<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number: 1-14031
CORRECTIONAL PROPERTIES TRUST
(Exact name of Registrant as specified in its declaration of trust)
Maryland 65-0823232
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3300 PGA Blvd., Suite 430, Palm Beach Gardens, Florida 33410
(Address and zip code of principal executive offices)
(561)630-6336
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
7,130,000
(Outstanding shares of the issuer's common shares,
$0.001 par value per share as of August 1, 1998)
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CORRECTIONAL PROPERTIES TRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
INDEX
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<TABLE>
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Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets 3
as of February 20, 1998 and June 30, 1998
b) Consolidated Statement of Income 4
for the period from April 1, 1998 to June 30, 1998
c) Consolidated Statement of Cash Flows 5
for the period from April 1, 1998 to June 30, 1998
d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 13
Market Risk
PART II - OTHER INFORMATION
Item 6. Exhibits 14
SIGNATURE
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, FEBRUARY 20,
1998 1998
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<S> <C> <C>
ASSETS
REAL ESTATE PROPERTIES, AT COST
CORRECTIONAL AND DETENTION FACILITIES $ 113,041 $ --
LESS - ACCUMULATED DEPRECIATION AND AMORTIZATION (460) --
--------- ---------
NET REAL ESTATE PROPERTIES 112,581 --
CASH AND CASH EQUIVALENTS 19,220 3
OTHER ASSETS 410 --
--------- ---------
TOTAL ASSETS $ 132,211 $ 3
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 177 --
--------- ---------
TOTAL LIABILITIES 177 --
--------- ---------
SHAREHOLDERS' EQUITY
PREFERRED SHARES, $.001 PAR VALUE;
50,000,000 SHARES AUTHORIZED;
NONE OUTSTANDING -- --
COMMON SHARES, $.001 PAR VALUE;
150,000,000 SHARES AUTHORIZED;
7,130,000 AND 1,000 SHARES ISSUED AND OUTSTANDING,
RESPECTIVELY 7 --
CAPITAL IN EXCESS OF PAR VALUE 130,722 3
RETAINED EARNINGS 1,305 0
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 132,034 3
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 132,211 $ 3
========= =========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
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CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENT OF INCOME
PERIOD FROM APRIL 1, 1998 TO JUNE 30, 1998
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
REVENUES
RENTAL $1,992
INTEREST 147
------
2,139
------
EXPENSES
DEPRECIATION AND AMORTIZATION 460
GENERAL AND ADMINISTRATIVE 374
------
834
------
NET INCOME $1,305
======
NET INCOME PER COMMON SHARE
BASIC $ 0.27
======
DILUTED $ 0.27
======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC 4,826
======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, DILUTED 4,844
======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
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CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD APRIL 1, 1998 TO JUNE 30, 1998
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 1,305
ADJUSTMENTS TO NET INCOME:
DEPRECIATION OF REAL ESTATE ASSETS 460
CHANGES IN ASSETS AND LIABILITIES:
OTHER ASSETS (410)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 177
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,532
---------
CASH FLOWS FROM INVESTING ACTIVITIES
ACQUISITION OF REAL ESTATE INVESTMENTS (113,041)
---------
NET CASH USED IN INVESTING ACTIVITIES (113,041)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM INITIAL PUBLIC OFFERING, NET OF OFFERING COSTS OF $1,892 130,726
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 130,726
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,217
CASH AND CASH EQUIVALENTS, BEGINNING OF OPERATIONS 3
---------
CASH AND CASH EQUIVALENTS, END OF QUARTER $ 19,220
=========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
5
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CORRECTIONAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. ORGANIZATION AND OPERATIONS
Correctional Properties Trust ("the "Company") was formed in February 1998 as a
Maryland real estate investment trust to capitalize on the growing trend toward
privatization in the corrections industry by acquiring correctional and
detention facilities from both private prison operators and governmental
entities.
On April 28, 1998, the Company commenced operations after completing its initial
public offering ("IPO") of 6,200,000 common shares of beneficial interest.
Subsequently, on May 13, 1998 the underwriters involved in the IPO exercised
their over-allotment option for an additional 930,000 shares resulting in a
total of 7,130,000 shares of beneficial interest outstanding (collectively the
"Offering"). The 7,130,000 common shares were issued at an IPO price of $20.00
generating gross proceeds of $142,600,000. The aggregate proceeds to
Correctional Properties Trust, net of underwriters' discount and offering costs
of $9,982,000, were approximately $132,618,000.
Simultaneous with the completion of the Offering (collectively, the "Formation
Transactions"), the Company acquired the following eight correctional and
detention facilities (the "Initial Facilities") located in five states with an
aggregate design capacity of 3,154 beds from Wackenhut Corrections Corporation
and certain of its subsidiaries (collectively, "WCC") for an aggregate purchase
price of $113.0 million:
(i) Aurora INS Processing Center (Aurora, Colorado);
(ii) McFarland Community Correctional Facility (McFarland, California);
(iii) Queens Private Correctional Facility (New York, New York);
(iv) Central Valley Community Correctional Facility (McFarland,
California);
(v) Golden State Community Correctional Facility (McFarland,
California);
(vi) Desert View Community Correctional Facility (McFarland,
California);
(vii) Broward County Work Release Center Center (Broward County,
Florida);and
(viii) Karnes County Correctional Center (Karnes County, Texas).
As part of the Formation Transactions, the Company also entered into agreements
with WCC to lease the Initial Facilities back to WCC pursuant to long-term,
non-cancelable triple net leases (the "Leases") which require WCC to pay all
operating expenses, taxes, insurance and other costs. The Leases provide for
initial, annual base rents which aggregate $10.7 million, and provide for an
initial term of 10 years that may generally be extended by WCC for three
five-year terms at fair market rental rates. The Leases provide for a base rent
equal to 9.5% of the total purchase price of each Initial Facility and annual
rent escalations equal to the annual increase in the Consumer Price Index - All
Urban Consumers, as published by the Bureau of Statistics of the United States
Department of Labor (the "CPI"), subject to a minimum annual increase of 3%
during the first three years and a maximum annual increase of 4% throughout the
term of the Lease.
WCC is not prohibited under its arrangements with the Company from leasing
properties from parties other than the Company. The obligations of WCC under the
Leases are cross-defaulted to each of the other Leases with respect to certain
payment defaults and certain other defaults.
The Company has also entered into option agreements with WCC (the "Option
Agreements") pursuant to which the Company was granted the option to acquire and
leaseback to WCC three additional correctional and detention facilities
currently under development by WCC in three states that have an aggregate design
capacity of 2,256 beds (the "Option Facilities").
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The purchase price of each Option Facility will equal 105% (or such lower
percentage as may be agreed to with WCC) of the aggregate costs related to the
acquisition, development, design, construction, and equipment of such option
facility. If acquired, the Company will lease the Option Facilities to WCC (and
WCC will continue to operate such Option Facilities) pursuant to long-term,
non-cancelable, triple-net leases on substantially the same terms and conditions
as the Leases for the Initial Facilities.
Further, the Company has entered into a Right to Purchase Agreement with WCC,
pursuant to which the Company will have the right, during the 15 years following
the consummation of the Offering (so long as there are any leases in force
between the Company and WCC), to acquire and lease back to WCC any future
facilities subject to certain limited exceptions where the sale or transfer of
ownership of a facility is previously restricted.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company include all the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
The accompanying interim consolidated financial statements are unaudited,
however, the financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in conjunction with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the disclosures required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting solely of normal
recurring matters) necessary for a fair presentation of the financial statements
for this interim period have been included. The results of operations for the
interim period are not necessarily indicative of the results to be obtained for
the full fiscal year. These financial statements should be read in conjunction
with the prospectus filed as a part of the Company's Registration Statement
filed on Form S-11 pursuant to Rule 424(b) of the Securities Act of 1933
(Commission File No. 333-46681) (the "Prospectus"), and the pro forma financial
statements and notes thereto included therein.
Cash and Cash Equivalents
The Company considers all short-term, highly-liquid investments that are readily
convertible to cash and have an original maturity of three months or less at the
time of purchase to be cash equivalents.
Real Estate Properties
Real estate properties are recorded at cost. Acquisition costs and transaction
fees directly related to each property are capitalized as a cost of the
respective property. The cost of real estate properties acquired is allocated
between land, buildings and improvements, and machinery and equipment based upon
cost at the time of acquisition. Depreciation is provided for on a straight-line
basis over an estimated useful life of 40 years for building and improvements.
As of June 30, 1998, the Company had investments in 8 leased real estate
properties totaling $113.0 million. Components of these real estate investments
at cost are as follows: land and land improvements - $8.0 million; and building
and improvements - $105.0 million.
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Federal Income Taxes
The Company will seek qualification as a REIT under the Code commencing with its
taxable period ending December 31, 1998. As a result, management believes the
Company will generally not be subject to federal income tax on its taxable
income at corporate rates to the extent it distributes annually at least 95% of
its taxable income to its shareholders and complies with certain other
requirements. Accordingly, no provision has been made for federal income taxes
in the accompanying consolidated financial statements.
Leases and Rental Income
All Leases are accounted for as operating leases. Lease payments are recognized
as revenue as earned on a straight-line basis over the lease term including the
impact of the scheduled rent increases for the leases.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could vary from those estimates.
3. BANK CREDIT FACILITY
The Company has obtained a commitment for a $100 million line of credit (the
"Bank Credit Facility") which may be used to finance the acquisition of
additional correctional and detention facilities (including the option
facilities and future facilities), to expand the Facilities and for general
working capital requirements. The Company's ability to borrow under the Bank
Credit Facility is subject to closing on the facility and the Company's ongoing
compliance with several covenants. As of June 30, 1998, no funds had been drawn
on the Bank Credit Facility.
4. SHARE OPTION AND INCENTIVE PLANS
The Company has established share option and incentive plans for the purpose of
attracting and retaining qualified executive officers and key employees, as well
as non-employee trustees. In conjunction with the Offering, the Company granted
options with respect to 590,000 common shares to officers, employees and
trustees. The exercise price for such options is the initial public offering
price of $20.00. The term of such options is ten years from the date of grant.
In general, one-fourth of the 565,000 shares granted to executive officers and
employees vested immediately, with the remaining options becoming exercisable
ratably on the first, second, and third anniversary of the date of grant,
respectively. The 25,000 options granted to the non-employee trustees vested at
the date of grant. Shares remaining for issuance under the share incentive and
non-employeee trustees plans total 620,000 and 55,000, respectively.
5. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"), has been issued effective for fiscal periods ending after December 15,
1997. SFAS 128 establishes standards for computing and presenting earnings per
share. Under the standards established by SFAS 128, earnings per share is
measured at two levels: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during
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<PAGE> 9
the year. Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares after considering the additional
dilution. The following data show the amounts used in computing earnings per
share and the effects on income and the weighted-average number of shares of
potential dilutive common stock (in thousands, except share data):
Basic EPS
Net income $1,305
------
Weighted average shares 4,826
------
Per share - Basic $ 0.27
======
Diluted EPS
Net income $1,305
------
Weighted average shares 4,826
Effect of dilutive stock options 18
------
4,844
------
Per share - Diluted $ 0.27
======
There were no antidilutive weighted options to purchase shares of common stock
outstanding during the quarter ended June 30, 1998.
6. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
(SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in
financial statements. This statement requires that all elements of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. For the period ended June 30, 1998 the
Company's comprehensive income equaled its net income AS there were no
adjustments to net income under SFAS 130.
7. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or a liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. Management believes
the impact of adopting this statement will not have a material impact upon the
Company's results of operations or financial position.
8. SUBSEQUENT EVENT
On July 28, 1998, the Board of Trustees declared an initial distribution of
$0.25 per share for the quarter ended June 30, 1998, to shareholders of record
on August 12, 1998. The distribution will be paid on August 19, 1998 and
represents a pro rata distribution for the period from April 28, 1998 through
June 30, 1998, based on a quarterly distribution rate of $0.35 per share.
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
FORWARD-LOOKING STATEMENTS: The management's discussion and analysis of
financial condition and results of operations contain forward-looking statements
that are based on current expectations, estimates and projections about the
segment in which the Company operates. This section of the quarterly report also
includes management's beliefs and assumptions made by management. Words such as
"expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates",
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") which are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
Future Factors include increasing price and product/service competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes; the ability to continue to introduce competitive new
products and services on a timely, cost effective basis; the mix of
products/services; the achievement of lower costs and expenses; domestic and
foreign governmental and public policy changes including environmental
regulations; protection and validity of patent and other intellectual property
rights; reliance on large customers; technological, implementation and
cost/financial risks in increasing use of large, multi-year contracts; the
outcome of pending and future litigation and governmental proceedings and
continued availability of financing; financial instruments and financial
resources in the amounts, at the times and on the terms required to support the
Company's future business. These are representative of the Future Factors that
could affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency rate fluctuations and other future factors. The
Company discusses such risks in the Company's various reports filed with the
Securities & Exchange Commission.
OVERVIEW
The Company was formed in February 1998 as a Maryland real estate investment
trust to capitalize on the growing trend toward privatization in the corrections
industry by acquiring correctional and detention facilities from both private
prison operators and governmental entities and to lease such facilities to
experienced correctional and detention facility operators under long-term,
non-cancelable, triple-net leases (leases where the tenant is required to payy
all operating expenses, taxes, insurance, structural and non-structural repairs
and other costs).
The principal business strategy of the Company is to acquire correctional and
detention facilities that meet the Company's investment criteria, from both
private prison managers and government entities, to expand its existing
facilities, and to lease all such facilities under long-term leases to qualified
third-party operators. The Company's eight Initial Facilities are
privately-managed facilities that are operated by Wackenhut Corrections
Corporation ("WCC"). However, the Company is pursuing other acquisition
opportunities, including correctional facilities owned and operated by various
government entities and private operators other than WCC.
Substantially all of the Company's revenues are derived from: (i) rents received
under triple net leases of correctional and detention facilities; and (ii)
interest earned from the temporary investment of funds in short-term
investments.
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The Company incurs operating and administrative expenses including compensation
expense for its executive officers and other employees, office rental and
related occupancy costs and various expenses incurred in the process of
acquiring additional properties. The Company is self-administered and managed by
its executive officers and staff, and does not engage a separate advisor or pay
an advisory fee for administrative or investment services, although the Company
does engage legal, accounting, tax and financial advisors from time to time. The
primary non-cash expense of the Company is depreciation of its correctional and
detention facilities.
The Company anticipates having to leverage its portfolio of real estate equity
investments and expects to incur long and short-term indebtedness, and related
interest expense.
The Company intends to make distributions to its shareholders in amounts not
less than the amounts required to maintain REIT status under the Internal
Revenue Service Code.
On April 28, 1998, the Company completed its initial public offering ("IPO) of
6,200,000 common shares of beneficial interest. Subsequently, on May 13, 1998
the underwriters involved in the IPO exercised their over-allotment option for
an additional 930,000 shares outstanding resulting in a total of 7,130,000
shares of beneficial interest outstanding (collectively the "Offering"). The
7,130,000 common shares were issued at an IPO price of $20.00, generating gross
proceeds of $142,600,000. The aggregate proceeds to Correctional Properties
Trust, net of underwriters' discount and offering costs, were approximately
$132,618,000 net proceeds.
RESULTS OF OPERATIONS
The Company consummated its IPO, purchased the eight Initial Facilities and
began operations on April 28, 1998. Accordingly, rental and interest revenue and
operating expenses including depreciation and amortization were generally
recognized by the Company beginning on April 28, 1998 through June 30, 1998.
For the period from April 1, 1998 to June 30, 1997, rental revenues of $2.0
million were generated from the leaseback to WCC of eight correctional and
detention facilities purchased April 28, 1998 with proceeds of the Offering.
Interest income of $.1 million was earned during the quarter by investing in
short-term instruments bearing interest between 5% and 6%.
Depreciation of real estate properties totaled $0.5 million for the quarter
ended June 30, 1998.
General and administrative expenses incurred during the quarter ended June 30,
1998 were approximately $.3 million, or 15% of lease revenues. These expenses
consisted primarily of management salaries and benefits, accounting, legal and
other administrative costs.
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LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Offering, the Company received approximately $132.6
million in net proceeds. The Company used these funds to purchase eight
correctional and detention facilities (the "Initial Facilities") at a cost of
$113.0 million.
The Company invested cash on hand in interest-bearing accounts and other
short-term, interest-bearing securities.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient to
allow the Company to make distributions necessary to enable the Company to
qualify as a REIT. All facilities owned by the Company are leased under triple
net leases, which require the lessee to pay substantially all expenses
associated with the operation of such facilities. As a result of these
arrangements, the Company does not believe it will be responsible for any major
expenses in connection with the facilities during the terms of the Leases.
The Company has a $100 million commitment for a line of credit. The Bank Credit
Facility will enable the Company to borrow generally at floating rates between
125 to 200 basis point spread over LIBOR. The Company's ability to borrow under
the secured line of credit is subject to the Company's compliance with a number
of covenants. There were no draws on the Bank Credit Facility during the period
ended June 30, 1998.
In addition, the Company entered into option agreements with WCC (the "Option
Agreements") pursuant to which the Company was granted the option to acquire and
leaseback to WCC three additional correctional and detention facilities
currently under development by WCC having an aggregate design capacity of 2,256
beds (the "Option Facilities"). The purchase price of each Option Facility will
equal 105% (or such lower percentage as may be agreed to by WCC) of the
aggregate costs related to the acquisition, development, design, construction,
and equipment of such Option Facility. If acquired, the Company will lease the
option facilities to WCC (and WCC will continue to operate such option
facilities) pursuant to long-term, non-cancelable, triple-net leases on
substantially the same terms and conditions as the Leases for the Initial
Facilities. The total estimated aggregate purchase price and first-year rent for
the option facilities are estimated to be approximately $109.7 million and
approximately $10.4 million, respectively. Further, WCC granted the Company an
option to acquire, at up to 105% of cost, and lease back to WCC, any
correctional or detention facility acquired or developed and owned by WCC in the
future.
The Company has no commitments with respect to other capital expenditures.
However, the Company has options to purchase any or all of the three Option
Facilities from WCC for up to 105% of cost, aggregating approximately $109.7
million. In addition, the Company has an option to acquire, at a similar price
of up to 105% of cost, and lease back to WCC, any correctional or detention
facility acquired or developed and owned by WCC subject to certain limitations.
While the Company has completed an assessment of its computer systems and
software applications and believes that both are "Year 2000" compliant, there
can be no assurance that coding errors or other defects will not be discovered
in the future. WCC has informed the Company that it has several information
system initiatives under way including the replacement of certain of WCC's
computer systems to be Year 2000 compliant. WCC has indicated that it has not
completely determined the effect of expenditures related to the Year 2000 issue,
but they are not expected to be significant. Any Year 2000 compliance problem of
the Company, its lessee or other third parties could result in a material
adverse effect on the Company's business, prospects, results of operations and
financial condition.
The Company expects to meet its long-term liquidity requirements for the funding
of real estate property development and acquisitions by borrowing under the Bank
Credit Facility and by issuing equity or debt securities in public or private
transactions, The Company anticipates that as a result of its initially low debt
to total capitalization and its intention to maintain a moderate ratio of debt
to total capitalization, it will be able to
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<PAGE> 13
obtain financing for its long-term capital needs. However, there can be no
assurance that such additional financing or capital will be available on terms
acceptable to the Company. The Company may, under certain circumstances, borrow
additional amounts in connection with the renovation or expansion of facilities,
the acquisition of additional properties, or as necessary, to meet certain
distribution requirements imposed on REITs under the Code.
FUNDS FROM OPERATIONS
Management believes Funds from Operations is helpful to investors as a measure
of the performance of an equity REIT. Along with cash flows from operating
activities, financing activities and investing activities, funds from operations
("FFO") provides investors with an understanding of the ability of the Company
to incur and service debt and make capital expenditures.
The Company computes Funds from Operations in accordance with standards
established by the White Paper on Funds from Operations approved by the Board of
Governors of the Natiional Association of Real Estate Investment Trusts
("NAREIT") in 1995, which may differ from the methodology for calculating Funds
from Operations utilized by other equity REITs, and accordingly, may not be
comparable to such other REITs. The White Paper defines Funds from Operations as
net income (loss), computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. Further,
Funds from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. Funds from
Operations should not be considered as an alternative to net income (determined
in accordance with GAAP) as an indication of the Company's financial performance
or to cash flows from operating activities (determined in accordance with GAAP)
as a measure of the Company's liquidity, nor is it indicative of funds available
to fund the Company's cash needs, including its ability to make distributions.
The Company believes that in order to facilitate a clear understanding of the
consolidated operating results of the Company, Funds from Operations should be
examined in conjunction with net income as presented in the consolidated
financial statements.
The following table presents the Company's Funds from Operations for the period
from April 1, 1998 to June 30, 1998:
Funds from Operations
Net Income $ 1,305
Add back real estate depreciation and amortization 460
--------
$ 1,705
========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the Company's business results in claims or litigation against the
Corporation for damages arising from the conduct of its employees or others.
Except for routine litigation incidental to the business of the Company,
there are no pending material legal proceedings to which the Company or any
of its subsidiaries is a party or to which any of their property is subject. The
Company believes that the outcome of the proceedings to which it is currently a
party will not have a material adverse effect upon its operations or financial
condition.
ITEM 2. CHANGES IN SECURITIES
(a) On April 22, 1998, the Company's Registration Statement on Form S-11 was
declared effective in connection with the Company's initial public offering. The
initial public offering commenced on April 22, 1998 and closed on April 28,
1998. The offering was underwritten by Salomon Smith Barney, Prudential
Securities Incorporated, SBC Warburg Dillon Read Inc., Genesis Merchant Group,
and SunTrust Equitable Securities. On April 28, 1998, the Company commenced
operations after completing its IPO of 6,200,000 common shares of beneficial
interest. Subsequently, on May 13, 1998 the underwriters involved in the IPO
exercised their over-allotment option for an additional 930,000 shares resulting
in a total of 7,130,000 shares of beneficial interest outstanding. The 7,130,000
common shares were issued at an IPO price of $20.00 generating gross proceeds of
$142,600,000. The aggregate proceeds to Correctional Properties Trust, net of
underwriters' discount and offering costs of $9,982,000, were approximately
$132,618,000.
Simultaneous with the completion of the Offering, the Company acquired the eight
Initial Facilities from WCC for an aggregate purchase price of $113.0 million.
The balance of the proceeds from the Offering will be used for working capital,
general corporate purposes or for the possible future acquisition of additional
correctional or detention facilities consistent with the Company's investment
policies.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Company's Registration Statement on Form S-11, filed with the
Securities and Exchange Commission on February 20, 1998, as amended,
(the "Registration Statement") is incorporated herein by reference.
Exhibit Nos. 2, 3.1, 3.2, 3.3, 3.4, 4.1, 10.1, 10.2, 10.3, 10.4, 10.5,
10.6, 10.7 and 10.8 of the Registration Statement are incorporated
herein by reference.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K - The Company did not file a Form 8-K during the quarter
of the fiscal year ending June 30, 1998.
14
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CORRECTIONAL PROPERTIES TRUST
/s/ Patrick T. Hogan
- --------------------------
Patrick T. Hogan
Vice President, Chief Financial Officer,
Secretary & Treasurer
(Principal Financial Officer)
Date: August 14, 1998
EXHIBIT INDEX
27 Financial Data Schedule (for SEC use only)
THIS DOCUMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CORRECTIONAL PROPERTIES TRUST FOR THE PERIOD ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
15
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<FISCAL-YEAR-END> DEC-31-1998
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