UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 001-16109

CORRECTIONS CORPORATION OF AMERICA

(Exact name of registrant as specified in its charter)

MARYLAND		62-1763875
(State or other jurisdiction of		(I.R.S. Employer Identification Number)
incorporation or organization)

(615) 263-3000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each class of Common Stock as of May 4, 2010:

Shares of Common Stock, $0.01 par value per share: 113,735,992 shares outstanding.

 

 

CORRECTIONS CORPORATION OF AMERICA

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

INDEX

		PAGE
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets (Unaudited) as of March 31, 2010 and December 31, 2009			1
b) Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2010 and 2009			2
c) Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2010 and 2009			3
d) Consolidated Statement of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2010			4
e) Consolidated Statement of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2009			5
f) Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			40
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults Upon Senior Securities			41
Item 4. (Removed and Reserved)			41
Item 5. Other Information			41
Item 6. Exhibits			42
SIGNATURES			43
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I – FINANCIAL INFORMATION

ITEM 1.		– FINANCIAL STATEMENTS.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		March 31,				December 31,
		2010				2009
ASSETS
Cash and cash equivalents		$	47,166			$	45,908
Accounts receivable, net of allowance of $1,803 and $1,563, respectively			249,586				241,185
Deferred tax assets			10,867				11,842
Prepaid expenses and other current assets			15,510				26,254
Current assets of discontinued operations			56				66
Total current assets			323,185				325,255
Property and equipment, net			2,535,559				2,520,503
Restricted cash			6,749				6,747
Investment in direct financing lease			11,854				12,185
Goodwill			13,672				13,672
Other assets			26,380				27,381
Total assets		$	2,917,399			$	2,905,743
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses		$	189,597			$	193,429
Income taxes payable			6,387				481
Current liabilities of discontinued operations			727				673
Total current liabilities			196,711				194,583
Long-term debt, net of current portion			1,149,416				1,149,099
Deferred tax liabilities			90,945				88,260
Other liabilities			32,438				31,255
Total liabilities			1,469,510				1,463,197
Commitments and contingencies
Common stock – $0.01 par value; 300,000 shares authorized; 114,663 and 115,962 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively			1,147				1,160
Additional paid-in capital			1,453,947				1,483,497
Retained deficit			(7,205	)			(42,111	)
Total stockholders’ equity			1,447,889				1,442,546
Total liabilities and stockholders’ equity		$	2,917,399			$	2,905,743

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		For the Three Months
		Ended March 31,
		2010				2009
REVENUE:
Management and other		$	414,154			$	403,572
Rental			793				582
			414,947				404,154
EXPENSES:
Operating			297,419				284,797
General and administrative			18,614				19,771
Depreciation and amortization			25,198				24,644
			341,231				329,212
OPERATING INCOME			73,716				74,942
OTHER EXPENSE:
Interest expense, net			17,271				17,935
Other expense			72				26
			17,343				17,961
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			56,373				56,981
Income tax expense			(21,467	)			(21,595	)
INCOME FROM CONTINUING OPERATIONS			34,906				35,386
Loss from discontinued operations, net of taxes			—				(789	)
NET INCOME		$	34,906			$	34,597
BASIC EARNINGS PER SHARE:
Income from continuing operations		$	0.30			$	0.30
Loss from discontinued operations, net of taxes			—				(0.01	)
Net income		$	0.30			$	0.29
DILUTED EARNINGS PER SHARE:
Income from continuing operations		$	0.30			$	0.29
Loss from discontinued operations, net of taxes			—				—
Net income		$	0.30			$	0.29

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS)

		For the Three Months
		Ended March 31,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	34,906			$	34,597
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			25,198				24,648
Amortization of debt issuance costs and other non-cash interest			1,074				894
Deferred income taxes			3,137				3,205
Income tax benefit of equity compensation			(1,206	)			(149	)
Non-cash equity compensation			2,260				2,562
Other expenses and non-cash items			142				370
Changes in assets and liabilities, net:
Accounts receivable, prepaid expenses and other assets			2,385				11,029
Accounts payable, accrued expenses and other liabilities			(2,867	)			(6,317	)
Income taxes payable			7,112				11,273
Net cash provided by operating activities			72,141				82,112
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for facility development and expansions			(36,618	)			(22,493	)
Expenditures for other capital improvements			(6,469	)			(11,133	)
Proceeds from sale of assets			25				120
Increase in other assets			(205	)			(54	)
Payments received on direct financing leases and notes receivable			293				260
Net cash used in investing activities			(42,974	)			(33,300	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt			5,000				72,388
Principal repayments of debt			(5,000	)			(167	)
Income tax benefit of equity compensation			1,206				149
Purchase and retirement of common stock			(31,040	)			(111,500	)
Proceeds from exercise of stock options			1,925				289
Net cash used in financing activities			(27,909	)			(38,841	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			1,258				9,971
CASH AND CASH EQUIVALENTS, beginning of period			45,908				34,077
CASH AND CASH EQUIVALENTS, end of period		$	47,166			$	44,048
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized of $1,326 and $303 in 2010 and 2009, respectively)		$	16,188			$	17,894
Income taxes		$	52			$	245

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS)

										Additional
		Common Stock								Paid-in
		Shares				Par Value				Capital				Retained Deficit				Total
Balance as of December 31, 2009			115,962			$	1,160			$	1,483,497			$	(42,111	)		$	1,442,546
Comprehensive income:
Net income			—				—				—				34,906				34,906
Total comprehensive income			—				—				—				34,906				34,906
Issuance of common stock			1				—				12				—				12
Retirement of common stock			(1,681	)			(17	)			(34,415	)			—				(34,432	)
Amortization of deferred compensation, net of forfeitures			(8	)			—				1,336				—				1,336
Income tax benefit of equity compensation			—				—				684				—				684
Restricted stock grant			176				2				(2	)			—				—
Stock option compensation expense			—				—				912				—				912
Stock options exercised			213				2				1,923				—				1,925
Balance as of March 31, 2010			114,663			$	1,147			$	1,453,947			$	(7,205	)		$	1,447,889

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS)

										Additional
		Common Stock								Paid-in
		Shares				Par Value				Capital				Retained Deficit				Total
Balance as of December 31, 2008			124,673			$	1,247			$	1,576,177			$	(197,065	)		$	1,380,359
Comprehensive income:
Net income			—				—				—				34,597				34,597
Total comprehensive income			—				—				—				34,597				34,597
Issuance of common stock			1				—				12				—				12
Retirement of common stock			(9,701	)			(97	)			(109,437	)			—				(109,534	)
Amortization of deferred compensation, net of forfeitures			(18	)			—				1,448				—				1,448
Income tax benefit (charge) of equity compensation			—				—				(804	)			—				(804	)
Restricted stock grant			134				1				(1	)			—				—
Stock option compensation expense			—				—				1,102				—				1,102
Stock options exercised			60				—				289				—				289
Balance as of March 31, 2009			115,149			$	1,151			$	1,468,786			$	(162,468	)		$	1,307,469

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

1.

ORGANIZATION AND OPERATIONS

As of March 31, 2010, Corrections Corporation of America, a Maryland corporation (together with its subsidiaries, the “Company” or “CCA”), owned 46 correctional and detention facilities, two of which are leased to other operators. As of March 31, 2010, CCA operated 65 facilities located in 19 states and the District of Columbia. CCA is also constructing an additional 1,072-bed correctional facility under a contract awarded by the Office of Federal Detention Trustee in Pahrump, Nevada that is expected to be completed in the third quarter of 2010.

CCA 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, CCA’s facilities offer a variety of rehabilitation and educational programs, including basic education, religious services, life skills and employment training, and substance abuse treatment. These services are intended to reduce recidivism and to prepare inmates for their successful re-entry into society upon their release. CCA also provides health care (including medical, dental and psychiatric services), food services, and work and recreational programs.

2.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying 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 fiscal year. Reference is made to the audited financial statements of CCA included in its Annual Report on Form 10-K as of and for the year ended December 31, 2009 (the “2009 Form 10-K”) with respect to certain significant accounting and financial reporting policies as well as other pertinent information of the Company.

Fair Value of Financial Instruments

On April 9, 2009, the Financial Accounting Standards Board (“FASB”) modified Accounting Standard Codification (“ASC”) 825, Financial Instruments, and ASC 270, Interim Reporting, to extend the disclosure requirements related to fair value of financial instruments to interim financial statements of publicly traded companies. To meet the reporting requirements of ASC 825 regarding fair value of financial instruments, CCA calculates the estimated fair value of financial instruments using quoted market prices of similar instruments or discounted cash flow techniques. At March 31, 2010 and December 31, 2009, there were no material differences between the carrying amounts and the estimated fair values of CCA’s financial instruments, other than as follows (in thousands):

		March 31, 2010								December 31, 2009
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Investment in direct financing lease		$	13,120			$	15,877			$	13,414			$	16,329
Note receivable from APM		$	4,755			$	7,976			$	5,025			$	8,497
Debt		$	(1,149,416	)		$	(1,198,849	)		$	(1,149,099	)		$	(1,187,768	)

3.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $13.7 million as of March 31, 2010 and December 31, 2009 and was associated with fourteen facilities CCA manages but does not own.

The components of CCA’s amortizable intangible assets and liabilities are as follows (in thousands):

		March 31, 2010								December 31, 2009
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Contract acquisition costs		$	873			$	(862	)		$	873			$	(862	)
Contract values			(35,688	)			33,189				(35,688	)			32,571
Total		$	(34,815	)		$	32,327			$	(34,815	)		$	31,709

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 each of the three months ended March 31, 2010 and 2009 was $0.7 million and $1.0 million, respectively. Interest expense associated with the amortization of contract values for both the three months ended March 31, 2010 and 2009 was $0.1 million. Estimated amortization income, net of amortization expense, for the remainder of 2010 and the five succeeding fiscal years is as follows (in thousands):

2010 (remainder)			1,668
2011			134
2012			134
2013			134
2014			134
2015			134

4.

FACILITY ACTIVATION, DEVELOPMENTS, AND CLOSURES

In February 2008, CCA announced its intention to construct a new correctional facility in Trousdale County, Tennessee. However, during the first quarter of 2009 CCA temporarily suspended the construction of this facility until there is greater clarity around the timing of future bed absorption by its customers. CCA will continue to monitor its customers’ needs, and could promptly resume construction of the facility. As of March 31, 2010, CCA has capitalized $27.5 million related to the Trousdale facility, a majority of which consists of pre-fabricated concrete cells that are generally transferable to other potential CCA development projects.

In May 2008, CCA 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 third quarter of 2010 for approximately $83.5 million. The new 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.

During December 2009, CCA announced its decision to idle its 1,600-bed Prairie Correctional Facility in Minnesota due to low inmate populations at the facility. During 2009, the Prairie facility housed offenders from the states of Minnesota and Washington. However, due to excess capacity in the states’ systems, both states reduced the populations held at Prairie throughout 2009. During January 2010, the final transfer of offenders from the Prairie facility to the state of Minnesota was completed. The state of Washington has also removed all of its offenders from the Prairie facility.

On January 15, 2010, the Arizona Governor and Legislature proposed budgets that would phase out the utilization of private out-of-state beds due to in-state capacity coming on-line and severe budget conditions. During January 2010, the Arizona Department of Corrections notified CCA that it elected not to renew the contract at CCA’s 752-bed Huerfano County Correctional Center upon expiration of the contract in March 2010. As a result, the Arizona Department of Corrections removed all of the inmates from the Huerfano facility during March 2010. Further, during March 2010, the Arizona Department of Corrections notified CCA that it elected not to renew its contract at CCA’s 2,160-bed Diamondback Correctional Facility in Oklahoma, which is scheduled to expire on May 1, 2010. The Arizona Department of Corrections expects to begin transferring offenders from the Diamondback facility beginning in May 2010 and expects to complete the transfer within approximately 30 days. As a result of this notification, CCA intends to idle the Huerfano and Diamondback facilities, but will continue marketing the facilities to other customers. The Diamondback facility has previously housed inmates from the states of Wisconsin, Hawaii, and Oklahoma, while the Huerfano facility recently housed inmates from the state of Colorado. CCA continues to manage inmate populations from the states of Oklahoma and Colorado at other facilities it owns and operates.

During January 2010, CCA announced that pursuant to the BOP Criminal Alien Requirement 10 Solicitation (“CAR 10”) its 2,304-bed California City Correctional Center in California was not selected for the continued management of the federal offenders currently located at this facility. The current contract with the BOP at the California City facility expires on September 30, 2010. CCA currently expects that all inmates will be transferred out of the facility by the end of the third quarter of 2010.

The Company is currently pursuing new management contracts to take advantage of the beds that have or will become available at the Huerfano, Diamondback, Prairie, and California City facilities but can provide no assurance that it will be successful in doing so.

As a result of the notifications described above related to the Huerfano, Diamondback, Prairie, and California City facilities, CCA recently performed impairment tests as required by generally accepted accounting principles when events or circumstances, such as contract terminations, may trigger an impairment. For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. In each of these facilities, the undiscounted cash flows estimated by the Company were sufficient to recover the carrying values of these assets which totaled $197.7 million and $198.6 million as of March 31, 2010 and December 31, 2009, respectively, excluding equipment and other assets that could generally be transferred and used at other facilities CCA owns without significant cost. In performing the analysis of undiscounted cash flows, CCA considered the useful lives of these particular assets and determined that there remain a significant number of useful years remaining as the facilities are each less than 20 years old and correctional facilities are generally operated much longer than 20 years. CCA will continue to monitor these facilities and the expected cash flows that could result from new management contracts. Future events could occur that would result in a potential impairment to one or more of these facilities, such as a reduction in the cash flows ultimately expected to be generated or a reduction in the estimated useful life of the asset.

In April 2010, CCA announced that pursuant to a re-bid of the management contracts at four Florida facilities, two of which are currently managed by CCA, the Florida Department of Management Services (“Florida DMS”) indicated its intent to award CCA the continued management of the 985-bed Bay Correctional Facility, in Panama City, Florida. Additionally, the Florida DMS indicated its intent to award CCA management of the 985-bed Moore Haven Correctional Facility in Moore Haven, Florida and the 1,884-bed Graceville Correctional Facility in Graceville, Florida, facilities which were not previously managed by CCA. However, CCA was not selected for the continued management of the 1,520-bed Gadsden Correctional Facility in Quincy, Florida. All of the facilities are owned by the state of Florida. The contracts contain an initial term of three years and two 2-year renewal options. CCA expects to assume management of the Moore Haven and Graceville facilities and to transition management at the Gadsden facility during the third quarter of 2010. In April 2010, CCA also provided notice to Hernando County, Florida of its intent to terminate the management contract at the 876-bed Hernando County Jail during the third quarter of 2010. CCA expects to incur non-cash charges totaling approximately $3.1 million during the second quarter of 2010 for the write-offs of goodwill and other costs associated with the termination of the management contracts for the Gadsden and Hernando County facilities.

5.

DISCONTINUED OPERATIONS

In May 2008, the Company notified the Bay County Commission of its intention to exercise the Company’s 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 jail is owned by the County. During 2009, the Company reported expenses related to negative developments in outstanding legal matters which are reported as discontinued operations.

Pursuant to a re-bid of the management contracts, during September 2008, CCA 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. Accordingly, the results of operations, net of taxes, and the assets and liabilities of these two facilities are reported as discontinued operations upon termination of operations in the first quarter of 2009 for all periods presented.

The following table summarizes the results of operations for these facilities for the three months ended March 31, 2010 and 2009 (in thousands):

		For the Three Months
		Ended March 31,
		2010				2009
REVENUE:
Managed-only			—				510
			—				510
EXPENSES:
Managed-only			—				1,782
Depreciation and amortization			—				4
			—				1,786
OPERATING LOSS			—				(1,276	)
Other income			—				6
LOSS BEFORE INCOME TAXES			—				(1,270	)
Income tax benefit			—				481
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES		$	—			$	(789	)

The assets and liabilities of the discontinued operations presented in the accompanying consolidated balance sheets are as follows (in thousands):

		March 31, 2010				December 31, 2009
ASSETS
Accounts receivable		$	—			$	23
Other current assets			56				43
Total current assets		$	56			$	66
LIABILITIES
Accounts payable and accrued expenses		$	727			$	673
Total current liabilities		$	727			$	673

6.

DEBT

Debt outstanding as of March 31, 2010 and December 31, 2009 consists of the following (in thousands):

		March 31,				December 31,
		2010				2009
Revolving Credit Facility, principal due at maturity in December 2012; interest payable periodically at variable interest rates. The weighted average rate at March 31, 2010 was 1.0%.		$	171,799			$	171,799
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
7.75% Senior Notes, principal due at maturity in June 2017; interest payable semi-annually in June and December at 7.75%. These notes were issued with a $13.4 million discount, of which $12.4 million and $12.7 million was unamortized at March 31, 2010 and December 31, 2009, respectively.			452,617				452,300
		$	1,149,416			$	1,149,099

Revolving Credit Facility. During December 2007, CCA entered into a $450.0 million senior secured revolving credit facility (the “Revolving Credit Facility”) arranged by Banc of America Securities LLC and Wachovia Capital Markets, LLC. The Revolving Credit Facility is being utilized to fund development projects and the stock repurchase program as further described in Note 7, as well as for working capital, capital expenditures and general corporate purposes.

The Revolving Credit Facility has an aggregate principal capacity of $450.0 million and matures in December 2012. At CCA’s 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 CCA’s leverage ratio. Based on CCA’s current leverage ratio, loans under the 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 March 31, 2010, CCA had $171.8 million of outstanding borrowings under the Revolving Credit Facility as well as $30.4 million in letters of credit outstanding.

Lehman Brothers Commercial Bank (“Lehman”), which holds a $15.0 million share in the Revolving Credit Facility, is a defaulting lender under the terms of the credit agreement. At March 31, 2010, Lehman had funded $2.3 million in borrowings and $1.1 million in letters of credit that remained outstanding on the facility. The loan balance will be repaid on a pro-rata basis to the extent that LIBOR-based loans are repaid on tranches Lehman previously funded. It is CCA’s expectation that going forward it will not have access to additional incremental funding from Lehman, and to the extent Lehman’s funding is reduced, it will not be replaced. CCA does not believe that this reduction of credit has a material effect on its liquidity and capital resources. None of the other banks providing commitments under the Revolving Credit Facility have failed to fund borrowings CCA 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 fail, it is possible that the capacity under the Revolving Credit Facility would be reduced further.

The Revolving Credit Facility has a $20.0 million sublimit for swing line loans which enables CCA to borrow from Banc of America Securities LLC without advance notice, at the base rate. The Revolving Credit Facility also has a $100.0 million sublimit for the issuance of standby letters of credit. CCA has an option to increase the availability under the 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.

The Revolving Credit Facility is secured by a pledge of all of the capital stock of CCA’s domestic subsidiaries, 65% of the capital stock of CCA’s foreign subsidiaries, all of CCA’s accounts receivable, and all of CCA’s deposit accounts.

The Revolving Credit Facility requires CCA 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 March 31, 2010, CCA was in compliance with all such covenants. In addition, the Revolving Credit Facility contains certain covenants which, among other things, limits 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 Revolving Credit Facility is subject to certain cross-default provisions with terms of CCA’s other indebtedness.

$375 Million 6.25% Senior Notes. Interest on the $375.0 million aggregate principal amount of CCA’s 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. CCA may redeem all or a portion of the notes at redemption prices 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 CCA’s 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. CCA may redeem all or a portion of the notes at redemption prices set forth in the indenture governing the 6.75% Senior Notes.

$465 Million 7.75% Senior Notes. Interest on the $465.0 million aggregate principal amount of CCA’s 7.75% unsecured senior notes issued in June 2009 (the “7.75% Senior Notes”) accrues at the stated rate and is payable on June 1 and December 1 of each year. The 7.75% Senior Notes are scheduled to mature on June 1, 2017. The 7.75% Senior Notes were issued at a price of 97.116%, resulting in a yield to maturity of 8.25%. At any time on or before June 1, 2012, CCA 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. CCA may redeem all or a portion of the notes on or after June 1, 2013. Redemption prices are set forth in the indenture governing the 7.75% Senior Notes.

7.

STOCKHOLDERS’ EQUITY

Stock Repurchase Program

In February 2010, the Company’s Board of Directors approved a stock repurchase program to purchase up to $250.0 million of CCA’s common stock through June 30, 2011. Through March 31, 2010, CCA completed the purchase of 1.6 million shares at a total cost of $31.9 million. CCA has utilized cash on hand, net cash provided by operations, and borrowings available under the Revolving Credit Facility to fund the repurchases.

Restricted Stock

During the first quarter of 2010, CCA issued 319,000 shares of restricted common stock and common stock units to certain of its employees, with an aggregate fair value of $6.6 million, including 274,000 restricted shares or units to employees whose compensation is charged to general and administrative expense and 45,000 restricted shares to employees whose compensation is charged to operating expense. During 2009, CCA issued 333,000 shares of restricted common stock to certain of its employees, with an aggregate fair value of $3.7 million, including 242,000 restricted shares or units to employees whose compensation is charged to general and administrative expense and 91,000 restricted shares to employees whose compensation is charged to operating expense.

CCA established performance-based vesting conditions on the shares of restricted common stock and common stock units awarded to its officers and executive officers. Unless earlier vested under the terms of the agreements, shares or units 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 or units 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 agreements, the shares or units of restricted stock issued to the other employees vest after three years of continuous service.

During the three months ended March 31, 2010, the Company expensed $1.3 million, net of forfeitures, relating to restricted common stock and common stock units ($0.2 million of which was recorded in operating expenses and $1.1 million of which was recorded in general and administrative expenses). During the three months ended March 31, 2009, the Company expensed $1.4 million, net of forfeitures, relating to restricted common stock and common stock units ($0.2 million of which was recorded in operating expenses and $1.2 million of which was recorded in general and administrative expenses). As of March 31, 2010, 741,000 shares of restricted common stock and common stock units remained outstanding and subject to vesting.

Stock Options

During the first quarter of 2010, CCA issued to its officers and executive officers options to purchase 566,000 shares of common stock with an aggregate fair value of $4.3 million, with an exercise price of $20.65 per share. During 2009, CCA issued to its officers, executive officers, and non-employee directors options to purchase 826,000 shares of common stock with an aggregate fair value of $3.4 million, with a weighted average exercise price of $11.93 per share. CCA 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 CCA’s executive officers vest on the anniversary of the grant date over a three-year period while one fourth of the stock options issued to CCA’s other officers vest on the anniversary of the grant date over a four-year period. Options granted to non-employee directors vest on the one-year anniversary of the grant date.

During the three months ended March 31, 2010 and 2009, CCA expensed $0.9 million and $1.1 million, respectively, net of forfeitures, relating to its outstanding stock options. As of March 31, 2010, options to purchase 4.3 million shares of common stock were outstanding with a weighted average exercise price of $16.05.

8.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For CCA, diluted earnings per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to restricted stock-based compensation 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
		Ended March 31,
		2010				2009
NUMERATOR
Basic:
Income from continuing operations		$	34,906			$	35,386
Loss from discontinued operations, net of taxes			—				(789	)
Net income		$	34,906			$	34,597
Diluted:
Income from continuing operations		$	34,906			$	35,386
Loss from discontinued operations, net of taxes			—				(789	)
Diluted net income		$	34,906			$	34,597
DENOMINATOR
Basic:
Weighted average common shares outstanding			115,359				119,797
Diluted:
Weighted average common shares outstanding			115,359				119,797
Effect of dilutive securities:
Stock options and warrants			839				611
Restricted stock-based compensation			156				149
Weighted average shares and assumed conversions			116,354				120,557
BASIC EARNINGS PER SHARE:
Income from continuing operations		$	0.30			$	0.30
Loss from discontinued operations, net of taxes			—				(0.01	)
Net income		$	0.30			$	0.29
DILUTED EARNINGS PER SHARE:
Income from continuing operations		$	0.30			$	0.29
Loss from discontinued operations, net of taxes			—				—
Net income		$	0.30			$	0.29

9.

COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The nature of CCA’s 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 employee or inmate misconduct, medical malpractice, employment matters, property loss, contractual claims, and personal injury or other damages resulting from contact with CCA’s facilities, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. CCA maintains insurance to cover many of these claims, which may mitigate the risk that any single claim would have a material effect on CCA’s 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, CCA is subject to substantial self-insurance risk.

CCA 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 management’s review of the potential claims and outstanding litigation and based upon management’s experience and history of estimating losses, management believes a loss in excess of amounts already recognized would not be material to CCA’s financial statements. In the opinion of management, there are no pending legal proceedings that would have a material effect on CCA’s 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 CCA’s 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 CCA’s assumptions, new developments, or by the effectiveness of CCA’s 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 County’s 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 CCA 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 CCA for the correctional facility.

In connection with the issuance of the revenue bonds, CCA is obligated, under a debt service deficit agreement, to pay the trustee of the bond’s trust indenture (the “Trustee”) amounts necessary to pay any debt service deficits consisting of principal and interest requirements (outstanding principal balance of $41.7 million at March 31, 2010 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, CCA 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, CCA does not currently believe the state of Tennessee will exercise its option to purchase the facility. At March 31, 2010, the outstanding principal balance of the bonds exceeded the purchase price option by $12.3 million.

10.

INCOME TAXES

Income taxes are accounted for under the provisions of ASC 740 “Income Taxes”. ASC 740 generally requires CCA 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 CCA’s 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 Company’s effective tax rate was 38.1% during the first quarter of 2010 compared with 37.9% during the same period in the prior year. CCA’s overall effective tax rate is estimated based on CCA’s current projection of taxable income and could change in the future as a result of changes in these estimates, the implementation of additional tax strategies, changes in federal or state tax rates or laws affecting tax credits available to the Company, changes in estimates related to uncertain tax positions, or changes in state apportionment factors, as well as changes in the valuation allowance applied to CCA’s 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 FASB issued new guidance related to accounting for tax contingencies, which 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 ASC 740 establishes a recognition threshold of more likely than not that a tax position will be sustained upon examination. The measurement attribute 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.

CCA has a $0.2 million liability recorded for uncertain tax positions as of March 31, 2010, included in other non-current liabilities in the accompanying balance sheet. CCA 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 $0.1 million. CCA does not currently anticipate that the total amount of unrecognized tax positions will significantly increase or decrease in the next twelve months.

11.

SEGMENT REPORTING

As of March 31, 2010, CCA owned and managed 44 correctional and detention facilities, and managed 21 correctional and detention facilities it did not own. Management views CCA’s 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 CCA’s 2009 Form 10-K. Owned and managed facilities include the operating results of those facilities owned and managed by CCA. Managed-only facilities include the operating results of those facilities owned by a third party and managed by CCA. CCA measures the operating performance of each facility within the above two reportable segments, without differentiation, based on facility contribution. CCA defines facility contribution as a facility’s operating income or loss from operations before interest, taxes, depreciation and amortization. Since each of CCA’s 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 CCA’s operating income is as follows for the three months ended March 31, 2010 and 2009 (in thousands):

		For the Three Months
		Ended March 31,
		2010				2009
Revenue:
Owned and managed		$	326,018			$	317,660
Managed-only			87,531				84,743
Total management revenue			413,549				402,403
Operating expenses:
Owned and managed			215,931				207,703
Managed-only			78,122				73,805
Total operating expenses			294,053				281,508
Facility contribution:
Owned and managed			110,087				109,957
Managed-only			9,409				10,938
Total facility contribution			119,496				120,895
Other revenue (expense):
Rental and other revenue			1,398				1,751
Other operating expense			(3,366	)			(3,289	)
General and administrative			(18,614	)			(19,771	)
Depreciation and amortization			(25,198	)			(24,644	)
Operating income		$	73,716			$	74,942

The following table summarizes capital expenditures for the reportable segments for the three months ended March 31, 2010 and 2009 (in thousands):

		For the Three Months
		Ended March 31,
		2010				2009
Capital expenditures:
Owned and managed		$	38,836			$	16,259
Managed-only			1,025				3,644
Corporate and other			1,050				5,924
Total capital expenditures		$	40,911			$	25,827

The assets for the reportable segments are as follows (in thousands):

		March 31,				December 31,
		2010				2009
Assets:
Owned and managed		$	2,630,291			$	2,605,023
Managed-only			113,837				116,460
Corporate and other			173,215				184,194
Discontinued operations			56				66
Total assets		$	2,917,399			$	2,905,743

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This quarterly report on Form 10-Q 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:

	•		general economic and market conditions, including the impact governmental budgets can have on our per diem rates and occupancy;
	•		fluctuations in operating results because of, among other things, 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; and
	•		the availability of debt and equity financing on terms that are favorable to us.

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, 2009, filed with the Securities and Exchange Commission, or SEC, on February 24, 2010 (File No. 001-16109) (the “2009 Form 10-K”) and in other reports we file with the SEC from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report and in the 2009 Form 10-K.

OVERVIEW

The Company

As of March 31, 2010, we owned 46 correctional and detention facilities, two of which we leased to other operators. As of March 31, 2010, we operated 65 facilities, including 44 facilities that we owned, with a total design capacity of approximately 87,000 beds in 19 states and the District of Columbia. We are also constructing an additional 1,072-bed correctional facility under a contract awarded by the Office of Federal Detention Trustee (“OFDT”) in Pahrump, Nevada that is expected to be completed in the third 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 amendments to those 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. Information on our website is not part of this report.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements in this report are prepared in conformity with U.S. generally accepted accounting principles. 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material. A summary of our significant accounting policies is described in our 2009 Form 10-K. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Asset impairments. As of March 31, 2010, we had $2.5 billion in property and equipment. We evaluate the recoverability of the carrying values of our long-lived assets, other than goodwill, when events suggest that an impairment may have occurred. Such events primarily include, but are not limited to, the termination of a management contract or a significant decrease in inmate populations within a correctional facility we own or manage. In these circumstances, we utilize estimates of undiscounted cash flows to determine if an impairment 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 March 31, 2010, 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 and discounted cash flows. Each of these techniques requires considerable judgment and estimations which could change in the future.

Income taxes. Deferred income taxes reflect the available net operating losses and tax credit carryforwards 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 $5.2 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. We have a valuation allowance of $0.9 million for the estimated amount of the net operating losses that will expire unused. In addition, we have $6.8 million of state tax credits applicable to various states that we expect to carry forward in future years to offset taxable income in such states. We have a $3.3 million valuation allowance related to state tax credits that are 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 March 31, 2010, we had $35.0 million in accrued liabilities for employee health, workers’ compensation, and automobile insurance claims. We are significantly self-insured for employee health, workers’ compensation, and automobile liability insurance claims. As such, our insurance expense is largely dependent on claims experience and our ability to control our claims. We have consistently accrued the estimated liability for employee health insurance claims based on our history of claims experience and the time lag between the incident date and the date we pay the claims. We have accrued the estimated liability for workers’ compensation and automobile insurance claims based on an actuarial valuation of the outstanding liabilities, discounted to the net present value of the outstanding liabilities, using a combination of actuarial methods used to project ultimate losses. The liability for employee health, workers compensation, and automobile insurance includes estimates for both claims incurred and for claims incurred but not reported. 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 March 31, 2010, we had $12.1 million in accrued liabilities related to certain legal proceedings in which we are involved. We have accrued our best estimate of the probable costs for the resolution of these claims based on a range of potential outcomes. In addition, we are subject to current and potential future legal proceedings for which little or no accrual has been reflected because our current assessment of the potential exposure is nominal. These estimates have been developed in consultation with our General Counsel’s office and, as appropriate, outside counsel handling these matters, and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible 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, 2008					43				22				3				68
Termination of the lease at our owned Queensgate Correctional Facility		January 2009			1				—				(1	)			—
Expiration of the management contract for the B.M. Moore Correctional Center		January 2009			—				(1	)			—				(1	)
Expiration of the management contract for the Diboll Correctional Center		January 2009			—				(1	)			—				(1	)
Activation of the North Georgia Detention Center		July 2009			—				1				—				1
Facilities as of December 31, 2009					44				21				2				67
Facilities as of March 31, 2010					44				21				2				67

During the first quarter of 2009, we incurred $0.7 million of operating expenses at the North Georgia Detention Center in preparation for the receipt of detainees under the new contract with the U.S. Immigration and Customs Enforcement, or ICE, as discussed further under “Facility Operations”.

Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

Net income was $34.9 million, or $0.30 per diluted share, for the three months ended March 31, 2010, compared with net income of $34.6 million, or $0.29 per diluted share, for the three months ended March 31, 2009.

Facility Operations

A key performance indicator we use to measure the revenue and expenses associated with the operation of the facilities we own or manage is expressed in terms of a compensated man-day, which represents the revenue we generate and expenses we incur for one inmate for one calendar day. Revenue and expenses per compensated man-day are computed by dividing facility revenue and expenses by the total number of compensated man-days during the period. A compensated man-day represents a calendar day for which we are paid for the occupancy of an inmate. We believe the measurement is useful because we are compensated for operating and managing facilities at an inmate per-diem rate based upon actual or minimum guaranteed occupancy levels. We also measure our ability to contain costs on a per-compensated man-day basis, which is largely dependent upon the number of inmates we accommodate. Further, per man-day measurements are also used to estimate our potential profitability based on certain occupancy levels relative to design capacity. Revenue and expenses per compensated man-day for all of the facilities we owned or managed, exclusive of those discontinued (see further discussion below regarding discontinued operations), were as follows for the three months ended March 31, 2010 and 2009:

		For the Three Months
		Ended March 31,
		2010				2009
Revenue per compensated man-day		$	58.52			$	58.45
Operating expenses per compensated man-day:
Fixed expense			32.05				30.96
Variable expense			9.56				9.94
Total			41.61				40.90
Operating margin per compensated man-day		$	16.91			$	17.55
Operating margin			28.9	%			30.0	%
Average compensated occupancy			90.3	%			89.4	%
Average available beds			86,916				85,528
Average compensated population			78,523				76,489

Average compensated population for the quarter ended March 31, 2010 increased 2,034 from 76,489 in the first quarter of 2009 to 78,523 in the first quarter of 2010. The increase in average compensated population resulted primarily from increases in average compensated population from the newly activated 2,232-bed Adams County Correctional Center as well as increases in average compensated population from the state of California.

Our total facility management revenue increased by $11.1 million, or 2.8%, during the first quarter of 2010 compared with the same period in the prior year resulting primarily from an increase in revenue of approximately $10.7 million generated by an increase in the average daily compensated population during the first quarter of 2010. The remaining increase in facility management revenue was primarily driven by the marginal increase of $0.07 per compensated man-day in the average revenue per compensated man-day resulting from per diem increases as well as new contracts at higher than average per diem rates than existing contracts.

Business from our federal customers, including primarily the Federal Bureau of Prisons, or the BOP, the U.S. Marshals Service, or the USMS, and ICE, continues to be a significant component of our business. Our federal customers generated approximately 41% and 40% of our total revenue for the three months ended March 31, 2010 and 2009, respectively, increasing 7.5% from $160.1 million in the first quarter of 2009 to $172.2 million in the first quarter of 2010.

State revenues decreased $0.6 million from $211.8 million in the first quarter of 2009 to $211.2 million in the first quarter of 2010. State revenues declined as certain states, such as the states of Washington and Minnesota, have recently opened new correctional facilities within their respective states and reduced the number of inmates we housed in facilities we operate to utilize the excess capacity within their state systems, while other states have reduced inmate populations in an effort to control their costs and alleviate their extraordinary budget challenges. Additionally, we were notified by the Alaska Department of Corrections during the third quarter of 2009 that we were not selected in Alaska’s competitive solicitation to house up to 1,000 inmates from the state of Alaska. The state of Alaska completed the transfer of their inmate population out of our Red Rock facility during the fourth quarter of 2009. Partially offsetting these reductions in state revenues, we continued to receive additional inmates from the state of California throughout 2009 and into the first quarter of 2010. We housed approximately 8,200 inmates from the state of California as of March 31, 2010, compared with approximately 6,650 California inmates as of March 31, 2009.

Although we are encouraged by recent economic data indicating that the worst of the economic downturn may be over, state government agencies continue to experience revenue shortfalls in their fiscal year 2010 budgets, as tax revenue to governmental agencies typically lag the overall economy. States may be forced to take further actions to address revenue shortfalls in their fiscal year 2010 budgets such as reductions in inmate populations through early release programs, alternative sentencing, or inmate transfers from facilities managed by private operators to facilities operated by the state or other local jurisdictions. Further, certain states have requested, and additional state customers could request, reductions in per diem rates or request that we forego prospective rate increases in the future as methods of addressing the budget shortfalls they may be experiencing. We also currently expect fiscal 2011 budgets generally commencing in the second half of 2010 to present similar challenges.

As of March 31, 2010, we had approximately 10,000 unoccupied beds at facilities that had availability of 100 or more beds, and almost 2,600 additional beds under development, including 1,500 expansion beds at two facilities we own in Georgia and a new 1,072-bed correctional facility we are constructing in Nevada. Of these, 4,200 beds are under guaranteed contracts with existing customers, leaving us with 8,400 beds available. We have staff throughout the organization actively engaged in marketing this available capacity to existing and prospective customers. Historically, we have been successful in substantially filling our inventory of available beds and the beds that we have constructed. Filling these beds would provide substantial growth in revenues, cash flow, and earnings per share. However, we can provide no assurance that we will be able to obtain new or existing customers to fill our available beds.

Operating expenses totaled $297.4 million and $284.8 million for the three months ended March 31, 2010 and 2009, respectively. Operating expenses consist of those expenses incurred in the operation and management of adult correctional and detention facilities and for our inmate transportation subsidiary.

We remain steadfast in our efforts to contain costs. Recognizing the challenges we faced as a result of the economic downturn, our efforts to contain costs were intensified during 2009, as we implemented a company-wide initiative to improve operating efficiencies, and established a framework for accelerating the process and ensuring continuous delivery over the long-term. These efforts were primarily manifested in our variable expenses, which decreased 3.8% from $9.94 per compensated man-day during the first quarter of 2009 to $9.56 per compensated man-day during the first quarter of 2010.

Fixed expenses per compensated man-day increased to $32.05 in the first quarter of 2010 from $30.96 in the first quarter of 2009 primarily as a result of an increase in salaries and benefits of $0.96 per compensated man-day, an increase of 3.6%. Salaries and benefits represent the most significant component of fixed operating expenses and represented approximately 64% of total operating expenses during 2009. During the three months ended March 31, 2010, facility salaries and benefits expense increased $11.6 million. Although we did not provide annual wage increases during 2009 to the majority of our employees, our salaries expense during the first quarter of 2010 include $4.1 million, or $0.58 per compensated man-day, of bonuses paid to non-management level staff in-lieu of wage increases. Like many companies suffering the effects of the current economy, we have monitored our compensation levels very closely and believe these adjustments to our compensation strategy were necessary to help ensure the long-term success of our business.

Notwithstanding these bonus payments, salaries and benefits increased most notably at our Adams County facility that opened in the third quarter of 2009, at our newly opened North Georgia facility as a result of the new ICE contract, and at our La Palma facility as a result of an increase in beds utilized from the state of California. Operating expenses per compensated man-day were also negatively impacted by operational inefficiencies associated with the ramping up of California populations at our Red Rock and North Fork facilities and the ramping down of Arizona populations at our Huerfano facility.

We typically enter into facility management contracts with governmental entities for terms typically from three to five years, with additional renewal periods at the option of the contracting governmental agency. Accordingly, a substantial portion of our facility management contracts are scheduled to expire each year, notwithstanding contractual renewal options that a government agency may exercise. Although we generally expect these customers to exercise renewal options or negotiate new contracts with us, one or more of these contracts may not be renewed by the corresponding governmental agency.

As disclosed further hereafter under the “Owned and Managed Facilities” and “Managed Only Facilities”, we were notified by the state of Arizona of its intent to not renew management contracts at our Huerfano County Correctional Center and our Diamondback Correctional Facility expiring in March 2010 and May 2010, respectively. We also were notified by the BOP that our California City Correctional Center in California was not selected for the continued management of the federal offenders currently located at this facility upon expiration of the contract on September 30, 2010. In April 2010, we were notified that our Gadsden Correctional Facility was not awarded a new contract pursuant to a competitive procurement process and we will cease operations at the Gadsden facility on July 31, 2010 upon expiration of the existing contract. Additionally, we decided to temporarily cease operations at our Prairie Correctional Facility during the first quarter of 2010 due to low inmate populations at the facility. Due to excess capacity in the states’ systems, both the states of Minnesota and Washington have removed the populations held at our Prairie facility. During April 2010, we also provided notice of our intent to terminate the management contract at the 876-bed Hernando County Jail during the third quarter of 2010.

In addition to these known pending contract terminations, we manage five facilities in Texas that we do not own pursuant to management contracts that expire in January 2011, which are currently subject to a competitive procurement process. We intend to competitively bid on the continued management of these five facilities but cannot provide assurance that we will be successful in maintaining contracts at any of these five facilities.

Other than the specific contracts discussed above that have either terminated or which we believe are reasonably possible to terminate, we believe we will renew all contracts that have expired or are scheduled to expire within the next twelve months. We believe our renewal rates on existing contracts remains high as a result of a variety of reasons including, but not limited to, the constrained supply of available beds within the U.S. correctional system, our ownership of the majority of the beds we operate, and the quality of our operations. We generated total revenues of $59.3 million and $65.4 million at the Huerfano, Diamondback, California City, Gadsden, Prairie, Hernando County, and five Texas managed-only facilities during the three months ended March 31, 2010 and 2009, respectively, and the carrying amounts of the property and equipment were $205.1 million and $207.1 million as of March 31, 2010 and December 31, 2009, respectively.

The operation of the facilities we own carries a higher degree of risk associated with a management contract than the operation of the facilities we manage but do not own because we incur significant capital expenditures to construct or acquire facilities we own. Additionally, correctional and detention facilities have a limited or no alternative use. Therefore, if a management contract is terminated on a facility we own, we continue to incur certain operating expenses, such as real estate taxes, utilities, and insurance that we would not incur if a management contract were terminated for a managed-only facility. As a result, revenue per compensated man-day is typically higher for facilities we own and manage than for managed-only facilities. Because we incur higher expenses, such as repairs and maintenance, real estate taxes, and insurance, on the facilities we own and manage, our cost structure for facilities we own and manage is also higher than the cost structure for the managed-only facilities. The following tables display the revenue and expenses per compensated man-day for the facilities we own and manage and for the facilities we manage but do not own:

		For the Three Months Ended March 31,
		2010				2009
Owned and Managed Facilities:
Revenue per compensated man-day		$	66.77			$	67.21
Operating expenses per compensated man-day:
Fixed expense			34.08				33.51
Variable expense			10.14				10.44
Total			44.22				43.95
Operating margin per compensated man-day		$	22.55			$	23.26
Operating margin			33.8	%			34.6	%
Average compensated occupancy			88.7	%			86.1	%
Average available beds			61,149				61,009
Average compensated population			54,256				52,517

		For the Three Months Ended March 31,
		2010				2009
Managed Only Facilities:
Revenue per compensated man-day		$	40.08			$	39.28
Operating expenses per compensated man-day:
Fixed expense			27.51				25.37
Variable expense			8.26				8.84
Total			35.77				34.21
Operating margin per compensated man-day		$	4.31			$	5.07
Operating margin			10.7	%			12.9	%
Average compensated occupancy			94.2	%			97.8	%
Average available beds			25,767				24,519
Average compensated population			24,267				23,972

Owned and Managed Facilities

The operating margins per man-day at owned and managed facilities decreased 3.1% from $23.26 during the first quarter of 2009 to $22.55 during the first quarter of 2010. Facility contribution or the operating income before interest, taxes, depreciation and amortization, at our owned and managed facilities increased by $0.1 million, from $110.0 million during the first quarter of 2009 to $110.1 million during the first quarter of 2010. The increase in facility contribution at our owned and managed facilities is largely the result of the increase in the average compensated population during the first quarter of 2010 to 54,256 compared to 52,517 in the same period in 2009, an increase of 3.3%. Partially offsetting the favorable increase in facility contribution, salaries and benefits expense at owned and managed facilities increased $7.0 million, or $0.52 per compensated man-day, due in part to the aforementioned bonuses reflected in the first quarter of 2010 for non-management level staff in lieu of wage increases.

The most notable increases in compensated population during the first quarter of 2010 occurred at the Adams County facility which commenced operations with the BOP in the third quarter of 2009. Additionally, we experienced increases in compensated population from the state of California at the La Palma and Tallahatchie facilities. Our total revenues increased by $21.2 million at these three facilities during the three months ended March 31, 2010 compared to the same period in the prior year.

In November 2009, we announced that we entered into an amendment of our agreement with the State of California Department of Corrections and Rehabilitation (the “CDCR”) providing the CDCR the ability to house up to 10,468 inmates in five of the facilities we own, an increase from 8,132 inmates under our previous agreement. The agreement, as amended, which is subject to appropriations by the California legislature, expires June 30, 2011. As of March 31, 2010, we held approximately 8,200 inmates from the state of California. We began receiving additional inmates pursuant to the amendment during the first quarter of 2010, with a gradual ramp-up estimated to be completed during the first quarter of 2011.

We remain optimistic that the state of California will continue to utilize out-of-state beds to alleviate its severe overcrowding situation. Legislative enactments or legal proceedings, including a proceeding under federal jurisdiction that could potentially reduce the number of inmates in the California prison system, may impact the out-of-state transfer of inmates or could result in the return of inmates we currently house for the CDCR. Further, the expiration of the statutory authority to transfer California inmates to out-of-state private correctional facilities coincides with the expiration of our management contract on June 30, 2011. If transfers from California are limited as a result of one or more of these proceedings, or if the authority to transfer inmates out-of-state to our facilities is not extended upon expiration, we would market the beds housed by the CDCR to other federal and state customers. The return of the California inmates to the state of California would have a significant adverse impact on our financial position, results of operations, and cash flows.

In March 2009, we announced that the state of Arizona awarded us a contract to manage up to 752 Arizona inmates at our 752-bed Huerfano County Correctional Center in Colorado. The contract included an initial term ending March 9, 2010. During the first quarter of 2009, we completed the relocation of approximately 600 Colorado inmates previously housed at the Huerfano facility to our three other Colorado facilities and also completed the process of receiving the new inmates from Arizona. On January 15, 2010, the Arizona Governor and Legislature proposed budgets that would phase out the utilization of private out-of-state beds due to in-state capacity coming on-line and severe budget conditions. During January 2010, the Arizona Department of Corrections notified us of its election not to renew its contract at our Huerfano facility. Arizona completed the transfer of offenders from the Huerfano facility during March 2010. As a result, we have decided to idle the Huerfano facility, but will continue marketing the facility to other customers.

We also have a management contract with the state of Arizona at our 2,160-bed Diamondback Correctional Facility in Oklahoma, which is scheduled to expire May 1, 2010. During March 2010, the Arizona Department of Corrections notified us of its election not to renew its contract at our Diamondback facility also. Arizona expects to begin transferring offenders from the Diamondback facility beginning in May 2010 and expects to complete the transfer within approximately 30 days. As a result of this notification, we intend to idle the Diamondback facility shortly thereafter, but will continue marketing the facility to other customers.

During December 2009, we announced our decision to idle our 1,600-bed Prairie Correctional Facility on or about February 1, 2010 due to low inmate populations at the facility. During 2009, our Prairie facility housed offenders from the states of Minnesota and Washington. However, due to excess capacity in the states’ systems, both states reduced the populations held at Prairie throughout 2009. The final transfer of offenders back to the state of Minnesota from the Prairie facility was completed on January 26, 2010. The state of Washington has removed all of its offenders from the Prairie facility, but maintains a population of approximately 125 inmates in two other facilities we own in Arizona. We are currently pursuing new management contracts to take advantage of the beds that became available at the Prairie facility but can provide no assurance that we will be successful in doing so.

During January 2010, we announced that pursuant to the Criminal Alien Requirement 10 Solicitation (“CAR 10”) our 2,304-bed California City Correctional Center in California was not selected for the continued management of the federal offenders currently located at this facility. The current contract with the BOP at the California City facility expires on September 30, 2010. We currently expect the BOP to transfer all inmates out of the facility by the end of the third quarter of 2010. We are also pursuing other opportunities for our California City facility.

Total revenues at the Huerfano, Diamondback, Prairie, and California City facilities were $33.0 million and $38.4 million during the three months ended March 31, 2010 and 2009, respectively.

Managed-Only Facilities

Our operating margins decreased at managed-only facilities during the three months ended March 31, 2010 to 10.7% from 12.9% during the three months ended March 31, 2009. Facility contribution at the managed-only facilities decreased by $1.5 million, from $10.9 million during the first quarter of 2009 to $9.4 million during the first quarter of 2010, a decrease of 14.0%. The managed-only business remains very competitive, which continues to put pressure on per diems, resulting in marginal increases in the managed-only revenue per compensated man-day. Revenue per compensated man-day increased during the first quarter of 2010 to $40.08 per compensated man-day from $39.28 per compensated man-day during the first quarter of 2009, an increase of 2.0%.

Operating expenses per compensated man-day increased $1.56 per compensated man-day to $35.77 during the first quarter of 2010 compared with $34.21 during the same period in the prior year, an increase of 4.6%. Operating expenses per compensated man-day were affected by increases in personnel costs caused largely from the aforementioned bonuses reflected in the first quarter of 2010 to non-management level staff in lieu of wage increases, and due to staffing in anticipation of the receipt of additional ICE detainees at the North Georgia Detention Center. However, these increases were partially offset by reductions in other variable expenses resulting from efforts to contain costs through a company-wide initiative to improve operating efficiencies. Further, in certain instances, in order to assist our customers in meeting their budgetary challenges, we agreed to contract modifications that curtailed per diem rates and operating expenses.

In March 2009, we announced a new contract to manage detainee populations for ICE at the North Georgia Detention Center in Hall County, Georgia, which has a total design capacity of 502 beds. Under a five-year Inter-Governmental Service Agreement between Hall County, Georgia and ICE, we will house up to 500 ICE detainees at the facility. We have entered into a lease for the former Hall County Jail from Hall County, Georgia. The lease has an initial term of 20 years with two five-year renewal options and provides us the ability to cancel the lease if we do not have a management contract. We placed the beds into service during the third quarter of 2009 and began receiving detainees during the fourth quarter of 2009. Although this facility has not reached a stable occupancy, the commencement of operations is expected to have a favorable impact on our operating margins in the managed-only segment as occupancy increases.

During the three months ended March 31, 2010 and 2009, managed-only facilities generated 7.9% and 9.0%, respectively, of our total facility contribution. We define facility contribution as a facility’s operating income or loss before interest, taxes, goodwill impairment, depreciation, and amortization.

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.

In April 2010, we announced that pursuant to a re-bid of the management contracts at four Florida facilities, two of which we currently manage, the Florida Department of Management Services (“Florida DMS”) indicated its intent to award us the continued management of the 985-bed Bay Correctional Facility, in Panama City, Florida. Additionally, the Florida DMS indicated its intent to award us management of the 985-bed Moore Haven Correctional Facility in Moore Haven, Florida and the 1,884-bed Graceville Correctional Facility in Graceville, Florida, facilities which we do not currently manage. However, we were not selected for the continued management of the 1,520-bed Gadsden Correctional Facility in Quincy, Florida. All of the facilities are owned by the state of Florida. The contracts contain an initial term of three years and two 2-year renewal options. We expect to assume management of the Moore Haven and Graceville facilities and to transition management at the Gadsden facility during the third quarter of 2010. In April 2010, we also provided notice to Hernando County, Florida of our intent to terminate the management contract at the 876-bed Hernando County Jail during the third quarter of 2010 due to inadequate financial performance. We expect to incur non-cash charges totaling approximately $3.1 million during the second quarter of 2010, which will impact net income but not facility contribution of the managed-only segment by our definition, for the write-off of goodwill and other costs associated with the termination of the management contracts at the Gadsden and Hernando County facilities.

We do not expect the re-bid of our two Florida managed-only contracts, including the successful award of two additional management contracts for the Moore Haven Correctional Facility and the Graceville Correctional Facility and the loss of the management contracts for our Gadsden Correctional Facility and the Hernando County Jail, to have a material effect on the operating margin percentages of our managed-only segment. As previously described herein, five of the facilities we manage in Texas pursuant to management contracts that expire in January 2011 are subject to a competitive procurement process. We can provide no assurance that we will be successful in being awarded the continued management for any of these facilities. Our operating margins could be affected in 2011 based on our bidding strategy and the ultimate outcome of the awards. Total revenues at the Gadsden, Hernando County, and the five facilities we manage in Texas were $26.3 million and $27.0 million during the three months ended March 31, 2010 and 2009, respectively.

General and administrative expense

For the three months ended March 31, 2010 and 2009, general and administrative expenses totaled $18.6 million and $19.8 million, respectively. General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses. General and administrative expenses decreased as compared to the first three months of 2009 primarily as a result of a $0.3 million decline in stock-based compensation as well as a decline of $0.4 million in charges related to the abandonment of certain development projects.

Depreciation and amortization

For the three months ended March 31, 2010 and 2009, depreciation and amortization expense totaled $25.2 million and $24.6 million, respectively. The increase in depreciation and amortization from the comparable period in 2009 resulted from the combination of additional depreciation expense recorded on the various facility expansion and development projects and other capital expenditures.

Interest expense, net

Interest expense is reported net of interest income and capitalized interest for the three months ended March 31, 2010 and 2009. Gross interest expense, net of capitalized interest, was $17.9 million and $18.5 million, respectively, for the three months ended March 31, 2010 and 2009. Gross interest expense is based on outstanding borrowings under our revolving credit facility, our outstanding senior notes, as well as the amortization of loan costs and unused facility fees. We expect gross interest expense to increase in the future as we utilize our revolving credit facility to fund our stock repurchase program and/or additional expansion and development projects. Additionally, the repayment of our $450.0 million 7.5% senior notes with the net proceeds from the issuance in June 2009 of our $465.0 million 7.75% senior notes, which were issued at a discount to par resulting in a yield to maturity of 8.25%, will result in an increase in interest expense compared with prior periods. However, as further described hereafter, this refinancing extended our debt maturities and provides us with more financial flexibility to take advantage of opportunities that may require additional capital. Further, we have benefited from relatively low interest rates on our revolving credit facility, which is largely based on the London Interbank Offered Rate (LIBOR). It is possible that the LIBOR could increase in the future.

Gross interest income was $0.6 million for both the three months ended March 31, 2010 and 2009. Gross interest income is earned on cash collateral requirements, a direct financing lease, notes receivable, investments, and cash and cash equivalents.

Capitalized interest was $1.3 million and $0.3 million during the first quarters of 2010 and 2009, respectively, and 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 $21.5 million and $21.6 million for the three months ended March 31, 2010 and 2009, respectively. Our effective tax rate was 38.1% during the first quarter of 2010 compared with 37.9% during the same period in the prior year. 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 additional tax strategies, changes in federal or state tax rates or laws affecting tax credits available to us, changes in estimates related to uncertain tax positions, or changes in state apportionment factors, as well as changes in the valuation allowance applied to our deferred tax assets that are based primarily on the amount of state net operating losses and tax credits that could expire unused.

Discontinued operations

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. Accordingly, our contract with the Bay County Commission expired in October 2008 and the results of operations, net of taxes, and the assets and liabilities of this facility, which is owned by the County, are being reported as discontinued operations for all periods presented. The Bay County Jail and Annex incurred a loss of $0.7 million (primarily pertaining to negative developments in outstanding legal matters), net of taxes, for the three months ended March 31, 2009.

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. Accordingly, the results of operations, net of taxes, and the assets and liabilities of these two facilities are reported as discontinued operations upon termination of operations in the first quarter of 2009 for all periods presented. These two facilities operated at a loss of $0.1 million, net of taxes, for the three months ended March 31, 2009.

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 2009 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 also regularly evaluate the most efficient use of our capital resources and respond to changes in market conditions, by taking advantage of opportunities to use our capital resources to repurchase our common stock at prices which would equal or exceed the rates of return when we invest in new beds. We will also consider opportunities for growth, including potential acquisitions of businesses within our line of business and those that provide complementary services, provided we believe such opportunities will broaden our market share and/or increase the services we can provide to our customers.

In May 2008, we announced that we were awarded a contract by the 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 prisoners upon receipt of a Notice to Proceed, and includes an initial term of five years with three five-year renewal options. During April 2009, the OFDT authorized us to commence construction of the new Nevada Southern Detention Center. We currently expect construction to be complete during the third quarter of 2010, at an estimated cost of $83.5 million. As of March 31, 2010, the remaining costs to complete construction totaled approximately $18.5 million.

In July 2009, we announced that we had been awarded an amendment to our existing contracts with the Georgia Department of Corrections to expand two of our existing facilities by 1,500 beds. The award satisfied a competitive Request for Proposal of 1,500 beds from the state of Georgia that was issued in October of 2008. As of March 31, 2010, we housed approximately 3,800 inmates from the state of Georgia. As a result of the award, we will expand our 1,524-bed Coffee Correctional Facility by 788 beds and our 1,524 bed Wheeler Correctional Facility by 712 beds. The expansions are estimated to cost approximately $65.0 million and are currently anticipated to be completed during the second quarter of 2010, at which point we expect to begin receiving the incremental inmates. As of March 31, 2010, the remaining costs to complete construction totaled approximately $22.9 million. The amended contracts expire June 30, 2010 and include twenty-four one-year remaining renewal options. In addition to the guarantee on the existing beds at both facilities, the amended contracts contain a 90% guaranteed occupancy on the expansion beds.

In addition, during February 2008, we announced our intention to construct our new 2,040-bed Trousdale Correctional Center in Trousdale County, Tennessee. However, during the first quarter of 2009, we temporarily suspended the construction of this facility until we have greater clarity around the timing of future bed absorption by our customers. We will continue to monitor our customers’ needs, and could promptly resume construction of the facility. During 2010, we expect to incur less than $0.1 million in operating expenses, primarily property taxes, associated with this facility.

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 previously had separate terms ranging from June 2006 to December 2015. During January 2010, we entered into an amendment to the ground lease with the County of San Diego whereby the terms of the different properties are now scheduled to expire at the same date on December 31, 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. Under the terms of the original ground lease, the County had 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. Pursuant to the amendment to the ground lease signed in January 2010, the County’s right to purchase the Initial portion of the facility was removed and the lease term for the 200-bed Expansion portion of the facility was extended through December 31, 2015. 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 and 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 at a site we are currently developing. However, we can provide no assurance that we will be able to retain these inmate populations.

During the first quarter of 2010, we capitalized $5.4 million of facility maintenance and technology related expenditures, compared with $10.3 million during the first quarter of 2009. We expect to incur approximately $48.5 million to $53.5 million in facility maintenance and technology related capital expenditures during 2010, and approximately $86.0 million to $106.0 million on prison development and expansions. During the year ended December 31, 2009, we capitalized $48.9 million of facility maintenance and technology related expenditures. We also currently expect to pay approximately $67.2 million to $73.0 million in federal and state income taxes during 2010, compared with $63.5 million during 2009. Income taxes paid in 2009 reflect the favorable tax depreciation provisions on qualified assets under the American Recovery and Reinvestment Act of 2009 signed into law in February 2009.

Although the demand for prison beds in the short term has been affected by the severe budget challenges many of our customers currently face, these challenges put further pressure on our customers’ ability to construct new prison beds of their own, which we believe could result in further reliance on the private sector for providing the capacity we believe our customers will need in the long term. We will continue to pursue build-to-suit opportunities like the aforementioned 1,500-bed expansions for the state of Georgia and the 1,072-bed facility we are constructing in Nevada for the OFDT. In the long-term, we would like to see continued and meaningful utilization of our remaining capacity and better visibility from our customers before we add any additional capacity on a speculative basis.

In November 2008, our Board of Directors approved a program to repurchase up to $150.0 million of our common stock. Through the expiration of this stock repurchase plan on December 31, 2009, we completed the purchase of 10.7 million shares at a total cost of $125.0 million, or an average price of $11.72 per share. We utilized cash on hand, net cash provided by operations and borrowings available under our revolving credit facility to fund the repurchases. Our last purchase under the $150.0 million stock repurchase plan was in March 2009. In February 2010, our Board of Directors approved a new program to repurchase up to $250.0 million of our common stock through June 30, 2011. The program is intended to be implemented essentially the same as the previous repurchase program, through purchases made from time to time in the open market or in privately negotiated transactions, in accordance with SEC requirements. Given current market conditions and available bed capacity within our portfolio, we believe that it is appropriate to use our capital resources to repurchase common stock at prices which would equal or exceed the rates of return we require when we invest in new beds. Through March 31, 2010, we have completed the purchase of 1.6 million shares under the $250.0 million stock repurchase plan at a total cost of $31.9 million, or an average price of $20.36 per share.

On May 19, 2009, we announced a cash tender offer for any and all of our outstanding $450.0 million 7.5% senior notes. On June 3, 2009, we completed the sale and issuance of $465.0 million aggregate principal amount of 7.75% unsecured senior notes pursuant to a prospectus supplement under an automatically effective shelf registration statement that we filed with the SEC on May 19, 2009. The 7.75% senior notes were issued at a price of 97.116%, resulting in a yield to maturity of 8.25%. We used the net proceeds from the sale of the 7.75% senior notes to purchase (through the previously described cash tender offer), redeem, or otherwise acquire our 7.5% senior notes, to pay fees and expenses, and for general corporate purposes. We reported a charge of $3.8 million during the second quarter of 2009 in connection with the purchase and redemption of the 7.5% senior notes. We capitalized approximately $10.5 million of costs associated with the issuance of the 7.75% senior notes.

Replacing the 7.5% senior notes, which were scheduled to mature on May 1, 2011, with the 7.75% senior notes, which are scheduled to mature on June 1, 2017, extended our nearest debt maturity to December 2012. Although the current downturn in the economy has increased the level of uncertainty in the demand for prison beds in the short-term, we believe the long-term implications are very positive as states defer or cancel plans for adding new prison bed capacity. Further, certain of our customers have expressed an interest in pursuing additional bed capacity from third parties despite their budgetary challenges. We believe our debt refinancing provides us with more financial flexibility to take advantage of opportunities that may require additional capital. These opportunities also include stock repurchases.

We have the ability to fund our capital expenditure requirements, including the aforementioned construction projects, as well as our facility maintenance and information technology expenditures, working capital, debt service requirements, and the stock repurchase program, with cash on hand, net cash provided by operations, and borrowings available under our revolving credit facility.

As of March 31, 2010, our liquidity was provided by cash on hand of $47.2 million and $236.2 million available under our $450.0 million revolving credit facility. During the three months ended March 31, 2010 and 2009, we generated $72.1 million and $82.1 million, respectively, in cash through operating activities, and as of March 31, 2010, we had net working capital of $126.5 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 principal repayments, and we have no debt maturities until December 2012. 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 may issue debt or equity 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.

Lehman Brothers Commercial Bank (“Lehman”) which had a $15.0 million credit commitment under our revolving credit facility, is a defaulting lender under the terms of the credit agreement. At March 31, 2010, Lehman had funded $2.3 million in borrowings and $1.1 million in letters of credit that remained outstanding on the facility. The loan balance will be repaid on a pro-rata basis to the extent that LIBOR-based loans are repaid on tranches Lehman previously funded. It is our expectation that going forward we will not have access to additional incremental funding from Lehman, and to the extent Lehman’s funding is reduced, it will not be replaced. We do not believe that this reduction of credit has had a material effect on our liquidity and capital resources. None of the other banks providing commitments under our revolving credit facility have failed to fund borrowings we have 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 our revolving credit facility would be reduced further.

Our cash flow is subject to the receipt of sufficient funding of and timely payment by contracting governmental entities. If the appropriate governmental agency does not receive sufficient appropriations to cover its contractual obligations, it may terminate our contract or delay or reduce payment to us. Delays in payment from our major customers, or the termination of a number of contracts from our major customers, could have an adverse effect on our cash flow and financial condition.

At March 31, 2010, the interest rates on our outstanding indebtedness were fixed, with the exception of the interest rate applicable to $171.8 million outstanding under our revolving credit facility, with a total weighted average effective interest rate of 6.6%, while our total weighted average maturity was 4.7 years. Standard & Poor’s Ratings Services currently rates our unsecured debt and corporate credit as “BB”, while Moody’s Investors Service currently rates our unsecured debt as “Ba2”. On September 17, 2009, Moody’s improved its outlook on our debt rating to positive from stable.

Operating Activities

Our net cash provided by operating activities for the three months ended March 31, 2010 was $72.1 million, compared with $82.1 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 decrease in cash provided by operating activities for the three months ended March 31, 2010 was primarily due to the unfavorable fluctuations in working capital balances during the first quarter of the 2010 compared to the same period in 2009.

Investing Activities

Our cash flow used in investing activities was $43.0 million for the three months ended March 31, 2010 and was primarily attributable to capital expenditures during the quarter of $43.1 million and included expenditures for the aforementioned facility development and expansions of $36.6 million. Our cash flow used in investing activities was $33.3 million for the three months ended March 31, 2009 and was primarily attributable to capital expenditures during the quarter of $33.6 million and included expenditures for facility development and expansions of $22.5 million.

Financing Activities

Our cash flow used in financing activities was $27.9 million for the three months ended March 31, 2010 and was primarily attributable to paying $31.0 million to purchase common stock including $28.5 million in connection with the aforementioned stock repurchase program and $2.5 million from employees who elected to satisfy their tax withholding obligations with a portion of their vesting restricted shares. These payments were partially offset by cash flows associated with exercising stock options, including the related income tax benefit of equity compensation. Our cash flow used in financing activities was $38.8 million for the three months ended March 31, 2009 and was primarily attributable to paying $111.5 million to purchase common stock including $110.4 million in connection with the aforementioned stock repurchase program and $1.1 million from employees who elected to satisfy their tax withholding obligations with a portion of their vesting restricted shares. These payments were partially offset by $72.2 million of net borrowings from our revolving credit facility, as well as cash flows associated with exercising stock options, including the related income tax benefit of equity compensation.

Contractual Obligations

The following schedule summarizes our contractual cash obligations by the indicated period as of March 31, 2010 (in thousands):

		Payments Due By Year Ended December 31,
		2010
		(remainder)				2011				2012				2013				2014				Thereafter				Total
Long-term debt		$	—			$	—			$	171,799			$	375,000			$	150,000			$	465,000			$	1,161,799
Interest on senior notes			52,819				69,600				69,600				57,881				41,100				90,094				381,094
Contractual facility expansions			41,670				—				—				—				—				—				41,670
Operating leases			3,483				6,045				6,065				6,085				6,105				33,043				60,826
Total contractual cash obligations		$	97,972			$	75,645			$	247,464			$	438,966			$	197,205			$	588,137			$	1,645,389