<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 1-13560
CORRECTIONS CORPORATION OF AMERICA
(Exact name of Registrant as specified in its charter)
TENNESSEE 62-1156308
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 BURTON HILLS BOULEVARD
NASHVILLE, TENNESSEE 37215
- ---------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(615) 263-3000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
- -------------------------------------------------------------------------------
(Former name, address and 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
--- ---
84,214,275
- -------------------------------------------------------------------------------
(Outstanding shares of the issuer's common stock as of November 1, 1998.)
1
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CORRECTIONS CORPORATION OF AMERICA
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION: Number
------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Statements of Operations
Three months ended September 30, 1998 and 1997
(Unaudited) 4
Consolidated Statements of Operations
Nine months ended September 30, 1998 and 1997
(Unaudited) 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
(Unaudited) 6-7
Notes to Consolidated Financial Statements
(Unaudited) 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15-16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,627 $ 136,147
Accounts receivable, net of allowances 140,291 89,822
Prepaid expenses 8,032 4,868
Other 3,317 2,585
-------- ---------
Total current assets 179,267 233,422
Property and equipment, net 613,892 266,493
Other long-term assets:
Notes receivable 1,151 59,264
Investment in direct financing leases 75,217 90,184
Deferred tax assets 14,627 10,195
Other assets 60,773 38,382
-------- ---------
$944,927 $ 697,940
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 74,299 $ 32,094
Accrued salaries and wages 12,104 9,778
Income taxes payable 614 14,128
Deferred tax liabilities 2,799 1,229
Other accrued expenses 21,553 20,361
Current portion of long-term debt 108 5,847
Current portion of deferred gain on real estate 13,294 13,223
-------- ---------
Total current liabilities 124,771 96,660
Long-term debt, net of current portion 292,832 127,075
Deferred gain on real estate transactions 114,051 122,529
Other noncurrent liabilities -- 3,600
-------- ---------
Total liabilities 531,654 349,864
-------- ---------
Stockholders' equity:
Preferred stock 376 380
Common stock 83,109 80,230
Additional paid-in capital 226,494 215,833
Retained earnings 103,294 92,475
Treasury stock, at cost -- (40,842)
-------- ---------
Total stockholders' equity 413,273 348,076
-------- ---------
$944,927 $ 697,940
======== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
September 30
--------------------------
1998 1997
--------- ----------
<S> <C> <C>
Revenues $ 179,136 $ 127,069
Expenses:
Operating 124,794 93,062
Lease 15,702 6,826
General and administrative 5,720 4,267
Depreciation and amortization 4,386 3,011
--------- ---------
Total expenses 150,602 107,166
--------- ---------
Operating income 28,534 19,903
Interest income, net (112) (1,625)
--------- ---------
Income before income taxes 28,646 21,528
Provision for income taxes 7,544 7,863
--------- ---------
Net income $ 21,102 $ 13,665
========= =========
Net income per common share:
Basic $ 0.26 $ 0.18
========= =========
Diluted $ 0.24 $ 0.15
========= =========
Weighted average common shares outstanding:
Basic 80,970 77,721
========= =========
Diluted 89,726 90,606
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
September 30
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues $ 484,505 $ 325,931
Expenses:
Operating 339,136 234,034
Lease 40,638 9,123
General and administrative 16,183 11,558
Depreciation and amortization 11,673 10,941
--------- ---------
Total expenses 407,630 265,656
--------- ---------
Operating income 76,875 60,275
Interest income, net (5,323) (273)
--------- ---------
Income before income taxes 82,198 60,548
Provision for income taxes 21,565 23,276
--------- ---------
Net income $ 60,633 $ 37,272
========= =========
Net income per common share:
Basic $ 0.76 $ 0.49
========= =========
Diluted $ 0.68 $ 0.42
========= =========
Weighted average common shares outstanding:
Basic 79,924 76,525
========= =========
Diluted 89,728 89,897
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 60,633 $ 37,272
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 11,673 10,941
Deferred and other noncash income taxes 1,186 2,153
Other noncash items 365 275
Loss (gain) on disposal of assets 2 (1,244)
Equity in earnings of unconsolidated entities (649) (616)
Recognized gain on real estate transactions (9,979) (2,591)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (50,053) 18,186
Prepaid expenses (3,025) (4,793)
Other current assets (732) (651)
Accounts payable 41,810 8,411
Income taxes payable (13,514) (3,794)
Accrued expenses and other liabilities (1,494) 18,531
--------- ---------
Net cash provided by operating activities 36,223 82,080
--------- ---------
Cash Flows from Investing Activities:
Additions of property and equipment (312,508) (224,887)
Decrease in restricted cash -- 3,450
Increase in other assets (16,340) (13,310)
Acquisition of USCC subsidiaries, net of cash acquired (9,341) --
Investment in affiliates, net (2,891) 587
Proceeds from disposals of assets 36,412 380,904
Increase in direct financing leases -- (55,850)
Payments received on direct financing leases and notes
receivable 3,541 2,057
--------- ---------
Net cash provided by (used in) investing activities (301,127) 92,951
--------- ---------
Cash Flows from Financing Activities:
Payments on long-term debt (45) (57,184)
Proceeds from line of credit, net 165,000 11,000
Payment of debt issuance costs (2,925) (743)
Payment of prepayment penalties -- (1,782)
Proceeds from exercise of stock options and warrants 1,954 3,043
Purchase of treasury stock (7,600) --
--------- ---------
Net cash provided by (used in) financing activities 156,384 (45,666)
--------- ---------
Net increase (decrease) in cash (108,520) 129,365
CASH AND CASH EQUIVALENTS, beginning of period 136,147 4,832
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 27,627 $ 134,197
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
------------------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 4,708 $ 10,917
======== ========
Income taxes $ 34,927 $ 5,577
======== ========
Supplemental Schedule of Noncash Investing and Financing
Activities:
The Company acquired treasury stock and issued common stock through the
exercise of stock options:
Common stock $ 422 $ 669
Additional paid-in capital 3,421 4,573
Retained earnings (115) (830)
Treasury stock, at cost (3,728) (4,412)
-------- --------
$ -- $ --
======== ========
Long-term debt was converted into common stock:
Other assets $ 5 $ 23
Long-term debt (5,800) (1,700)
Common stock 2,063 1,003
Additional paid-in capital 1,588 674
Retained earnings (48,885) --
Treasury stock, at cost 51,029 --
-------- --------
$ -- $ --
======== ========
The Company converted a facility from investment in direct financing lease to
property and equipment by acquiring the equity in the facility from the
leasing entity:
Accounts receivable $ 3,500 $ --
Property and equipment (16,207) --
Investment in direct financing leases 12,707 --
-------- --------
$ -- $ --
======== ========
The Company acquired a facility by converting a note receivable and assuming
long-term debt:
Property and equipment $(58,487) $ --
Notes receivable 57,624 --
Long-term debt 863 --
-------- --------
$ -- $ --
======== ========
</TABLE>
7
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheets as of September 30, 1998 and December
31, 1997, the consolidated statements of operations and cash flows for
the nine month periods ended September 30, 1998 and 1997, and the
consolidated statements of operations for the quarters ended September
30, 1998 and 1997 have been prepared by the Company in accordance with
the accounting policies described in its 1997 Annual Report on Form
10-K, as amended, and should be read in conjunction with the notes
thereto.
In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows at September
30, 1998 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The results of
operations for the periods ended September 30, 1998, are not
necessarily indicative of the operating results for the full year.
2. ACQUISITIONS
In April 1998, the Company acquired all of the issued and outstanding
capital stock of eight subsidiaries of U.S. Corrections Corporation
("USCC") (the "USCC Acquisition") for approximately $10,000,000, less
cash acquired. By virtue of the USCC Acquisition, the Company acquired
contracts to manage four currently operating facilities in Kentucky and
one in North Carolina, each of which is owned by CCA Prison Realty
Trust ("Prison Realty"), as well as one each in Florida and Texas, each
of which is owned by governmental entities of Florida and Texas,
respectively. The Company, or one of its affiliates, currently leases
the four Kentucky facilities from Prison Realty, or one of its
affiliates, pursuant to the terms of a master lease. The North Carolina
facility currently operated by the Company is owned by Prison Realty,
which leases such facility to the State of North Carolina. The Company
also acquired by virtue of the USCC Acquisition the right to enter into
a contract to manage a North Carolina facility owned by Prison Realty
for which construction was substantially completed in November 1998.
The Company expects to operate the newly completed North Carolina
facility pursuant to a contract with the State of North Carolina, which
will lease the facility from Prison Realty. The Company operates or
will operate 5,543 beds as a result of the USCC Acquisition.
In April 1998, the Company acquired a 376-bed correctional facility
from a governmental entity for $18,389,000 and assumed management of
the facility.
In May 1998, in consideration of relinquishing its rights to purchase a
facility, the Company agreed to pay a governmental agency $3,500,000.
As a result, the Company converted the facility from a direct financing
lease to property and equipment. In lieu of a cash payment, the entity
agreed to utilize a credit for management revenue billings beginning in
July 1998 until the credit is exhausted.
3. MERGER
On September 29, 1998 the Company entered into an Amended and Restated
Agreement and Plan of Merger by and among the Company, Prison Realty,
and Prison Realty Corporation ("Prison Realty Corporation") providing
for the merger of the Company and Prison Realty, with Prison Realty
Corporation as the surviving company (the "Merger"). This agreement
amended and restated the Agreement and Plan of Merger dated April 18,
1998 previously entered into by the Company and Prison Realty regarding
the Merger. In the Merger, the shareholders of the Company will receive
0.875 share of Prison Realty Corporation common stock in exchange for
each outstanding share of Company common stock they own. The Merger is
expected to be completed on or about January 1, 1999, subject to
customary conditions, including approval by the shareholders of the
Company and Prison Realty. Prison Realty Corporation intends to operate
so as to qualify as a real estate investment trust for federal income
tax purposes upon completion of the Merger.
8
<PAGE> 9
4. EARNINGS PER SHARE
The Company adopted the provisions of SFAS 128, "Earnings Per Share"
effective December 31, 1997. Under the standards established by SFAS
128, earnings per share is measured at two levels: basic earnings per
share and diluted earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average number of
common shares outstanding during the year. Diluted earnings per share
is computed by dividing net income by the weighted average number of
common shares after considering the additional dilution related to
convertible preferred stock, convertible subordinated notes, options
and warrants. All earnings per share amounts presented herein have been
restated to reflect the adoption of SFAS 128.
In computing diluted earnings per common share, the Company's stock
warrants and stock options are considered dilutive using the treasury
stock method, and the Series B convertible preferred stock and the 8.5%
convertible subordinated notes are considered dilutive using the
if-converted method. The following table presents information necessary
to calculate diluted earnings per share for the third quarter and nine
months ended September 30:
<TABLE>
<CAPTION>
Three months ended
September 30
--------------------
1998 1997
------- --------
<S> <C> <C>
Net Income $21,102 $13,665
Interest expense applicable to convertible subordinated
notes, net of tax 169 171
------- -------
Adjusted net income $21,271 $13,836
======= =======
Weighted average common shares outstanding 80,970 77,721
Effect of dilutive options and warrants 4,023 7,337
Conversion of preferred stock 730 --
Conversion of convertible subordinated notes 4,003 5,548
------- -------
Adjusted diluted common shares outstanding 89,726 90,606
------- -------
Diluted earnings per share $ .24 $ .15
======= =======
<CAPTION>
Nine months ended
September 30
--------------------
1998 1997
------- -------
<S> <C> <C>
Net Income $60,633 $37,272
Interest expense applicable to convertible subordinated
notes, net of tax 542 706
------- -------
Adjusted net income $61,175 $37,978
======= =======
Weighted average common shares outstanding 79,924 76,525
Effect of dilutive options and warrants 4,560 7,771
Conversion of preferred stock 731 --
Conversion of convertible subordinated notes 4,513 5,661
------- -------
Adjusted diluted common shares outstanding 89,728 89,897
------- -------
Diluted earnings per share $ .68 $ .42
======= =======
</TABLE>
9
<PAGE> 10
5. NEW PRONOUNCEMENT
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities", effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires the costs of
start-up activities to be expensed as incurred. In accordance with the
provisions of SOP 98-5, the Company will adopt the new accounting
method on or before January 1, 1999 by recording a cumulative effect of
a change in accounting principle. As of September 30, 1998, the
Company's deferred start-up costs and project development costs subject
to the provisions of SOP 98-5 totaled $32,893,000.
6. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that changes
in the amounts of certain items, including gains and losses on certain
securities, be shown in the financial statements. The Company adopted
the provisions of SFAS No. 130 on January 1, 1998. The Company's
comprehensive income is substantially equivalent to net income for the
quarters ended and nine months ended September 30, 1998 and 1997.
7. SUBSEQUENT EVENTS
On October 2, 1998, pursuant to the terms of an Exchange Agreement by
and among the Company, American Corrections Transport, Inc. ("ACT")
and certain shareholders of ACT, and the charter of the Company, as
amended, the Company converted each share of it's Series B convertible
preferred stock into 1.94 shares of the Company's common stock,
resulting in the issuance of an aggregate of 730,320 shares of the
Company's common stock. In connection therewith, the Company paid a
nominal amount of cash for fractional shares issued in the conversion.
The Company received no cash proceeds as a result of the transaction.
On November 4, 1998 the Company filed a Registration Statement on Form
S-3 that will allow it, over the next two years, to sell common stock
in one or more offerings up to a total dollar amount of $100,000,000.
The Company intends to use the net proceeds from the sale of the common
stock for general corporate purposes including without limitation,
repayment of indebtedness, financing capital expenditures and working
capital.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this
report.
This Quarterly Report on Form 10-Q, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, includes
certain forward-looking statements about the Company's business,
revenues, prospects, expenditures and operating and capital
requirements that are provided in reliance upon the "safe harbor"
provisions of the Private Securities Litigation Act of 1995 as set
forth in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In
addition, forward-looking statements may be included in various other
Company documents to be issued in the future and in various oral
statements by Company representatives to securities analysts and
potential investors from time to time. Any such statements are subject
to risks that could cause the actual results to vary materially. The
risks and uncertainties associated with the forward-looking
information include the strength of the markets in which the Company
operates, competitive market conditions,
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<PAGE> 11
general economic growth, interest rates and capital market conditions.
Reference is hereby made to the more detailed discussion of such risks
in the Company's Annual Report on Form 10-K, as amended. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
REVENUES AND EXPENSES
Revenues for the third quarter and first nine months of 1998 increased
41% and 49%, respectively, over the comparable periods of 1997.
Management revenues increased $52,067,000 and $156,994,000 for the
third quarter and first nine months of 1998, respectively, as compared
to the same periods of 1997, while transportation revenues increased
$441,000 and $1,580,000, respectively, for the same relative time
periods. The increase in management revenues was due to compensated
mandays increasing by 42% and 50% for the third quarter and first nine
months of 1998, respectively, over the comparable periods of 1997.
During the third quarter of 1998, the Company opened three new
facilities representing 2,264 beds and expanded two facilities
representing 650 beds. These beds were in addition to the 10,400 beds
brought on line in the first half of 1998 which resulted in the Company
cumulatively adding 12,664 beds through the first nine months of 1998.
Transportation revenues increased 13% and 17% for the third quarter and
first nine months of 1998, respectively, over the comparable periods of
1997, primarily as a result of an expanded customer base and increased
compensated mileage realized through the increased utilization of three
transportation hubs opened in 1997 and more "mass transports," which
are generally moves of 40 or more inmates per trip.
Operating expenses for the third quarter and first nine months of 1998
increased 34% and 45%, respectively, over the comparable periods of
1997. This increase was due to the increased compensated mandays and
compensated mileage that the Company realized in the third quarter and
first nine months of 1998 as previously mentioned. As a percentage of
revenues, operating expenses decreased to 70% for both the third
quarter and first nine months of 1998 as compared to 73% and 72% for
the respective time periods of 1997.
Lease expense increased significantly in the third quarter and first
nine months of 1998 as a result of the lease agreements that the
Company entered into with Prison Realty in 1997 and 1998. As of
September 30, 1998, the Company had entered into lease agreements with
Prison Realty for 17 facilities, including the four USCC facilities.
General and administrative expenses for the third quarter and first
nine months of 1998 increased 34% and 40% respectively, over the
comparable periods of 1997. However, as a percentage of revenues,
general and administrative expenses for the third quarter and first
nine months of 1998 declined to 3.2% and 3.3% as compared to 3.5% and
3.4% for the comparable periods of 1997. The Company expects that as it
continues to grow, general and administrative expenses will increase in
volume but continue to decrease as a percentage of revenues.
Depreciation and amortization for the third quarter and first nine
months of 1998 increased 46% and 7%, respectively, over the comparable
periods of 1997. The increases are due to the increase in the number of
owned facilities operated by the Company during the third quarter of
1998 as compared to the comparable period of 1997.
OTHER EXPENSES
Interest income for the third quarter and first nine months of 1998 was
$112,000 and $5,323,000, respectively, as compared to $1,625,000 and
$273,000 in the comparable periods of 1997. This interest income was
primarily the result of the sale of facilities to Prison Realty which
allowed the Company to benefit from interest earnings on its increased
cash balances. The decrease in the third quarter 1998 compared to 1997
was due to the significant decline in cash resulting from the company's
continued investment in owned facilities.
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<PAGE> 12
INCOME TAXES
The Company's effective tax rate decreased to approximately 26% in the
third quarter and first nine months of 1998. The decrease is due to the
recognition of certain tax benefits realized in 1997 and 1998. The
Company is recognizing these benefits over the next four years which
should result in maintaining a consistent effective tax rate.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive in relation to the
development of a correctional facility. The Company's efforts to obtain
contracts, construct additional facilities and maintain its day-to-day
operations have required the continued acquisition of funds through
borrowings and equity offerings. The Company has financed these
activities through the sale of capital stock, subordinated convertible
notes and senior secured debt, through the issuance of taxable and
tax-exempt bonds, by bank borrowings, by assisting governmental
agencies in the issuance of municipal bonds and most recently through
the sale and leaseback of certain correctional facilities to Prison
Realty.
Cash flow from operations, calculated on an EBITDA basis, for the nine
months of 1998 was $88,548,000 as compared to $71,216,000 in the
comparable period of 1997. The Company has strengthened its cash flow
through its expanded business, additional focus on larger, more
profitable facilities, the expansion of existing facilities where
economies of scale can be realized, and the continuing effort of cost
containment.
Cash flow from operations for the first nine months of 1998 was
$36,223,000 as compared to $82,080,000 in the comparable period of
1997. This decrease was primarily the result of an increase in accounts
receivable and income taxes payable for the nine months of 1998 as
compared to the comparable period of 1997. The increase in accounts
receivable was due to the company's continued growth as indicated by
the increase in revenues of approximately $157,000,000 during the nine
months of 1998 as compared to nine months of 1997.
In June 1998, the Company increased its revolving credit facility with
a group of banks to $350,000,000. The facility matures on the earlier
of the date of the completion of the Merger or September 6, 1999 and is
used for general corporate purposes and the issuance of letters of
credit. The credit facility bears interest, at the election of the
Company, at either the bank's prime rate or a rate which is 1.25% above
the applicable 30, 60, or 90 day LIBOR rate. Interest is payable
quarterly with respect to prime rate loans and at the expiration of the
applicable LIBOR period with respect to LIBOR based loans. There are no
prepayment penalties associated with the credit facility. The credit
facility requires the Company, among other things, to maintain certain
net worth, leverage and debt service coverage ratios. The Company was
in compliance with these ratios at September 30, 1998. The facility
also limits certain payments and distributions. As of September 30,
1998, there was $235,000,000 borrowed under this facility. Letters of
credit totaling $64,250,000 had been issued leaving the total unused
commitment at $50,750,000.
The Company also has a $2,500,000 credit facility with a bank that
provides for the issuance of letters of credit and matures on the
earlier of the date of the completion of the Merger or September 6,
1999. As of September 30, 1998 there were $2,049,000 in letters of
credit issued, leaving the unused commitment at $451,000.
On November 4, 1998 the Company filed a Registration Statement on Form
S-3 that will allow it, over the next two years, to sell common stock
in one or more offerings up to a total dollar amount of $100,000,000.
The Company intends to use the net proceeds from the sale of the common
stock for general corporate purposes including without limitation,
repayment of indebtedness, financing capital expenditures and working
capital.
The Company anticipates making cash investments in connection with
future acquisitions and expansions. In addition, in accordance with the
developing trend of private prison managers toward making strategic
financial investments in facilities, the Company plans to use a portion
of its cash to finance start-up costs, leasehold improvements and
equity investments in facilities, if
12
<PAGE> 13
appropriate in connection with undertaking new contracts. The Company
believes that the cash flow from operations, the availability of
future capital from Prison Realty and amounts available under its
credit facility and the issuance of common stock under its shelf
registration will be sufficient to meet its capital requirements for
the foreseeable future. Furthermore, management believes that
additional resources may be available to the Company through a variety
of other financing methods.
YEAR 2000 COMPLIANCE
The Year 2000 issue generally relates to computer programs that were
written using two digits rather than four to define the applicable
year. In those programs, the year 2000 may be incorrectly identified as
the year 1900, which can result in a system failure or miscalculations
causing a disruption of operations, including a temporary inability to
process transactions, prepare financial statements or engage in other
normal business activities. The following discussion identifies the
actions taken by the Company to assess and address the Year 2000 issues
it faces.
The Company's Year 2000 compliance program is focused on addressing
Year 2000 readiness in the following areas: (i) the Company's
information technology hardware and software; (ii) material
non-information technology systems; (iii) Year 2000 compliance of third
parties with which the Company has a material relationship; (iv)
systems used to track and report assets not owned by the Company (e.g.
inmate funds and personal effects); and (v) development of contingency
plans.
The Company has completed an initial assessment and remediation of its
key information technology systems including its client server and
minicomputer hardware and operating systems and critical financial and
nonfinancial applications. Remediation efforts as of the date hereof
include upgrades of the Company's minicomputer hardware and critical
financial applications. Based on this initial assessment and
remediation efforts, the Company believes that these key information
technology systems are Year 2000 compliant. However, there can be no
assurance that coding errors or other defects will not be discovered in
the future. The Company is in the process of evaluating the remaining
noncritical information technology systems for Year 2000 compliance.
The Company manages and operates facilities it owns, facilities it
leases from Prison Realty, and facilities owned by and leased from
government entities. The Company is currently evaluating whether the
material non-information technology systems such as security control
equipment, fire suppression equipment and other physical plant
equipment at both the facilities it owns and the facilities it leases
from Prison Realty are Year 2000 compliant. The Company will also
request that the owners of the government facilities it manages provide
Year 2000 certification for material information technology and
non-information technology systems at those facilities.
All the Company's managed correctional facilities, as a part of general
operating policy, have existing contingency plans that are deployed in
the event key operational systems, such as security control equipment
fail (e.g. when a power failure occurs). In addition, the correctional
facilities' key security systems are "fail secure" systems which
automatically "lock down" and are then operated manually should the
related electronic components fail. Therefore, Company management
believes no additional material risks associated with the physical
operation of its correctional facilities are created as a result of
potential Year 2000 issues.
The Company depends upon the proper functioning of third-party computer
and non-information technology systems. These third parties include
government agencies for which the Company provides services, commercial
banks and other lenders, construction contractors, architects and
engineers, and vendors such as providers of food supplies and services,
inmate medical services, telecommunications and utilities. The Company
has initiated communications with third parties with whom it has
important financial or operational relationships to determine the
extent to which they are vulnerable to the Year 2000 issue. The Company
has not yet received sufficient information from all parties about
their remediation plans to predict the outcome of their efforts.
13
<PAGE> 14
If third parties with whom the Company interacts have Year 2000
problems that are not remedied, the following problems could result:
(i) in the case of construction contractors and architects and
engineers, in the delayed construction of correctional facilities; (ii)
in the case of vendors, in disruption of important services upon which
the Company depends, such as medical services, food services and
supplies, telecommunications and electrical power, (iii) in the case of
government agencies, in delayed collection of accounts receivable
potentially resulting in liquidity stress, or (iv) in the case of banks
and other lenders, in the disruption of capital flows potentially
resulting in liquidity stress.
The Company is also evaluating Year 2000 compliance of other software
applications used to track and report assets that are not the property
of the Company. This includes applications used to track and report
inmate funds and the inmates' personal effects.
The Company is currently developing a contingency plan that is expected
to address financial and operational problems that might arise on and
around January 1, 2000. This contingency plan would include
establishing additional sources of liquidity that could be drawn upon
in the event of systems disruption and identifying alternative vendors
and back-up processes that do not rely on computers, whenever possible.
Company management expects to have the contingency plan completed
by mid-year 1999.
The Company has incurred and expects to continue to incur expenses
allocable to internal staff, as well as costs for outside consultants,
computer systems' remediation and replacement and non-information
technology systems' remediation and replacement (including validation)
in order to achieve Year 2000 compliance. The Company currently
estimates that these costs will total approximately $4.0 million. Of
this total it is estimated that $2.5 million will be for the repair of
software problems and $1.5 million will be for the replacement of
problem systems and equipment. As of September 30, 1998, the Company
has incurred $500,000 in Year 2000 program costs. These costs are
expensed as incurred. Management of the Company believes there will be
no material impact on the Company's financial condition or results of
operations resulting from other information technology projects being
delayed due to Year 2000 efforts.
The costs of the Company's Year 2000 compliance program and the date on
which the Company plans to complete it are based on current estimates,
which reflect numerous assumptions about future events, including the
continued availability of certain resources, the timing and
effectiveness of third-party remediation plans and other factors. The
Company can give no assurance that these estimates will be achieved,
and actual results could differ materially from the Company's plans.
Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct relevant computer
source codes and embedded technology, the results of internal and
external testing and the timeliness and effectiveness of remediation
efforts of third parties.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
In July 1998, a consolidated complaint regarding the Merger was filed
with respect to a group of lawsuits originally filed in April 1998 by
certain purported shareholders of the Company in Chancery Court for
Davidson County in Nashville, Tennessee, pursuant to an order in which
these lawsuits were required to be consolidated in to a single action.
The complaint names the Company and its directors as defendants. The
plaintiffs in the action represent a putative class of all public
holders of the Company's common stock.
The complaint alleges, among other things, that the directors of the
Company breached their fiduciary duties to the Company and the
Company's public shareholders. Among the allegations in this complaint
are that the Company's board of directors agreed to sell the Company
at too low a price, compared to its then current market price, without
conducting a process, such as an auction, for a sale. The complaint
seeks, among other things, preliminary and permanent injunctive relief
prohibiting completion of the Merger as presently proposed and
directing the Company or the individual defendants to adopt a
procedure or process, such as an auction, to obtain the highest
possible price for the Company. The complaint also seeks unspecified
damages, attorney's fees and other relief. The Company is contesting
the action vigorously.
Also, on August 6, 1998, a complaint was filed by a purported
shareholder of the Company naming the Company, Doctor R. Crants,
Thomas W. Beasley, Charles A Blanchette and David L. Myers as
defendants. The complaint, filed in Chancery Court for Davidson
County, Tennessee, is a purported class action which alleges that the
individual defendants violated certain provisions of Tennessee law by
selling the Company's common stock during the period from April 1997
through April 1998. Among the allegations in this complaint are that
the Company and the individual defendants made false and misleading
statements to maintain the price of the Company's common stock at an
artificially high level in order to be able to sell their shares. The
Company is contesting this action vigorously.
Item 2. CHANGES IN SECURITIES & USE OF PROCEEDS.
None.
Item 3. DEFAULT UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
2.1 Amended and Restated Agreement and Plan of Merger,
dated as of September 29, 1998, by and among
Corrections Corporation of America,
15
<PAGE> 16
CCA Prison Realty Trust and Prison Realty
Corporation (previously filed as Exhibit 2.1 to
Prison Realty Corporation's Registration Statement
on Form S-4 filed with the Securities and Exchange
Commission on September 30, 1998).
27.1 Financial Data Schedule. (For SEC use only)
27.2 Restated Financial Data Schedule for the Quarter
Ended September 30, 1997 (For SEC use only)
b) Reports on Form 8-K
Report on Form 8-K filed September 30, 1998 relating
to the merger of Corrections Corporation of America
(the "Company") with CCA Prison Realty Trust
("Prison Realty") and the filing of a Registration
Statement on Form S-4 with respect to the merger
which contains the Joint Proxy Statement of the
Company and Prison Realty. In the Report on Form 8-K,
the Company included for following historical
financial statements of Prison Realty:
(i) unaudited condensed consolidated financial
statements for the six month period ended
June 30, 1998 (incorporated therein by
reference to Prison Realty's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1998); and
(ii) audited consolidated financial statements
for the period from July 18, 1997 to
December 31, 1997 (incorporated therein by
reference to Prison Realty's Annual Report
on Form 10-K, as amended, for the year ended
December 31, 1997).
The Company also included the following pro-forma
financial statements of Prison Realty Corporation
("Prison Realty Corporation") (incorporated therein by
reference to the Registration Statement on Form S-4 of
Prison Realty Corporation filed on September 30, 1998
with respect to the merger of the Company with Prison
Realty):
(i) pro forma combined balance sheet as of June
30, 1998;
(ii) pro forma combined statement of operations
for the year ended December 31, 1997; and
(iii) pro forma combined statement of operations
for the six months ended June 30, 1998.
16
<PAGE> 17
SIGNATURES
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.
CORRECTIONS CORPORATION OF AMERICA
----------------------------------
(Registrant)
November 13, 1998 /s/ Darrell K. Massengale
- ------------------------------- ------------------------------
(Date) Darrell K. Massengale
Chief Financial Officer
Secretary
Principal Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CORRECTIONS CORPORATION OF AMERICA FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 27,627
<SECURITIES> 0
<RECEIVABLES> 140,291
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 179,267
<PP&E> 613,892
<DEPRECIATION> 0
<TOTAL-ASSETS> 944,927
<CURRENT-LIABILITIES> 124,771
<BONDS> 0
0
376
<COMMON> 83,109
<OTHER-SE> 329,788
<TOTAL-LIABILITY-AND-EQUITY> 944,927
<SALES> 484,505
<TOTAL-REVENUES> 484,505
<CGS> 0
<TOTAL-COSTS> 407,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,323)
<INCOME-PRETAX> 82,198
<INCOME-TAX> 21,565
<INCOME-CONTINUING> 60,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,633
<EPS-PRIMARY> .76
<EPS-DILUTED> .68
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CORRECTIONS CORPORATIONS OF AMERICA FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 134,197
<SECURITIES> 0
<RECEIVABLES> 82,433
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 226,657
<PP&E> 266,457
<DEPRECIATION> 0
<TOTAL-ASSETS> 618,710
<CURRENT-LIABILITIES> 79,502
<BONDS> 0
0
0
<COMMON> 80,150
<OTHER-SE> 249,111
<TOTAL-LIABILITY-AND-EQUITY> 618,710
<SALES> 325,931
<TOTAL-REVENUES> 325,931
<CGS> 0
<TOTAL-COSTS> 265,656
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (273)
<INCOME-PRETAX> 60,548
<INCOME-TAX> 23,276
<INCOME-CONTINUING> 37,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 37,272
<EPS-PRIMARY> .49
<EPS-DILUTED> .42
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