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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, 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 August 10, 1999)
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CORRECTIONAL PROPERTIES TRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30 1999
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets 3
as of June 30, 1999 and December 31, 1998
b) Consolidated Statement of Income 4
for the three months ended June 30, 1999
and for the period from inception through June 30, 1998
c) Consolidated Statement of Income
for the six months ended June 30, 1999 5
and for the period from inception through June 30, 1998
d) Consolidated Statement of Cash Flows
for the Six Months Ended June 30, 1999 6
and for the period from inception through June 30, 1998
e) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 12
Market Risk
PART II - OTHER INFORMATION
Items 1-5. 12
Item 6. Exhibits 14
SIGNATURE
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 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 (4,290) (1,890)
--------- --------
NET REAL ESTATE PROPERTIES 202,899 137,597
CASH AND CASH EQUIVALENTS 202 2,325
DEFERRED FINANCING COSTS 1,874 2,094
OTHER ASSETS 1,083 748
--------- --------
TOTAL ASSETS $ 206,058 $142,764
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 550 661
DEFERRED REVENUE 1,667 1,104
REVOLVING LINE OF CREDIT 72,300 9,000
--------- --------
TOTAL LIABILITIES 74,517 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 130,998 130,884
BALANCE OF UNDISTRIBUTED INCOME 536 1,108
--------- --------
TOTAL SHAREHOLDERS' EQUITY 131,541 131,999
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 206,058 $142,764
========= ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND
FOR THE PERIOD FROM INCEPTION THROUGH JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD
THREE FROM
MONTHS INCEPTION
ENDED THROUGH
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
REVENUES
RENTAL $5,118 $1,992
INTEREST 11 147
------ ------
5,129 2,139
------ ------
EXPENSES
DEPRECIATION 1,232 460
GENERAL AND ADMINISTRATIVE 380 374
INTEREST 1,310 --
------ ------
2,922 834
------ ------
NET INCOME $2,207 $1,305
====== ======
NET INCOME PER COMMON SHARE
BASIC $ 0.31 $ 0.27
====== ======
DILUTED $ 0.31 $ 0.27
====== ======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC 7,130 4,826
====== ======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, DILUTED 7,130 4,844
====== ======
</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
FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND FOR THE PERIOD FROM INCEPTION THROUGH JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD
SIX FROM
MONTHS INCEPTION
ENDED THROUGH
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
REVENUES
RENTAL $ 9,979 $ 1,992
INTEREST 22 147
------- -------
10,001 2,139
------- -------
EXPENSES
DEPRECIATION 2,400 460
GENERAL AND ADMINISTRATIVE 750 374
INTEREST 2,432 --
------- -------
5,582 834
------- -------
NET INCOME $ 4,419 1,305
======= =======
NET INCOME PER COMMON SHARE
BASIC $ 0.62 $ 0.27
======= =======
DILUTED $ 0.62 $ 0.27
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC 7,130 4,826
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, DILUTED 7,130 4,844
======= =======
</TABLE>
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
FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND FOR THE PERIOD FROM INCEPTION THROUGH JUNE 30, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Period From
Six Months Inception
Ended Through
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 4,419 $ 1,305
ADJUSTMENTS TO NET INCOME:
DEPRECIATION OF REAL ESTATE ASSETS 2,400 460
OTHER AMORTIZATION 334 --
CHANGES IN ASSETS AND LIABILITIES:
OTHER ASSETS (335) (410)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (111) 177
DEFERRED REVENUE 563 --
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,270 1,532
--------- ---------
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
PROCEEDS FROM INITIAL PUBLIC OFFERING, NET OF OFFERING COSTS OF $1,892 130,726
DIVIDENDS PAID (4,991) --
BORROWINGS UNDER LINE OF CREDIT 63,300 --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 58,309 130,726
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,123) 19,217
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,325 3
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 202 $ 19,220
========= =========
CASH PAID FOR INTEREST $ 1,992 --
========= =========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THIS STATEMENT.
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CORRECTIONAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. GENERAL
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 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 prior year comparisons are 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 March 31, 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. ACQUISITION
On June 30, 1999 the Company purchased from Wackenhut Corrections Corporation
("WCC") for approximately $1,600,000 an industry building asssociated with the
Lea County Correctional Facility in Hobbs, New Mexico (the "Hobbs Facility").
This addition increases the total cost of the Hobbs Facilty to approximately
$48,400,000.
WCC has leased the Hobbs Facility from the Company since January 15, 1999 for an
initial term of ten years, with three additional renewal options for terms of
five years each. The purchase price of the Hobbs Facility consisted of WCC's
project costs. The renewal terms will be determined by 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 Leases.
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4. 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 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. However, the Company
has the ability to do additional non-recourse borrowings as discussed in the
Credit Agreement. In total, the Company had the ability to borrow approximately
an additional $28 million at 6/30/99.
As of June 30, 1999, $72,300,000 had been drawn on the Bank Credit Facility at a
rate of 6.91% based upon LIBOR plus an applicable margin through September 17,
1999. No Indebtedness greater than 90 days in duration existed as of June 30,
1999.
5. 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 Months Ended For the Six Months Ended Period From Inception Through
June 30, 1999 June 30, 1999 June 30, 1998
------ ------ ------
<S> <C> <C> <C>
Basic EPS
Net income $2,207 $4,419 $1,305
------ ------ ------
Weighted average shares 7,130 7,130 4,826
------ ------ ------
Per share - Basic $ 0.31 $ 0.62 $ 0.27
====== ====== ======
Diluted EPS
Net income $2,207 $4,419 $1,305
------ ------ ------
Weighted average shares 7,130 7,130 4,826
Effect of dilutive stock options 0 0 18
------ ------ ------
7,130 7,130 4,844
------ ------ ------
Per share - Diluted $ 0.31 $ 0.62 $ 0.27
====== ====== ======
</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 June 30, 1999.
6. SUBSEQUENT EVENTS
On July 22, 1999, the Board of Trustees declared a distribution of $0.365 per
share for the quarter ended June 30, 1999, to shareholders of record on August
5, 1999. The distribution will be paid on August 19, 1999 and represents a
distribution for the period from April 1, 1999 through June 30, 1999.
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, and 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 contain forward-looking statements
that are based on current expectations, estimates and projections about the
segment in which
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Correctional Properties Trust (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; 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; 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 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.
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 of
6,200,000 common shares of beneficial interest. Therefore, no meaningful prior
year comparisons are available.
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RESULTS OF OPERATIONS
For the Three Months Ended June 30, 1999
For the period from April 1, 1999 to June 30, 1999, rental revenues of $5.1
million were generated from the leaseback to WCC of ten correctional and
detention facilities (eight purchased April 28, 1998 with proceeds of the
Offering and two additional facilities purchased January 15, 1999).
Interest income of $11,000 was earned during the three months ended June 30,
1999 by investing in short-term instruments bearing interest between 5% and 6%.
Depreciation of real estate properties totaled $1.2 million.
General and administrative expenses incurred during the quarter ended June 30,
1999 were approximately $.4 million, or approximately 7% of lease revenues.
These expenses consisted primarily of management salaries and benefits,
accounting, legal and other administrative costs.
For the Six Months Ended June 30, 1999
For the six months ended June 30, 1999, rental revenues of $10.0 million were
generated from the leaseback to WCC of ten correctional and detention
facilities.
Interest income of $22,000 was earned by investing in short-term instruments
bearing interest between 5% and 6%. Depreciation of real estate properties
totaled $2.4 million for the six months ended June 30, 1999.
General and administrative expenses incurred during the period were
approximately $.8 million, or approximately 7.5% 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 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 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.
During the six months ended June 30, 1999 the Company made additional borrowings
of $63,300,000 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 Correctional Facility for approximately $46,000,000.
Working Capital funded the remainder of the purchases. As of June 30, 1999
$72,300,000 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, 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 subject to certain limitations.
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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 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.
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 compliant 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 seperately 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.
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, is being
reviewed by management. 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 several information system initiatives under way
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. The Company is assessing its risk and full impact on operations
should the most reasonably likely worst case year 2000 scenario occur. In
conjunction with the validation phase the Company is developing contingency
plans and expects to complete them in the third quarter of 1999.
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 (the "White Paper")
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.
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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 January 1, 1999 to June 30, 1999:
Funds from Operations
Net Income $ 4,419
Plus real estate depreciation 2,400
-------
$ 6,819
=======
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 June 30, 1999, $72,300,000 had been drawn on the Bank Credit Facility at a
rate of 6.91% through September 17, 1999. No indebtedness greater than three
months in duration exists as of June 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 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.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
A-12
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on April 27,
1999.
(b) The following matters were submitted to a vote at the Company's Annual
Meeting:
(1) Election of the following nominees as directors for a three year
term:
<TABLE>
<CAPTION>
Director's Name: Richard R. Wackenhut William M. Murphy Robert R. Veach, Jr.
-------------- -------------------- ----------------- --------------------
<S> <C> <C> <C>
Votes in favor: 5,860,552 5,864,852 5,865,852
Votes against: -- -- --
Abstentions 11,770 7,470 6,470
</TABLE>
(2) Ratification of the appointment of Arthur Andersen LLP to serve as
the independent certified public accountants of the Trust for the
fiscal year 1999, and to perform such other services as may be
requested by the Trust:
Votes in favor: 5,863,427
Vote against: 6,370
Abstentions 2,525
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 June 30, 1999.
A-13
<PAGE> 14
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: August 13, 1999
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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
A-14
<TABLE> <S> <C>
<ARTICLE> 5
<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 JUNE 30, 1999.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 202
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 207,189
<DEPRECIATION> (4,290)
<TOTAL-ASSETS> 206,058
<CURRENT-LIABILITIES> 2,217
<BONDS> 72,300
0
0
<COMMON> 7
<OTHER-SE> 131,534
<TOTAL-LIABILITY-AND-EQUITY> 206,058
<SALES> 9,979
<TOTAL-REVENUES> 10,001
<CGS> 0
<TOTAL-COSTS> 750
<OTHER-EXPENSES> 2,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,432
<INCOME-PRETAX> 4,419
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,419
<EPS-BASIC> .62
<EPS-DILUTED> .62
</TABLE>
