<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, 2000
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 750, Palm Beach Gardens, Florida 33410
(Address and zip code of principal executive offices)
(561) 630-6336
(Registrant's telephone number, including area code)
3300 PGA Blvd., Suite 430, Palm Beach Gardens, Florida 33410
(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 14, 2000)
<PAGE> 2
CORRECTIONAL PROPERTIES TRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
a) Consolidated Balance Sheets
as of September 30, 2000 and September 30, 1999 3
b) Consolidated Statements of Income
for the three months ended September 30, 2000 4
and 1999.....................................
c) Consolidated Statements of Income
for the nine months ended September 30, 2000 5
and 1999.....................................
d) Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 6
and 1999.....................................
e) Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 11
PART II - OTHER INFORMATION
ITEMS 1-5 13
ITEM 6. Exhibits 13
SIGNATURE 14
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS.
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
2000 1999
------------- ------------
ASSETS
REAL ESTATE PROPERTIES, AT COST
CORRECTIONAL AND DETENTION FACILITIES $ 222,501 $ 207,189
LESS - ACCUMULATED DEPRECIATION (10,779) (6,774)
--------- ---------
NET REAL ESTATE PROPERTIES 211,722 200,415
CASH AND CASH EQUIVALENTS 1,949 121
DEFERRED FINANCING COSTS 1,324 1,654
OTHER ASSETS 1,878 1,358
--------- ---------
TOTAL ASSETS $ 216,873 $ 203,548
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 540 1,899
DEFERRED REVENUE 1,857 1,689
REVOLVING LINE OF CREDIT 85,000 69,200
--------- ---------
TOTAL LIABILITIES 87,397 72,788
--------- ---------
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 SHARES ISSUED AND OUTSTANDING 7 7
CAPITAL IN EXCESS OF PAR VALUE 131,222 131,112
DISTRIBUTIONS IN EXCESS OF INCOME (1,753) (359)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 129,476 130,760
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 216,873 $ 203,548
========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS
3
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CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Three Months
Ended Ended
September 30, September 30,
2000 1999
------------- -------------
REVENUES
RENTAL $ 5,681 $ 5,157
INTEREST 3 5
------- -------
5,684 5,162
------- -------
EXPENSES
DEPRECIATION 1,337 1,242
GENERAL AND ADMINISTRATIVE 350 373
INTEREST 1,962 1,386
------- -------
3,649 3,001
------- -------
NET INCOME $ 2,035 $ 2,161
======= =======
NET INCOME PER COMMON SHARE
BASIC $ 0.29 $ 0.30
======= =======
DILUTED $ 0.29 $ 0.30
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, BASIC 7,130 7,130
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, DILUTED 7,130 7,130
======= =======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 5
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
------------ -------------
REVENUES
RENTAL $17,009 $15,136
INTEREST 9 27
------- -------
17,018 15,163
------- -------
EXPENSES
DEPRECIATION 4,005 3,642
GENERAL AND ADMINISTRATIVE 1,088 1,123
INTEREST 5,512 3,818
------- -------
10,605 8,583
------- -------
NET INCOME $ 6,413 $ 6,580
======= =======
NET INCOME PER COMMON SHARE
BASIC $ 0.90 $ 0.92
======= =======
DILUTED $ 0.90 $ 0.92
======= =======
WEIGHTED AVERAGE NUMBER Of SHARES
OUTSTANDING, BASIC 7,130 7,130
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, DILUTED 7,130 7,130
======= =======
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 6
CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 6,413 $ 6,580
ADJUSTMENTS TO NET INCOME:
DEPRECIATION OF REAL ESTATE ASSETS 4,005 3,642
OTHER AMORTIZATION 441 501
CHANGES IN ASSETS AND LIABILITIES:
OTHER ASSETS (520) (491)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (1,360) (59)
DEFERRED REVENUE 168 563
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,147 10,736
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
ACQUISITION OF REAL ESTATE INVESTMENTS (15,312) (67,702)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (15,312) (67,702)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
DIVIDENDS PAID (7,807) (7,593)
BORROWINGS UNDER LINE OF CREDIT 15,800 62,300
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,993 54,707
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,828 (2,259)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 121 2,325
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,949 $ 66
======== ========
CASH PAID FOR INTEREST $ 5,094 $ 3,272
======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
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CORRECTIONAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. General
The consolidated financial statements of the Company include all the accounts of
the Company and its wholly owned subsidiaries. All 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, 1999 filed with the Securities and Exchange
Commission.
During the three months ended September 30, 2000 and 1999, the Company did not
have changes in equity resulting from non-owner sources. Therefore,
comprehensive income was equal to net income for the respective periods in the
accompanying financial statements.
2. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 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 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 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of SFAS No. 133." SFAS 138 addresses a limited
number of issues causing implementation difficulties for numerous entities that
apply SFAS No. 133 and amends the accounting and reporting standards of SFAS 133
for certain derivative instruments and certain hedging activities. SFAS 133, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000.
3. Acquisition
On January 7, 2000, the Company purchased the Jena Juvenile Justice Center (the
"Jena Facility") from Wackenhut Corrections Corporation ("WCC") for
approximately $15,300,000, using funds available under a $100 million secured
line of credit (the "Bank Credit Facility"). WCC will leaseback the newly
constructed 276-bed facility located in Jena, Louisiana at an initial cap rate
of 11% with 4% annual escalators for an initial term of ten years, with three
additional renewal options for terms of five years each in length. The lease
provides for fixed rental payments to the Company without regard for occupancy.
While WCC previously had an operating contract for the facility, WCC does not
presently have an operating contract with a client. However, WCC continues to
make rental payments to Correctional Properties Trust. As a result of the
termination of WCC's operating contract, the Jena Facility no longer is included
in the Company's pledge pool Borrowing Base described in the Bank Credit
Facility. The purchase price of the Jena Facility consisted of WCC's estimated
total project costs.
7
<PAGE> 8
4. Bank Credit Facility
The Company's operating partnership subsidiary, CPT Operating Partnership, L.P.
(the "Operating Partnership"), has a $100 million secured line of credit that
may be used to finance the acquisition of additional correctional and detention
facilities from WCC and others, to expand the 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. In total, the Company had the ability to borrow
approximately $1,000,000 on its Bank Credit Facility at September 30, 2000.
On July 24, 2000, the Operating Partnership, closed a $45 million notional
amount cash flow interest rate swap. The swap agreement provides that floating
rate LIBOR payments on $45 million of indebtedness will be exchanged for fixed
payments at a rate of 7.035%. In addition, the Operating Partnership will be
obligated for the EuroDollar Rate Margin described in the credit agreement based
upon a ratio of outstanding borrowings to pledge pool Borrowing Base.
As of September 30, 2000, $85,000,000 had been drawn on the Bank Credit Facility
at a rate of 8.4% based upon LIBOR plus an applicable margin through December
27, 2000. No Indebtedness greater than 90 days in duration existed as of
September 30, 2000. Based upon the Company's Borrowing Base Ratio at September
30, 2000, the Company's EuroDollar Rate Margin is 2.00%.
As a result of the termination of WCC's operating contract in Jena, Louisiana,
the Jena Facility no longer is included in the Company's pledge pool Borrowing
Base described in the Bank Credit Facility.
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 Three Months Ended
September 30, 2000 September 30, 1999
--------------------------- --------------------------
<S> <C> <C>
Basic and diluted EPS
Net income $2,035 $2,161
------ ------
Weighted average shares - Basic and diluted 7,130 7,130
------ ------
Per Share - Basic and diluted $ 0.29 $ 0.30
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
September 30, 2000 September 30, 1999
--------------------------- --------------------------
<S> <C> <C>
Basic and diluted EPS
Net income $6,413 $6,580
------ ------
Weighted average shares - Basic and diluted 7,130 7,130
------ ------
Per share - Basic and diluted $ 0.90 $ 0.92
====== ======
</TABLE>
In conjunction with the IPO, the Company granted options with respect to an
aggregate of 590,000 common shares to officers, employees and trustees. The
exercise price of such options is the IPO price of $20 with a ten-year term from
date of grant. In general, options granted to executive officers and employees
vested immediately as to one-fourth of an aggregate of 565,000 shares and vested
as to an additional one-fourth on the first and second anniversary of grant with
the remaining one-fourth vesting on the third anniversary of the date of grant.
Options with respect to an aggregate of 25,000 shares granted to the
non-employee trustees vested in full at the date of grant. In addition, the
value of options with respect to an aggregate of 240,000 shares granted to
non-employees is being charged to compensation expense over the life of the
options.
On January 21, 1999, the Company granted options with respect to an aggregate of
51,000 shares to officers and employees and an aggregate of 10,000 shares to
non-employee trustees. Such options were granted at an exercise price of $17.31
per share.
On April 25, 2000, the Company granted options with respect to 96,000 shares to
officers and employees and 10,000 shares to non-employee trustees at an exercise
price of $11.19 per share.
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, 2009 or 2010. All options were granted at the fair market value at the
date of grant and were still outstanding at September 30, 2000.
8
<PAGE> 9
6. Subsequent Events
On October 19, 2000, the Board of Trustees declared a distribution of $0.365 per
share for the quarter ended September 30, 2000, to shareholders of record on
November 2, 2000. The distribution will be paid on November 16, 2000 and
represents a distribution for the period from July 1, 2000 through September 30,
2000.
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
business marketplace in which Correctional Properties Trust (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 increasing price and product/service competition by
foreign and domestic competitors, including new entrants in the marketplace; the
mix of possible future tenants as it relates to other private operators and
governmental entities; governmental and public policy changes; reliance on a
single tenant for revenue; interest rate risk; continued availability of
financing at rates less than tenant lease rates; rental rates sufficient to make
acquisitions feasible; continued ability to pay a dividend; reliance upon a
single property type for the company's development or acquisitions; balance
sheet and income statement risk associated with an interest rate hedge, and
financial instruments and financial resources in the amounts, at the times and
on the terms required to support the company's future business. 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 fluctuations and other future factors. The Company discusses such
risks in the Company's various reports filed with the Securities and 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). On April 28, 1998, the Company completed its initial public
offering.
The principal business strategy of the Company is to acquire correctional and
detention facilities that meet the Company's investment criteria. The Company
may in the future acquire facilities from private prison managers and government
entities, expand its existing facilities, and lease all such facilities under
current long-term leases to qualified third-party operators. All of the
Company's current facilities are privately-managed facilities that are operated
by Wackenhut Corrections Corporation.
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
expenses 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
9
<PAGE> 10
in advisory fee for administrative or investment services, although the Company
does occasionally engage legal and tax consultants. The primary non-cash expense
of the Company is depreciation of its correctional and detention facilities.
The Company has leveraged and anticipates having to continue to leverage its
portfolio of real estate equity investments. Accordingly, the Company expects to
continue to incur 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.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the period from July 1, 2000 to September 30, 2000, revenues were $5.7
million from the leasing to WCC of eleven correctional and detention facilities
(eight purchased April 28, 1998, two additional facilities purchased January 15,
1999 and one purchased January 7, 2000). Revenues of $5.2 million were generated
from July 1, 1999 to September 30, 1999 as a result of the leaseback to WCC of
ten correctional and detention facilities. The $0.5 million increase in 2000
revenue resulted from the acquisition of the Jena Juvenile Justice Center in
January 2000.
Depreciation associated with the Jena Facility increased total depreciation of
real estate properties, during the three months ended September 30, 2000, to
$1.3 million from $1.2 million during the three months ended September 30, 1999.
Interest expense for the three months ended September 30, 2000 increased to $2.0
million from $1.4 million during the three months ended September 30, 1999. This
$0.6 increase resulted from additional borrowings of approximately $15,000,000
associated with the purchase of the Jena Juvenile Justice Center as well as
higher borrowing rates on all outstanding floating rate LIBOR debt associated
with the Bank Credit Facilty.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the nine months ended September 30, 2000, the Company generated rental
revenues of $17.0 million from the leaseback to WCC of eleven correctional and
detention facilities. The $1.9 million increase in revenue from $15.1 million
generated for the nine months ended September 30, 1999 resulted from the
acquisition of the Jena Juvenile Justice Center in January 2000.
Depreciation of real estate properties totaled $4.0 million for the nine months
ended September 30, 2000 versus depreciation of $3.6 million for the nine months
ended September 30, 1999. The $0.4 million increase resulted from additional
depreciation incurred after the acquisition of the Jena Facility.
Interest expense for the nine months ended September 30, 2000 increased to $5.5
million from $3.8 million during the nine months ended September 30, 1999. This
$1.7 increase resulted from additional borrowings of approximately $15,000,000
associated with the purchase of the Jena Juvenile Justice Center as well as
higher borrowing rates on all outstanding floating rate LIBOR debt associated
with the Bank Credit Facilty.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its short-term liquidity requirements generally
through use of its 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.
10
<PAGE> 11
During the nine months ended September 30, 2000, the Company made additional
borrowings of $15,800,000 under the Bank Credit Facility to finance the
acquisition of the Jena Juvenile Justice Center and reduce accounts payable
outstanding at the end of the period. As of September 30, 2000, $85,000,000 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.
The Company expects that it may 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 ratio
of debt to total capitalization not greater than fifty percent, 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 an 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.
FUNDS FROM OPERATIONS
Management believes Funds from Operations ("FFO") is helpful to investors as a
supplemental 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 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 FFO 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, FFO 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, FFO should be examined in
conjunction with net income as presented in the consolidated financial
statements.
The following table presents the Company's FFO for the period from January 1 to
September 30, 2000 and 1999:
2000 1999
------- -------
Funds from Operations
Net Income $ 6,413 $ 6,580
Plus real estate depreciation 4,005 3,642
------- -------
$10,418 $10,222
======= =======
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.
On July 24, 2000, the Operating Partnership closed a $45 million notional amount
cash flow interest rate swap. The swap agreement provides that floating rate
LIBOR payments on $45 million of indebtedness will be exchanged for fixed
payments at a rate of 7.035%. In addition the Operating Partnership will be
11
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obligated for the EuroDollar Rate Margin described in the credit agreement based
upon a ratio of outstanding borrowings to pledge pool Borrowing Base.
As of September 30, 2000, $85,000,000 had been drawn on the Bank Credit Facility
at an average rate of 8.4% based upon LIBOR plus an applicable margin through
December 27, 2000. No Indebtedness greater than 90 days in duration existed as
of September 30, 2000. On $40,000,000 of debt outstanding as of September 30,
2000, for which no interest rate swap has been executed, a one percent increase
in the weighted average interest rate would cause a $400,000 decrease in the
Company's annual net income or a $.06 reduction of diluted net income per
share.
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 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, the Board of Trustees continues
to evaluate its financial position on an ongoing basis.
12
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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
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 AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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, 2000.
13
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
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 14, 2000
14
<PAGE> 15
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, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
