
|
|
|
|
|
|
|
|
Crossroads Correctional Center
|
|
First quarter 2007
|
|
|
96 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
Gadsden Correctional Institution
|
|
Third quarter 2007
|
|
|
384 |
|
|
Managed-Only |
|
|
|
|
|
|
|
|
|
Bay Correctional Facility
|
|
Third quarter 2007
|
|
|
235 |
|
|
Managed-Only |
|
|
|
|
|
|
|
|
|
North Fork Correctional Facility
|
|
Fourth quarter 2007
|
|
|
960 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
Tallahatchie County Correctional Facility
|
|
Fourth quarter 2007
|
|
|
720 |
|
|
Owned |
|
|
Second quarter 2008
|
|
|
720 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
Kit Carson Correctional Center
|
|
First quarter 2008
|
|
|
720 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
Eden Detention Center
|
|
First quarter 2008
|
|
|
129 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
Bent County Correctional Facility
|
|
Second quarter 2008
|
|
|
720 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
Leavenworth Detention Center
|
|
Second quarter 2008
|
|
|
266 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
Davis Correctional Facility
|
|
Third quarter 2008
|
|
|
660 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,970 |
|
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended September 30, 2008 Compared to the Three and Nine Months Ended
September 30, 2007
Net income was $37.9 million, or $0.30 per diluted share, for the three months ended September 30,
2008, compared with net income of $33.3 million, or $0.26 per diluted share, for the three months
ended September 30, 2007. During the nine months ended September 30, 2008, we generated net income
of $110.4 million, or $0.87 per diluted share, compared with net income of $98.4 million, or $0.79
per diluted share, for the nine months ended September 30, 2007.
Net income during the three and nine months ended September 30, 2008 was favorably impacted by the
increase in operating income of $8.5 million, or 12.8%, for the three-month period over the same
period in the prior year and $21.7 million, or 11.0%, for the nine-month period over the same
period in the prior year. Contributing to the increase in operating income during 2008 compared
with the previous year was an increase in inmate populations and the commencement of new management
contracts, partially offset by increases in general and administrative expenses and depreciation
and amortization.
Facility Operations
A key performance indicator we use to measure the revenue and expenses associated with the
operation of the facilities we own or manage is expressed in terms of a compensated man-day, which
represents the revenue we generate and expenses we incur for one inmate for one calendar day.
Revenue and expenses per compensated man-day are computed by dividing facility revenue and expenses
by the total number of compensated man-days during the period. 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-
23
day basis, which is largely dependent upon the number of inmates we accommodate. Further, per
compensated man-day measurements are also used to estimate our potential profitability based on
certain occupancy levels relative to design capacity. Revenue and expenses per compensated man-day
for all of the facilities placed into service that we owned or managed were as follows for the
three and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue per compensated man-day |
|
$ |
57.23 |
|
|
$ |
54.94 |
|
|
$ |
56.57 |
|
|
$ |
54.27 |
|
Operating expenses per compensated
man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
30.50 |
|
|
|
29.25 |
|
|
|
29.74 |
|
|
|
28.56 |
|
Variable expense |
|
|
9.83 |
|
|
|
9.98 |
|
|
|
9.97 |
|
|
|
9.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40.33 |
|
|
|
39.23 |
|
|
|
39.71 |
|
|
|
38.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin per compensated man-day |
|
$ |
16.90 |
|
|
$ |
15.71 |
|
|
$ |
16.86 |
|
|
$ |
15.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
29.5 |
% |
|
|
28.6 |
% |
|
|
29.8 |
% |
|
|
29.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated occupancy |
|
|
95.3 |
% |
|
|
97.9 |
% |
|
|
96.3 |
% |
|
|
98.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated population |
|
|
77,695 |
|
|
|
73,740 |
|
|
|
76,626 |
|
|
|
72,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated population for the quarter ended September 30, 2008 increased 3,955 from
73,740 in the third quarter of 2007 to 77,695 in the third quarter of 2008. The increase in average
compensated population resulted primarily from the placement of 5,514 expansion beds into service
since the end of the second quarter of 2007, and the opening and subsequent ramp-up in populations
at our 1,896-bed Saguaro Correctional Facility in June 2007. Further, we also commenced operation
at our La Palma Correctional Center by placing 1,020 beds into service during July 2008.
State revenues increased $28.8 million, or 15.5%, from $185.2 million for the three months ended
September 30, 2007 to $214.0 million for the three months ended September 30, 2008, and $88.1
million, or 16.8%, from $525.6 million for the nine months ended September 30, 2007 to $613.7
million for the nine months ended September 30, 2008. State revenues increased as certain states,
such as the state of California, turned to the private sector to help alleviate their overcrowding
situations, while other states utilized additional bed capacity we constructed for them or
contracted to utilize additional beds at our facilities. We were also successful in achieving
certain per diem increases caused by a strong demand for prison beds.
We are monitoring the challenges faced by our customers as a result of the downturn in the economy
and the unusual financial environment. Although this environment increases the level of
uncertainty in the short-term, we believe the long-term implications are very positive as states may defer or
cancel plans for adding new prison bed capacity, which should ensure a continuation of the supply
and demand imbalance that has been benefiting the private prison industry.
Business from our federal customers, including primarily the Federal Bureau of Prisons, or the BOP,
the U.S. Marshals Service, or the USMS, and U.S. Immigration and Customs Enforcement, or ICE,
continues to be a significant component of our business. Our federal customers generated
approximately 39% and 41% of our total revenue for the nine months ended September 30, 2008 and
2007, respectively, increasing 5.4%, from $443.2 million during the nine months ended September 30,
2007 to $467.1 million during the nine months
24
ended September 30, 2008. Similar to business from our state customers, we were successful in
achieving per diem increases under several of our federal management contracts as a result of a
strong demand for prison beds.
Operating expenses totaled $292.6 million and $273.5 million for the three months ended September
30, 2008 and 2007, respectively, while operating expenses for the nine months ended September 30,
2008 and 2007 totaled $850.2 million and $778.9 million, respectively. Operating expenses consist
of those expenses incurred in the operation and management of adult and juvenile correctional and
detention facilities and for our inmate transportation subsidiary.
Fixed expenses per compensated man-day during the three-month periods increased 4.3% from $29.25 in
2007 to $30.50 in 2008. Fixed expenses per compensated man-day during the nine-month periods
increased 4.1% from $28.56 in 2007 to $29.74 in 2008 primarily as a result of an increase in
salaries and benefits. Salaries and benefits represent the most significant component of fixed
operating expenses and represent approximately 64% of total operating expenses during both the
three and nine months ended September 30, 2008. During the three and nine months ended September
30, 2008, facility salaries and benefits expense increased $17.3 million and $50.6 million,
respectively. Salaries and benefits increased most notably at the aforementioned facilities such
as our Saguaro facility that opened in June 2007, our La Palma facility that opened in July 2008,
and at our North Fork and Tallahatchie facilities where expansion beds were placed into service.
Fixed costs per compensated man-day will be negatively impacted as we commence operations at newly
developed facilities or as we hire additional staff at facilities we expand until the occupancy at
such facilities reach stabilized levels. Further, as we fill our available beds, the opportunity to
leverage our fixed costs, such as salaries and benefits, over a larger inmate population will be
diminished. While we have also experienced tightening labor markets for staff, a softening economy
could provide relief.
Although facility variable expenses decreased $0.15 per compensated man-day during the three-month
period in the current year compared with the prior year, facility variable expenses increased $0.06
per compensated man-day during the nine months ended September 30, 2008 compared with the same
period in the prior year. The increase in facility variable operating expenses during the
nine-month period was largely due to increased costs at facilities where new beds were placed into
service. Additionally, we experienced an increase in legal expenses during the first nine months
of 2008 compared with the same period in the prior year. Expenses associated with legal
proceedings may fluctuate from quarter to quarter based on new or threatened litigation, changes in
our assumptions, new developments, or the effectiveness of our litigation and settlement
strategies.
We continually evaluate the profitability of certain management contracts and may elect to
terminate such contracts from time to time based on a variety of factors but primarily based on
poor operating performance. Although generally more profitable, the operation of the facilities we
own carries a higher degree of risk associated with a management contract than the operation of the
facilities we manage but do not own because we incur significant capital expenditures to construct
or acquire facilities we own. Additionally, correctional and detention facilities have a limited
or no alternative use. Therefore, if a management contract is terminated on a facility we own, we
continue to incur certain operating expenses, such as real estate taxes, utilities, and insurance,
that we would not incur if a management contract
25
were terminated for a managed-only facility. As a result, revenue per compensated man-day is
typically higher for facilities we own and manage than for managed-only facilities. Because we
incur higher expenses, such as repairs and maintenance, real estate taxes, and insurance, on the
facilities we own and manage, our cost structure for facilities we own and manage is also higher
than the cost structure for the managed-only facilities. The following tables display the revenue
and expenses per compensated man-day for the facilities placed into service that we own and manage
and for the facilities we manage but do not own:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Owned and Managed Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per compensated man-day |
|
$ |
66.14 |
|
|
$ |
63.67 |
|
|
$ |
65.35 |
|
|
$ |
62.68 |
|
Operating expenses per
compensated man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
32.84 |
|
|
|
31.39 |
|
|
|
31.82 |
|
|
|
30.63 |
|
Variable expense |
|
|
10.55 |
|
|
|
10.85 |
|
|
|
10.65 |
|
|
|
10.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
43.39 |
|
|
|
42.24 |
|
|
|
42.47 |
|
|
|
41.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin per
compensated man-day |
|
$ |
22.75 |
|
|
$ |
21.43 |
|
|
$ |
22.88 |
|
|
$ |
21.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
34.4 |
% |
|
|
33.7 |
% |
|
|
35.0 |
% |
|
|
34.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated occupancy |
|
|
94.2 |
% |
|
|
97.5 |
% |
|
|
96.0 |
% |
|
|
98.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated population |
|
|
51,664 |
|
|
|
47,726 |
|
|
|
50,738 |
|
|
|
46,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Managed Only Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per compensated man-day |
|
$ |
39.56 |
|
|
$ |
38.93 |
|
|
$ |
39.36 |
|
|
$ |
38.75 |
|
Operating expenses per
compensated man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
25.86 |
|
|
|
25.32 |
|
|
|
25.66 |
|
|
|
24.76 |
|
Variable expense |
|
|
8.41 |
|
|
|
8.37 |
|
|
|
8.65 |
|
|
|
8.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
34.27 |
|
|
|
33.69 |
|
|
|
34.31 |
|
|
|
33.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin per
compensated man-day |
|
$ |
5.29 |
|
|
$ |
5.24 |
|
|
$ |
5.05 |
|
|
$ |
5.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
|
13.4 |
% |
|
|
13.5 |
% |
|
|
12.8 |
% |
|
|
14.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated occupancy |
|
|
97.7 |
% |
|
|
98.6 |
% |
|
|
96.9 |
% |
|
|
97.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average compensated population |
|
|
26,031 |
|
|
|
26,014 |
|
|
|
25,888 |
|
|
|
25,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and Managed Facilities
Our operating margins at owned and managed facilities for the three months ended September 30, 2008
increased to 34.4% compared with 33.7% for the same three-month period in 2007. Additionally,
operating margins at our owned and managed facilities for the nine months ended September 30, 2008
increased to 35.0% compared with 34.0% for the same nine-month period in 2007. The increase in
operating margins at our owned and managed facilities is largely the result of the increase in the
average compensated population
26
during the three and nine months ended September 30, 2008 as compared to the same periods in the
prior year. The increase in average compensated population was largely the result of placing into
service our 1,896-bed Saguaro Correctional Facility in June 2007 and the completion of
approximately 2,400 expansion beds at our North Fork Correctional Facility and Tallahatchie County
Correctional Facility. Further, the aforementioned demand experienced with our federal and state
customers has resulted in an increase in the overall average revenue per compensated man-day
resulting from new contracts at higher average per diems than on existing contracts and from annual
per diem increases.
The most notable increases in inmate populations during 2008 occurred at the Saguaro facility due
to its opening in June 2007, the North Fork facility resulting from higher inmate populations from
various existing state customers, and the Tallahatchie facility resulting from the receipt of
inmate populations from the state of California. Our total revenues increased by $17.2 million and
$56.1 million at these three facilities during the three and nine months ended September 30, 2008,
respectively, compared to the same periods in the prior year. As a result of the recently
completed bed expansions, the North Fork and Tallahatchie facilities also have approximately 1,800
available beds as of September 30, 2008 that are expected to be used to house inmates from state
customers.
The Saguaro Correctional Facility was constructed to provide the state of Hawaii the opportunity to
consolidate its inmate populations into fewer facilities, while providing us with an additional
supply of beds to meet anticipated demand. We completed construction of the Saguaro Correctional
Facility in June 2007 at a cost of approximately $102.6 million. While the consolidation of inmates
from Hawaii did not result in a significant increase in total inmate populations, the consolidation
created additional capacity at our Diamondback and Tallahatchie facilities, which was substantially
utilized by additional inmate populations from the states of Arizona and California, respectively,
pursuant to new management contracts. The consolidation also created additional capacity at our Red
Rock Correctional Center, which was substantially utilized with additional inmate populations from
the state of California during the second quarter of 2008.
On October 5, 2007, we announced that we had entered into a new agreement with the California
Department of Corrections and Rehabilitation (CDCR) for the housing of up to 7,772 inmates from
the state of California. The new contract replaced and superseded the previous contract we had
with the CDCR, which provided housing for up to 5,670 inmates. In January 2008, this agreement was
further amended to allow for an additional 360 CDCR inmates. As a result, we now have a contract
that provides the CDCR with the ability to house up to 8,132 inmates in six of the facilities we
own. The new agreement, which is subject to appropriations by the California legislature, expires
June 30, 2011, and provides for a minimum payment based on the greater of the actual occupancy or
90% of the capacity made available to the CDCR at each facility in which inmates are housed. The
minimum payments are subject to specific terms and conditions in the contract at each facility that
houses CDCR inmates.
In October 2007, we announced that we would begin construction of our new 3,060-bed La Palma
Correctional Center, which we expect to be fully utilized by the CDCR. We expect to complete
construction of the new La Palma Correctional Center during the first quarter of 2009 at an
estimated total cost of $205.0 million. However, we opened a portion of the new facility and began
receiving inmates from the state of California during the third quarter of 2008, and expect to
continue to receive additional California inmates through completion of
27
construction, as phases of the facility become available. As a condition of undertaking the
substantial cost required to construct the La Palma Correctional Center, the CDCR agreed to occupy
the beds allocated to it in accordance with a Phase-In Schedule, and to make a minimum payment
based on the greater of the actual occupancy or 90% of the capacity available to CDCR according to
the Phase-In Schedule.
We currently expect that we will ultimately provide the CDCR approximately 960 beds at our Florence
Correctional Center, 80 beds at our West Tennessee Detention Facility, 2,592 beds at our
Tallahatchie facility, 1,080 beds at our North Fork facility, 360 beds at our Red Rock facility,
and 3,060 beds at the new La Palma facility, with the final transfer from California occurring
during the second quarter of 2009. As of September 30, 2008, we held approximately 5,100 inmates
from the state of California.
We remain optimistic that the state of California will continue to utilize out-of-state beds to
alleviate its severe overcrowding situation. However, several legal proceedings have challenged the
States ability to send inmates out-of-state. Legislative enactments or additional legal
proceedings, including a proceeding under federal jurisdiction that could potentially reduce the
number of inmates in the California prison system, may prohibit the out-of-state transfer of
inmates or could result in the return of inmates we currently house for the CDCR. If transfers
from California are limited as a result of one or more of these proceedings, we would market the
beds designated for the CDCR, including those that will be provided at our new La Palma
Correctional Center, to other federal and state customers. While we currently believe we would
ultimately be able to fill a substantial portion of such beds, the utilization would likely be at a
much slower pace.
We have recently experienced delays in the intake of CDCR inmates compared to our previous
expectations. These delays have been necessary to ensure that we are in compliance with certain
medical requirements as set forth by a federal medical receiver appointed to oversee the healthcare
delivery within the California correctional system. However, we continue to expect the CDCR to
fully utilize all of the 8,132 beds available under our contract. Although, we can provide no
assurance as to the timing of the receipt of inmates from the CDCR, the receipt of which could be
delayed as a result of legal challenges, operational disruptions, or for unforeseen circumstances.
As a result of weakness in inmate populations from the District of Columbia, the 1,500-bed D.C.
Correctional Treatment Facility experienced a decline in occupancy from 74% during the first nine
months of 2007 to 61% during the first nine months of 2008, and from 74% during the third quarter
of 2007 to 69% during the third quarter of 2008, negatively impacting margins on our owned and
managed business. We have recently agreed with the District of Columbia to permit the
utilization of available space by the USMS.
Managed-Only Facilities
Our operating margins decreased at managed-only facilities during the three months ended September
30, 2008 to 13.4% from 13.5% during three months ended September 30, 2007. Similarly, our
managed-only operating margins also decreased during the nine months ended September 30, 2008 to
12.8% from 14.4% during the nine months ended September 30, 2007. The managed-only business remains
very competitive which continues to put pressure on per diem rates resulting in only marginal
increases in the managed-only revenue per
28
compensated man-day. Revenue per compensated man-day increased 1.6% during both the three- and
nine-month periods of 2008 compared with the same periods in the prior year.
Operating expenses per compensated man-day increased 1.7% to $34.27 during the third quarter of
2008 from $33.69 during the same period in the prior year. The increase in operating expenses per
compensated man-day was caused in part by an increase in salaries and benefits largely due to
annual merit increases.
Although the managed-only business is attractive because it requires little or no upfront
investment and relatively modest ongoing capital expenditures, we expect the managed-only business
to remain competitive. Any reductions to our per diem rates or the lack of per diem increases at
managed-only facilities would likely result in a further deterioration in our operating margins.
During the three months ended September 30, 2008 and 2007, managed-only facilities generated 10.5%
and 11.8%, respectively, of our total facility contribution, compared with 10.1% and 12.4%, for the
nine months ended September 30, 2008 and 2007, respectively. We define facility contribution as a
facilitys operating income or loss before interest, taxes, goodwill impairment, depreciation, and
amortization.
In April 2008, we agreed with the New Mexico Department of Corrections to suspend operations of the
192-bed Camino Nuevo Correctional Center in Albuquerque, New Mexico, and transfer existing
populations to our New Mexico Womens Correctional Facility in Grants, New Mexico. Operations were
suspended due to consistently low inmate populations that were not adequate to maintain efficient
operations. The Camino Nuevo facility operated at a loss of $0.1 million and $0.6 million during
the three and nine months ended September 30, 2008, respectively, compared with operating income of
$17,000 and $0.3 million during the three and nine months ended September 30, 2007, respectively,
inclusive of depreciation expense. During the third quarter of 2008, we mutually agreed with the
New Mexico Department of Corrections to terminate the management contract for the Camino Nuevo
Correctional Center.
In May 2008, we notified the Bay County Commission of our intention to exercise our option to
terminate the operational management contract for the 1,150-bed Bay County Jail and Annex in Panama
City, Florida, effective October 9, 2008. The Bay County Jail and Annex operated at a loss of $0.3
million and $1.0 million during the three and nine months ended September 30, 2008, respectively,
compared with operating income of $0.7 million and $0.8 million during the three and nine months
ended September 30, 2007 respectively, inclusive of depreciation expense. We expect to reclassify
the results of operations, net of taxes, and the assets and liabilities of this facility as
discontinued operations upon termination of operations in the fourth quarter of 2008 for all
periods presented.
Pursuant to a re-bid of the management contracts, during September 2008, we were notified by the
Texas Department of Criminal Justice (TDCJ) of its intent to transfer the management of the
500-bed B.M. Moore Correctional Center in Overton, Texas and the 518-bed Diboll Correctional Center
in Diboll, Texas to another operator, upon the expiration of the management contracts on January
16, 2009. Both of these facilities are owned by the TDCJ. We currently expect to reclassify the
results of operations, net of taxes, and the assets and liabilities of these two facilities as
discontinued operations upon termination of operations in the first quarter of 2009 for all periods
presented. Revenue and operating
29
expenses for these two facilities was $3.1 million and $2.9 million for the three months ended
September 30, 2008 compared with revenue and operating expenses of $3.0 million and $2.9 million
for the three months ended September 30, 2007. Revenue and operating expenses for these two
facilities was $9.3 million and $8.4 million for the nine months ended September 30, 2008 compared
with revenue and operating expenses of $8.9 million and $8.2 million for the nine months ended
September 30, 2007.
General and administrative expense
For the three months ended September 30, 2008 and 2007, general and administrative expenses totaled
$20.9 million and $18.4 million, respectively, while general and administrative expenses totaled
$60.2 million and $54.5 million, respectively, during the nine months ended September 30, 2008 and
2007. General and administrative expenses increased from 2007 primarily as a result of an increase
in salaries and benefits for an increase in corporate staffing levels to help ensure the quality
and effectiveness of our facility operations and to intensify our efforts on developing new bed
capacity. Stock-based compensation also increased to $2.2 million during the third quarter of 2008
from $1.6 million during the third quarter of 2007, and to $6.3 million for the first nine months
of 2008 compared with $4.6 million during the first nine months of 2007.
As a result of our intensified efforts to develop new capacity, we incurred charges of $0.4 million
and $7,000 during the three months ended September 30, 2008, and 2007, respectively and $1.0
million and $0.2 million during the nine months ended September 30, 2008 and 2007, respectively, in
connection with the abandonment of certain development projects. General and administrative
expenses could increase in the future for the write-off of additional pre-acquisition costs we
incur in the event we decide to abandon any such projects.
Depreciation and amortization
For the three months ended September 30, 2008 and 2007, depreciation and amortization expense
totaled $23.6 million and $20.1 million, respectively. For the nine months ended September 30,
2008 and 2007, depreciation and amortization expense totaled $67.2 million and $57.3 million,
respectively. The increase in depreciation and amortization from the comparable periods in 2007
resulted from the combination of additional depreciation expense recorded on various completed
facility expansion and development projects, most notably our Saguaro Correctional Facility placed
into service in June 2007 and our La Palma Correctional Center where we activated 1,020 beds in
July 2008, and the additional depreciation on our investments in technology and other capital
expenditures. We currently expect depreciation and amortization expense to increase in future
quarters as we complete additional facility expansion and development projects.
Interest expense, net
Interest expense is reported net of interest income and capitalized interest for the three and nine
months ended September 30, 2008 and 2007. Gross interest expense, net of capitalized interest, was
$15.9 million and $16.4 million, respectively, for the three months ended September 30, 2008 and
2007 and was $45.4 million and $49.3 million, respectively, for the nine months ended September 30,
2008 and 2007. Gross interest expense is based on outstanding borrowings under our revolving credit
facility, our senior notes, as well as the amortization of loan costs and unused facility fees. We
expect gross interest expense to
30
increase in future quarters as we utilize our revolving credit facility to fund our expansion and
development projects. Further as a result of tightening credit markets, interest rates applicable
to our revolving credit facility have increased.
Gross interest income was $0.8 million and $3.1 million for the three months ended September 30,
2008 and 2007, respectively. Gross interest income was $2.7 million and $8.5 million for the nine
months ended September 30, 2008 and 2007, respectively. Gross interest income is earned on cash
collateral requirements, a direct financing lease, notes receivable, investments, and cash and cash
equivalents, and decreased due to the lower cash and investment balances, which were used to fund
our expansion and development projects.
Capitalized interest was $3.6 million and $1.7 million during the three months ended September 30,
2008 and 2007, respectively, and was $11.3 million and $4.8 million during the nine months ended
September 30, 2008 and 2007, respectively. Capitalized interest was associated with various
construction and expansion projects further described under Liquidity and Capital Resources
hereafter.
Income tax expense
We incurred income tax expense of $22.0 million and $66.8 million for the three and nine months
ended September 30, 2008, respectively, while we incurred income tax expense of $20.2 million and
$59.3 million for the three and nine months ended September 30, 2007, respectively.
Our effective tax rate was 36.7% and 37.7% during the three and nine months ended September 30,
2008 compared with 37.8% and 37.7% during the three- and nine-month periods in the prior year. We
currently expect our annual effective tax rate in 2008 to remain relatively consistent with the
effective tax rate in 2007, as increases in our projected taxable income in states with higher
statutory tax rates and the full year impact of an adverse change in Texas tax law are expected to
be substantially offset by an increase in state tax credits resulting from certain tax planning
strategies. Our effective tax rate is estimated based on our current projection of taxable income
and could fluctuate based on changes in these estimates, the implementation of tax strategies,
changes in federal or state tax rates, changes in tax laws, or changes in state apportionment
factors, as well as changes in the valuation allowance applied to our deferred tax assets that are
based primarily on the amount of state net operating losses and tax credits that could expire
unused.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are for working capital, capital expenditures, and debt service
payments. Capital requirements may also include cash expenditures associated with our outstanding
commitments and contingencies, as further discussed in the notes to the financial statements and as
further described in our 2007 Form 10-K. Additionally, we may incur capital expenditures to expand
the design capacity of certain of our facilities (in order to retain management contracts) and to
increase our inmate bed capacity for anticipated demand from current and future customers. We may
acquire additional correctional facilities that we believe have favorable investment returns and
increase value to our stockholders. We will also consider opportunities for growth, including
potential acquisitions of businesses within our line of business and those that provide
complementary services, provided we
31
believe such opportunities will broaden our market share and/or increase the services we can
provide to our customers.
As a result of increasing demand from both our federal and state customers and the utilization of a
significant portion of our existing available beds, we have intensified our efforts to deliver new
capacity to address the lack of available beds that our existing and potential customers are
experiencing. We can provide no assurance, however, that the increased capacity that we construct
will be utilized. The following addresses certain significant projects that are currently in
process:
In July 2007, we announced the commencement of construction of a new 1,668-bed correctional
facility in Adams County, Mississippi. During the second quarter of 2008, we announced that we
would increase the size of the Adams County Correctional Center to 2,232 beds. Construction of the
new Adams County facility is estimated to be completed during the fourth quarter of 2008 at an
estimated aggregate cost of approximately $130.0 million. In February 2008, we announced our
intention to construct our new 2,040-bed Trousdale Correctional Center in Trousdale County,
Tennessee. We have begun construction of our new Trousdale Correctional Center and expect to
complete construction of the facility during the first quarter of 2010 at an estimated cost of
approximately $143.0 million. We do not currently have a management contract to utilize either of
these facilities, but will market the new beds to various existing and potential customers.
In October 2007, we announced our intention to construct our new 3,060-bed La Palma Correctional
Center located in Eloy, Arizona, which we expect to be fully utilized by the CDCR. We expect to
complete construction of the new La Palma Correctional Center during the first quarter of 2009 at
an estimated total cost of $205.0 million. However, we opened a portion of the new facility and
began receiving inmates from the state of California at this facility during the third quarter of
2008, and expect to continue to receive additional California inmates through completion of
construction, as phases of the facility become available.
In May 2008, we announced that we were awarded a contract by the Office of the Federal Detention
Trustee (OFDT) to design, build, and operate a new correctional facility located in Pahrump,
Nevada, approximately 65 miles outside of Las Vegas, Nevada. Our new 1,072-bed Nevada Southern
Detention Center is expected to house approximately 1,000 federal prisoners. The contract provides
for a guarantee of up to 750 inmates or detainees and includes an initial term of five years with
three five-year renewal options. Construction of our Nevada Southern Detention Center is expected
to be complete during the second quarter of 2010, at an estimated cost of $83.5 million.
The following table summarizes the aforementioned construction and expansion projects. Estimated
costs include pre-acquisition costs (as applicable), land acquisition costs, design and
construction costs, capitalized interest, as well as furniture, fixtures, and equipment required to
operate the beds:
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated remaining |
|
|
|
|
|
|
|
|
|
|
|
cost to complete as of |
|
|
|
No. of |
|
|
Estimated |
|
|
September 30, 2008 |
|
Facility |
|
beds |
|
|
completion date |
|
|
(in thousands) |
|
La Palma Correctional Center
|
|
|
|
|
|
Third quarter 2008 - |
|
|
|
|
Eloy, AZ |
|
|
3,060 |
|
|
First quarter 2009 |
|
$ |
20,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adams County Correctional Center
Adams County, MS |
|
|
2,232 |
|
|
Fourth quarter 2008 |
|
|
21,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trousdale Correctional Center
Hartsville, TN |
|
|
2,040 |
|
|
First quarter 2010 |
|
|
121,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nevada Southern Detention Center
Pahrump, NV |
|
|
1,072 |
|
|
Second quarter 2010 |
|
|
71,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,404 |
|
|
|
|
|
|
$ |
235,612 |
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the foregoing, the following expansions and development projects were
completed during 2007 and during 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
Facility |
|
No. of beds |
|
|
Completion date |
|
|
(in thousands) |
|
Citrus County Detention Facility
Lecanto, FL |
|
|
360 |
|
|
First quarter 2007 |
|
$ |
18,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crossroads Correctional Center
Shelby, MT |
|
|
96 |
|
|
First quarter 2007 |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Saguaro Correctional Facility
Eloy, AZ |
|
|
1,896 |
|
|
Second quarter 2007 |
|
|
102,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tallahatchie County Correctional Facility
|
|
|
720 |
|
|
Fourth quarter 2007 |
|
|
40,000 |
|
Tutwiler, MS
|
|
|
720 |
|
|
Second quarter 2008 |
|
|
45,500 |
|
|
|
|
128 |
|
|
Fourth quarter 2008 |
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Fork Correctional Facility
Sayre, OK |
|
|
960 |
|
|
Fourth quarter 2007 |
|
|
53,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eden Detention Center
Eden, TX |
|
|
129 |
|
|
First quarter 2008 |
|
|
19,500 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Kit Carson Correctional Center
Burlington, CO |
|
|
720 |
|
|
First quarter 2008 |
|
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bent County Correctional Facility
Las Animas, CO |
|
|
720 |
|
|
Second quarter 2008 |
|
|
45,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leavenworth Detention Center
Leavenworth, KS |
|
|
266 |
|
|
Second quarter 2008 |
|
|
21,000 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cimarron Correctional Facility
Cushing, OK |
|
|
660 |
|
|
Fourth quarter 2008 |
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Davis Correctional Facility
Holdenville, OK |
|
|
660 |
|
|
Third quarter 2008 |
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,035 |
|
|
|
|
|
|
$ |
480,100 |
|
|
|
|
|
|
|
|
|
|
|
|
33
(1) |
|
The cost included a renovation of the facility pursuant to a new contract award from
the BOP to house up to 1,558 federal inmates. These beds were substantially occupied by
the end of the second quarter of 2008. |
|
(2) |
|
The cost included a renovation of the existing building infrastructure to accommodate
higher detainee populations. |
We continue to pursue additional expansion and development opportunities in order to satisfy
increasing demand from existing and potential customers. In order to help ensure the timely
completion of pre-fabricated housing units and to help avoid potential increases in costs
associated with constructing new bed capacity, during the fourth quarter of 2007, we entered into
an agreement with a company to design, fabricate, and install pre-finished concrete modular housing
structures for an aggregate cost of $32.7 million. We may terminate the agreement at any time for
any reason, including our convenience, without substantial penalty. We have designated $22.0
million for housing structures at several of our new development and expansion projects pursuant to
this agreement.
In order to retain federal inmate populations we currently manage in the San Diego Correctional
Facility, we may be required to construct a new facility in the future. The San Diego Correctional
Facility is subject to a ground lease with the County of San Diego. Under the provisions of the
lease, the facility is divided into three different properties (Initial, Existing and Expansion
Premises), all of which have separate terms ranging from June 2006 to December 2015.
Ownership of the Initial portion of the facility containing approximately 950 beds reverts to the
County upon expiration of the lease on December 31, 2015. The County has the right to purchase the
Initial portion of the facility, but no sooner than December 31, 2011, at a price generally equal
to the cost of the premises, less an allowance for the amortization over a 20-year period. The
lease for the Expansion portion of the facility containing approximately 200 beds expires December
31, 2011. However, the County may terminate the lease for the Expansion portion of the facility by
providing us with 270 days notice after March 31, 2008. The third portion of the lease (Existing
Premises) included 200 beds that expired in June 2006 and was not renewed.
Upon expiration of the lease for the Initial Premises, or should the County exercise its right to
purchase the Initial Premises or terminate our lease for the Expansion Premises, we will likely be
required to relocate a portion of the existing federal inmate population to other available beds
within or outside the San Diego Correctional Facility, which could include the construction of a
new facility. However, we can provide no assurance that we will be able to retain these inmate
populations.
During the first nine months of 2008, we capitalized $23.1 million of facility maintenance and
technology related expenditures, compared with $32.5 million during the first nine months of 2007.
We expect to incur approximately $20.3 million in facility maintenance and information technology
expenditures during the remainder of 2008. We also currently expect to pay approximately $55.0
million in federal and state income taxes during 2008, compared with $51.3 million during 2007.
Income taxes paid in 2008 reflect the favorable tax depreciation provisions on qualified assets
under the Economic Stimulus Act of 2008 signed into law in February 2008, as well as on our Adams
County Correctional Center, which is in
34
a location that qualifies for accelerated depreciation under the Gulf Opportunity Zone Act of 2005.
During December 2007, we entered into a new $450.0 million senior secured revolving credit facility
arranged by Banc of America Securities LLC and Wachovia Capital Markets, LLC. The new senior
secured revolving credit facility replaces our previous $250.0 million revolving credit facility.
The new revolving credit facility will be utilized to fund development projects in anticipation of
increasing demand by existing and potential new customers, as well as for working capital, capital
expenditures and general corporate purposes. At our option, interest on outstanding borrowings is
based on either a base rate plus a margin ranging from 0.00% to 0.50% or a London Interbank Offered
Rate, or LIBOR, plus a margin ranging from 0.75% to 1.50%. The applicable margins are subject to
adjustments based on our leverage ratio. The revolving credit facility currently bears interest at
a base rate plus a margin of 0.00% or a LIBOR plus a margin of 0.75%.
We have the ability to fund our capital expenditure requirements, including the aforementioned
construction projects, as well as our information technology expenditures, working capital, and
debt service requirements, with cash on hand, net cash provided by operations, and borrowings
available under our revolving credit facility.
As of September 30, 2008, our liquidity was provided by cash on hand of $28.7 million, and $237.2
million available under our $450.0 million revolving credit facility. During the nine months ended
September 30, 2008 and 2007, we generated $222.9 million and $214.8 million, respectively, in cash
through operating activities, and as of September 30, 2008, we had net working capital of $78.2
million. We currently expect to be able to meet our cash expenditure requirements for the next year
utilizing these resources. None of our outstanding debt requires scheduled principal repayments,
and we have no debt maturities until May 2011. We also have an option to increase the availability
under our revolving credit facility by up to $300.0 million subject to, among other things, the
receipt of commitments for the increased amount. In addition, we have an effective shelf
registration statement under which we may issue an indeterminate amount of securities from time to
time when we determine that market conditions and the opportunity to utilize the proceeds from the
issuance of such securities are favorable.
As a result of current economic conditions, including turmoil and uncertainty in the capital
markets, credit markets have tightened significantly such that the ability to obtain new capital
has become more challenging and more expensive. In addition, several large financial institutions
have either recently failed or been dependent on the assistance of the federal government to
continue to operate as a going concern. None of the banks providing commitments under the
revolving credit facility have failed to fund borrowings we have
requested. However, we can provide no
assurance that all of the banks in our lending group will continue to operate as a going concern in
the future.
If any of the banks that have made commitments under the revolving credit facility were to fail, it
is possible that the capacity under our revolving credit facility would be reduced. In the
unlikely event that the availability under our revolving credit facility was reduced significantly,
we could be required to obtain capital from alternate sources in order to continue with our
development and expansion initiatives. Our options for addressing such capital constraints would
include, but not be limited to (i) obtaining commitments from the remaining banks in the lending
group or from new banks to fund increased amounts under the
35
terms of our revolving credit facility, (ii) accessing the public capital markets, or (iii)
delaying certain of our existing construction projects. Although we believe we would be able to
obtain additional capital if needed, such alternatives in the current market would likely be on
terms less favorable than our existing terms, which could have a material effect on our
consolidated financial position, results of operations, and cash flows.
At September 30, 2008, the interest rates on all our outstanding indebtedness are fixed, with the
exception of the interest rate applicable to $180.0 million outstanding under our revolving credit
facility, with a total weighted average effective interest rate of 6.8%, while our total weighted
average maturity was 3.8 years. Standard & Poors Ratings Services currently rates our unsecured
debt and corporate credit as BB, while Moodys Investors Service currently rates our unsecured
debt as Ba2.
Operating Activities
Our net cash provided by operating activities for the nine months ended September 30, 2008 was
$222.9 million, compared with $214.8 million for the same period in the prior year. Cash provided
by operating activities represents the year to date net income plus depreciation and amortization,
changes in various components of working capital, and various non-cash charges, including primarily
deferred income taxes. The increase in cash provided by operating activities for the nine months
ended September 30, 2008 was primarily due to the increase in operating income caused by an
increase in inmate populations under our management.
Investing Activities
Our cash flow used in investing activities was $445.7 million for the nine months ended September
30, 2008 and was primarily attributable to capital expenditures during the nine-month period of
$446.5 million, including expenditures for facility development and expansions of $423.4 million
primarily related to the aforementioned facility expansion and development projects during the
period. Our cash flow used in investing activities was $181.9 million for the nine months ended
September 30, 2007 and was primarily attributable to capital expenditures during the nine-month
period of $194.1 million, including expenditures for facility development and expansions of $161.6
million. Cash flow used in investing activities during the first nine months of 2007 was net of the
release of restricted cash of $5.6 million for collateral previously required for a forward
purchase agreement related to the Hardeman County Correctional Facility and also net of $10.0
million of proceeds from the sale of investments.
Financing Activities
Our cash flow provided by financing activities was $193.6 million for the nine months ended
September 30, 2008 and was primarily attributable to $180.0 million of net borrowings from our
revolving credit facility, as well as the cash flows associated with the exercising of stock
options, including the related income tax benefit of equity compensation, net of the purchase and
retirement of common stock. Our cash flow provided by financing activities was $27.4 million for
the nine months ended September 30, 2007 and was primarily attributable to the cash flows
associated with exercising stock options, including the related income tax benefit of equity
compensation, net of the purchase and retirement of common stock.
36
Contractual Obligations
The following schedule summarizes our contractual cash obligations by the indicated period as of
September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Year Ended December 31, |
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(remainder) |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
|
Total |
|
Long-term debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
450,000 |
|
|
$ |
180,000 |
|
|
$ |
525,000 |
|
|
$ |
1,155,000 |
|
Contractual
facility expansions |
|
|
5,457 |
|
|
|
59,553 |
|
|
|
12,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,174 |
|
Operating leases |
|
|
489 |
|
|
|
3,508 |
|
|
|
3,629 |
|
|
|
3,066 |
|
|
|
2,089 |
|
|
|
6,309 |
|
|
|
19,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
|
$ |
5,946 |
|
|
$ |
63,061 |
|
|
$ |
15,793 |
|
|
$ |
453,066 |
|
|
$ |
182,089 |
|
|
$ |
531,309 |
|
|
$ |
1,251,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cash obligations in the table above do not include future cash obligations for interest
associated with our outstanding indebtedness. Further, the cash obligations in the table above
also do not include future cash obligations for uncertain tax positions recorded pursuant to FIN
48, as defined below, as we are unable to make reliable estimates of the timing of such payments,
if any, to the taxing authorities. During the nine months ended September 30, 2008, we paid $53.3
million in interest, including capitalized interest. We had $32.8 million of letters of credit
outstanding at September 30, 2008 primarily to support our requirement to repay fees and claims
under our workers compensation plan in the event we do not repay the fees and claims due in
accordance with the terms of the plan. The letters of credit are renewable annually. We did not
have any draws under any outstanding letters of credit during the nine months ended September 30,
2008 or 2007.
INFLATION
We do not believe that inflation has had a direct adverse effect on our operations. Many of our
management contracts include provisions for inflationary indexing, which mitigates an adverse
impact of inflation on net income. However, a substantial increase in personnel costs, workers
compensation or food and medical expenses could have an adverse impact on our results of operations
in the future to the extent that these expenses increase at a faster pace than the per diem or
fixed rates we receive for our management services.
SEASONALITY AND QUARTERLY RESULTS
Our business is somewhat subject to seasonal fluctuations. Because we are generally compensated
for operating and managing facilities at an inmate per diem rate, our financial results are
impacted by the number of calendar days in a fiscal quarter. Our fiscal year follows the calendar
year and therefore, our daily profits for the third and fourth quarters include two more days than
the first quarter (except in leap years) and one more day than the second quarter. Further,
salaries and benefits represent the most significant component of operating expenses. Significant
portions of the Companys unemployment taxes are recognized during the first quarter, when base
wage rates reset for state unemployment tax purposes. Finally, quarterly results are affected by
government funding initiatives, the timing of the opening of new facilities, or the commencement of
new management contracts and related start-up expenses which may mitigate or exacerbate the impact
of other seasonal influences. Because of these seasonality factors, results for any quarter are
not necessarily indicative of the results that may be achieved for the full fiscal year.
37
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Our primary market risk exposure is to changes in U.S. interest rates. We are exposed to market
risk related to our revolving credit facility because the interest rate on our revolving credit
facility is subject to fluctuations in the market. If the interest rate for our outstanding
indebtedness under the revolving credit facility was 100 basis points higher or lower during the
three and nine months ended September 30, 2008, our interest expense, net of amounts capitalized,
would have been increased or decreased by $0.4 million and $0.6 million, respectively.
As of September 30, 2008, we had outstanding $450.0 million of senior notes with a fixed interest
rate of 7.5%, $375.0 million of senior notes with a fixed interest rate of 6.25%, and $150.0
million of senior notes with a fixed interest rate of 6.75%. Because the interest rates with
respect to these instruments are fixed, a hypothetical 100 basis point increase or decrease in
market interest rates would not have a material impact on our financial statements.
We may, from time to time, invest our cash in a variety of short-term financial instruments. These
instruments generally consist of highly liquid investments with original maturities at the date of
purchase of three months or less. While these investments are subject to interest rate risk and
will decline in value if market interest rates increase, a hypothetical 100 basis point increase or
decrease in market interest rates would not materially affect the value of these investments.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES. |
An evaluation was performed under the supervision and with the participation of our senior
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this
quarterly report. Based on that evaluation, our senior management, including our Chief Executive
Officer and Chief Financial Officer, concluded that as of the end of the period covered by this
quarterly report our disclosure controls and procedures are effective in causing material
information relating to us (including our consolidated subsidiaries) to be recorded, processed,
summarized and reported by management on a timely basis and to ensure that the quality and
timeliness of our public disclosures complies with SEC disclosure obligations. There have been no
changes in our internal control over financial reporting that occurred during the period covered by
this report that have materially affected, or are likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS. |
See the information reported in Note 8 to the financial statements included in Part I, which
information is incorporated hereunder by this reference.
38
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this Report, you should carefully consider the
risks and uncertainties previously reported under the caption Part I Item 1A. Risk Factors in
the 2007 Form 10-K, the occurrence of which could materially and adversely affect our business,
prospects, financial condition and operating results. The risks previously reported and described
in the 2007 Form 10-K and in this Report are not the only risks facing our business. Additional
risks and uncertainties not currently known to us or those we currently deem to be immaterial may
also materially and adversely affect our business operations.
The following risk factor is updated from the 2007 Form 10-K to reflect updated or additional risks
and uncertainties.
We may be affected by general macroeconomic conditions.
As a result of current economic conditions, including turmoil and uncertainty in the capital
markets, credit markets have tightened significantly such that the ability to obtain new capital
has become more challenging and more expensive. In addition, several large financial institutions
have either recently failed or been dependent on the assistance of the federal government to
continue to operate as a going concern. The Company can provide no assurance that all of the banks
that have made commitments under its revolving credit facility will continue to operate as a going
concern in the future.
If any of the banks in the lending group were to fail, it is possible that the capacity under the
revolving credit facility would be reduced. In the event that the availability under the revolving
credit facility was reduced significantly, the Company could be required to obtain capital from
alternate sources in order to continue with its development and expansion initiatives. The
Companys options for addressing such capital constraints would include, but not be limited to (i)
obtaining commitments from the remaining banks in the lending group or from new banks to fund
increased amounts under the terms of the revolving credit facility, (ii) accessing the public
capital markets, or (iii) delaying certain of the Companys existing construction projects. Such
alternatives in the current market would likely be on terms less favorable than under existing
terms, which could have a material effect on the Companys consolidated financial position, results
of operations, or cash flows.
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ITEM 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
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ITEM 3. |
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DEFAULTS UPON SENIOR SECURITIES. |
None.
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ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None.
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ITEM 5. |
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OTHER INFORMATION. |
Audit Committee Matters.
Section 10A(i)(1) of the Exchange Act, as added by Section 202 of the Sarbanes-Oxley Act of 2002,
requires that the Companys Audit Committee (or one or more designated members of the Audit
Committee who are independent directors of the Companys board of directors) pre-approve all audit
and non-audit services provided to the Company by its external auditor, Ernst & Young LLP. Section
10A(i)(2) of the Exchange Act further requires that the Company disclose in its periodic reports
required by Section 13(a) of the Exchange Act any non-audit services approved by the Audit
Committee to be performed by Ernst & Young.
Consistent with the foregoing requirements, during the third quarter, the Companys Audit Committee
pre-approved the engagement of Ernst & Young for non-audit services, as defined by the SEC,
including certain tax services pertaining to the audit by the Internal Revenue Service of the
Companys 2006 federal income tax return.
The following exhibits are filed herewith:
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Exhibit |
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Number |
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Description of Exhibits |
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31.1 |
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Certification of the Companys Chief Executive Officer pursuant to Securities and Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
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31.2 |
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Certification of the Companys Chief Financial Officer pursuant to Securities and Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
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32.1 |
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Certification of the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
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Certification of the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CORRECTIONS CORPORATION OF AMERICA
Date: November 6, 2008
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/s/ John D. Ferguson
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John D. Ferguson |
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Chairman of the Board of Directors and
Chief Executive Officer |
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/s/ Todd J Mullenger
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Todd J Mullenger |
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Executive Vice President, Chief Financial Officer, and
Principal Accounting Officer |
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41