<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
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 November 12, 1999)
<PAGE> 2
CORRECTIONAL PROPERTIES TRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
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PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) Consolidated Balance Sheets.................................................... 3
as of September 30, 1999 and December 31, 1998
b) Consolidated Statement of Income............................................... 4
for the three months ended September 30, 1999 and 1998
c) Consolidated Statement of Income
for the nine months ended September 30, 1999................................... 5
and for the period from inception through September 30, 1998
d) Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 1999................................... 6
and for the period from inception through September 30, 1998
e) Notes to Consolidated Financial Statements..................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL..................... 9
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT........................ 13
MARKET RISK
PART II - OTHER INFORMATION
Items 1-5. ............................................................. 14
Item 6. Exhibits ............................................................. 14
SIGNATURE ............................................................. 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
REAL ESTATE PROPERTIES, AT COST
CORRECTIONAL AND DETENTION FACILITIES $ 207,189 $ 139,487
LESS - ACCUMULATED DEPRECIATION (5,532) (1,890)
------------ -----------
NET REAL ESTATE PROPERTIES 201,657 137,597
CASH AND CASH EQUIVALENTS 66 2,325
DEFERRED FINANCING COSTS 1,764 2,094
OTHER ASSETS 1,239 748
------------ -----------
TOTAL ASSETS $ 204,726 $ 142,764
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 602 661
DEFERRED REVENUE 1,667 1,104
REVOLVING LINE OF CREDIT 71,300 9,000
------------ -----------
TOTAL LIABILITIES 73,569 10,765
------------ -----------
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 ISSUED AND OUTSTANDING 7 7
CAPITAL IN EXCESS OF PAR VALUE 131,055 130,884
BALANCE OF UNDISTRIBUTED INCOME 95 1,108
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 131,157 131,999
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 204,726 $ 142,764
============ ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 4
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- ------------
<S> <C> <C>
REVENUES
RENTAL $ 5,157 $ 2,846
INTEREST 5 253
------------ -----------
5,162 3,099
------------ -----------
EXPENSES
DEPRECIATION 1,242 662
GENERAL AND ADMINISTRATIVE 373 357
INTEREST 1,386 --
------------ -----------
3,001 1,019
------------ -----------
NET INCOME $ 2,161 $ 2,080
============ ===========
NET INCOME PER COMMON SHARE
BASIC $ 0.30 $ 0.29
============ ===========
DILUTED $ 0.30 $ 0.29
============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, BASIC and DILUTED 7,130 7,130
============ ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 5
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND FOR THE PERIOD FROM INCEPTION THROUGH SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS INCEPTION
ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
REVENUES
RENTAL $ 15,136 $ 4,838
INTEREST 27 400
---------- ------------
15,163 5,238
---------- ------------
EXPENSES
DEPRECIATION 3,642 1,122
GENERAL AND ADMINISTRATIVE 1,123 731
INTEREST 3,818 --
---------- ------------
8,583 1,853
---------- ------------
NET INCOME $ 6,580 3,385
========== ============
NET INCOME PER COMMON SHARE
BASIC $ 0.92 $ 0.69
========== ============
DILUTED $ 0.92 $ 0.69
========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING,
BASIC 7,130 4,891
========== ============
DILUTED 7,130 4,899
========== ============
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THIS STATEMENT.
5
<PAGE> 6
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND FOR THE PERIOD FROM INCEPTION THROUGH SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS INCEPTION
ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 6,580 $ 3,385
ADJUSTMENTS TO NET INCOME:
DEPRECIATION OF REAL ESTATE ASSETS 3,642 1,116
OTHER AMORTIZATION 501 6
CHANGES IN ASSETS AND LIABILITIES:
OTHER ASSETS (491) (677)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (59) 237
DEFERRED REVENUE 563 --
---------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,736 4,067
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
ACQUISITION OF REAL ESTATE INVESTMENTS (67,702) (113,041)
---------- ------------
NET CASH USED IN INVESTING ACTIVITIES (67,702) (113,041)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
INITIAL CAPITALIZATION -- 3
PROCEEDS FROM INITIAL PUBLIC OFFERING,
NET OF OFFERING COSTS OF $1,892 130,726
DIVIDENDS PAID (7,593) (1,782)
BORROWINGS UNDER LINE OF CREDIT 62,300 --
---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 54,707 128,947
---------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,259) 19,973
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,325 --
---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 66 $ 19,973
========== ============
CASH PAID FOR INTEREST $ 3,272 --
========== ============
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THIS STATEMENT.
6
<PAGE> 7
CORRECTIONAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. GENERAL
The consolidated financial statements of Correctional Properties Trust (the
"Company") include all the accounts of the Company and its wholly owned
subsidiaries. All significant inter-company 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 and the Company's Form 10-K for
the year ended December 31, 1998 filed with the Securities And Exchange
Commission. On April 28, 1998, the Company commenced operations after completing
its initial public offering. Therefore, no meaningful prior nine-month
comparison is available.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehenseive 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 September 30,
1999 the Company's comprehensive income equaled its net income, as there were no
adjustments to net income under SFAS 130.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." This 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
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. In June 1999 the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the effective date of SFAS 133." SFAS 137 deferred the effective
date of SFAS 133 to fiscal years beginning after June 15, 2000. Management
believes the impact of adopting this statement will not have a material impact
upon the Company's results of operations or financial position.
3. BANK CREDIT FACILITY
The Company has obtained a $100 million secured line of credit (the "Bank Credit
Facility") which may be used to finance the acquisition of additional
correctional and detention facilities from Wackenhut Corrections Corporation
("WCC") and others, to expand current facilities and for general working capital
requirements. The Company's ability to borrow under the Bank Credit Facility is
subject to the Company's ongoing compliance with several covenants including a
cash flow covenant restricting collateralized borrowings to four times Adjusted
EBITDA. The Company has the ability to borrow additional non-recourse funds
subject to various additional limitations discussed in the Bank Credit Facility.
Without consideration of potential non-recourse borrowings, the Company had the
ability to borrow
7
<PAGE> 8
approximately an additional $7 million immediately without further acquisitions
under the Bank Credit Facility at September 30, 1999.
As of September 30, 1999, $71,300,000 had been drawn on the Bank Credit Facility
at a rate of 6.9% based upon LIBOR plus an applicable margin through October 17,
1999. No indebtedness greater than 30 days in duration existed as of September
30, 1999.
4. EARNINGS PER SHARE
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):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE FOR THE THREE PERIOD FROM
MONTHS ENDED MONTHS ENDED MONTHS ENDED INCEPTION THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1998 1998
------------- ------------ ------------- ------------------
<S> <C> <C> <C> <C>
Basic EPS
Net income $2,161 $6,580 $2,080 $3,385
------ ------ ------ ------
Weighted average shares 7,130 7,130 7,130 4,891
------ ------ ------ ------
Per share - Basic $ 0.30 $ 0.92 $ 0.29 $ 0.69
====== ====== ====== ======
Diluted EPS
Net income $2,161 $6,580 $2,080 $3,385
------ ------ ------ ------
Weighted average shares 7,130 7,130 7,130 4,891
Effect of dilutive stock options 0 0 0 8
------ ------ ------ ------
7,130 7,130 7,130 4,899
------ ------ ------ ------
Per share - Diluted $ 0.30 $ 0.92 $ 0.29 $ 0.69
====== ====== ====== ======
</TABLE>
Options to purchase 590,000 shares of the Company's stock at $20.00 per share
have been outstanding since February 20, 1998. An additional 61,000 options were
granted at a fair market value exercise price of $17.31 per share on January 21,
1999. None of these options were included in the computation of diluted EPS
because their effect would be anti-dilutive. All options expire in either the
years 2008 or 2009 and were still outstanding at September 30, 1999.
5. SUBSEQUENT EVENTS
On October 22, 1999, the Board of Trustees declared a distribution of $0.365 per
share for the quarter ended September 30, 1999, to shareholders of record on
November 4, 1999. The distribution will be paid on November 18, 1999 and
represents a distribution for the period from July 1, 1999 through September 30,
1999.
8
<PAGE> 9
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, the Company's
Form 10-K for the year ended December 31, 1998 filed with the Securities and
Exchange Commission, and the financial statements and notes thereto included
therein.
FORWARD-LOOKING STATEMENTS: The management's discussion and analysis of
financial condition and results of operations contains forward-looking
statements that are based on current expectations, estimates and projections
about the business marketplace in which the Company operates. This section of
the quarterly report also includes management's beliefs and assumptions. 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, without limitation, increasing competition, including
new entrants in the marketplace; the mix of tenants as it relates to other
private operaters and governmental entities; governmental and public policy
changes; reliance on a single tenant for revenue; interest rate risk; continued
availability of financing; and 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 pay
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 facilities are privately managed facilities
that are operated by 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.
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.
9
<PAGE> 10
The Company has leveraged and anticipates having to continue to leverage its
portfolio of real estate equity investments, and expects to continue 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 (the
"Offering") of 6,200,000 common shares of beneficial interest. Therefore, no
meaningful prior nine-month comparison is available.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 vs. THREE MONTHS ENDED SEPTEMBER 30, 1998
For the three months ended September 30, 1999 rental revenues increased to
$5,157,000 from $2,846,000 for the three months ended September 30, 1998. This
81.2% increase resulted from the Company's incremental revenue associated with
completing the purchases of the Lawton Community Correctional Facility (the
"Lawton Facility") for a total cost of approximatley $46 million and the Lea
County Correctional Facility (the "Hobbs" Facility) for a total cost of
approximately $48.4 million during January 1999.
WCC has leased both the Hobbs Facility and the Lawton Facility from the Company
for an initial term of ten years, with three additional renewal options for
terms of five years each. The leases provide for a base rent equal to 9.5% of
the total purchase price of each 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 leases.
Depreciation associated with the Lawton and Hobbs facilities resulted in an
87.6% increase in depreciation from $662,000 for the three months ended
September 30, 1999 to $1,242,000 for the three months ended September 30, 1999.
Interest income for the three months ended September 30, 1999 decreased to
$5,000 from $253,000 for the three months ended September 30, 1998. During both
periods the Company invested cash in short-term instruments bearing interest
between 5% and 6%. However, cash available to the Company subsequent to its
April 1998 initial public offering generated interest income throughout 1998.
The Company used the cash available in 1998 to fund a portion of the Lawton and
Hobbs facilities acquired in 1999. The diminished 1999 cash balance resulted in
a smaller amount of interest income during the three months ended September 30,
1999 than the prior year.
General and administrative expenses increased 4% from $357,000 for the three
months ended September 30, 1998 to $373,000 for the three months ended September
30, 1999. The change resulted from increases in management salaries and
benefits, accounting, legal and other administrative costs.
10
<PAGE> 11
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
For the nine months ended September 30, 1999, rental revenues of $15.1 million
were generated from the leaseback to WCC of ten correctional and detention
facilities.
Interest income of $27,000 was earned by investing in short-term instruments
bearing interest between 5% and 6%. Depreciation of real estate properties
totaled $3.6 million for the nine months ended September 30, 1999.
General and administrative expenses incurred during the period were
approximately $1.1 million, or approximately 7.4% of lease revenues. These
expenses consisted primarily of management salaries and benefits, accounting,
legal and other administrative costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its short-term liquidity requirements generally
through its 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 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 Bank Credit Facility is subject to the Company's compliance
with a number of covenants.
During the nine months ended September 30, 1999 the Company made additional
borrowings of $62,300,000 under the Bank Credit Facility to finance the
acquisition of the 600-bed expansion of the Hobbs Facility for approximately
$20,000,000, and the acquisition of the Lawton Facility for approximately
$46,000,000. Both transactions closed on January 15, 1999. Working capital
funded the remainder of the purchases. As of September 30, 1999, $71,300,000 had
been drawn on the Bank Credit Facility.
The Company has no commitments with respect to other capital expenditures. The
Company has an option to acquire, subject to certain limitations, at a price of
up to 105% of cost, and lease back to WCC, any correctional or detention
facility acquired or developed and owned by WCC.
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 may be able to 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 Internal Revenue Code.
YEAR 2000 READINESS DISCLOSURE
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. Any Year 2000 compliance problem of
the Company, its lessees 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's year 2000 compliance process may be described in three phases. The
awareness phase encompasses developing a budget and project plan. The assessment
phase identifies mission-critical systems to check for compliance. The final
stage includes validation of its systems. Based on current information, all of
these phases have been completed. The Company completed testing all systems
before the end of the second quarter 1999.
The Company has incurred expenses related to year 2000 compliance. These costs
include time and effort of internal staff and consultants for validation. The
total costs, funded from working capital and not considered material, for
achieving year 2000 compliance are estimated to be less than $5,000.
These total estimated costs exclude payroll costs of internal staff related to
year 2000 compliance as the Company does not separately track such costs.
Deferral of other projects that would have a material effect on operations has
not been required, nor anticipated, as a result of the Company's year 2000
efforts.
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<PAGE> 12
Management has reviewed the state of year 2000 readiness for third parties with
which the Company shares a material relation, such as banks and vendors used by
the Company. At this time, the Company is unaware of any third party year 2000
issues that would materially effect these relations. WCC has informed the
Company that it has completed several information system initiatives including
the replacement of WCC's computer systems to be year 2000 compliant.
While the Company believes itself to be year 2000 compliant in 1999 for all
major systems, there can be no assurance that defects will not be discovered in
the future.
FUNDS FROM OPERATIONS
Management believes funds from operations ("FFO") 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, FFO
provides investors with an understanding of the ability of the Company to incur
and service debt and make capital expenditures.
The Company computes FFO in accordance with standards established by the White
Paper on Funds from Operations (the "White Paper") approved by the Board of
Governors of the National 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 FFO 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.
FFO 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, FFO should be examined in
conjunction with net income as presented in the consolidated financial
statements.
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<PAGE> 13
The following table presents the Company's FFO for the periods from July 1 to
September 30, 1999 and 1998:
(All amounts in thousands, except per share amounts)
1999 1998
---- ----
Net Income $2,161 $2,080
Real estate depreciation 1,242 662
------ ------
Funds from Operations $3,403 $2,742
====== ======
Commons Shares Outstanding (Basic and Diluted) 7,130 7,130
The following table presents the Company's FFO for the periods from January 1,
1999 to September 30, 1999:
(All amounts in thousands, except per share amounts)
1999
----
Net Income $ 6,580
Real estate depreciation 3,642
-------
Funds from Operations $10,222
=======
Commons Shares Outstanding (Basic and Diluted) 7,130
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks inherent in the Company's financial
instruments. These instruments arise from transactions entered into in the
normal course of business and relate to the Company's acquisitions of
correctional and detention facilities. The Company is subject to interest rate
risk on its existing Bank Credit Facility and any future financing requirements.
As of September 30, 1999, $71,300,000 had been drawn on the Bank Credit Facility
at rate of 6.9% through October 17, 1999. No indebtedness greater than one month
in duration existed as of September 30, 1999.
The Company's primary market risk exposure relates to (i) the interest rate risk
on short-term borrowings, (ii) its ability to refinance its Bank Credit Facility
at maturity at market rates and (iii) the impact of interest rate movements on
its ability to obtain and maintain adequate financing to fund future
acquisitions. While the Company can not predict or manage its ability to
refinance existing debt or the impact interest rate movements will have on its
existing debt, management continues to evaluate its financial position on an
ongoing basis and may in the future seek to minimize interest rate exposure.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the Company's business results in claims or litigation against the
Company 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
None.
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 - 27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K - The Company did not file any reports on Form 8-K
during the quarter ending September 30, 1999.
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
& Principal Accounting Officer)
Date: November 12, 1999
15
<PAGE> 16
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
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH DISCUSSION AND ANALYSIS PROVIDED WITHIN THE
FORM 10Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 66
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 207,189
<DEPRECIATION> (5,532)
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<TOTAL-LIABILITY-AND-EQUITY> 204,726
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