<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13560
CORRECTIONS CORPORATION OF AMERICA
(Exact name of Registrant as specified in its charter)
AMENDMENT NO. 2
TENNESSEE 62-1156308
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 BURTON HILLS BOULEVARD, NASHVILLE, TENNESSEE 37215
(Address and Zip Code of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 263-3000
102 WOODMONT BLVD., SUITE 800, NASHVILLE, TENNESSEE 37205
(Former name, address and fiscal year if changed since last report)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
------------------
Indicate by check mark whether the Company (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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant was $2,156,105,380 as of March 17, 1998, based
upon the closing price of such stock as reported on the New York Stock Exchange
("NYSE") on that day. There were 80,187,742 shares of common stock, $1.00 par
value per share, outstanding at March 17, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates by reference information from the
definitive Proxy Statement for the Annual Meeting of Shareholders, held on
May 12, 1998.
This Amendment No. 2 amends the 1997 Form 10-K Annual Report filed on
March 30, 1998, as amended by Amendment No. 1 to the 1997 Form 10-K Annual
Report filed on September 15, 1998 (the "Form 10-K"), by amending the following
items as set forth in the pages attached hereto.
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<PAGE> 2
PART I
ITEM 2. PROPERTIES
The Company currently operates facilities located in 19 states, the
District of Columbia, Puerto Rico, Australia and the United Kingdom. As of March
20, 1998, the Company owns five of the 52 domestic facilities it operates,
leases 34 domestic facilities from government agencies and non-profit
corporations and leases 13 facilities from Prison Realty.
On July 18, 1997, the Company and certain of its subsidiaries, sold the
Initial Facilities to Prison Realty for an aggregate purchase price of $308.1
million. The Company sold the real property and all tangible property associated
with each of the Initial Facilities to Prison Realty. Simultaneously with the
sale of each of the facilities to Prison Realty, the Company entered into the
Leases which require the Company to pay all operating expenses, taxes, insurance
and other costs. All of the Leases provide for base rent with certain annual
escalations and have primary terms ranging from 10-12 years which may be
extended at the fair market rates for three additional five-year periods upon
the mutual agreement of the Company and Prison Realty.
In connection with the sale of facilities to Prison Realty, the Company
and certain of its subsidiaries entered into Option Agreements pursuant to which
the Company and certain of its subsidiaries granted Prison Realty exclusive
options to acquire any or all of five correctional facilities until July 18,
2000 for a purchase price equal to the Company's cost of developing,
constructing, and equipping such facilities plus 5% of such costs. The purchase
price formula under the Option Agreements was not intended to represent fair
value for any acquired facility. To date, Prison Realty has exercised its option
to acquire two such facilities, the Northeast Ohio Correction Center located in
Youngstown,
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Ohio and the Torrance County Detention Facility located in Estancia, New Mexico,
for an aggregate purchase price of $108.7 million. In addition, in connection
with the sale and lease-back arrangements, the Company and Prison Realty entered
into a Right to Purchase Agreement pursuant to which Prison Realty has an option
to acquire at fair market value and lease-back to the Company any correctional
or detention facility acquired or developed and owned by the Company in the
future for a period of three years following the date inmates are first received
at such facility. To date, Prison Realty has acquired two facilities, the
Cimarron Correctional Facility located in Cushing, Oklahoma and the Davis
Correctional Facility located in Holdenville, Oklahoma, pursuant to the Right to
Purchase Agreement for an aggregate purchase price of $74.4 million.
The location, name and rated capacity of each of the Company's
operating facilities at March 20, 1998, grouped by state, are set forth in the
following table:
<TABLE>
<CAPTION>
NO. OF OWNED, MANAGED
LOCATION CITY NAME BEDS OR LEASED
- -------- ---- ---- ---- ---------
DOMESTIC
<S> <C> <C> <C> <C>
Arizona Eloy Eloy Detention Center 1,250 (250) Leased
Florence Central Arizona 1,792 Leased
Detention Center
Colorado Las Animas Bent County Correctional 700 Managed
Facility
Walsenburg Huerfano County Correctional
Center 752 Owned
Florida Panama City Bay Correctional Facility 750 Managed
Panama City Bay County Jail 276 Managed
Panama City Bay County Jail Annex 401 Managed
Brooksville Hernando County Jail 302 Managed
Lake City Lake City Correctional Facility 350 Managed
Lecanto Citrus County Detention 300 Managed
Facility
Okeechobee Okeechobee Juvenile Offender 100 Managed
Correctional Center
Indiana Vincennes Southwest Indiana Regional 132 Managed
Youth Village
Indianapolis Marion County Jail II 670 Managed
Kansas Leavenworth Leavenworth Detention Center 327 Leased
Louisiana Winnfield Winn Correctional Center 1,474 Managed
Minnesota Appleton Prairie Correctional Facility 1,338 Managed
Mississippi Greenwood Delta Correctional Facility 1,016 Managed
Woodville Wilkinson County Correctional 500 Managed
Center
Nevada Las Vegas Southern Nevada Women's 500 Owned
Correctional Facility
New Jersey Elizabeth Elizabeth Detention Center 300 Managed
New Mexico Estancia Torrance County Detention 910 Leased
Facility
Grants New Mexico Women's 322 Owned
Correctional Facility
</TABLE>
- --------
( )Indicates number of expansion beds.
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<PAGE> 4
<TABLE>
<CAPTION>
NO. OF OWNED, MANAGED
LOCATION CITY NAME BEDS OR LEASED
- -------- ---- ---- ---- ---------
<S> <C> <C> <C> <C>
Ohio Youngstown Northeast Ohio Correction Center 2,016 Leased
Oklahoma Cushing Cimarron Correctional Facility 960 Leased
Hinton Great Plains Correctional 768 Managed
Facility
Holdenville Davis Correctional Facility 960 Leased
Puerto Rico Guayama Guayama Correctional Center 1,000 Managed
Ponce Ponce Correctional Center 1,000 Managed
Ponce Ponce Young Adult Facility 500 Managed
Tennessee Chattanooga Silverdale Facilities 414 Managed
Clifton South Central Correctional 1,506 Managed
Center
Mason West Tennessee Detention 600 Leased
Facility
Memphis Shelby Training Center 200 Owned
Memphis Tall Trees 63 Managed
Nashville Davidson County Juvenile 100 Managed
Detention Center
Nashville Metro-Davidson County 1,092 Managed
Detention Facility
Whiteville Hardeman County Correctional 2,016 Managed
Center
Texas Bartlett Bartlett State Jail 962 Managed
Bridgeport Bridgeport Pre-Parole Transfer 200 Leased
Facility
Brownfield Brownfield Intermediate 200 Managed
Sanction Facility
Cleveland Cleveland Pre-Release Center 520 Managed
Dallas Jesse R. Dawson State Jail 2,000 Managed
Eden Eden Detention Center 1,225 Managed
Houston Houston Processing Center 411 Leased
Laredo Laredo Processing Center 258 Leased
Liberty Liberty County Jail 382 Managed
Mineral Wells Mineral Wells Pre-Parole 1,503(300) Leased
Transfer Facility
Overton B.M. Moore Pre-Release 500 Managed
Center
Taylor T. Don Hutto Correctional 480 Leased
Center
Venus Venus Pre-Release Center 1,000 Managed
District of Washington Correctional Treatment 866 Owned
Columbia Facility
INTERNATIONAL
Australia Queensland Borallon Corrections Centre 455 Managed
Victoria Metropolitan Women's 125 Owned
Correctional Centre
United Kingdom Redditch Blakenhurst HM Prison 649 Managed
</TABLE>
- -----------------------------
( ) Indicates number of expansion beds.
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<PAGE> 5
For the first ten months of 1997, the Company maintained its corporate
headquarters in approximately 21,600 square feet of office space at 102 Woodmont
Boulevard, Suite 800, Nashville, Tennessee 37205, at a rate comparable for
similar space in the area. In addition, during the same period, the Company also
leased approximately 13,000 square feet of office space in Brentwood, Tennessee,
at a rate comparable for similar space in the area.
In March 1996, the Company acquired approximately 3.25 acres in the
Burton Hills Office Park, Nashville, Tennessee and began construction on a
75,000 square foot office building. Construction on the office building was
completed in November 1997, at which time the Company terminated the office
leases referred to above and moved the Company's corporate headquarters to the
new building. The Company occupies substantially all of the building with
approximately 844 square feet of the office space being leased by the Company to
Prison Realty and approximately 2,284 square feet of office space being leased
to DC Investment Partners, LLC, a Tennessee limited liability company ("DC
Investments"), which serves as the general partner or investment advisor to five
private investment limited partnerships. D. Robert Crants, III is a principal in
DC Investments and is the son of Doctor R. Crants.
The Company's wholly-owned subsidiary, TransCor, leases approximately
15,000 square feet of office space and a maintenance facility comprising
approximately 8,000 square feet at 1510 Fort Negley Boulevard, Nashville,
Tennessee, at a rate comparable for similar space in the area.
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<PAGE> 6
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for the five years ended December
31, 1997 are derived from the Company's consolidated financial statements and
include financial data reflecting the acquisitions of TransCor in December 1994,
Concept in April 1995 and CPI in August 1995, all of which were accounted for as
poolings-of-interests. All information contained in the following table should
be read in conjunction with the consolidated financial statements and related
notes of the Company included herein.
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<PAGE> 7
CORRECTIONS CORPORATION OF AMERICA
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues $ 462,249 $292,513 $207,241 $152,375 $132,534
--------- -------- -------- -------- --------
Expenses:
Operating 330,470 211,208 153,692 123,273 107,837
Lease 18,684 2,786 5,904 741 742
General and administrative 16,025 12,607 13,506 8,939 7,332
Depreciation and amortization 14,093 11,339 6,524 5,753 5,759
--------- -------- -------- -------- --------
379,272 237,940 179,626 138,706 121,670
--------- -------- -------- -------- --------
Operating income 82,977 54,573 27,615 13,669 10,864
Interest expense (income), net (4,119) 4,224 3,952 3,439 4,424
--------- -------- -------- -------- --------
Income before income taxes 87,096 50,349 23,663 10,230 6,440
Provision for income taxes 33,141 19,469 9,330 2,312 832
--------- -------- -------- -------- --------
Net income 53,955 30,880 14,333 7,918 5,608
Preferred stock dividends -- -- -- 204 425
--------- -------- -------- -------- --------
Net income allocable to
common stockholders $ 53,955 $ 30,880 $ 14,333 $ 7,714 $ 5,183
========= ======== ======== ======== ========
Net income per share:
Basic $ .70 $ .43 $ .23 $ .14 $ .10
Diluted $ .61 $ .36 $ .18 $ .12 $ .10
Weighted average shares outstanding:
Basic 77,221 71,763 62,257 54,500 50,185
Diluted 90,239 87,040 81,595 62,384 52,155
BALANCE SHEET:
Total assets $ 697,940 $468,888 $213,478 $141,792 $109,285
Long-term debt, less current
portion 127,075 117,535 74,865 47,984 50,558
Total liabilities excluding
deferred gain 214,112 187,136 116,774 80,035 75,103
Stockholders' equity 348,076 281,752 96,704 61,757 34,182
</TABLE>
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<PAGE> 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following financial analysis should be read in conjunction with the
above financial information concerning the Company.
General
The Company presently has contracts to manage 68 correctional and
detention facilities with an aggregate design capacity of 54,944 beds. Of these
68 facilities, 55 are currently in operation and 13 are under development by the
Company, eight of which are subject to an option to purchase by CCA Prison
Realty Trust ("Prison Realty"), two of which will be financed and owned by the
Company and three of which will be financed and owned by contracting government
entities. The Company, through its United Kingdom joint venture, UK Detention
Services ("UKDS"), manages one facility in the United Kingdom and, through its
Australian joint venture, CC Australia, manages two facilities in Australia. The
Company's ownership interest in UKDS and CC Australia is accounted for under the
equity method. Of the 13 facilities under development by the Company, eight are
scheduled to commence operations during 1998. In addition, at March 9, 1998, the
Company had outstanding written responses to RFPs and other solicitations for
nine projects with an aggregate design capacity of 11,604 beds.
The following table sets forth the number of facilities under contract
or award at the end of the periods shown:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Contracts(1) 67 59 47
Facilities in operation 54 42 38
Design capacity of contracts 52,890 41,135 28,607
Design capacity of facilities in operation 38,509 24,310 20,252
Compensated mandays(2) 10,524,537 7,113,794 4,799,562
</TABLE>
(1) Consists of facilities in operation and facilities under development for
which contracts have been finalized.
(2) Compensated mandays for a period ended are calculated, for per diem rate
facilities, as the number of beds occupied by residents on a daily basis
during the period ended and, for fixed rate facilities, as the design
capacity of the facility multiplied by the number of days the facility
was in operation during the period.
The Company derives substantially all of its revenues from the
management of correctional and detention facilities for national, federal, state
and local government agencies in the United States and abroad.
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<PAGE> 9
Domestic Geographic Market Concentration. The Company currently manages
facilities in 19 states, the District of Columbia and Puerto Rico. Management
revenues by state, as a percentage of the Company's total revenues for the years
ended December 31, 1997, 1996 and 1995, respectively, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ------------------------ ------------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
OF OF TOTAL OF OF TOTAL OF OF TOTAL
FACILITIES REVENUES FACILITIES REVENUES FACILITIES REVENUES
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Arizona 2 12.1% 2 14.7% 2 16.5%
Colorado 2 1.9 1 0.3 -- --
Florida 7 8.9 5 10.3 5 7.8
Indiana 2 .3 1 0.4 1 1.4
Kansas 1 1.9 1 3.0 2 4.6
Louisiana 1 3.1 1 4.7 1 6.1
Minnesota 1 2.6 1 0.7 -- --
Mississippi 1 2.1 1 1.1 -- --
Nevada 1 .4 -- -- -- --
New Jersey 1 2.4 -- -- -- --
New Mexico 2 3.4 3 6.7 3 8.4
Ohio 1 3.5 -- -- -- --
Oklahoma 3 5.6 2 3.0 1 1.9
Puerto Rico 3 6.2 1 4.7 1 0.1
South Carolina -- .8 1 2.1 -- --
Tennessee 9 17.8 8 19.2 8 25.2
Texas 13 21.7 11 23.6 12 22.7
Washington, D.C. 1 3.6 -- -- -- --
</TABLE>
To the extent favorable or unfavorable changes in regulations or market
conditions occur in these markets, such changes would likely have a
corresponding impact on the Company's results of operations.
Revenues for operation of correctional and detention facilities are
recognized as the services are provided, based on a gross rate per day per
inmate or on a fixed monthly rate. Of the Company's 52 domestic facilities in
operation, 48 are compensated on a per diem basis and four are compensated at
fixed monthly rates. The per diem rates or fixed monthly rates vary according to
the type of facility and the extent of services provided at the facility. The
Company has certain contracts which provide for the realization of operating
bonuses which are contingent upon various criteria. The Company also realizes
development fee revenues on the percentage-of-completion method for certain
correctional facilities. Transportation revenues are based on a per mile charge
or a fixed fee per trip.
The Company incurs all facility operating expenses, except for certain
debt service and lease payments with respect to certain facilities that the
Company does not own or lease. The Company currently owns five of the domestic
facilities it manages, manages 34 domestic facilities that are owned or leased
by a government agency, construction of which has been financed by the agency
through one or more of a variety of methods and manages 13 domestic facilities
that are owned and leased to the Company by Prison Realty.
Facility payroll and related taxes constitute the majority of facility
operating expenses for the Company. Substantially all other operating expenses
consist of food, clothing, medical services, utilities, supplies, maintenance,
insurance and other general operating expenses. As inmate populations increase
following the start-up of a facility, operating expenses generally decrease as a
percentage of related revenues. Each facility is fully staffed at the time it is
opened or taken over by the Company, although it may be operating at a
relatively low occupancy rate at such time.
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<PAGE> 10
The Company's general and administrative costs consist of salaries of
officers and other corporate headquarters personnel, legal, accounting and other
professional fees (including pooling expenses related to certain acquisitions),
travel expenses, executive office rental, and promotional and marketing
expenses. The most significant component of these costs relates to the hiring
and training of experienced corrections and administrative personnel necessary
for the implementation and maintenance of the facility management and
transportation contracts.
Operating income for each facility depends upon the relationship
between operating costs, the rate at which the Company is compensated per
manday, and the occupancy rate. The rates of compensation are fixed by contract
and approximately two-thirds of all operating costs are fixed costs. Therefore,
operating income will vary from period to period as occupancy rates fluctuate.
Operating income will be affected adversely as the Company increases the number
of newly-constructed or expanded facilities under management and experiences
initial low occupancy rates. After a management contract has been awarded, the
Company incurs facility start-up costs that consist principally of initial
employee training, travel and other direct expenses incurred in connection with
the contract. These costs are capitalized and amortized on a straight-line basis
over the shorter of the term of the contract plus renewals, or five years.
Depending on the contract, start-up costs are either fully recoverable as
pass-through costs or are billable to the contracting agency over the initial
term of the contract plus renewals. The Company has historically financed
start-up costs through available cash, the issuance of various securities, cash
from operations and borrowings under the Company's revolving credit facility.
Newly opened facilities are staffed according to contract requirements
when the Company begins receiving inmates. Inmates are typically assigned to a
newly opened facility on a regulated, structured basis over a one-to-three month
period. Until expected occupancy levels are reached, operating losses may be
incurred.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of revenues of certain items in the Company's statement of operations
and the percentage change from period to period in such items:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31, 1997 1996
----------------------- COMPARED COMPARED
1997 1996 1995 TO 1996 TO 1995
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 58.0% 41.1%
Expenses:
Operating 71.5 72.2 74.2 56.5 37.4
Lease 4.0 1.0 2.8 570.6 (52.8)
General and administrative 3.5 4.3 6.5 27.1 ( 6.7)
Depreciation and amortization 3.0 3.9 3.2 24.3 73.8
----- ----- -----
Operating income 18.0 18.6 13.3 52.0 97.6
----- ----- -----
Interest expense, net ( .9) 1.4 1.9 (197.5) 6.9
----- ----- -----
Income before income taxes 18.9 17.2 11.4 73.0 112.8
Provision for income taxes 7.2 6.6 4.5 70.2 108.7
----- ----- -----
Net income 11.7% 10.6% 6.9% 74.7 115.4
===== ===== =====
</TABLE>
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues. Total revenues increased 58.0% in 1997 as compared to 1996,
with increases in both management and transportation services. Management
revenues increased 59.5% in 1997, or $167.7 million. This increase was
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<PAGE> 11
primarily due to the opening of new facilities and the expansion of existing
facilities by the Company in 1996 and 1997. In 1997, the Company opened 13 new
facilities with an aggregate design capacity of 11,644 beds, assumed management
of one facility with an aggregate design capacity of 866 beds and expanded six
existing facilities to increase their design capacity by an aggregate of 2,290
beds. Accordingly, 14,800 new beds were brought on line in 1997. Due to the
growth in beds, compensated mandays increased 47.9% in 1997 from 7,113,794 to
10,524,537. Average occupancy remained stable at 93.2% in 1997 as compared to
94.1% in 1996.
Transportation revenues increased $2.0 million or 18.9% in 1997 as
compared to 1996. This growth was primarily the result of an expanded customer
base and increased compensated mileage realized through the opening of two new
transportation hubs in the first quarter of 1997 and more "mass transports,"
which are generally moves of 40 or more inmates per trip.
During the second quarter of 1997, the Company sold 30% of UKDS to
Sodexho and recognized an after-tax gain of $777,000.
Facility Operating Expenses. Facility operating expenses increased
56.5% to 330.5 million in 1997. This increase was due to the increased
compensated mandays and compensated mileage that the Company realized in 1997 as
previously mentioned. As a percentage of revenues, facility operating expenses
decreased to 71.5% in 1997 as compared with 72.2% in 1996. The Company's
management operating cost per compensated manday was $30.51 during 1997 as
compared to $28.82 in 1996. This increase was primarily due to the Company
bringing the 14,800 new beds on line and having multiple facilities in the
start-up phase of operation throughout 1997 which resulted in increased
personnel costs including employee training and overtime. The increase is also
due to the expanded scope of services that the Company has recently encountered
in some of its new contracts.
Lease Expense. Lease expense increased 570.6% in 1997 compared to 1996.
The significant increase in lease expense was the result of the Leases that the
Company entered into with Prison Realty in 1997. Annual first year rent for
these 12 facilities is expected to be approximately $50.0 million. Management
expects that in the future, lease expense will increase as the Company enters
into additional sale-leaseback transactions with Prison Realty.
General and Administrative. General and administrative expenses
increased 27.1% in 1997 over 1996. However, as a percentage of revenues, general
and administrative expenses for 1997 declined to 3.5% as compared to 4.3% for
1996. Management expects that as the Company continues to grow, general and
administrative expenses will increase in volume but continue to decrease as a
percentage of revenues.
Depreciation and Amortization. Depreciation and amortization expenses
increased 24.3% in 1997 over 1996. The increase was due to the 58.4% growth in
beds in operation at the end of 1997 as compared to 1996. Depreciation and
amortization expenses should continue to increase as the Company brings more
beds on line.
Interest Expense, Net. Interest expense for 1997 was actually net
interest income of $4.1 million as compared to $4.2 million of interest expense
in 1996. This change in net interest was primarily the result of the sale of the
12 facilities to Prison Realty for an aggregate purchase price of approximately
$455.1 million which allowed the Company to pay off approximately $182.6 million
in debt and benefit from interest earnings on approximately $128.0 million
invested for a portion of 1997.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues. The Company's total revenues increased 41% from 1995 to 1996
with increases in both management and transportation services. The Company's
management revenues increased 43% in 1996, or $84.2 million. This increase was
due to the opening of new facilities and the expansion of existing facilities by
the Company
34
<PAGE> 12
in 1995 and 1996. In 1996, the Company opened four new facilities with an
aggregate design capacity of 2,501 beds, assumed management of two facilities
with an aggregate design capacity of 899 beds and expanded five existing
facilities to increase their design capacity by an aggregate of 1,058 beds.
Accordingly, 4,458 new beds were brought on line in 1996. Due to the growth in
beds, compensated mandays increased 48% in 1996 from 4,799,562 to 7,113,794.
Average occupancy remained stable at 94.1% for 1996 as compared to 93.9% for
1995.
Transportation revenues increased $1.1 million or 12% in 1996 as
compared to 1995. The 1996 growth was due to a continued marketing effort that
expanded the customer base and resulted in increased compensated mileage.
During the second and fourth quarters of 1996, the Company purchased
the remaining two-thirds of UKDS from its original joint venture partners. After
consideration of several strategic alternatives related to UKDS, the Company
sold 20% of the entity to Sodexho, and recognized an after-tax gain of $515,000.
In conjunction with this transaction, Sodexho was also provided the option to
purchase an additional 30% of UKDS, which option was exercised in the second
quarter 1997.
Facility Operating Expenses. Facility operating expenses increased
37.4% to $213.2 million in 1996 compared to $158.8 million in 1995. This
increase was due to the additional beds on line that increased compensated
mandays and the growth in the transportation services. The average management
operating cost per manday was $28.82 for 1996 as compared to $31.59 for 1995.
The decrease in average cost per manday was due to the Company's ability to
realize more economies of scale as additional beds were brought on line. As a
percentage of revenues, facility operating expenses decreased to 73% from 77%.
This decrease was primarily attributable to the expansion of various facilities
that added lower incremental operating expenses and improved economies of scale.
Salary and related employee benefits constituted approximately 63% and 58% of
facility operating expenses for 1996 and 1995, respectively.
General and Administrative. General and administrative costs decreased
6.7% in 1996 to $13.4 million as compared to $14.3 million in 1995. This
decrease was due to the non-recurring pooling expenses associated with
acquisitions during fiscal 1995 as well as the Company's ability to reduce
duplication in the general and administrative areas by integrating the acquired
companies into its systems.
Depreciation and Amortization. Depreciation and amortization increased
74% to $11.3 million in 1996 as compared to $6.5 million in 1995. The 1996
increase was due to the growth in total beds in owned facilities as well as the
one-time, non-recurring reserve of $850,000 established for the termination of
the Company's contract with South Carolina.
Interest Expenses Net. Interest expense, net, increased 7% in 1996,
consisting of a 48%, or $2.7 million, increase in interest expense, and a 151%,
or $2.4 million, increase in interest income. Interest expense increased due
primarily to the addition of $50.0 million in convertible subordinated notes
issued in February and April 1996, bearing interest at 7.5%. Interest income
increased as a result of the Company investing the net proceeds from an equity
offering, which closed in June 1996.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
In 1994 and 1995, the Company expanded its service capabilities and
broadened its geographic presence in the United States through a series of
strategic acquisitions that complemented the Company's development activities
(collectively, the "Acquisitions"). In December 1994, the Company acquired
TransCor, a nationwide provider of inmate transportation services. In April
1995, the Company acquired Concept, a prison management company with eight
facilities and 4,400 beds under contract at the time of acquisition. In August
1995, the Company acquired CPI, a prison management company with seven
facilities and 2,900 beds under contract at the time of acquisition. The
Company's operating results for 1995 were significantly affected by the
Acquisitions. All of these business combinations were
35
<PAGE> 13
accounted for as a pooling-of-interests and, accordingly, the operations of
TransCor, Concept and CPI have been combined in the accompanying consolidated
financial statements. The discussion herein is based upon the combined
operations of the Company, TransCor, Concept and CPI for all periods presented
in the accompanying consolidated financial statements.
Revenues. Total revenues increased 36% from 1994 to 1995 with increases
in both management and transportation services. Management revenues increased
37% in 1995, or $53.2 million. This increase was due to the opening of new
facilities and the expansions of existing facilities in 1994 and 1995 by the
Company and the related Acquisitions. In 1995, the Company opened five new
facilities with an aggregate design capacity of 3,390 beds and assumed
management of three facilities with an aggregate design capacity of 1,688 beds.
The Company also realized the full-year effect of three facilities added in 1994
with an aggregate design capacity of 1,560 beds. The third contributing factor
to growth was the expansion of 13 existing facilities to increase their design
capacity by 1,887 beds. Due to the growth in the number of beds, compensated
mandays increased 27% in 1995 from 3,768,095 to 4,799,562. Average occupancy
remained stable at 93.9% for 1995 as compared to 93.5% for 1994.
Transportation revenues increased $1.7 million or 21% in 1995 as
compared to 1994. The 1995 growth was due to a continued marketing effort that
expanded the customer base and resulted in increased compensated mileage.
During the first quarter of 1995, the Company purchased the remaining
50% of CC Australia from its original joint venture partner. After consideration
of several strategic alternatives related to CC Australia, the Company then sold
50% of the entity to Sodexho during the second quarter of 1995. The Company
accounted for the 100% ownership period on the equity basis of accounting and
recognized an after-tax gain of $783,000 on the sale.
Facility Operating Expenses. Facility operating expenses increased 29%
to $158.8 million in 1995 compared to $123.5 million in 1994. This increase was
due to the additional beds on line that increased compensated mandays and the
growth in the transportation services. The average management operating cost per
manday was $31.59 for 1995 as compared to $31.16 for 1994. The increase in
average cost per manday was due to the significant number of new beds brought on
line in 1995. As the five new facilities were opened, the full complement of
fixed costs was being incurred prior to full occupancy. As a percentage of
revenues, however, facility operating expenses decreased to 77% from 81%. This
decrease was primarily attributable to the expansion of various facilities that
added lower incremental operating expenses and improved economies of scale.
Salary and related employee benefits constituted approximately 58% and 55% of
facility operating expenses for 1995 and 1994, respectively.
General and Administrative. General and administrative costs increased
52% in 1995 to $14.3 million as compared to $9.4 million in 1994. Included in
1995 were approximately $950,000 of non-recurring pooling expenses related to
the Acquisitions. The Company also expanded its management staff to manage its
significant growth. Additional staff was added to bring new business on line,
resulting in cost being incurred prior to revenue being realized. As all
transition issues are finalized from the acquired operations and the duplicate
services are consolidated, general and administrative cost decrease as a
percentage of revenues.
Depreciation and Amortization. Depreciation and amortization increased
$771,000, to $6.5 million in 1995 as compared to $5.8 million in 1994. The 1995
increase was due to the growth in total beds in owned facilities.
Interest Expenses, Net. Interest expense, net, increased 15% in 1995
due to the assumption of debt related to the Eloy Detention Center in Eloy,
Arizona. In July 1995, the Company acquired the remaining 50% of the investment
in a partnership and assumed the assets and debts.
Income Taxes. In 1995, the Company's effective income tax rate
increased to 39% as compared to 23% in 1994. This increase in taxes was due to
the Company's complete utilization of net operating loss carry forwards,
therefore becoming subject to full statutory tax rates.
36
<PAGE> 14
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, warrants, subordinated convertible notes and senior secured
debt, through the issuance of taxable and tax-exempt bonds, by bank borrowings,
by assisting government agencies in the issuance of municipal bonds and most
recently through the sale and leaseback of certain correctional facilities to
Prison Realty.
The Company's current ratio increased to 2.41 in 1997 as compared to
1.79 in 1996. This improvement was primarily the result of increased cash
balances derived from the sale of the 12 facilities to Prison Realty in 1997.
The ratio of long-term debt to total capitalization decreased to 26.7% at
December 31, 1997 compared to 29.4% at December 31, 1996.
Cash flow from operations for 1997 was $92.0 million as compared to
$24.4 million for 1996. 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.
In February 1996, the Company issued $30.0 million of its convertible
subordinated notes to an investor. The proceeds were used to repay the
outstanding principal under the Company's working capital credit facility and
construction loan. The notes bear interest at 7.5%, payable quarterly, and
require the Company to maintain specific ratio requirements relating to net
worth, cash flow and debt coverage. The notes are convertible into shares of the
Company's common stock at a conversion price, as adjusted, of $25.91 per share.
In April 1996, due to the triggering of its preemptive right in connection with
the issuance of the convertible subordinated notes, Sodexho purchased $20.0
million of convertible subordinated notes under the same terms and conditions.
In June 1996, the Company completed a public offering of 3,700,000
shares of its Common Stock at a price to the public of $37.50 per share. The
proceeds of the offering, after deducting all associated costs, were $131.8
million.
In October 1996, the Company invested $22.5 million in the 564-bed,
medium security Prairie Correctional Facility located in Appleton, Minnesota
through the purchase of Correctional Facility Revenue Bonds previously issued in
connection with the construction of the facility. In 1997, through the expansion
of the facility, the Company increased the capacity to 1,338 beds and increased
its investment in the facility by approximately $36.4 million.
The Company has a revolving credit facility with a group of banks which
matures in September 1999. The credit facility provides for borrowings of up to
$170.0 million for general corporate purposes and 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 .5% 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 maximum
leverage ratios and a minimum debt service coverage ratio. The facility also
limits certain payments and distributions. As of December 31, 1997, there was
$70.0 million borrowed under this facility. Letters of credit totaling $1.6
million had been issued leaving the total unused commitment at $98.4 million.
The Company also has a $2.5 million credit facility with a bank that
provides for the issuance of letters of credit and matures in September 1999. As
of December 31, 1997 there were $1.6 million in letters of credit issued,
leaving the unused commitment at $0.9 million.
In July 1997, the Company sold ten of its facilities to Prison Realty
for approximately $378.3 million. The proceeds were used to pay off $131.0
million of credit facility debt, $42.2 million of first mortgage debt and $9.4
million of senior secured notes. The remaining proceeds were used to fund
existing construction projects and for general
37
<PAGE> 15
working capital purposes. In October 1997, the Company sold an additional
facility to Prison Realty for approximately $38.5 million. In November and
December 1997, the Company purchased two correctional facilities for $74.4
million. Subsequently, the Company sold these facilities to Prison Realty for
$74.4 million. Management expects that as a result of this relationship, the
Company will have access to additional capital that will help fund future
growth.
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 the
facilities, if 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 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. The Company is
currently undergoing routine IRS audits for certain tax years and adverse
conclusions (if any) could negatively impact the Company's cash flows.
Year 2000 Disclosure
In 1997, the Company made significant improvements to its computer
systems, software and applications. Although the Company believes that its
software applications and programs are "Year 2000" compliant, there can be no
assurance that coding errors or other defects will not be discovered in the
future. Also, the Company has not initiated formal communications with any of
the entities which contract with it to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company anticipates it will do so in 1998, in advance of
any impact from the issue. Any Year 2000 compliance problem of the Company or
other third parties could result in a material adverse effect on the Company's
business, prospects, results of operations and financial condition.
38
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation
S-X are included in this Report on Form 10-K commencing on page F-1 as indicated
below.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants....................................... F-1
Consolidated Balance Sheets as of December 31, 1997
and 1996....................................................................... F-2
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996, and 1995........................................ F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996,
and 1995....................................................................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996, and 1995........................................ F-6
Notes to Consolidated Financial Statements..................................... F-9
</TABLE>
39
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
The Financial Statements as set forth under Item 8 of
this Report on Form 10-K have been filed herewith
beginning on Page F-1 of this Report.
(2) Financial Statement Schedules.
All schedules specified in the accounting regulations
of the Securities and Exchange Commission have been
omitted because they are either inapplicable or are
not required.
(3) The Exhibits are listed in the Index of Exhibits
Required by Item 601 of Regulation S-K included
herewith.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
(c) Certain Exhibits. See Item 14(a)(3) above.
(d) Certain Financial Statements. See Item 14(a) (1) and (2) above.
40
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORRECTIONS CORPORATION OF AMERICA
Date: September 25, 1998 By: /s/ Darrell K. Massengale
----------------------------------
Darrell K. Massengale
Chief Financial Officer
and Secretary
(Principal Accounting Officer)
41
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corrections Corporation of America:
We have audited the accompanying consolidated balance sheets of CORRECTIONS
CORPORATION OF AMERICA (a Tennessee corporation) AND SUBSIDIARIES as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Corrections Corporation of America and Subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 16, 1998
F-1
<PAGE> 20
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ----------------------------------------------- -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash, cash equivalents and restricted cash $136,147 $ 8,282
Accounts receivable, net of allowances 89,822 100,551
Prepaid expenses 4,868 2,940
Deferred tax assets - 1,026
Other 2,585 1,643
-------- --------
Total current assets 233,422 114,442
PROPERTY AND EQUIPMENT, NET 266,493 288,697
OTHER LONG-TERM ASSETS:
Notes receivable 59,264 22,859
Investment in direct financing leases 90,184 12,898
Deferred tax assets 10,195 -
Restricted investments - 587
Other 38,382 29,405
-------- --------
Total assets $697,940 $468,888
======== ========
</TABLE>
(continued)
F-2
<PAGE> 21
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ---------------------------------------------------------------- --------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 32,094 $ 39,224
Accrued salaries and wages 9,778 5,487
Income taxes payable 14,128 886
Deferred tax liabilities 1,229 -
Other accrued expenses 20,361 10,016
Current portion of long-term debt 5,847 8,281
Current portion of deferred gain on real estate transactions 13,223 -
--------- ---------
Total current liabilities 96,660 63,894
LONG-TERM DEBT, NET OF CURRENT PORTION 127,075 117,535
DEFERRED TAX LIABILITIES - 4,717
DEFERRED GAIN ON REAL ESTATE TRANSACTIONS, NET
OF CURRENT PORTION 122,529 -
OTHER NONCURRENT LIABILITIES 3,600 990
--------- ---------
Total liabilities 349,864 187,136
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - Series B - $1 (one dollar) par value;
400 shares authorized 380 -
Common stock - $1 (one dollar) par value; 150,000
shares authorized 80,230 75,029
Additional paid-in capital 215,833 165,317
Retained earnings 92,475 42,132
Treasury stock, at cost (40,842) (726)
--------- ---------
Total stockholders' equity 348,076 281,752
--------- ---------
Total liabilities and stockholders' equity $ 697,940 $ 468,888
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 22
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
REVENUES $ 462,249 $292,513 $207,241
--------- -------- --------
EXPENSES:
Operating 330,470 211,208 153,692
Lease 18,684 2,786 5,904
General and administrative 16,025 12,607 13,506
Depreciation and amortization 14,093 11,339 6,524
--------- -------- --------
379,272 237,940 179,626
--------- -------- --------
OPERATING INCOME 82,977 54,573 27,615
INTEREST (INCOME) EXPENSE, NET (4,119) 4,224 3,952
--------- -------- --------
INCOME BEFORE INCOME TAXES 87,096 50,349 23,663
PROVISION FOR INCOME TAXES 33,141 19,469 9,330
--------- -------- --------
NET INCOME $ 53,955 $ 30,880 $ 14,333
========= ======== ========
NET INCOME PER COMMON SHARE:
Basic $ .70 $ .43 $ .23
========= ======== ========
Diluted $ .61 $ .36 $ .18
========= ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC 77,221 71,763 62,257
========= ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, DILUTED 90,239 87,040 81,595
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 23
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------------------------------------
SERIES B ISSUED TREASURY STOCK
--------------- ----------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 - $ - 59,380 $ 59,380 (78) $ (307)
Issuance of common stock - - 1,158 1,158 - -
Stock options exercised and
warrants repurchased or
converted to stock - - 2,228 2,228 74 270
Income tax benefits of incentive
stock option exercises - - - - - -
Conversion of long-term debt - - 1,774 1,774 - -
Net income - - - - - -
---- ------ ------ -------- ------- --------
BALANCE, DECEMBER 31, 1995 - - 64,540 64,540 (4) (37)
Issuance of common stock - - 3,700 3,700 - -
Stock options exercised and
warrants converted to stock - - 6,789 6,789 (19) (689)
Income tax benefits of incentive
stock option exercises - - - - - -
Compensation expense related
to deferred stock awards - - - - - -
Net income - - - - - -
---- ------ ------ -------- ------- --------
BALANCE, DECEMBER 31, 1996 - - 75,029 75,029 (23) (726)
Exchange of preferred stock for
acquisition of American
Corrections Transport 380 380 - - (760) (32,812)
Stock options and warrants
exercised - - 4,197 4,197 (41) (1,975)
Stock repurchased - - - - (123) (5,329)
Income tax benefits of incentive
stock option exercises - - - - - -
Conversion of long-term debt - - 1,004 1,004 - -
Compensation expense related
to deferred stock awards and
stock options - - - - - -
Net income - - - - - -
---- ------ ------ -------- ------- --------
BALANCE, DECEMBER 31, 1997 380 $ 380 80,230 $ 80,230 (947) $(40,842)
==== ====== ====== ======== ======= ========
</TABLE>
<TABLE>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
---------- -------- ----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ (1,182) $ 3,866 $ 61,757
Issuance of common stock 7,184 - 8,342
Stock options exercised and
warrants repurchased or 1,699 1,639
converted to stock (2,558)
Income tax benefits of incentive
stock option exercises 3,987 - 3,987
Conversion of long-term debt 4,872 - 6,646
Net income - 14,333 14,333
--------- -------- ---------
BALANCE, DECEMBER 31, 1995 16,560 15,641 96,704
Issuance of common stock 128,112 - 131,812
Stock options exercised and
warrants converted to stock 8,177 (4,389) 9,888
Income tax benefits of incentive
stock option exercises 11,944 - 11,944
Compensation expense related
to deferred stock awards 524 - 524
Net income - 30,880 30,880
--------- -------- ---------
BALANCE, DECEMBER 31, 1996 165,317 42,132 281,752
Exchange of preferred stock for
acquisition of American
Corrections Transport 32,432 - -
Stock options and warrants
exercised 10,626 (3,612) 9,236
Stock repurchased - - (5,329)
Income tax benefits of incentive
stock option exercises 6,328 - 6,328
Conversion of long-term debt 673 - 1,677
Compensation expense related
to deferred stock awards and
stock options 457 - 457
Net income - 53,955 53,955
--------- -------- ---------
BALANCE, DECEMBER 31, 1997 $ 215,833 $ 92,475 $ 348,076
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 24
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 53,955 $ 30,880 $ 14,333
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,093 11,339 6,524
Deferred and other noncash income taxes (6,329) 13,117 6,162
Other noncash items 457 524 -
Gain on disposal of assets (881) (3,501) (1,284)
Equity in earnings of unconsolidated entities (916) (1,098) (619)
Recognized gain on real estate transactions (5,906) - -
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable 16,027 (55,993) (12,750)
Prepaid expenses (1,928) (1,371) (18)
Other current assets (942) (623) (87)
Accounts payable (7,130) 28,467 1,991
Income taxes payable 13,242 190 374
Accrued expenses 14,636 2,459 3,140
Other liabilities 3,600 - -
--------- --------- --------
Net cash provided by operating activities 91,978 24,390 17,766
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (297,293) (165,703) (25,926)
Acquisition of UCLP - - (5,250)
(Increase) decrease in restricted cash and investments 4,037 (3,025) (619)
Increase in other assets (17,868) (11,163) (8,500)
Investments in affiliates, net 1,707 (3,138) (3,717)
Proceeds from disposals of assets 457,802 6,747 3,763
Investment in notes receivable (38,156) (22,500) -
Increase in direct financing leases (84,295) (3,693) -
Payments received on direct financing
leases and notes receivable 3,462 553 328
--------- --------- --------
Net cash provided by (used in) investing activities 29,396 (201,922) (39,921)
--------- --------- --------
</TABLE>
(continued)
F-6
<PAGE> 25
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(continued)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $ - $ 74,700 $ 7,111
Payments on long-term debt (57,194) (24,443) (8,648)
(Payments on) proceeds from line of credit, net 66,000 (10,500) 13,715
Payment of debt issuance costs and
prepayment penalties (2,772) (433) (260)
Proceeds from issuance of common stock - 131,006 7,859
Proceeds from exercise of stock options and
warrants 9,236 9,889 868
Purchase of treasury stock and warrants (5,329) - (630)
--------- --------- --------
Net cash provided by financing activities 9,941 180,219 20,015
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 131,315 2,687 (2,140)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,832 2,145 4,285
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 136,147 $ 4,832 $ 2,145
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 6,579 $ 8,979 $ 5,145
========= ========= ========
Income taxes $ 24,351 $ 6,630 $ 3,060
========= ========= ========
</TABLE>
(continued)
F-7
<PAGE> 26
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(continued)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Long-term debt was converted into
common stock through the exercise
of stock warrants:
Other assets $ - $ - $ 27
Long-term debt - - (1,428)
Common stock - - 400
Additional paid-in capital - - 1,001
---------- ---------- ---------
$ - $ - $ -
========== ========== =========
Long-term debt was converted into common stock:
Other assets $ 23 $ - $ 53
Long-term debt (1,700) - (6,700)
Common stock 1,004 - 887
Additional paid-in capital 673 - 5,760
---------- ---------- ---------
$ - $ - $ -
========== ========== =========
The Company acquired property and
equipment by assuming long-term debt:
Property and equipment $ - $ - $ (27,392)
Long-term debt - - 27,392
---------- ---------- ---------
$ - $ - $ -
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 27
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corrections Corporation of America, a Tennessee corporation, (together
with its subsidiaries, collectively referred to as the "Company") operates
and manages prisons and other correctional facilities and provides
prisoner transportation services for government agencies. The Company
provides a full range of related services to government agencies,
including managing, financing, designing and constructing new facilities
and redesigning and renovating older facilities. All material intercompany
transactions and balances have been eliminated in consolidation.
At December 31, 1997, the Company has a 50% interest in Corrections
Corporation of Australia PTY LTD ("CC Australia"). CC Australia provides
services similar to the Company in Australia and surrounding countries. At
December 31, 1997, the Company's wholly-owned subsidiary, CCA (UK)
Limited, has a 50% interest in UK Detention Services Limited ("UKDS"), a
United Kingdom joint venture. UKDS provides services similar to the
Company in the United Kingdom. The Company accounts for these investments
under the equity method. Assets and liabilities are converted from their
functional currency into the U.S. dollar utilizing the conversion rate in
effect at the balance sheet date. Revenue and expense items are converted
using the weighted average rate during the period. The excess of the
Company's investment in these unconsolidated subsidiaries over the
underlying equity is being amortized over twenty-five years.
Deferred project development costs consist of costs that can be directly
associated with a specific anticipated contract and, if recovery from that
contract is probable, are deferred until the anticipated contract has been
awarded. At the time the contract is awarded to the Company, the deferred
project development costs are either capitalized as part of property and
equipment or are transferred to project development costs. Costs of
unsuccessful or abandoned contracts are charged to depreciation and
amortization expense when their recovery is not considered probable.
Internal costs incurred in securing new clients including costs of
responding to requests for proposals are expensed as incurred. Facility
start-up costs, principally costs of initial employee training, travel and
other direct expenses incurred in connection with opening of new
facilities, to the extent recoverable under each negotiated contract, are
deferred and recorded as other assets. Project development costs and
start-up costs are amortized on a straight-line basis over the lesser of
the initial term of the contract plus renewals or five years. The
difference between amortization calculated under the Company's policy and
amortization calculated over the initial term of the contract is not
material.
F-9
<PAGE> 28
Debt issuance costs are amortized on a straight-line basis over the life
of the related debt. This amortization is charged to depreciation and
amortization expense.
Property and equipment is carried at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized;
other repairs and maintenance are expensed. Interest is capitalized to the
asset to which it relates in connection with the construction of major
facilities. The cost and accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition
is recognized in income. Depreciation is computed by the straight-line
method for financial reporting purposes and accelerated methods for tax
reporting purposes based upon the estimated useful lives of the related
assets.
Investment in direct financing leases represents the portion of the
Company's management contract with government agencies that represents
payments on building and equipment leases. The leases are accounted for
using the financing method and, accordingly, the minimum lease payments to
be received over the term of the leases less unearned income are
capitalized as the Company's investments in the leases. Unearned income is
recognized as income over the term of the leases using the interest
method.
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." This statement generally requires the Company to record deferred
income taxes for the differences between book and tax bases of its assets
and liabilities.
The Company maintains contracts with various government entities to
manage their facilities for fixed per diem rates or monthly fixed rates.
The Company also maintains contracts with various federal, state and local
government entities for the housing of inmates in Company owned
facilities at fixed per diem rates. These contracts usually contain
expiration dates with renewal options ranging from annual to multi-year
renewals. Most of these contracts have current terms that require renewal
every two to five years. The Company expects to renew these contracts for
periods consistent with the remaining renewal options allowed by the
contracts or other reasonable extensions. Fixed monthly rate revenue is
recorded in the month earned and fixed per diem revenue is recorded based
on the per diem rate multiplied by the number of inmates housed during the
respective period. The Company recognizes development revenue on the
percentage-of-completion method and recognizes any additional management
service revenues when earned or awarded by the respective authorities.
To meet the reporting requirements of SFAS 107, "Disclosures About Fair
Value of Financial Instruments," the Company calculates the fair value of
financial instruments using quoted market prices. At December 31, 1997,
there were no material differences in the book values of the Company's
financial instruments and their related fair values, except for the
Company's convertible subordinated notes (see Note 7) and the forward
contract for convertible subordinated notes (see Note 13), which based on
the conversion rate on the underlying equity securities, have an estimated
fair market value of approximately $378,000.
F-10
<PAGE> 29
For purposes of the statements of cash flows, the Company excludes
restricted cash from cash and cash equivalents. As of December 31, 1997,
the Company has no restricted cash. The Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of," the Company continually
evaluates the recoverability of the carrying values of its long-lived
assets.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income"
effective for fiscal years beginning after December 15, 1997. This
statement requires that changes in the amounts of certain items, including
gains and losses on certain securities, be shown in the financial
statements. The Company does not anticipate the adoption of SFAS 130 to
have a material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information" effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for the way
that public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company will adopt the provisions of SFAS
131 effective January 1, 1998 and, if appropriate, will begin disclosing
information about its operating segments accordingly. The Company does not
anticipate the adoption of SFAS 131 to have a material effect on the
Company's financial statements.
Certain reclassifications of 1996 and 1995 amounts have been made to
conform with the 1997 presentation.
F-11
<PAGE> 30
2. MERGERS AND ACQUISITIONS
On April 25, 1995, the Company issued 5,450 shares of its common stock for
all the outstanding shares of Concept Incorporated ("Concept"). Concept
operates and manages prisons and other correctional facilities for
government agencies.
On August 18, 1995, the Company issued 2,800 shares of its common stock
for all the outstanding shares of Corrections Management Affiliates, Inc.
("CMA") and Correctional Services Group, Inc. ("CSG"). CMA and CSG operate
and manage prisons and other correctional facilities for government
agencies.
The transactions above were accounted for under the pooling-of-interests
method of accounting, and the Company has previously filed restated
financial statements. In the preparation of the consolidated financial
statements, the Company made certain immaterial adjustments and
reclassifications to the historical financial statements of Concept, CMA
and CSG to be consistent with the accounting policies of the Company.
The Company exercised its option to acquire the remaining 50% of its
investment in United-Concept Limited Partnership ("UCLP") during 1995. The
acquisition was accounted for under the purchase method of accounting. The
purchase price was allocated to assets acquired and liabilities assumed
based on the estimated fair market value at the date of the acquisition.
The operations of UCLP on a consolidated basis prior to the acquisition
are not material to the Company's results of operations.
During the first quarter of 1995, the Company purchased the remaining 50%
of CC Australia from its original joint venture partner for $3,717 cash.
After consideration of several strategic alternatives related to CC
Australia, the Company sold 50% of the entity to Sodexho S.A. ("Sodexho"),
a French conglomerate, during the second quarter of 1995. The Company
accounted for the 100% ownership period on the equity basis of accounting
and recognized an after-tax gain of $783 on the sale.
During the second and fourth quarters of 1996, the Company purchased the
remaining two-thirds of UKDS from its original joint venture partners for
an aggregate total of $4,504 cash. After consideration of several
strategic alternatives related to UKDS, the Company sold 20% of the entity
to Sodexho in December 1996 and recognized an after-tax gain of $515.
In conjunction with this transaction, Sodexho was also provided the option
to purchase an additional 30% of UKDS. In the second quarter of 1997,
Sodexho exercised its option to purchase an additional 30% of UKDS, and
the Company recognized an after-tax gain of $777 on the sale.
On October 2, 1997, the Company exchanged 380 shares of Series B
convertible preferred stock for substantially all of the assets of
American Corrections Transport (primarily consisting of 760 shares of the
Company's common stock) in a tax-free reorganization pursuant to Section
368(a)(l)(C) of the Internal Revenue Code of 1986, as amended. Of the
preferred shares issued, 190 are held in escrow for the resolution of
specified contingencies.
F-12
<PAGE> 31
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Land $ 13,632 $ 14,276
Buildings and improvements 95,614 140,470
Equipment 19,863 19,376
Office furniture and fixtures 2,626 2,937
Construction in progress 152,042 137,405
--------- ---------
283,777 314,464
Less accumulated depreciation (17,284) (25,767)
--------- ---------
$ 266,493 $ 288,697
========= =========
</TABLE>
Depreciation expense was $9,710, $7,147, and $4,428 for 1997, 1996 and 1995,
respectively.
4. NOTES RECEIVABLE
Notes receivable consists of the following:
<TABLE>
DECEMBER 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Notes receivable, principal and interest
payments of $535 monthly through
September 2017, interest at 9.25%, secured
by a first mortgage on a facility $ 58,154 $ 22,401
Notes receivable, $700 is secured by a third
mortgage on a facility and is due in
January 1999, remaining balance is due in
monthly principal and interest payments
through April 1999, weighted average
interest rate at 11.14% 876 876
Other 1,310 -
-------- --------
60,340 23,277
Less current portion in accounts receivable (1,076) (418)
-------- --------
$ 59,264 $ 22,859
======== ========
</TABLE>
F-13
<PAGE> 32
5. INVESTMENT IN DIRECT FINANCING LEASES
At December 31, 1997, the Company's investment in direct financing leases
represents building and equipment leases between the Company and certain
government agencies. Certain of the agreements contain provisions that
allow the government agencies to purchase the buildings and equipment for
predetermined prices at specific intervals during the contract period.
A schedule of minimum future rentals to be received under the direct
financing leases at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ---------
<S> <C>
1998 $ 6,909
1999 6,909
2000 6,909
2001 6,909
2002 6,909
Thereafter 88,087
---------
Total minimum obligation 122,632
Less unearned income (28,226)
---------
Present value of direct financing leases 94,406
Less current portion in accounts receivable (4,222)
---------
Long-term portion $ 90,184
=========
</TABLE>
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
Deferred project development costs $ 786 $ 284
Project development costs, less
accumulated amortization of $513 and
$499, respectively 5,832 3,989
Facility start-up costs, less accumulated
amortization of $5,351 and $4,296, respectively 20,459 11,404
Debt issuance costs, less accumulated
amortization of $1,135 and $1,698, respectively 1,191 2,555
Deferred placement fees 2,404 2,404
Investments in affiliates 6,941 7,893
Other assets 769 876
------- -------
$38,382 $29,405
======= =======
</TABLE>
F-14
<PAGE> 33
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revolving Credit Facility payable to a
group of banks, principal due
September 1999, interest payable
quarterly at the bank's prime rate
(8.5% at December 31, 1997) or LIBOR
plus .5% (6.22% at December 31, 1997),
collateralized by the pledge of stock
of the Company's first tier domestic
subsidiaries $ 70,000 $ 4,000
Convertible Subordinated Notes,
principal due at maturity in 2002 with
call provisions beginning in March
2000, interest payable quarterly at
7.5% 50,000 50,000
Convertible Subordinated Notes,
principal due at maturity in 1999 with
call provisions beginning in June 1999,
interest payable semi-annually at 8.5% 7,000 7,000
Convertible Subordinated Notes, principal due at maturity
in 1998 with call provisions beginning in June 1997,
interest payable quarterly at 8.5% 5,800 7,500
Senior Secured Notes, principal paid in
full in July 1997 - 10,328
Secured Notes Payable, principal paid in
full in March 1997 - 1,210
Detention Center Revenue Bonds, principal paid in
full in July 1997 - 24,700
Notes payable to a bank, principal paid in
full in July 1997 - 20,911
Other 122 167
--------- ---------
132,922 125,816
Less current portion (5,847) (8,281)
--------- ---------
$ 127,075 $ 117,535
========= =========
</TABLE>
F-15
<PAGE> 34
At December 31, 1997, the Company's revolving credit facility provides for
borrowings up to $170,000. The facility bears interest at the bank's prime
rate or LIBOR plus .50%, .75% or 1.0% depending on the Company's leverage
ratio. The facility is used for working capital and letters of credit.
Letters of credit totaling $1,600 have been issued to secure the Company's
worker's compensation insurance policy. The unused commitment at December
31, 1997 was $98,400. The facility is subject to renewal on September 6,
1999.
At December 31, 1997, the Company has a $2,500 letter of credit facility.
Letters of credit totaling $1,615 have been issued to secure the Company's
worker's compensation insurance policy, performance bonds and utility
deposits. The unused commitment at December 31, 1997 was $885. The
facility is subject to renewal on September 6, 1999.
Restricted cash of $3,450 at December 31, 1996, represents cash held in
sinking funds established for the funding of current year principal and
interest on certain bonds and current construction obligations.
The Company does not maintain any significant formal or informal
compensating balance arrangements with financial institutions.
The Convertible Subordinated Notes are convertible into the Company's
common stock at prices ranging from $1.69 to $25.91 per share. The Company
may require conversion under certain conditions after the stock has a
market value of 150% of the conversion price for a specified period. In
1997, Convertible Subordinated Notes with a face value of $1,700 were
converted into 1,004 shares of common stock.
The provisions of the credit facilities and notes contain restrictive
covenants, the most restrictive of which are limits on the payment of
dividends, incurrence of additional indebtedness, investments and mergers.
The agreements also require that the Company maintain specific ratio
requirements relating to cash flow, tangible net worth, interest coverage
and earnings. The Company was in compliance with the covenants at December
31, 1997.
The Company capitalized interest of $6,263, $502 and $717 in 1997, 1996
and 1995, respectively. Interest (income) expense, net is comprised of the
following for each year:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Interest expense $ 6,633 $ 8,200 $ 5,534
Interest income (10,752) (3,976) (1,582)
-------- ------- -------
$ (4,119) $ 4,224 $ 3,952
======== ======= =======
</TABLE>
Maturities of long-term debt for the next five years and thereafter are:
1998 - $5,847; 1999 - $77,047; 2000 - $28; 2001 - $0; and 2002 - $50,000.
F-16
<PAGE> 35
8. RELATIONSHIP WITH CCA PRISON REALTY TRUST
On July 18, 1997, the Company sold nine correctional and detention
facilities (the "Initial Facilities") to CCA Prison Realty Trust, a
Maryland real estate investment trust, ("Prison Realty") for an aggregate
amount of $308,100. The Company entered into agreements with Prison Realty
to lease the Initial Facilities back to the Company pursuant to long-term,
non-cancelable triple net leases (the "Leases") which require the Company
to pay all operating expenses, taxes, insurance and other costs. All of
the Leases have initial terms ranging from 10-12 years which may be
extended at the fair market rates for three additional five-year periods
upon the mutual agreement of the Company and Prison Realty.
The Company entered into option agreements with Prison Realty pursuant to
which Prison Realty was granted the option to acquire and leaseback any or
all of five option facilities to the Company at any time during the
three-year period following the acquisition of the Initial Facilities. In
addition, the Company granted Prison Realty an option to acquire, at fair
market value, and leaseback to the Company any correctional or detention
facility acquired or developed and owned by the Company in the future for
a period of three years following the date the Company first receives
inmates at such facility.
Subsequent to the sale of the Initial Facilities through December 31,
1997, the Company individually sold three correctional and detention
facilities to Prison Realty and immediately entered into 10-year lease
agreements with Prison Realty with terms substantially similar to the
Leases with respect to the Initial Facilities.
As of December 31, 1997, the net property and equipment has been removed
from the balance sheet, and the gains realized on the sale transactions
have been deferred and are being recognized as lease expense reductions
over the terms of the leases.
The Chairman of the Board of Directors, President and Chief Executive
Officer of the Company is also the Chairman of the Board of Trustees of
Prison Realty.
F-17
<PAGE> 36
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
CURRENT PROVISION
Federal $ 35,930 $ 5,567 $2,853
State 3,540 785 315
-------- ------- ------
39,470 6,352 3,168
-------- ------- ------
INCOME TAXES CHARGED TO EQUITY
Federal 5,679 10,719 3,567
State 649 1,225 420
-------- ------- ------
6,328 11,944 3,987
-------- ------- ------
DEFERRED PROVISION
Federal (11,360) 1,052 1,946
State (1,297) 121 229
-------- ------- ------
(12,657) 1,173 2,175
-------- ------- ------
Provision for income taxes $ 33,141 $19,469 $9,330
======== ======= ======
</TABLE>
F-18
<PAGE> 37
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
-------- -------
<S> <C> <C>
CURRENT DEFERRED TAX ASSETS
Asset reserves and liabilities not yet
deductible for tax $ 2,546 $ 2,067
Deferred revenue 2,731 -
-------- -------
Total current deferred tax assets 5,277 2,067
-------- -------
CURRENT DEFERRED TAX LIABILITIES
Tax in excess of book amortization 6,480 -
Income item not yet taxable and other 26 1,041
-------- -------
Total current deferred tax liabilities 6,506 1,041
-------- -------
Net current deferred tax assets (liabilities) $ (1,229) $ 1,026
======== =======
NONCURRENT DEFERRED TAX ASSETS
Deferred gain on real estate transactions $ 12,684 $ -
Other 2,245 788
-------- -------
Total noncurrent deferred tax assets 14,929 788
-------- -------
NONCURRENT DEFERRED TAX LIABILITIES
Tax in excess of book depreciation 2,443 3,876
Income items not yet taxable and other 2,291 1,629
-------- -------
Total noncurrent deferred tax liabilities 4,734 5,505
-------- -------
Net noncurrent deferred tax assets (liabilities) $ 10,195 $(4,717)
======== =======
</TABLE>
F-19
<PAGE> 38
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income for the years ended December 31,
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 34.0%
State taxes, net of federal tax benefit 4.0 4.0 4.0
Other items, net (.9) (.3) 1.4
---- ---- ----
38.1% 38.7% 39.4%
==== ==== ====
</TABLE>
F-20
<PAGE> 39
10.EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted the provisions of SFAS
128, "Earnings Per Share." Under the standards established by SFAS 128,
earnings per share is measured at two levels: basic earnings per share and
diluted earnings per share. Basic earnings per share is computed by
dividing net income by the weighted average number of common shares
outstanding during 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. Earnings per share
for 1996 and 1995 have been restated to conform with the provisions 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 years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income $53,955 $30,880 $14,333
Interest expense applicable to
convertible subordinated
notes, net of tax 700 752 740
------- ------- -------
Adjusted net income $54,655 $31,632 $15,073
======= ======= =======
Weighted average common
shares outstanding 77,221 71,763 62,257
Effect of dilutive options and warrants 7,279 9,028 13,089
Conversion of preferred stock 182 - -
Conversion of convertible
subordinated notes 5,557 6,249 6,249
------- ------- -------
Adjusted diluted common
shares outstanding 90,239 87,040 81,595
======= ======= =======
Diluted earnings per share $ .61 $ .36 $ .18
======= ======= =======
</TABLE>
F-21
<PAGE> 40
11.STOCKHOLDERS' EQUITY
Preferred Stock -
The Company has authorized 1,000 shares of $1 (one dollar) par value Series
A preferred stock. At December 31, 1997, no Series A preferred stock was
issued or outstanding.
The Company has authorized 400 shares of $1 (one dollar) par value Series B
convertible preferred stock. The preferred stock has the same voting rights
as the Company's common stock. Dividends are paid on the preferred stock at
a rate equal to two times the dividend being paid on each share of the
Company's common stock. Each share of the preferred stock is convertible
into 1.94 shares of the Company's common stock. The preferred stock is
convertible at the Company's option any time on or after January 1, 1998 and
at the holder's option in twenty-five percent increments beginning July 1,
1999 through January 1, 2001. At December 31, 1997, 380 shares of Series B
convertible preferred stock were issued and outstanding.
Stock Offering -
On June 5, 1996, the Company completed a secondary public offering of 3,700
new shares of its common stock. The net proceeds of $131,812 were used to
develop, acquire and expand correctional and detention facilities.
Stock Split -
On June 5, 1996, the Board of Directors declared a two-for-one stock split
of the Company's common stock to be effective on July 2, 1996. An amount
equal to the par value of the common shares outstanding as of July 2, 1996,
was transferred from additional paid-in capital to the common stock account.
On October 4, 1995, the Board of Directors declared a two-for-one stock
split of the Company's common stock to be effective on October 31, 1995. An
amount equal to the par value of the common shares outstanding as of October
31, 1995, was transferred from additional paid-in capital to the common
stock account. All references to number of shares and to per share data in
the consolidated financial statements have been adjusted for these stock
splits.
Stock Warrants -
The Company has issued stock warrants to certain affiliated and unaffiliated
parties for providing certain financing, consulting and brokerage services
to the Company and to stockholders as a dividend. At December 31, 1997,
1,100 stock warrants were outstanding. The warrants were issued June 23,
1994 with an exercise price of $15.80 per warrant and an expiration date of
December 31, 1999. Each warrant entitles the warrant holder to four common
shares upon exercise. The warrants are exercisable from the date of
issuance.
F-22
<PAGE> 41
Stock Option Plans -
The Company has incentive and nonqualified stock option plans under which
options may be granted to "key employees" as designated by the Board of
Directors. The options are granted with exercise prices that equal market
value on the date of grant. The options are exercisable after the later of
two years from the date of employment or one year after the date of grant
until ten years after the date of the grant.
The Company's Board of Directors approved a stock repurchase program for up
to an aggregate of 400 shares of the Company's stock for the purpose of
funding the employee stock options, stock ownership and stock award plans.
On September 30, 1997, the Company repurchased 123 shares of the Company's
stock from a member of the Board of Directors of the Company at the market
price pursuant to this program.
Stock option transactions relating to the Company's incentive and
nonqualified stock option plans are summarized below:
<TABLE>
<CAPTION>
1997
----------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
-------- -------
<S> <C> <C>
Outstanding at beginning of period 3,503 $ 9.96
Granted 454 23.83
Exercised (1,078) 7.60
Canceled (26) 26.21
------ ------
Outstanding at end of period 2,853 $12.91
====== ======
Available for future grant 2,802 -
====== ======
Exercisable 2,337 $ 9.98
====== ======
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
-------- -------
<S> <C> <C>
Outstanding at beginning of period 3,916 $ 3.73
Granted 903 27.06
Exercised (1,297) 2.92
Canceled (19) 22.97
------ ------
Outstanding at end of period 3,503 $ 9.96
====== ======
Available for future grant 2,950 -
====== ======
Exercisable 2,601 $ 4.06
====== ======
</TABLE>
F-23
<PAGE> 42
<TABLE>
<CAPTION>
1995
----------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at beginning of period 3,470 $ 2.31
Granted 1,248 7.61
Exercised (754) 3.49
Canceled (48) 5.82
------ ------
Outstanding at end of period 3,916 $ 3.73
====== ======
Available for future grant 3,818 -
====== ======
Exercisable 2,680 $ 1.93
====== ======
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and
1995 was $10.14, $12.28 and $3.21 per option, respectively. The options
outstanding at December 31, 1997, have exercise prices between $1.04 and
$33.13 and a weighted average remaining contractual life of 7 years.
In addition to the plans mentioned above, the Company has a nonqualified
stock option plan to encourage stock ownership by selected employees of the
Company. Pursuant to the plan, stock options may be granted to key
employees upon authorization by the Board of Directors. The aggregate
number of options that may be granted under the plan is 1,440. As of
December 31, 1997, 240 options were outstanding at an option price of $1.35
per share.
During 1995, the Company authorized the issuance of 337 shares of common
stock to certain key employees as a deferred stock award. The award becomes
fully vested ten years from the date of grant based on continuous employment
with the Company. The Company is expensing the $3,670 of awards over the
vesting period.
During 1997, the Company granted 80 stock options to a member of the Board
of Directors of the Company to purchase the Company's common stock. The
options were granted with an exercise price less than the market value on
the date of grant. The options are exercisable immediately. The Company is
expensing the $480 of compensation over the four year anticipated service
period.
F-24
<PAGE> 43
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes new financial accounting and reporting
standards for stock-based compensation plans. The Company has adopted the
disclosure-only provisions of SFAS 123 and continues to account for
stock-based compensation using the intrinsic value method as prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations. As a result, no compensation cost
has been recognized for the Company's stock option plans under the criteria
established by SFAS 123. Had compensation cost for the stock option plans
been determined based on the fair value of the options at the grant date for
awards in 1997, 1996 and 1995 consistent with the provisions of SFAS 123,
the Company's net income and net income per share would have been reduced to
the pro forma amounts indicated below for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income - as reported $ 53,955 $ 30,880 $ 14,333
Net income - pro forma 48,911 25,995 13,550
Net income per share - Basic - as reported $ .70 $ .43 $ .23
Net income per share - Basic - pro forma .63 .36 .22
Net income per share - Diluted - as reported $ .61 $ .36 $ .18
Net income per share - Diluted - pro forma .55 .31 .18
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not be
representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 40.4% 49.5% 50.3%
Risk-free interest rate 5.3% 5.9% 6.8%
Expected life of options 4 years 4 years 4 years
</TABLE>
F-25
<PAGE> 44
Employee Stock Ownership Plan -
The Company has an Employee Stock Ownership Plan whereby each employee of
the Company who is at least 18 years of age is eligible for membership in
the plan as of January 1 of their first anniversary year in which they have
completed at least one thousand hours of service.
Benefits, which become 40% vested after four years of service and 100%
vested after five years of service, are paid on death, retirement or
termination. The Board of Directors has discretion in establishing the
amount of the Company contributions. The Company's contributions to the
plan may be in the form of common stock, cash or other property.
Contributions to the plan amounted to $3,723, $2,086 and $1,366 for the
years ended December 31, 1997, 1996 and 1995, respectively.
12.REVENUES AND EXPENSES
Approximately 98%, 99% and 99% of the Company's revenues for the years ended
December 31, 1997, 1996 and 1995, respectively, relate to amounts earned
from federal, state and local government management and transportation
contracts.
The Company had revenues of 21%, 21% and 23% from the federal government and
59%, 54% and 49% from state governments for the years ended December 31,
1997, 1996 and 1995, respectively. One state government accounted for
revenues of 13%, 16% and 18% for the years ended December 31, 1997, 1996 and
1995, respectively. In 1997, the Company recognized $7,900 as additional
management service revenues. For the years ended December 31, 1997 and
1996, the Company recognized after tax development fee income of $2,453 and
$1,629, respectively, related to a contract to design, construct and equip a
managed detention facility.
Accounts receivable include $81,387 and $55,924 due from federal, state and
local governments at December 31, 1997 and 1996, respectively. Accounts
receivable and accounts payable at December 31, 1997, consist of the
following:
<TABLE>
<CAPTION>
ACCOUNTS ACCOUNTS
RECEIVABLE PAYABLE
---------- -------
<S> <C> <C>
Trade $77,506 $21,021
Construction 3,394 11,073
Other 8,922 -
------- -------
$89,822 $32,094
======= =======
</TABLE>
Salaries and related benefits represented 66%, 64% and 60% of operating
expenses for the years ended December 31, 1997, 1996 and 1995, respectively.
F-26
<PAGE> 45
13.INTERNATIONAL ALLIANCE
The Company has entered into an International Alliance (the "Alliance") with
Sodexho to pursue prison management business outside the United States. In
conjunction with the Alliance, Sodexho purchased an equity position in the
Company by acquiring several instruments. In 1994, the Company sold Sodexho
2,800 shares of common stock at $3.75 per share and a $7,000 convertible
subordinated note bearing interest at 8.5%. Sodexho also received 1,100
warrants at $15.80 per warrant that expire December 1999. Each warrant
entitles Sodexho to four common shares upon exercise. In consideration of
the placement of the aforementioned securities, the Company agreed to pay
Sodexho $3,960 over a four-year period ending in 1998. These fees include
debt issuance costs and private placement equity fees. These fees have been
allocated to the various instruments based on the estimated cost to the
Company of raising the various components of capital and are charged to debt
issuance costs or equity as the respective financings are completed. Sodexho
is subject to a standstill agreement that limits their ownership to 25% in
the Company and has certain preemptive rights to retain its percentage
ownership.
In 1995, Sodexho purchased 1,090 shares of common stock for $7.63 per share
pursuant to their contractual preemptive right. Also during 1995, the
Company and Sodexho entered into a forward contract whereby Sodexho would
purchase up to $20,000 of convertible subordinated notes at any time prior
to December 1997. In 1997, the Company and Sodexho extended the expiration
date of this contract to December 1999. The notes will bear interest at
LIBOR plus 1.35% and will be convertible into common shares at a conversion
price of $6.83 per share.
In 1996, the Company sold $20,000 of convertible notes to Sodexho pursuant
to their contractual preemptive right. The notes bear interest at 7.5% and
are convertible into common shares at a conversion price of $25.91 per
share.
14.RELATED PARTY TRANSACTIONS
The Company pays legal fees to a law firm of which one of the partners is a
stockholder and a member of the Board of Directors of the Company. Legal
fees, including fees related to the Company's mergers and acquisitions, paid
to the law firm amounted to $1,109, $683 and $675 in 1997, 1996 and 1995,
respectively.
In 1997, the Company paid $382 to a member of the Board of Directors of the
Company for consulting services related to various contractual
relationships. Also in 1997, the Company paid $911 to National Corrections
and Rehabilitation Corporation, a company that is majority-owned by a member
of the Board of Directors, for services rendered at one of its facilities.
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<PAGE> 46
15.COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, office space and equipment under
long-term operating leases expiring through 2009. Gross lease expense
(before reductions associated with recognition of deferred gains on real
estate transactions) was approximately $22,443, $2,786 and $5,904 for the
years ended December 31, 1997, 1996 and 1995, respectively. Minimum lease
commitments for noncancelable leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1998 $ 52,580
1999 52,628
2000 53,470
2001 55,452
2002 57,670
Thereafter 340,667
--------
Total $612,467
========
</TABLE>
The nature of the Company's business results in claims and litigation
alleging that the Company is liable for damages arising from the conduct of
its employees or others. In the opinion of management, there are no pending
legal proceedings that would have a material effect on the consolidated
financial position or results of operations of the Company.
Each of the Company's management contracts and the statutes of certain
states require the maintenance of insurance. The Company maintains various
insurance policies including employee health, worker's compensation,
automobile liability and general liability insurance. These policies are
fixed premium policies with various deductible amounts that are self-funded
by the Company. Reserves are provided for estimated incurred claims within
the deductible amounts.
The Company guarantees $113 of a bank facility for CC Australia. The
Company has provided a $1,000 performance bond in connection with UKDS's
management contract with the United Kingdom.
The Company provides a limited guarantee related to a bond issue on the Eden
Detention Center in Eden, Texas. The maximum obligation as of December 31,
1997 was $22,290. In the event the Company is required to fund amounts
pursuant to this limited guarantee, the Company will obtain ownership rights
to the facility.
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<PAGE> 47
16.EVENT SUBSEQUENT TO DECEMBER 31, 1997
On January 5, 1998, the Company sold the Davis Correctional Facility,
located in Holdenville, Oklahoma, to Prison Realty for $36,100. In
addition, the Company received proceeds of approximately $3,000 which have
been deferred and is being recognized in reductions in lease expense over
10 years. The Company will continue to operate the medium-security
correctional facility under the terms of a 10-year operating lease, with
terms substantially similar to those of the Leases. Annual first year rent
for the facility is expected to be approximately $4,000.
F-29
<PAGE> 48
Exhibit Index
Exhibit 23.1 - Consent of Independent Public Accountants
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Annual Report on Form 10-K/A of Corrections Corporation
of America and Subsidiaries into the Company's previously filed Registration
Statement File Numbers 33-12503, 33-30825, 33-30826, 33-42068, 33-42614,
33-61173, 333-31711, 333-31743, 333-45193, 333-58339, 333-59155 and
333-63475-01.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
September 24, 1998
