UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-16109
CORRECTIONS CORPORATION OF AMERICA
10 BURTON HILLS BLVD., NASHVILLE, TENNESSEE 37215
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 263-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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 registrants 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X]
No [ ]
The aggregate market value of the shares of the registrants Common Stock held
by non-affiliates was approximately $849,277,386 as of June 30, 2003, based on
the closing price of such shares on the New York Stock Exchange on that day.
The number of shares of the Registrants Common Stock outstanding on March 1,
2004 was 35,066,960.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrants definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders currently scheduled to be held on May 13, 2004, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
CORRECTIONS CORPORATION OF AMERICA
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING
This annual report on Form 10-K contains statements that are forward-looking
statements as defined within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements give our current expectations
of forecasts of future events. All statements other than statements of current
or historical fact contained in this annual report, including statements
regarding our future financial position, business strategy, budgets, projected
costs and plans and objectives of management for future operations, are
forward-looking statements. The words anticipate, believe, continue,
estimate, expect, intend, may, plan, projects, will, and similar
expressions, as they relate to us, are intended to identify forward-looking
statements. These statements are based on our current plans and actual future
activities, and our results of operations may be materially different from
those set forth in the forward-looking statements. In particular these
include, among other things, statements relating to:
Any or all of our forward-looking statements in this annual report may turn out
to be inaccurate. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. They can be affected by
inaccurate assumptions we might make or by known or unknown risks,
uncertainties and assumptions, including the risks, uncertainties and
assumptions described in Risk Factors.
In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this annual report may not occur and
actual results could differ materially from those anticipated or implied in the
forward-looking statements. When you consider these forward-looking
statements, you should keep in mind these risk factors and other cautionary
statements in this annual report, including in Managements Discussion and
Analysis of Financial Condition and Results of Operations and Business.
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Our forward-looking statements speak only as of the date made. We undertake no
obligation to publicly update or revise forward-looking statements, whether as
a result of new information, future events or otherwise. All subsequent
written and oral forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained in this annual report.
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PART I
ITEM 1. BUSINESS
Overview
We are the nations largest owner and operator of privatized correctional and
detention facilities and one of the largest prison operators in the United
States behind only the federal government and four states. At December 31,
2003, we owned 41 correctional, detention and juvenile facilities, three of
which we lease to other operators, and one additional facility which is not yet
in operation. At December 31, 2003, we operated 59 facilities, including 38
facilities that we owned, with a total design capacity of approximately 59,000
beds in 20 states and the District of Columbia. During January 2004, we also
began operating six additional correctional facilities and ceased operating
one, all owned by the State of Texas, increasing the total number of facilities
under our operation to 64, with a total design capacity of approximately 65,000
beds.
We specialize in owning, operating and managing prisons and other correctional
facilities and providing inmate residential and prisoner transportation
services for governmental agencies. In addition to providing the fundamental
residential services relating to inmates, our facilities offer a variety of
rehabilitation and educational programs, including basic education, religious
services, life skills and employment training and substance abuse treatment.
These services are intended to help reduce recidivism and to prepare inmates
for their successful reentry into society upon their release. We also provide
health care (including medical, dental and psychiatric services), food services
and work and recreational programs.
Our website address is www.correctionscorp.com. We make our Form 10-K, Form
10-Q, Form 8-K, and Section 16 reports available on our website, free of
charge, as soon as reasonably practicable after these reports are filed with or
furnished to the Securities and Exchange Commission (the SEC). Information
contained on our website is not part of this report.
Operations
Management and Operation of Facilities
Our customers consist of federal, state, and local correctional and detention
authorities. For the years ended December 31, 2003, 2002, and 2001, federal
correctional and detention authorities represented 37%, 33%, and 30%,
respectively, of our total revenue. Federal correctional and detention
authorities consist of the Federal Bureau of Prisons, or BOP, the United States
Marshals Service, or USMS, and the Bureau of Immigration and Customs
Enforcement, or ICE (formerly the Immigration and Naturalization Service, or
INS).
Our management services contracts typically have terms of one to five years,
and contain multiple renewal options. Most of our facility contracts also
contain clauses that allow the government agency to terminate the contract at
any time without cause, and our contracts are generally subject to annual or
bi-annual legislative appropriation of funds.
We are compensated for operating and managing facilities at an inmate per diem
rate based upon actual or minimum guaranteed occupancy levels. Occupancy rates
for a particular facility are typically low when first opened or when
expansions are first available. However, beyond the start-up period, which
typically ranges from 90 to 180 days, the occupancy rate tends to stabilize.
For the years 2003, 2002, and 2001, the average compensated occupancy, based on
rated capacity, of our facilities was 92.9%, 89.1%, and 88.0%, respectively,
for all of the facilities we owned or managed,
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exclusive of those discontinued. From a capacity perspective, we currently
have three facilities, our Northeast Ohio Correctional Center, North Fork
Correctional Facility, and Tallahatchie County Correctional Facility, that are
substantially vacant. We also have a facility with approximately 1,500 beds
located in Stewart County, Georgia, which is under construction and is expected
to be completed during the third quarter of 2004.
We are required by our contracts to maintain certain levels of insurance
coverage for general liability, workers compensation, vehicle liability and
property loss or damage. We are also required to indemnify the contracting
agencies for claims and costs arising out of our operations and, in certain
cases, to maintain performance bonds and other collateral requirements.
Approximately 81% of the facilities we operated at December 31, 2003 were
accredited by the American Correctional Association Commission on
Accreditation. The American Correctional Association, or the ACA, is an
independent organization comprised of professionals in the corrections industry
that establish standards by which a correctional institution may gain
accreditation.
Operating Procedures
Pursuant to the terms of our management contracts, we are responsible for the
overall operations of our facilities, including staff recruitment, general
administration of the facilities, facility maintenance, security and
supervision of the offenders. We also provide a variety of rehabilitative and
educational programs at our facilities. Inmates at most facilities we manage
may receive basic education through academic programs designed to improve
inmate literacy levels and the opportunity to acquire General Education
Development, or GED, certificates. We also offer vocational training to
inmates who lack marketable job skills. Our craft vocational training programs
are accredited by the National Craft Construction Education and Research. This
organization provides training curriculum and establishes industry standards
for over 4,000 construction and trade organizations in the United States and to
several foreign countries. In addition, we offer life skills transition
planning programs that provide inmates with job search skills, health
education, financial responsibility training, parenting and other skills
associated with becoming productive citizens. At several of our facilities, we
also offer counseling, education and/or treatment to inmates with alcohol and
drug abuse problems through our LifeLine and Strategies for Change programs.
Equally significant, we offer cognitive behavioral programs aimed at changing
the anti-social attitudes and behaviors of offenders. Our faith-based and
religious programs offer all offenders the opportunity to practice their
spiritual beliefs and these programs incorporate the use of thousands of
volunteers, along with our staff, that assist in providing guidance, direction
and post incarceration services to offenders. We believe these programs reduce
recidivism.
We operate our facilities in accordance with company-wide policies and
procedures and the standards and guidelines established by the ACA. The ACA
believes its standards safeguard the life, health and safety of offenders and
personnel and, accordingly, these standards are the basis of the accreditation
process and define policies and procedures for operating programs. The ACA
standards, which are the industrys most widely accepted correctional
standards, describe specific objectives to be accomplished and cover such areas
as administration, personnel and staff training, security, medical and health
care, food services, inmate supervision and physical plant requirements. We
have sought and received ACA accreditation for 48 of the facilities we managed
as of December 31, 2003, and we intend to apply for ACA accreditation for all
of our eligible facilities. The accreditation process is usually completed 18
to 24 months after a facility is opened.
We devote considerable resources to monitoring compliance with contractual and
other requirements and to maintain a high level of quality assurance at each
facility through a system of formal reporting, corporate oversight, site
reviews and inspection by on-site facility administrators.
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Under our management contracts, we usually provide the contracting government
agency with the services, personnel and material necessary for the operation,
maintenance and security of the facility and the custody of inmates. We offer
full logistical support to the facilities we manage, including security, health
care services, transportation, building and ground maintenance, education,
treatment and counseling services and food services.
Our operations department, in conjunction with our legal department, supervises
compliance of each facility with operational standards contained in the various
management contracts as well as those of professional and government agencies.
These responsibilities include developing specific policies and procedures
manuals, monitoring all management contracts, ensuring compliance with
applicable labor and affirmative action standards, training and administration
of personnel, purchasing supplies and developing educational, vocational,
counseling and life skills inmate programs. We provide meals for inmates at
the facilities we operate in accordance with regulatory, client and nutritional
requirements. These catering responsibilities include hiring and training
staff, monitoring food operations, purchasing food and supplies, and
maintaining equipment, as well as adhering to all applicable safety and
nutritional standards and codes.
Facility Portfolio
General
Our facilities can generally be classified according to the level(s) of
security at such facility. Minimum security facilities are facilities having
open housing within an appropriately designed and patrolled institutional
perimeter. Medium security facilities are facilities having either cells,
rooms or dormitories, a secure perimeter and some form of external patrol.
Maximum security facilities are facilities having single occupancy cells, a
secure perimeter and external patrol. Multi security facilities are facilities
with various areas encompassing either minimum, medium or maximum security.
Non-secure facilities are juvenile facilities having open housing that inhibit
movement by their design. Secure facilities are juvenile facilities having
cells, rooms, or dormitories, a secure perimeter and some form of external
patrol.
Our facilities can also be classified according to their primary function. The
primary functional categories are:
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Facilities and Facility Management Contracts
We own 41 correctional, detention and juvenile facilities in 14 states and the
District of Columbia, three of which we lease to other operators, and one
additional facility which is not yet in operation. We also own two corporate
office buildings. A substantial portion of our property and equipment has been
pledged to secure borrowings under our senior secured credit facility.
Additionally, we currently manage 26 correctional and detention facilities
owned by government agencies. The following table sets forth all of the
facilities which we currently (i) own and manage, (ii) own, but are leased to
another operator, and (iii) manage but are owned by a government authority.
The table includes certain information regarding each facility, including the
term of the primary management contract related to such facility, or, in the
case of facilities we own but lease to another operator, the term of such
lease. We have a number of management contracts and leases that expire in 2004
(or have expired) with no remaining renewal options. We continue to operate,
and expect to continue to manage or lease these facilities, although we can
provide no assurance that we will maintain our contracts to manage or lease
these facilities.
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9
10
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Facilities Under Construction or Development.
On September 10, 2003, we
announced our intention to expand by 594 beds the Crowley County Correctional
Facility located in Olney Springs, Colorado, a facility we acquired in January
2003. The anticipated cost of the expansion is approximately $22.0 million and
is estimated to be completed during the third quarter of 2004. This expansion
is being undertaken in anticipation of increasing demand from the States of
Colorado and Wyoming, the current customers at this facility. We also
announced on September 10, 2003 our intention to complete construction of the
Stewart County Correctional Facility located in Stewart County, Georgia. The
anticipated cost to complete the Stewart facility is approximately $22.0
million, with completion also estimated to occur during the third quarter of
2004. Construction on the 1,524-bed Stewart County Correctional Facility began
in August 1999 and was suspended in May 2000. Our decision to complete
construction of this facility is based on anticipated demand from several
government customers having a need for inmate bed capacity in the Southeast
region of the
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country. However, we can provide no assurance that we will be successful in
utilizing the increased bed capacity resulting from these projects.
Additionally, in October 2003, we announced the signing of a new contract with
ICE for up to 905 detainees at our Houston Processing Center located in
Houston, Texas. We also announced our intention to expand the facility by 494
beds from its current 411 beds to 905 beds. The anticipated cost of the
expansion is approximately $29.0 million and is estimated to be completed
during the first quarter of 2005. This expansion is being undertaken in order
to accommodate additional detainee populations that are anticipated as a result
of this contract, which contains a guarantee that ICE will utilize 679 beds at
such time as the expansion is completed.
During January 2004, we announced our intention to expand the Florence
Correctional Center located in Florence, Arizona by 224 beds. The anticipated
cost of the expansion is approximately $6.2 million and is estimated to be
completed during the first quarter of 2005. Upon completion of the expansion,
the Florence Correctional Center will have a total design capacity of 1,824
beds. The facility currently houses federal inmates as well as inmates from
Hawaii and Alaska. The expansion is being undertaken in anticipation of
increasing demand from each of these customers.
During January 2004, we also announced the signing of a new contract with the
USMS to manage up to 800 inmates at our Leavenworth Detention Center located in
Leavenworth, Kansas. To fulfill the requirements of this contract, we will
expand this facility by 256 beds from its current design capacity of 483 beds,
increasing its total design capacity to 739 beds. The new contract provides a
guarantee that the USMS will utilize 400 beds. The anticipated cost to expand
this facility is approximately $10.4 million, with completion estimated to
occur during the fourth quarter of 2004.
Business Development
General
We are currently the nations largest provider of outsourced correctional
management services. We manage approximately 50% of all beds under contract
with private operators of correctional and detention facilities in the United
States.
Under the direction of our business development department and our senior
management and with the aid, where appropriate, of certain independent
consultants, we market our services to government agencies responsible for
federal, state and local correctional facilities in the United States.
Recently, the industry has experienced greater opportunities at the federal
level, as needs are increasing within the BOP, the USMS, and the ICE. The BOP
and USMS were our only customers that accounted for 10% or more of our total
revenue, generating 16% and 14%, respectively, of total revenue in 2003, 14%
and 12%, respectively, in 2002, and 13% and 9%, respectively, in 2001.
Contracts at the federal level generally offer more favorable contract terms.
For example, certain federal contracts contain take-or-pay clauses that
guarantee us a certain amount of management revenue, regardless of occupancy
levels.
We believe that we can further develop our business by, among other things:
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We generally receive inquiries from or on behalf of government agencies that
are considering outsourcing the management of certain facilities or that have
already decided to contract with private enterprise. When we receive such an
inquiry, we determine whether there is an existing need for our services and
whether the legal and political climate in which the inquiring party operates
is conducive to serious consideration of outsourcing. Based on the findings,
an initial cost analysis is conducted to further determine project feasibility.
We pursue our business opportunities primarily through Request for Proposals,
or RFPs, and Request for Qualifications, or RFQs. RFPs and RFQs are issued by
government agencies and are solicited for bid.
Generally, government agencies responsible for correctional and detention
services procure goods and services through RFPs and RFQs. Most of our
activities in the area of securing new business are in the form of responding
to RFPs. As part of our process of responding to RFPs, members of our
management team meet with the appropriate personnel from the agency making the
request to best determine the agencys needs. If the project fits within our
strategy, we submit a written response to the RFP. A typical RFP requires
bidders to provide detailed information, including, but not limited to, the
service to be provided by the bidder, its experience and qualifications, and
the price at which the bidder is willing to provide the services (which
services may include the renovation, improvement or expansion of an existing
facility or the planning, design and construction of a new facility). Based on
the proposals received in response to an RFP, the agency will award a contract
to the successful bidder. In addition to issuing formal RFPs, local
jurisdictions may issue an RFQ. In the RFQ process, the requesting agency
selects a firm believed to be most qualified to provide the requested services
and then negotiates the terms of the contract with that firm, including the
price at which its services are to be provided.
Competitive Strengths
We believe that we benefit from the following competitive strengths:
The Largest and Most Recognized Private Prison Operator.
Our recognition as
the industrys leading private prison operator provides us with significant
credibility with our current and prospective clients. We manage approximately
50% of all privately managed prison beds in the United States. We pioneered
modern-day private prisons with a list of notable accomplishments, such as
being the first company to design, build and operate a private prison and the
first company to manage a private maximum-security facility under a direct
contract with the federal government. We believe that we benefit from certain
economies of scale in purchasing power for food services, health care services
and other supplies.
Available Beds Within Our Existing Facilities.
We currently have three
facilities, our Northeast Ohio Correctional Center, North Fork Correctional
Facility, and Tallahatchie County Correctional Facility, that are substantially
vacant and provide us with approximately 4,500 available beds. We believe,
depending on the customers needs, we can put the beds available at these three
facilities into operation with modest capital outlays. We also have an
additional facility located in Stewart County, Georgia, which is partially
complete. This facility, which is expected to be completed during the third
quarter of 2004, will bring approximately 1,500 additional beds on-line. In
addition to the Northeast Ohio Correctional Center, North Fork Correctional
Center, Tallahatchie County Correctional Facility, and the Stewart County
Correctional Facility, which provide an aggregate of approximately 6,000
available beds, as of December 31, 2003, we had a total of five facilities that
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had 200 or more beds available at each facility, which we believe provides
further potential for increased cash flow.
Diverse, High Quality Customer Base.
We provide services under management
contracts with a diverse client base of approximately 50 different customers
that generally have credit ratings of single-A or better. In addition, with
average inmate lengths of stay between three and five years and a majority of
our contracts having terms between one and five years, our revenue base is
relatively predictable and stable.
Proven Senior Management Team.
Our senior management team has applied their
prior experience and diverse industry expertise to significantly improve our
operations, related financial results, and capital structure. Under our senior
management teams leadership, our average occupancy has increased from 84.8%
in 2000 to 95.4% during the fourth quarter of 2003, while our average inmate
per diem operating margin increased from $8.29 to $13.39 during the same
period.
Financial Flexibility.
As of December 31, 2003, we had cash on hand of $84.2
million and $97.7 million available under a $125.0 million revolving credit
facility. During the year ended December 31, 2003, we generated $202.8 million
in cash through operating activities, and as of December 31, 2003, we had net
working capital of $133.6 million. In addition, we have an effective shelf
registration statement under which we may issue up to $279.6 million in equity
or debt securities, preferred stock and warrants. The shelf registration
statement provides us with the flexibility to issue additional equity or debt
securities, preferred stock, and warrants from time to time when we determine
that market conditions and the opportunity to utilize the proceeds from the
issuance of such securities are favorable. Further, as a result of the
completion of our recapitalization and refinancing transactions during 2003 and
2002, we have significantly reduced our exposure to variable rate debt, lowered
our after tax interest and dividend obligations associated with our outstanding
debt and preferred stock, further increasing our cash flow, and now have no
debt maturities on outstanding indebtedness until 2007. Also as a result of
the completion of these capital transactions, covenants under our senior
secured credit facility were amended to provide greater flexibility for, among
other matters, incurring unsecured indebtedness, capital expenditures, and
permitted acquisitions. At December 31, 2003, our total weighted average
effective interest rate was 7.74% and our total weighted average debt maturity
was 5.9 years.
Business Strategy
Our primary business strategy is to provide quality corrections services, offer
a compelling value, increase occupancy and revenue, and further rationalize our
capital structure, while maintaining our position as the leading owner,
operator and manager of privatized correctional and detention facilities. We
will also consider opportunities for growth, including potential acquisitions
of businesses within our line of business and those that provide complementary
services, provided we believe such opportunities will broaden our market and/or
increase the services we can provide to our customers.
Own and Operate High Quality Correctional and Detention Facilities
. We believe
that our clients choose an outsourced correctional services provider based
primarily upon the quality of the service provided. Approximately 81% of the
facilities we operated as of December 31, 2003 are accredited by the ACA, an
independent organization of corrections industry professionals that establishes
standards by which a correctional facility may gain accreditation. We believe
that this percentage compares favorably to the percentage of
government-operated adult prisons that are accredited by the ACA. The quality
of our operations is further illustrated by the fact that for the three years
ended December 31, 2003, we had an escape ratio at our adult prison
facilities that was less than one-twentieth of the national average
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for adult prisons (according to the 2002 Corrections Yearbook published by the
Criminal Justice Institute). We have experienced wardens managing our
facilities, with an average of over 22 years of corrections experience and an
average tenure of almost eight years with us.
Offer Compelling Value.
We believe that our clients also seek a compelling
value and service offering when selecting an outsourced correctional services
provider. We believe that we offer a cost-effective alternative to our clients
by reducing their correctional services costs. We attempt to accomplish this
through improving operating performance and efficiency through the following
key operating initiatives: (1) standardizing supply and service purchasing
practices and usage; (2) outsourcing the purchase of food products and services
nationwide; (3) improving inmate management, resource consumption and reporting
procedures through the utilization of numerous technological initiatives; and
(4) improving productivity and reducing employee turnover. We also intend to
continue to implement a wide variety of specialized services that address the
unique needs of various segments of the inmate population. Because the
facilities we operate differ with respect to security levels, ages, genders and
cultures of inmates, we focus on the particular needs of an inmate population
and tailor our services based on local conditions and our ability to provide
services on a cost-effective basis.
Increase Occupancy.
Our industry benefits from significant economies of scale,
resulting in lower operating costs per inmate as occupancy rates increase. Our
management team is pursuing a number of initiatives intended to increase
occupancy through obtaining new and additional contracts. We are also focused
on renewing and enhancing the terms of our existing contracts. Given our
significant number of available beds, we believe we can increase operating cash
flow from increased occupancy without incurring significant capital
expenditures. In addition, we have begun to expand several of our existing
facilities and will consider additional expansion opportunities or the
development or purchase of new prison facilities that we believe have favorable
investment returns and increase value to our stockholders.
The Corrections and Detention Industry
We believe we are well-positioned to capitalize on government outsourcing of
correctional management services because of our competitive strengths and
business strategy. The key reasons for this outsourcing trend include:
Growing United States Prison Population
. The average annual growth rate of the
prison population in the United States between December 1995 and December 2002
was 3.6%. The growth rate declined somewhat to 2.6% for the year ended
December 31, 2002, with the sentenced state prison population rising by 2.4%.
However, for the year ended December 31, 2002, the sentenced prison population
for the federal government rose 4.8%. During 2002, the number of federal
inmates increased 5.8%. Federal agencies are collectively our largest customer
and accounted for 37% of our total revenues (when aggregating all of our
federal contracts) for the year ended December 31, 2003. Further growth is
expected to come from increased focus and resources by the Department of
Homeland Security dedicated to illegal immigration, stricter sentencing
guidelines, longer prison sentences and prison terms for juvenile offenders, as
well as the growing demographic of the 18 to 24 year-old at-risk population.
Males between 18 and 24 years of age have demonstrated the highest propensity
for criminal behavior and the highest rates of arrest, conviction, and
incarceration.
Prison Overcrowding
. The significant growth of the prison population in the
United States has led to overcrowding in the state and federal prison systems.
In 2002, at least 25 states and the federal prison system reported operating at
or above capacity. The federal prison system was operating at 33% above
capacity at December 31, 2002.
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Acceptance of Privatization.
The prisoner population housed in privately
managed facilities in the United States as of December 31, 2002 was
approximately 94,000. At December 31, 2002, 12.4% of all federal inmates and
5.8% of all state inmates were held in private facilities. Seven states, all
of which are our customers, housed at least 20% of their prison population in
private facilities as of December 31, 2002 New Mexico (43%), Alaska (31%),
Wyoming (30%), Montana (29%), Oklahoma (28%), Hawaii (25%), and Idaho (20%).
Governmental Budgeting Constraints
. We believe the outsourcing of prison
management services to private operators allows governments to manage
increasing inmate populations while simultaneously controlling correctional
costs and improving correctional services. The use of facilities owned and
managed by private operators allows governments to expand prison capacity
without incurring large capital commitments required to increase correctional
capacity. In addition, contracting with a private operator allows governmental
agencies to add beds without making significant capital investment or incurring
new debt. We believe these advantages translate into significant cost savings
for government agencies. The Presidents fiscal 2005 budget places a
moratorium on new prison construction while promoting more aggressive BOP
contracting with state, local, and private sector prison providers. We believe
these views can lead to opportunities for our growth.
Government Regulation
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. As an owner of correctional and detention
facilities, we have been subject to these laws, ordinances and regulations as
the result of our, and our subsidiaries, operation and management of
correctional and detention facilities. The cost of complying with
environmental laws could materially adversely affect our financial condition
and results of operations.
Phase I environmental assessments have been obtained on substantially all of
the facilities we currently own. The purpose of a Phase I environmental
assessment is to identify potential environmental contamination that is made
apparent from historical reviews of such facilities, review of certain public
records, visual investigations of the sites and surrounding properties, toxic
substances and underground storage tanks. The Phase I environment assessment
reports do not reveal any environmental contamination that we believe would
have a material adverse effect on our business, assets, results of operations
or liquidity, nor are we aware of any such liability. Nevertheless, it is
possible that these reports do not reveal all environmental liabilities or that
there are material environmental liabilities of which we are unaware. In
addition, environmental conditions on properties we own may affect the
operation or expansion of facilities located on the properties.
Business Regulations
The industry in which we operate is subject to extensive federal, state and
local regulations, including educational, health care and safety regulations,
which are administered by many regulatory authorities. Some of the regulations
are unique to the corrections industry, and the combination of regulations we
face is unique. Facility management contracts typically include reporting
requirements, supervision and on-site monitoring by representatives of the
contracting governmental agencies. Corrections officers and juvenile care
workers are customarily required to meet certain training standards and, in
some instances, facility personnel are required to be licensed and subject to
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background investigation. Certain jurisdictions also require us to award
subcontracts on a competitive basis or to subcontract with businesses owned by
members of minority groups. Our facilities are also subject to operational and
financial audits by the governmental agencies with which we have contracts. We
may not always successfully comply with these regulations and failure to comply
can result in material penalties or non-renewal or termination of facility
management contracts.
In addition, private prison managers are increasingly subject to government
legislation and regulation attempting to restrict the ability of private prison
managers to house certain types of inmates. Legislation has been enacted in
several states, and has previously been proposed in the United States Congress,
containing such restrictions. Although we do not believe that existing
legislation will have a material adverse effect on us, there can be no
assurance that future legislation would not have such an effect.
Americans with Disabilities Act
The correctional and detention facilities we operate and manage are subject to
the Americans with Disabilities Act of 1990, as amended. The Americans with
Disabilities Act, or the ADA, has separate compliance requirements for public
accommodations and commercial facilities but generally requires that public
facilities such as correctional and detention facilities be made accessible to
people with disabilities. These requirements became effective in 1992. We
continue to monitor our facilities for compliance with the ADA in order to
conform to its requirements. Compliance with the ADA requirements could
require removal of access barriers and other modifications or capital
improvements at the facilities. Noncompliance could result in the imposition
of fines or an award of damages to private litigants. Although we believe we
are in compliance, any additional expenditures incurred in order to comply with
the ADA at our facilities, if required, would not have a material adverse
effect on our business and operations.
Health Insurance Portability and Accountability Act of 1996
In 1996, Congress enacted the Health Insurance Portability and Accountability
Act of 1996, or HIPAA. HIPAA is designed to improve the portability and
continuity of health insurance coverage and simplify the administration of
health insurance. Certain regulations promulgated by HIPAA become effective in
April 2003 and require health care providers to institute physical and
procedural safeguards to protect the health records of patients and insureds.
Examples of mandated safeguards include requirements that notices of the
entitys privacy practices be sent and that patients and insureds be given the
right to access and request amendments to their records. Authorizations are
required before a provider, insurer or clearinghouse can use health information
for marketing and certain other purposes. Additionally, health plans are
required to electronically transmit and receive standardized health care
information. These regulations require the implementation of compliance
training and awareness programs for our health care service providers
associated with healthcare we provide to inmates, and selected other employees
primarily associated with our employee medical plans.
Insurance
We maintain a general liability insurance policy of $5.0 million for each
facility we operate, as well as insurance in amounts we deem adequate to cover
property and casualty risks, workers compensation and directors and officers
liability. In addition, each of our leases with third-parties provides that
the lessee will maintain insurance on each leased property under the lessees
insurance policies providing for the following coverages: (i) fire, vandalism
and malicious mischief, extended coverage perils, and all physical loss perils;
(ii) comprehensive general public liability (including
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personal injury and property damage); and (iii) workers compensation. Under
each of these leases, we have the right to periodically review our lessees
insurance coverage and provide input with respect thereto.
Insurance expense represents a significant component of our operating expenses.
Each of our management contracts and the statutes of certain states require
the maintenance of insurance. We maintain various insurance policies including
employee health, workers compensation, automobile liability and general
liability insurance. Because we are significantly self-insured for employee
health, workers compensation, and automobile liability insurance, the amount
of our insurance expense is dependent on claims experience, and our ability to
control our claims experience. Our insurance policies contain various
deductibles and stop-loss amounts intended to limit our exposure for
individually significant occurrences. However, the nature of our
self-insurance policies provides little protection for a deterioration in
overall claims experience. We continue to incur increasing insurance expense
due to adverse claims experience and rising health care costs in general. We
are developing a strategy to improve the management of our future loss claims
but can provide no assurance that this strategy will be successful.
Additionally, since the terrorist attacks on September 11, 2001, and due to
concerns over corporate governance and recent corporate accounting scandals,
liability and other types of insurance have become more difficult and costly to
obtain. Unanticipated additional insurance expenses resulting from adverse
claims experience or a continued increasing cost environment for general
liability and other types of insurance could adversely impact our results of
operations and cash flows. See Risk Factors Risks Related to Our Business
and Industry We are subject to necessary insurance costs.
Employees
As of December 31, 2003, we employed approximately 13,800 employees. Of such
employees, approximately 240 were employed at our corporate offices and
approximately 13,560 were employed at our facilities and in our inmate
transportation business. We employ personnel in the following areas: clerical
and administrative, including facility administrators/wardens, security, food
service, medical, transportation and scheduling, maintenance, teachers,
counselors and other support services.
Each of the correctional and detention facilities we currently operate is
managed as a separate operational unit by the facility administrator or warden.
All of these facilities follow a standardized code of policies and procedures.
We have not experienced a strike or work stoppage at any of our facilities.
Approximately 1,200 employees at six of our facilities are represented by labor
unions. This number includes approximately 650 employees at three facilities
who have elected to be represented by a union. At this time, negotiations are
on-going at these locations. In the opinion of management, overall employee
relations are generally considered good.
Competition
The correctional and detention facilities we operate and manage, as well as
those facilities we own but are managed by other operators, are subject to
competition for inmates from other private prison managers. We compete
primarily on the basis of the quality and range of services offered, our
experience in the operation and management of correctional and detention
facilities and our reputation. We compete with government agencies that are
responsible for correctional facilities and a number of privatized correctional
service companies, including, but not limited to, the GEO Group, Inc. (formerly
Wackenhut Corrections Corporation), Correctional Services Corporation and
Cornell Companies, Inc. Other potential competitors may in the future enter
into businesses competitive with us without a substantial capital investment or
prior experience. Competition by other companies may
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adversely affect the number of inmates at our facilities, which could have a
material adverse effect on the operating revenue of our facilities. In
addition, revenue derived from our facilities will be affected by a number of
factors, including the demand for inmate beds, general economic conditions and
the age of the general population.
Risk Factors
As the owner and operator of correctional and detention facilities, we are
subject to certain risks and uncertainties associated with, among other things,
the corrections and detention industry and pending or threatened litigation in
which we are involved. In addition, we are also currently subject to risks
associated with our indebtedness. These risks and uncertainties set forth
below could cause our actual results to differ materially from those indicated
in the forward-looking statements contained herein and elsewhere. The risks
described below are not the only risks we face. Additional risks and
uncertainties not currently known to us or those we currently deem to be
immaterial may also materially and adversely affect our business operations.
Any of the following risks could materially adversely affect our business,
financial condition, or results of operations.
Risks Related to Our Business and Industry
Our results of operations are dependent on revenues generated by our jails,
prisons and detention facilities, which are subject to the following risks
associated with the corrections and detention industry.
General.
We currently operate 64 correctional and detention facilities
including 38 that we own. The facilities we manage have a total design
capacity of approximately 65,000 beds in 20 states and the District of
Columbia. Accordingly, we are subject to the operating risks associated with
the corrections and detention industry, including those set forth below.
We are subject to fluctuations in occupancy levels.
While a substantial
portion of our cost structure is fixed, a substantial portion of our revenues
are generated under facility management contracts that specify per diem
payments based upon occupancy. Under a per diem rate structure, a decrease in
our occupancy rates could cause a decrease in revenue and profitability.
Average compensated occupancy for our facilities in operation for 2003, 2002,
and 2001 was 92.9%, 89.1%, and 88.0%, respectively. Occupancy rates may,
however, decrease below these levels in the future.
We may incur significant start-up and operating costs on new contracts before
receiving related revenues, which may impact our cash flows and not be
recouped.
When we are awarded a contract to manage a facility, we may incur
significant start-up and operating expenses, including the cost of constructing
the facility, purchasing equipment and staffing the facility, before we receive
any payments under the contract. These expenditures could result in a
significant reduction in our cash reserves and may make it more difficult for
us to meet other cash obligations. In addition, a contract may be terminated
prior to its scheduled expiration and as a result we may not recover these
expenditures or realize any return on our investment.
We are subject to termination or non-renewal of our government contracts.
We
typically enter into facility management contracts with governmental entities
for terms of up to five years, with additional renewal periods at the option of
the contracting governmental agency. Notwithstanding any contractual renewal
option of a contracting governmental agency, 29 of our facility management
contracts with the customers listed under Business Facility Portfolio
Facilities and Facility Management Contracts have expired or are currently
scheduled to expire on or before December 31, 2004. See Business Facility
Portfolio Facilities and Facility Management contracts. One or more of
these contracts may not be renewed by the corresponding governmental agency.
In addition,
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these and any other contracting agencies may determine not to exercise renewal
options with respect to any of our contracts in the future. Governmental
agencies typically may also terminate a facility contract at any time without
cause or use the possibility of termination to negotiate a lower fee for per
diem rates. In the event any of our management contracts are terminated or are
not renewed on favorable terms or otherwise, we may not be able to obtain
additional replacement contracts. The non-renewal or termination of any of our
contracts with governmental agencies could materially adversely affect our
financial condition, results of operations and liquidity, including our ability
to secure new facility management contracts from others.
Competition for inmates may adversely affect the profitability of our business.
We compete with government entities and other private operators on the basis
of cost, quality and range of services offered, experience in managing
facilities and reputation of management and personnel. While there are
barriers to entering the market for the management of correctional and
detention facilities, these barriers may not be sufficient to limit additional
competition. In addition, our government customers may assume the management
of a facility we currently manage upon the termination of the corresponding
management contract or, if such customers have capacity at their facilities,
may take inmates currently housed in our facilities and transfer them to
government run facilities. Since we are paid on a per diem basis with no
minimum guaranteed occupancy under most of our contracts, the loss of such
inmates and resulting decrease in occupancy would cause a decrease in our
revenues and profitability. Further, many of our state customers are currently
experiencing budget difficulties. These budget difficulties could result in
decreases to our per diem rates, which could cause a decrease in our revenues
and profitability.
We are dependent on government appropriations.
Our cash flow is subject to the
receipt of sufficient funding of and timely payment by contracting governmental
entities. If the appropriate governmental agency does not receive sufficient
appropriations to cover its contractual obligations, it may terminate our
contract or delay or reduce payment to us. Any delays in payment, or the
termination of a contract, could have an adverse effect on our cash flow and
financial condition. In addition, as a result of, among other things, recent
economic developments, federal, state and local governments have encountered,
and may encounter, unusual budgetary constraints. As a result, a number of
state and local governments are under pressure to control additional spending
or reduce current levels of spending. Accordingly, we may be requested in the
future to reduce our existing per diem contract rates or forego prospective
increases to those rates. In addition, it may become more difficult to renew
our existing contracts on favorable terms or otherwise.
Public resistance to privatization of correctional and detention facilities
could result in our inability to obtain new contracts or the loss of existing
contracts.
The operation of correctional and detention facilities by private
entities has not achieved complete acceptance by either governments or the
public. The movement toward privatization of correctional and detention
facilities has also encountered resistance from certain groups, such as labor
unions and others that believe that correctional and detention facilities
should only be operated by governmental agencies.
Moreover, negative publicity about an escape, riot or other disturbance or
perceived poor conditions at a privately managed facility may result in
publicity adverse to us and the private corrections industry in general. Any
of these occurrences or continued trends may make it more difficult for us to
renew or maintain existing contracts or to obtain new contracts, which could
have a material adverse effect on our business.
Our ability to secure new contracts to develop and manage correctional and
detention facilities depends on many factors outside our control.
Our growth
is generally dependent upon our ability to obtain new contracts to develop and
manage new correctional and detention facilities. This possible growth depends
on a number of factors we cannot control, including crime rates and sentencing
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patterns in various jurisdictions and acceptance of privatization. The demand
for our facilities and services could be adversely affected by the relaxation
of enforcement efforts, leniency in conviction and sentencing practices or
through the decriminalization of certain activities that are currently
proscribed by our criminal laws. For instance, any changes with respect to
drugs and controlled substances or illegal immigration could affect the number
of persons arrested, convicted and sentenced, thereby potentially reducing
demand for correctional facilities to house them. Legislation has been
proposed in numerous jurisdictions that could lower minimum sentences for some
non-violent crimes and make more inmates eligible for early release based on
good behavior. Also, sentencing alternatives under consideration could put
some offenders on probation with electronic monitoring who would otherwise be
incarcerated. Similarly, reductions in crime rates could lead to reductions in
arrests, convictions and sentences requiring incarceration at correctional
facilities.
Moreover, certain jurisdictions recently have required successful bidders to
make a significant capital investment in connection with the financing of a
particular project, a trend that will require us to have sufficient capital
resources to compete effectively. We may not be able to obtain these capital
resources when needed. Additionally, our success in obtaining new awards and
contracts may depend, in part, upon our ability to locate land that can be
leased or acquired under favorable terms. Otherwise desirable locations may be
in or near populated areas and, therefore, may generate legal action or other
forms of opposition from residents in areas surrounding a proposed site.
Failure to comply with unique and increased governmental regulation could
result in material penalties or non-renewal or termination of our contracts to
manage correctional and detention facilities.
The industry in which we operate
is subject to extensive federal, state and local regulations, including
educational, health care and safety regulations, which are administered by many
regulatory authorities. Some of the regulations are unique to the corrections
industry, and the combination of regulations we face is unique. Facility
management contracts typically include reporting requirements, supervision and
on-site monitoring by representatives of the contracting governmental agencies.
Corrections officers and juvenile care workers are customarily required to
meet certain training standards and, in some instances, facility personnel are
required to be licensed and subject to background investigation. Certain
jurisdictions also require us to award subcontracts on a competitive basis or
to subcontract with businesses owned by members of minority groups. Our
facilities are also subject to operational and financial audits by the
governmental agencies with whom we have contracts. We may not always
successfully comply with these regulations, and failure to comply can result in
material penalties or non-renewal or termination of facility management
contracts.
In addition, private prison managers are increasingly subject to government
legislation and regulation attempting to restrict the ability of private prison
managers to house certain types of inmates, such as inmates from other
jurisdictions or inmates at medium or higher security levels. Legislation has
been enacted in several states, and has previously been proposed in the United
States Congress, containing such restrictions. Such legislation may have an
adverse effect on us.
Moreover, the Federal Communications Commission (the FCC) has published for
comment a petition for rulemaking, filed on behalf of an inmate family, which
would prevent private prison managers from collecting commissions from the
operations of inmate telephone systems. We believe that there are sound
reasons for the collection of such commissions by all operators of prisons,
whether public or private. The FCC has traditionally deferred from rulemaking
in this area; however, there is the risk that the FCC could act to prohibit
private prison managers, like us, from collecting such revenues. For 2003, we
derived less than one percent of our total revenue from such commissions.
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Government agencies may investigate and audit our contracts and, if any
improprieties are found, we may be required to refund revenues we have
received, to forego anticipated revenues, and we may be subject to penalties
and sanctions, including prohibitions on our bidding in response to RFPs.
Certain of the governmental agencies we contract with have the authority to
audit and investigate our contracts with them. As part of that process,
government agencies may review our performance of the contract, our pricing
practices, our cost structure and our compliance with applicable laws,
regulations and standards. For contracts that actually or effectively provide
for certain reimbursement of expenses, if an agency determines that we have
improperly allocated costs to a specific contract, we may not be reimbursed for
those costs, and we could be required to refund the amount of any such costs
that have been reimbursed. If a government audit asserts improper or illegal
activities by us, we may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeitures of
profits, suspension of payments, fines and suspension or disqualification from
doing business with certain government entities. Any adverse determination
could adversely impact our ability to bid in response to RFPs in one or more
jurisdictions.
We depend on a limited number of governmental customers for a significant
portion of our revenues.
We currently derive, and expect to continue to
derive, a significant portion of our revenues from a limited number of
governmental agencies. The loss of, or a significant decrease in, business
from the BOP, ICE, USMS, or various state agencies could seriously harm our
financial condition and results of operations. The three federal governmental
agencies with correctional and detention responsibilities, the BOP, ICE, and
USMS, accounted for 37% of our total revenues for the fiscal year ended
December 31, 2003 ($384.1 million). The BOP accounted for 16% of our total
revenues for the fiscal year ended December 31, 2003 ($168.8 million), and the
USMS accounted for 14% of our total revenues for the fiscal year ended December
31, 2003 ($141.1 million). We expect to continue to depend upon the federal
agencies and a relatively small group of other governmental customers for a
significant percentage of our revenues.
We are dependent upon our senior management and our ability to attract and
retain sufficient qualified personnel.
We are dependent upon the continued service of each member of our senior
management team, including John D. Ferguson, our President and Chief Executive
Officer. The unexpected loss of any of these persons could materially
adversely affect our business and operations. We only have employment
agreements with our President and Chief Executive Officer; Executive Vice
President and Chief Financial Officer; Executive Vice President and Chief
Operating Officer; Executive Vice President and Chief Development Officer; and
Executive Vice President, General Counsel and Secretary, all of which expire in
2004 subject to annual renewals unless either party gives notice of
termination.
In addition, the services we provide are labor-intensive. When we are awarded
a facility management contract or open a new facility, we must hire operating
management, correctional officers and other personnel. The success of our
business requires that we attract, develop and retain these personnel. Our
inability to hire sufficient qualified personnel on a timely basis or the loss
of significant numbers of personnel at existing facilities could adversely
affect our business and operations.
We are subject to necessary insurance costs.
Workers compensation, employee health and general liability insurance
represent significant costs to us. Because we significantly self-insure for
workers compensation, employee health, and general liability risks, we
continue to incur increasing insurance costs due to adverse claims experience
and
23
rising health care costs in general. In addition, since the events of
September 11, 2001, and due to concerns over corporate governance and recent
corporate accounting scandals, liability and other types of insurance have
become more difficult and costly to obtain. Unanticipated additional insurance
costs could adversely impact our results of operations and cash flows, and the
failure to obtain or maintain any necessary insurance coverage could have a
material adverse effect on us.
We may be adversely affected by inflation.
Many of our facility management contracts provide for fixed management fees or
fees that increase by only small amounts during their terms. If, due to
inflation or other causes, our operating expenses, such as wages and salaries
of our employees, and insurance, medical and food costs, increase at rates
faster than increases, if any, in our management fees, then our profitability
would be adversely affected. See Managements Discussion and Analysis of
Financial Condition and Results of Operations Inflation.
We are subject to legal proceedings associated with owning and managing
correctional and detention facilities.
Our ownership and management of correctional and detention facilities, and the
provision of inmate transportation services by a subsidiary, expose us to
potential third-party claims or litigation by prisoners or other persons
relating to personal injury or other damages resulting from contact with a
facility, its managers, personnel or other prisoners, including damages arising
from a prisoners escape from, or a disturbance or riot at, a facility we own
or manage, or from the misconduct of our employees. To the extent the events
serving as a basis for any potential claims are alleged or determined to
constitute illegal or criminal activity, we could also be subject to criminal
liability. Such liability could result in significant monetary fines and could
affect our ability to bid on future contracts and retain our existing
contracts. In addition, as an owner of real property, we may be subject to a
variety of proceedings relating to personal injuries of persons at such
facilities. The claims against our facilities may be significant and may not
be covered by insurance. Even in cases covered by insurance, our deductible
may be significant.
We are subject to risks associated with ownership of real estate.
Our ownership of correctional and detention facilities subjects us to risks
typically associated with investments in real estate. Investments in real
estate and, in particular, correctional and detention facilities, are
relatively illiquid, and therefore, our ability to divest ourselves of one or
more of our facilities promptly in response to changed conditions is limited.
Investments in correctional and detention facilities, in particular, subject us
to risks involving potential exposure to environmental liability and uninsured
loss. Our operating costs may be affected by the obligation to pay for the
cost of complying with existing environmental laws, ordinances and regulations,
as well as the cost of complying with future legislation. In addition,
although we maintain insurance for many types of losses, there are certain
types of losses, such as losses from earthquakes, riots and acts of terrorism,
which may be either uninsurable or for which it may not be economically
feasible to obtain insurance coverage, in light of the substantial costs
associated with such insurance. As a result, we could lose both our capital
invested in, and anticipated profits from, one or more of the facilities we
own. Further, it is possible to experience losses that may exceed the limits
of insurance coverage.
In addition, our increased focus on facility expansions poses an increased
risk, including cost overruns caused by various factors, many of which are
beyond our control, such as weather, labor conditions, and material shortages,
resulting in increased construction costs.
24
Certain of our facilities are subject to options to purchase and reversions.
Ten of our facilities are or will be subject to an option to purchase by
certain governmental agencies. Such options are exercisable by the
corresponding contracting governmental entity generally at any time during the
term of the respective facility management contract. See Business Facility
Portfolio Facilities and Facility Management Contracts. If any of these
options are exercised, there exists the risk that we will be unable to invest
the proceeds from the sale of the facility in one or more properties that yield
as much cash flow as the property acquired by the government entity. In
addition, in the event any of these options are exercised, there exists the
risk that the contracting governmental agency will terminate the management
contract associated with such facility. For the year ended December 31, 2003,
the facilities subject to these options generated $187.9 million in revenue
(18% of total revenue) and incurred $140.2 million in operating expenses.
Certain of the options to purchase are exercisable at prices below fair market
value. See Business Facility Portfolio Facilities and Facility Management
Contracts.
In
addition, ownership of three of our facilities (including two that are
also subject to options to purchase) will, upon the expiration of certain
ground leases with remaining terms generally ranging from 13 to 15 years,
revert to the respective governmental agency contracting with us. See
Business Facility Portfolio Facilities and Facility Management Contracts.
At the time of such reversion, there exists the risk that the contracting
governmental agency will terminate the management contract associated with such
facility. For the year ended December 31, 2003, the facilities subject to
reversion generated $61.7 million in revenue (6% of total revenue) and incurred
$46.4 million in operating expenses.
We may be adversely affected by the rising cost and increasing difficulty of
obtaining adequate levels of surety credit on favorable terms.
We are often required to post bid or performance bonds issued by a surety
company as a condition to bidding on or being awarded a contract. Availability
and pricing of these surety commitments are subject to general market and
industry conditions, among other factors. Recent events in the economy have
caused the surety market to become unsettled, causing many reinsurers and
sureties to reevaluate their commitment levels and required returns. As a
result, surety bond premiums generally are increasing. If we are unable to
effectively pass along the higher surety costs to our customers, any increase
in surety costs could adversely affect our operating results. We cannot assure
you that we will have continued access to surety credit or that we will be able
to secure bonds economically, without additional collateral, or at the levels
required for any potential facility development or contract bids. If we are
unable to obtain adequate levels of surety credit on favorable terms, we would
have to rely upon letters of credit under our credit facility, which would
entail higher costs even if such borrowing capacity was available when desired
at the time, and our ability to bid for or obtain new contracts could be
impaired.
Our issuance of additional series of preferred stock could adversely affect
holders of our common stock and discourage a takeover.
Our board of directors has the power to issue up to 50.0 million shares of
preferred stock without any action on the part of our stockholders. Our board
of directors also has the power, without stockholder approval, to set the terms
of any new series of preferred stock that may be issued, including voting
rights, dividend rights, preferences over our common stock with respect to
dividends or in the event of a dissolution, liquidation or winding up and other
terms. In the event that we issue additional shares of preferred stock in the
future that has preference over our common stock, with respect to payment of
dividends or upon our liquidation, dissolution or winding up, or if we issue
preferred stock with voting rights that dilute the voting power of our
25
common stock, the rights of the holders of our common stock or the market price
of our common stock could be adversely affected. In addition, the ability of
our board of directors to issue shares of preferred stock without any action on
the part of our stockholders may impede a takeover of us and prevent a
transaction favorable to our stockholders.
Our charter and bylaws and Maryland law could make it difficult for a third
party to acquire our company.
The Maryland General Corporation Law and our charter and bylaws contain
provisions that could delay, deter or prevent a change in control of our
company or our management. These provisions could also discourage proxy
contests and make it more difficult for our stockholders to elect directors and
take other corporate actions. These provisions:
We are also subject to anti-takeover provisions under Maryland law, which could
also delay or prevent a change of control. Together, these provisions of our
charter and bylaws and Maryland law may discourage transactions that otherwise
could provide for the payment of a premium over prevailing market prices for
our common stock, and also could limit the price that investors are willing to
pay in the future for shares of our common stock.
Risks Related to Our Leveraged Capital Structure
Our substantial indebtedness could adversely affect our financial health and
prevent us from fulfilling our obligations under our debt securities or the
terms of our preferred stock.
We have a significant amount of indebtedness. As of December 31, 2003, we had
total indebtedness of $1.0 billion.
Our substantial indebtedness could have important consequences to you. For
example, it could:
26
Our senior secured credit facility and other debt instruments have restrictive
covenants that could affect our financial condition.
The indenture related to our aggregate principal amount of $250.0 million
9.875% senior notes due 2009, the indenture related to our aggregate principal
amount of $250.0 million 7.5% senior notes due 2011, the indenture related to
our aggregate principal amount of $200.0 million 7.5% senior notes due 2011,
collectively referred to herein as our senior notes, and our senior secured
credit facility contain financial and other restrictive covenants that limit
our ability to engage in activities that may be in our long-term best
interests. Our ability to borrow under our senior secured credit facility is
subject to financial covenants, including leverage, interest rate and fixed
charge coverage ratios. Our senior secured credit facility limits our ability
to effect mergers, asset sales and change of control events. These covenants
also contain restrictions regarding our ability to make capital expenditures in
the future. The indentures related to our senior notes contain limitations on
our ability to effect mergers and change of control events, as well as other
limitations, including:
Our failure to comply with these covenants could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
debts. We do not have sufficient working capital to satisfy our debt
obligations in the event of an acceleration of all or a significant portion of
our outstanding indebtedness.
Despite current indebtedness levels, we may still incur more debt. This could
further exacerbate the risks described above.
The terms of the indentures for our senior notes and our senior secured credit
facility restrict our ability to incur significant additional indebtedness in
the future. However, in the future we may refinance all or a portion of our
indebtedness, including our senior secured credit facility, and incur more
indebtedness as a result. As of December 31, 2003, we had $97.7 million of
additional borrowing capacity available under our $125.0 million revolving
credit facility. If new debt is added to our and our subsidiaries current
debt levels, the related risks that we and they now face could intensify.
Servicing our indebtedness will require a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness and to fund
planned capital expenditures will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
27
The risk exists that our business will be unable to generate sufficient cash
flow from operations or that future borrowings will not be available to us
under our senior secured credit facility in an amount sufficient to enable us
to pay our indebtedness, including our existing senior notes, or new debt
securities, or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness, including our senior notes, or new debt
securities, on or before maturity. We may not, however, be able to refinance
any of our indebtedness, including our senior secured credit facility and
including our senior notes, or new debt securities on commercially reasonable
terms or at all.
Because portions of our indebtedness have floating interest rates, a general
increase in interest rates will adversely affect cash flows.
Our senior secured credit facility bears interest at a variable rate. To the
extent our exposure to increases in interest rates is not eliminated through
interest rate protection agreements, such increases will adversely affect our
cash flows. In accordance with terms of the senior secured credit facility, we
have entered into an interest rate cap agreement capping the London Interbank
Offered Rate, or LIBOR, at 5.0% (prior to our contractual interest rate margin)
on outstanding balances of $200.0 million through expiration of the cap
agreement on May 20, 2004. There can be no assurance that these interest rate
protection provisions will provide sufficient protection from increases in
interest rates, or that once the interest rate protection agreement expires, we
will enter into additional interest rate protection agreements. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations Quantitative and Qualitative Disclosures About Market Risk for a
further discussion of our exposure to interest rate increases.
We are required to repurchase all or a portion of our senior notes upon a
change of control.
Upon certain change of control events, as that term is defined in the
indentures for our senior notes, including a change of control caused by an
unsolicited third party, we are required to make an offer in cash to repurchase
all or any part of each holders notes at a repurchase price equal to 101% of
the principal thereof, plus accrued interest. The source of funds for any such
repurchase would be our available cash or cash generated from operations or
other sources, including borrowings, sales of equity or funds provided by a new
controlling person or entity. Sufficient funds may not be available to us,
however, at the time of any change of control event to repurchase all or a
portion of the tendered notes pursuant to this requirement. Our failure to
offer to repurchase notes, or to repurchase notes tendered, following a change
of control will result in a default under the respective indentures, which
could lead to a cross-default under our senior secured credit facility and
under the terms of our other indebtedness. In addition, our senior secured
credit facility prohibits us from making any such required repurchases. Prior
to repurchasing the notes upon a change of control event, we must either repay
outstanding indebtedness under our senior secured credit facility or obtain the
consent of the lenders under our senior secured credit facility. If we do not
obtain the required consents or repay our outstanding indebtedness under our
senior secured credit facility, we would remain effectively prohibited from
offering to purchase the notes.
ITEM 2. PROPERTIES.
The properties we owned at December 31, 2003 are described under Item 1. and in
Note 4 of the Notes to the Financial Statements contained in this annual
report.
28
ITEM 3. LEGAL PROCEEDINGS
General
The nature of our business results in claims and litigation alleging that we
are liable for damages arising from the conduct of our employees, inmates or
others. In the opinion of management, other than the litigation matters
discussed below, there are no pending legal proceedings that would have a
material effect on our consolidated financial position, results of operations
or cash flows. Adversarial proceedings and litigation are, however, subject to
inherent uncertainties, and unfavorable decisions and rulings could occur which
could have a material adverse impact on our consolidated financial position,
results of operations or cash flows for the period in which such decisions and
rulings occur, or future periods. See Risk Factors Risks Related to our
Business We are subject to legal proceedings associated with owning and
managing correctional and detention facilities.
Litigation
During the second quarter of 2002, we completed the settlement of certain
claims made against us as the successor to U.S. Corrections Corporation
(USCC), a privately-held owner and operator of correctional and detention
facilities which was acquired by a predecessor of ours in April 1998, by
participants in USCCs Employee Stock Ownership Plan (ESOP). As a result of
the settlement, we made a cash payment of $575,000 to the plaintiffs in the
action. We are currently in litigation with USCCs insurer seeking to recover
all or a portion of this settlement amount. The USCC ESOP litigation, entitled
Horn v. McQueen
,
continued to proceed, however, against two other defendants,
Milton Thompson and Robert McQueen, both of whom were stockholders and
executive officers of USCC and trustees of the ESOP prior to our acquisition of
USCC. In the
Horn
litigation, the ESOP participants allege numerous violations
of the Employee Retirement Income Security Act, including breaches of fiduciary
duties to the ESOP by causing the ESOP to overpay for employer securities. The
plaintiffs in the action are seeking damages in excess of $30.0 million plus
prejudgment interest and attorneys fees, although expert testimony in the
litigation has indicated actual damages of a significantly less amount. On
July 29, 2002, the United States District Court for the Western District of
Kentucky found that McQueen and Thompson had breached their fiduciary duties to
the ESOP, but made no determination as to the amount of the damages. A report
of a special master has fixed damages at approximately $10.0 million (exclusive of
interest, which could more than double the damages). The court has not yet
acted on this report.
In or about the second quarter of 2001, Northfield Insurance Co.
(Northfield), the issuer of the liability insurance policy to USCC and its
directors and officers, filed suit against McQueen, Thompson and us seeking a
declaration that it did not owe coverage under the policy for any liabilities
arising from the
Horn
litigation. Among other things, Northfield claimed that
it did not receive timely notice of litigation under the terms of the policy.
McQueen and Thompson subsequently filed a cross-claim in the
Northfield
litigation against us, claiming that, as the result of our alleged failure to
timely notify the insurance carrier of the
Horn
case on their behalf, they were
entitled to indemnification or contribution from us for any loss incurred by
them as a result of the
Horn
litigation if there were no insurance available to
cover the loss, if any. On September 30, 2002, the Court in the
Northfield
litigation found that Northfield was not obligated to cover McQueen and
Thompson or us. Though it did not resolve the cross-claim, the Court did note
that there was no basis for excusing McQueen and Thompson from their
independent obligation to provide timely notice to the carrier because of our
alleged failure to provide timely notice to the carrier. McQueen and Thompson
have since filed a state court action essentially duplicating their cross-claim
in the federal case, and we have initiated claims against the lawyer who
jointly represented us, McQueen and Thompson in the
Horn
litigation. Upon the
entry of a final order by the Court, we intend to
29
appeal the Courts decision that Northfield is not obligated to provide
coverage, and we intend to continue to assert our position that coverage is
required.
We cannot currently predict whether we will be successful in recovering all or
a portion of the amount we have paid in settlement of the
Horn
litigation.
With respect to the cross-claim and the state court claims made by McQueen and
Thompson, we believe that such cross-claim claims are without merit and that we
will be able to defend ourself successfully against such claims and/or any
additional claims of such nature that may be brought in the future. No
assurance can be given, however, that we will prevail.
On April 21, 2003, a putative class action lawsuit was filed in the Superior
Court of California for the County of San Diego against us styled
Sanchez v.
Corrections Corporation of America
. The lawsuit was brought by a former
employee on his own behalf and on behalf of other former and current
similarly-situated employees. Plaintiff alleged that we did not comply with
certain wage and hour laws and regulations primarily concerning meal periods
and other specified breaks, which laws and regulations are imposed by the State
of California pursuant to the California Labor Code and Business and
Professions Code. Plaintiff was seeking damages on his behalf and the alleged
class for such violations as well as certain penalties allegedly due and owing
as a consequence of such alleged violations. Following service of the
complaint and during the third quarter of 2003, we undertook certain
investigations in response to the allegations and an answer to the complaint
was filed. We have entered into a settlement agreement with the plaintiff,
which is subject to class certification and court approval, that is not
expected to have a material impact on our financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
30
PART II.
ITEM 5. MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Market Price of and Distributions on Capital Stock
Our common stock is traded on the New York Stock Exchange, or NYSE, under the
symbol CXW, our series A preferred stock is traded on the NYSE under the
symbol CXW PrA, and our series B preferred stock is traded on the NYSE under
the symbol CXW PrB. On March 1, 2004, the last reported sale price of our
common stock was $33.84 per share and there were approximately 6,400 registered
holders and approximately 30,000 beneficial holders, respectively, of our
common stock.
The following table sets forth, for the fiscal quarters indicated, the range of
high and low sales prices of the common stock, the series A preferred stock,
and the series B preferred stock on the NYSE, and the amount of cash
distributions or dividends paid per share.
Common Stock
Series A Preferred Stock
31
Series B Preferred Stock
Dividend Policy
Pursuant to the terms of our senior secured credit facility, we are restricted
from declaring or paying cash dividends with respect to outstanding shares of
our common stock. Moreover, even if such restriction is ultimately removed, we
currently do not intend to pay dividends with respect to shares of our common
stock in the future.
Our series A preferred stock provides for quarterly cash dividends at a rate of
8.0% per year, based on a liquidation price of $25.00 per share. We are
permitted to pay these dividends under the terms of our senior secured credit
facility and our other indebtedness.
Our shares of series B preferred stock provide for quarterly dividends at a
rate of 12.0% per year, based on a stated value of $24.46 per share. The
dividends are payable quarterly in arrears, in additional shares of series B
preferred stock through the third quarter of 2003, and in cash thereafter,
provided that all accrued and unpaid cash dividends have been made on our
series A preferred stock. We began paying cash dividends during the fourth
quarter of 2003.
Recent Issuances of Unregistered Securities
The following description sets forth our issuances of unregistered equity
securities during the year ended December 31, 2003. Unless otherwise
indicated, all equity securities were issued and sold in private placements
pursuant to the exemption from the registration requirements of the Securities
Act of 1933, as amended (the Securities Act), contained in Section 4(2) of
the Securities Act and no underwriters were engaged in connection with the
issuances of such equity securities.
MDP Convertible Subordinated Notes.
Pursuant to the terms of a note purchase
agreement, dated as of December 31, 1998, with Income Opportunity Fund I, LLC,
Millennium Holdings II LLC, and Millennium Holdings III LLC, which are
collectively referred to herein as MDP, we issued the $40.0 Million Convertible
Subordinated Notes. In May 2003, pursuant to the terms of an agreement with
MDP, MDP converted the $40.0 Million Convertible Subordinated Notes into
3,362,899 shares of our common stock and subsequently sold such shares to us.
The aggregate purchase price of the shares, inclusive of accrued interest of
$15.5 million, was $81.1 million. The shares purchased have been cancelled
under the terms of our charter and Maryland law and now constitute authorized
but unissued shares of our common stock.
Issuance of Series B Preferred Stock.
During 2003, we issued 316,253 shares of
series B preferred stock in satisfaction of the regular quarterly paid-in-kind
dividends on the series B preferred stock.
32
Issuances to Directors.
During the year ended December 31, 2003, we issued
1,464 shares of common stock to certain members of our board of directors who
have elected to receive a portion of their compensation in shares of our common
stock rather than in cash pursuant to our Non-Employee Directors Compensation
Plan.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended December 31,
2003, was derived from our consolidated financial statements and the related
notes thereto. This data should be read in conjunction with our audited
consolidated financial statements, including the related notes, and Item 7
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Our audited consolidated financial statements, including the
related notes, as of December 31, 2003 and 2002, and for the years ended
December 31, 2003, 2002, and 2001 are included in this annual report.
33
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
34
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
In connection with a merger completed in 1999, we elected to change our tax
status from a taxable corporation to a real estate investment trust, or REIT,
effective with the filing of our 1999 federal income tax return. Therefore,
the 1999 financial statements reflect the results of our operations as a REIT.
As a REIT, we were dependent on a company, as a lessee, for a significant
source of our income. In connection with a restructuring in 2000, we acquired
the company on October 1, 2000 and two additional service companies on December
1, 2000, and amended our charter to remove provisions requiring us to elect to
qualify and be taxed as a REIT. The 2001, 2002, and 2003 financial statements
reflect our financial condition, results of operations and cash flows for a
full year as an owner, operator and manager of prisons and other correctional
facilities.
35
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those described under Risk Factors and included in other
portions of this report.
OVERVIEW
The Company
As of December 31, 2003, we owned 41 correctional, detention and juvenile
facilities, three of which we lease to other operators, and one additional
facility which is not yet in operation. As of December 31, 2003, we operated
59 facilities, with a total design capacity of approximately 59,000 beds in 20
states and the District of Columbia. During January 2004, we also began
operating six additional correctional facilities and ceased operating one, all
owned by the State of Texas, increasing the total number of facilities under
our operation to 64, with a total design capacity of approximately 65,000 beds.
We are the nations largest owner and operator of privatized correctional and
detention facilities and one of the largest prison operators in the United
States behind only the federal government and four states. Our size and
experience provide us with significant credibility with our current and
prospective customers, and enables us to generate economies of scale in
purchasing power for food services, health care and other supplies and services
we offer to our customers.
We are compensated for operating and managing prisons and correctional
facilities at an inmate per diem rate based upon actual or minimum guaranteed
occupancy levels. The significant expansion of the prison population in the
United States has led to overcrowding in the state and federal prison systems,
providing us with opportunities for growth. However, recent economic
developments have caused federal, state, and local governments to experience
unusual budgetary constraints, putting pressure on governments to control
correctional budgets, including per diem rates our customers pay to us.
Nonetheless, while these constraints have and are expected to continue to put
pressure on our operating margins, we believe the outsourcing of prison
management services to private operators allows governments to manage
increasing inmate populations while simultaneously controlling correctional
costs and improving correctional services. We believe our customers discover
that partnering with private operators to provide residential services to their
inmates introduces competition to their prison system, resulting in
improvements to the quality and cost of corrections services throughout their
correctional system. Further, the use of facilities owned and managed by
private operators allows governments to expand prison capacity without
incurring large capital commitments required to increase correctional capacity.
We also believe that having beds immediately available to our customers
provides us with a distinct competitive advantage when bidding on new
contracts. While we have been successful in winning contract awards to provide
management services for facilities we do not own, and will continue to pursue
such management contracts, we believe the most significant opportunities for
growth are in providing our government partners with available beds within
facilities we currently own or develop. We also believe that owning the
facilities in which we provide management services enables us to more rapidly
replace business lost compared with managed-only facilities, since we can offer
the same beds to new and existing customers and, with customer consent, may
have more flexibility in moving our existing inmate populations to facilities
with available capacity. All of our management contracts generally provide our
customers with the right to terminate our management contracts at any time
without cause.
36
We currently have three correctional facilities, our Northeast Ohio
Correctional Center, our North Fork Correctional Facility, and our Tallahatchie
County Correctional Facility, which are substantially vacant and provide us
with approximately 4,500 available beds. We also have an additional facility
under construction in Georgia which will create approximately 1,500 additional
available beds that is expected to be completed during the third quarter of
2004. During 2003, we also announced the expansion of four of our facilities
that are expected to result in the development of approximately 1,600 beds
through the first quarter of 2005. As of December 31, 2003, we also had a
total of five facilities that had 200 or more beds available at each facility,
providing further potential for increased revenue and cash flow.
As a result of the completion of our recapitalization and refinancing
transactions during 2003 and 2002, we have significantly reduced our exposure
to variable rate debt, lowered our after tax interest and dividend obligations
associated with our outstanding debt and preferred stock, and now have no debt
maturities on outstanding indebtedness until 2007. Also as a result of the
completion of these capital transactions, covenants under our senior secured
credit facility were amended to provide greater flexibility for, among other
matters, incurring unsecured indebtedness, capital expenditures, and permitted
acquisitions, providing us with the financial flexibility to afford the capital
investments to create additional beds without unduly straining our capital
structure.
We are utilizing our financial flexibility and liquidity to make investments in
technology. While we have been successful in reducing our variable expenses
mostly in medical and food services primarily by taking advantage of our
purchasing power, we believe the largest opportunity for further reducing our
operating expenses depends on our ability to modernize our facility operations
through investments in technology. We believe investments in technology can
enable us to operate safe and secure facilities with more efficient, highly
skilled and better-trained staff, and to reduce turnover. Approximately 64% of
our operating expenses consist of salaries and benefits. Containing these
costs will continue to be challenging. Further, the turnover rate for
correctional officers for our company, and for the corrections industry in
general, remains high, and medical benefits for our employees continue to
increase primarily due to continued rising healthcare costs throughout the
country. Unlike the savings reaped in our variable operating expenses,
reducing these staffing costs requires a long-term strategy to control such
costs through the deployment of newly developed technologies, many of which are
unique and new to the corrections industry.
Through the combination of our business development initiatives to increase our
revenues and our strategies to generate savings and to contain our operating
expenses, we believe we will be able to maintain our competitive advantage and
continue to improve the quality services we provide to our customers at an
economical price, thereby producing value to our stockholders.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. A summary of our significant accounting policies
is described in Note 2 to our audited financial statements. The significant
accounting policies and estimates which we believe are the most critical to aid
in fully understanding and evaluating our reported financial results include
the following:
Asset impairments
.
As of December 31, 2003, we had $1.6 billion in long-lived
assets. We evaluate the recoverability of the carrying values of our
long-lived assets, other than goodwill, when events
37
suggest that an impairment may have occurred. In these circumstances, we
utilize estimates of undiscounted cash flows to determine if an impairment
exists. If an impairment exists, it is measured as the amount by which the
carrying amount of the asset exceeds the estimated fair value of the asset.
Goodwill impairments
. Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
or SFAS 142, which established new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS 142, all goodwill
amortization ceased effective January 1, 2002 and goodwill attributable to each
of our reporting units was tested for impairment by comparing the fair value of
each reporting unit with its carrying value. Fair value was determined using a
collaboration of various common valuation techniques, including market
multiples, discounted cash flows, and replacement cost methods. These
impairment tests are required to be performed at adoption of SFAS 142 and at
least annually thereafter. We perform our impairment tests during the fourth
quarter, in connection with our annual budgeting process, and whenever
circumstances indicate the carrying value of goodwill may not be recoverable.
Based on our initial impairment tests, we recognized an impairment of $80.3
million to write-off the carrying value of goodwill associated with our
locations included in the owned and managed reporting segment during the first
quarter of 2002. This goodwill was established in connection with the
acquisition of a company during 2000. The remaining goodwill, which is
associated with the facilities we manage but do not own, was deemed to be not
impaired. This remaining goodwill was established in connection with the
acquisitions of two service companies during 2000, both of which were
privately-held service companies, that managed certain government-owned adult
and juvenile prison and jail facilities. The implied fair value of goodwill of
the locations included in the owned and managed reporting segment did not
support the carrying value of any goodwill, primarily due to the highly
leveraged capital structure. No impairment of goodwill allocated to the
locations included in the managed-only reporting segment was deemed necessary,
primarily because of the relatively minimal capital expenditure requirements,
and therefore indebtedness, in connection with obtaining such management
contracts. Under SFAS 142, the impairment recognized at adoption of the new
rules was reflected as a cumulative effect of accounting change in our
statement of operations for the first quarter of 2002. Impairment adjustments
recognized after adoption, if any, are required to be recognized as operating
expenses.
Income taxes.
Income taxes are accounted for under the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109). SFAS 109 generally requires us to record deferred income taxes for the
tax effect of differences between book and tax bases of its assets and
liabilities.
Deferred income taxes reflect the available net operating losses and the net
tax effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. Realization of the future tax benefits related to deferred tax
assets is dependent on many factors, including our past earnings history,
expected future earnings, the character and jurisdiction of such earnings,
unsettled circumstances that, if unfavorably resolved, would adversely affect
utilization of our deferred tax assets, carryback and carryforward periods, and
tax strategies that could potentially enhance the likelihood of realization of
a deferred tax asset. During the three years ended December 31, 2003, we
provided a valuation allowance to substantially reserve our deferred tax assets
in accordance with SFAS 109. However, at December 31, 2003, we concluded that
it was more likely than not that substantially all of our deferred tax assets
would be realized. As a result, in accordance with SFAS 109, the valuation
allowance applied to such deferred tax assets was reversed.
38
Removal of the valuation allowance resulted in a significant non-cash reduction
in income tax expense. In addition, because a portion of the previously
recorded valuation allowance was established to reserve certain deferred tax
assets upon the acquisitions of two service companies during 2000, in
accordance with SFAS 109, removal of the valuation allowance resulted in a
reduction to the remaining goodwill recorded in connection with such
acquisitions to the extent the reversal related to the valuation allowance
applied to deferred tax assets existing at the date the service companies were
acquired. In addition, removal of the valuation allowance resulted in an increase in our additional
paid-in capital related to the tax benefits of exercises of employee
stock options and of grants of restricted stock. The
reduction to goodwill amounted to $4.5 million, while additional paid-in
capital increased $2.6 million. Future financial statements will reflect a
provision for income taxes at the applicable federal and state tax rates on
income before taxes.
Self-funded insurance reserves
. As of December 31, 2003 and 2002, we had $32.0
million and $25.6 million, respectively, in accrued liabilities for employee
health, workers compensation, and automobile insurance claims. We are
significantly self-insured for employee health, workers compensation, and
automobile liability insurance claims. As such, our insurance expense is
largely dependent on claims experience and our ability to control our claims.
We have consistently accrued the estimated liability for employee health
insurance claims based on our history of claims experience and the time lag
between the incident date and the date the cost is paid by us. We have accrued
the estimated liability for workers compensation and automobile insurance
claims based on a third-party actuarial valuation of the outstanding
liabilities. These estimates could change in the future. It is possible that
future cash flows and results of operations could be materially affected by
changes in our assumptions, new developments, or by the effectiveness of our
strategies.
Legal reserves.
As of December 31, 2003 and 2002, we had $20.2 million and
$20.7 million, respectively, in accrued liabilities related to certain legal
proceedings in which we are involved. We have accrued our estimate of the
probable costs for the resolution of these claims based on a range of potential
outcomes. In addition, we are subject to current and potential future legal
proceedings for which little or no accrual has been reflected because our
current assessment of the potential exposure is nominal. These estimates have
been developed in consultation with our General Counsels office and, as
appropriate, outside counsel handling these matters, and are based upon an
analysis of potential results, assuming a combination of litigation and
settlement strategies. It is possible that future cash flows and results of
operations could be materially affected by changes in our assumptions, new
developments, or by the effectiveness of our strategies.
RESULTS OF OPERATIONS
The following table sets forth for the years ended December 31, 2003, 2002, and
2001, the number of facilities we owned and managed, the number of facilities
we managed but did not own, the number of facilities we leased to other
operators, and the facilities we owned that were not yet in operation.
39
Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002
During the year ended December 31, 2003, we generated net income available to
common stockholders of $126.5 million, or $3.44 per diluted share, compared
with a net loss available to common stockholders of $28.9 million, or $0.82 per
diluted share, for the previous year. Contributing to the net income for 2003
compared to the previous year was an increase in operating income of $39.8
million, from $128.2 million during 2002 to $168.0 million during 2003. The
increase was due to the commencement of operations at our McRae Correctional
Facility in December 2002 and the acquisition of the Crowley County
Correctional Facility in January 2003, as well as increased occupancy levels
and improved margins. Net income available to common stockholders during 2003
was favorably impacted by an income tax benefit of $52.4 million primarily due
to the reversal of the valuation allowance previously established for our
deferred tax assets. Weighted average common shares outstanding for 2003
includes the effect of our issuance of 6.4 million shares in connection with
the recapitalization in May 2003.
Contributing to the net loss for 2002 was a non-cash charge for the cumulative
effect of an accounting change for goodwill of $80.3 million, or $2.49 per
diluted share, related to the adoption of SFAS 142, in addition to expenses
associated with debt refinancing transactions of $36.7 million, or $1.14 per
diluted share, during the second quarter of 2002. The debt refinancing
completed during 2002 also contributed to the reduction in net interest
expense, from $87.5 million during 2002 to $74.4 million during 2003. The
cumulative effect of accounting change and the costs of refinancing were
partially offset by an aggregate income tax benefit of $63.3 million, which
included a cash income tax benefit of $32.2 million recognized during the first
quarter of 2002 related to a change in tax law that became effective in March
2002, which enabled us to utilize certain of our net operating losses to offset
taxable income generated in 1997 and 1996. In addition, $30.3 million of the
income tax benefit in 2002 was due to the reduction of the tax valuation
allowance applied to certain deferred tax assets arising primarily as a result
of 2002 tax deductions based on a cumulative effect of accounting change for
tax depreciation reported on our 2002 federal income tax return.
40
Facility Operations
A key performance indicator we use to measure the revenue and expenses
associated with the operation of the facilities we own or manage is expressed
in terms of a compensated man-day, and represents the revenue we generate and
expenses we incur for one inmate for one calendar day. Revenue and expenses
per compensated man-day are computed by dividing facility revenue and expenses
by the total number of compensated man-days during the period. A compensated
man-day represents a calendar day for which we are paid for the occupancy of an
inmate. We believe the measurement is useful because we are compensated for
operating and managing facilities at an inmate per-diem rate based upon actual
or minimum guaranteed occupancy levels. We also measure our ability to contain
costs on a per-compensated man-day basis, which is largely dependent upon the
number of inmates we accommodate. Further, per man-day measurements are also
used to estimate our potential profitability based on certain occupancy levels
relative to design capacity. Revenue and expenses per compensated man-day for
all of the facilities we owned or managed, exclusive of those discontinued (see
further discussion below regarding discontinued operations), were as follows
for the years ended December 31, 2003 and 2002:
Management and other revenue consists of revenue earned from the operation and
management of adult and juvenile correctional and detention facilities we own
or manage and from our inmate transportation subsidiary, which, for the years
ended December 31, 2003 and 2002, totaled $1.0 billion and $934.1 million,
respectively. Business from our federal customers, including the Bureau of
Prisons, or the BOP, the United States Marshals Service, or the USMS, and the
United States Bureau of Immigration and Customs Enforcement, or ICE, remains
strong, while many of our state customers are currently experiencing budget
difficulties. Our federal customers generated 37% and 33%, respectively, of
our total revenue for the years ended December 31, 2003 and 2002. While the
budget difficulties experienced by our state customers present challenges with
respect to our per-diem rates resulting in pressure on our management revenue
in future quarters, these governmental entities are also constrained with
respect to funds available for prison construction. As a result, because we
believe inmate populations will continue to rise, we currently expect the lack
of new bed supply to lead to higher occupancies in the long-term.
Additionally, we may experience a slight reduction in our operating margins
during 2004 compared with 2003 as a result of recent contract awards for
facilities we manage but do not own, or future contract awards, which may
provide operating margins at lower levels than we generated during 2003. We
entered, or may enter, into these contracts knowing our operating margins may
decrease slightly in the future; however, the opportunity to both expand our
level of service with existing customers and provide services to new customers
outweighs the effects of possible short-term operating margin reductions.
41
Operating expenses totaled $775.3 million and $721.4 million for the years
ended December 31, 2003 and 2002, respectively. Operating expenses consist of
those expenses incurred in the operation and management of adult and juvenile
correctional and detention facilities, and for our inmate transportation
subsidiary.
Salaries and benefits represent the most significant component of fixed
operating expenses. During 2003, salaries and benefits expense increased $43.1
million from 2002. The increase in salaries and benefits expense was primarily
due to the arrival of inmates at the McRae Correctional Facility beginning in
December 2002 and the purchase of the Crowley County Correctional Facility in
January 2003. Salaries and benefits per compensated man-day increased $0.50
per compensated man-day during 2003 from 2002. The turnover rate for
correctional officers for our company, and for the corrections industry in
general, also remains high. We continue to develop strategies to reduce our
turnover rate, and have experienced moderate success, but we can provide no
assurance that these strategies will continue to be successful. In addition,
eleven of our facilities currently have contracts with the federal government
requiring that our wage and benefit rates comply with wage determination rates
set forth, and as adjusted from time to time, under the Service Contract Act of
the U.S. Department of Labor. Our contracts generally provide for
reimbursement of a portion of the increased costs resulting from wage
determinations in the form of increased per-diems, thereby mitigating the
effect of increased salaries and benefits expenses at those facilities. We may
also be subject to adverse claims, or government audits, relating to alleged
violations of wage and hour laws applicable to us, which may result in
adjustments to amounts previously paid as wages and, potentially, interest
and/or monetary penalties.
We also experienced a trend of increasing insurance expense during 2003
compared with 2002. Because we are significantly self-insured for employee
health, workers compensation, and automobile liability insurance, our
insurance expense is dependent on claims experience and our ability to control
our claims. Our insurance policies contain various deductibles and stop-loss
amounts intended to limit our exposure for individually significant
occurrences. However, the nature of our self-insurance provides little
protection for a deterioration in claims experience or increasing employee
medical costs in general.
We continue to incur increasing insurance expense due to adverse claims
experience primarily resulting from rising healthcare costs throughout the
country. We continue to develop new strategies to improve the management of
our future loss claims, but can provide no assurance that these strategies will
be successful. Additionally, general liability insurance costs have risen
substantially since the terrorist attacks on September 11, 2001, and other
types of insurance, such as directors and officers liability insurance, have
increased due to several high profile business failures and concerns about
corporate governance and accounting in the marketplace. Unanticipated
additional insurance expenses resulting from adverse claims experience or a
continued increasing cost environment for general liability and other types of
insurance could result in increasing expense in the future.
The reduction in variable operating expenses per compensated man-day to $9.84
per compensated man-day during 2003 from $10.23 per compensated man-day during
2002 was primarily due to the renegotiation of our contract for food services.
We decided to outsource food services at almost all of the facilities we
operate. Outsourcing our food services to one vendor for substantially all of
the facilities we manage generated opportunities to produce economies of scale.
We also achieved reductions in inmate medical expenses primarily due to the
renegotiation of our management contract for the Correctional Treatment
Facility located in the District of Columbia, as well as through the
negotiation of a national contract with our pharmaceutical provider and reduced
reliance on outsourced nursing.
42
The operation of the facilities we own carries a higher degree of risk
associated with a management contract than the operation of the facilities we
manage but do not own because we incur significant capital expenditures to
construct or acquire facilities we own. Additionally, correctional and
detention facilities have a limited or no alternative use. Therefore, if a
management contract is terminated at a facility we own, we continue to incur
certain operating expenses, such as real estate taxes, utilities, and
insurance, that we would not incur if a management contract was terminated for
a managed-only facility. As a result, revenue per compensated man-day is
typically higher for facilities we own and manage than for managed-only
facilities. Because we incur higher expenses, such as repairs and maintenance,
real estate taxes, and insurance, on the facilities we own and manage, our cost
structure for facilities we own and manage is also higher than the cost
structure for the managed-only facilities. The following tables display the
revenue and expenses per compensated man-day for the facilities we own and
manage and for the facilities we manage but do not own:
The following discussions under Owned and Managed Facilities and
Managed-Only Facilities address significant events that impacted our results
of operations for the respective periods, and events that will affect our
results of operations in the future.
Owned and Managed Facilities
On May 30, 2002, we were awarded a contract by the BOP to house 1,524 federal
detainees at our McRae Correctional Facility located in McRae, Georgia. The
three-year contract, awarded as part of the Criminal Alien Requirement Phase II
Solicitation, or CAR II, also provides for seven one-year renewals. The
contract with the BOP guarantees at least 95% occupancy on a take-or-pay basis,
and commenced full operations in December 2002. Total management and other
revenue at this facility was $35.8 million during the year ended December 31,
2003. This facility did not reach an average physical occupancy of 95% until
October 2003. As a result, during much of 2003, we benefited from a relatively
low level of operating expense resulting from lower physical occupancies while
43
generating revenue at the guaranteed 95% occupancy rate. As of December 31,
2003, the physical occupancy was 110.4%. While only $2.7 million of management
and other revenue was generated by this facility during 2002, we incurred $4.6
million of operating expenses during the year ended December 31, 2002.
Results for 2003 were also favorably impacted by the acquisition, on January
17, 2003, of the Crowley County Correctional Facility, a 1,200-bed medium
security adult male prison facility located in Olney Springs, Crowley County,
Colorado. The facility currently houses inmates from the States of Colorado
and Wyoming. As part of the transaction, we also assumed a management contract
with the State of Colorado and entered into a new management contract with the
State of Wyoming, and took over management of the facility effective January
18, 2003.
During the third quarter of 2003, we transferred all of the Wisconsin inmates
currently housed at our 1,440-bed medium security North Fork Correctional
Facility located in Sayre, Oklahoma to our 2,160-bed medium security
Diamondback Correctional Facility located in Watonga, Oklahoma in order to
satisfy a contractual provision mandated by the State of Wisconsin. As a
result of the transfer, North Fork Correctional Facility will remain closed for
an indefinite period of time. We are currently pursuing new management
contracts and other opportunities to take advantage of the beds that became
available at the North Fork Correctional Facility, but can provide no assurance
that we will be successful in doing so. The operational consolidations did not
have a material impact on our 2003 financial statements. However, long-term,
the consolidation will result in certain operational efficiencies.
Additionally, during the second quarter of 2003, the State of Wisconsin
approved legislation to open various prison facilities owned by the State. The
opening of these facilities is currently expected to lead to a reduction in the
number of inmates we house from the State of Wisconsin at our Diamondback
Correctional Facility and our Prairie Correctional Facility, totaling
approximately 1,900 inmates at December 31, 2003. However, given the
uncertainty regarding the exact timing of the openings, and the extent of
Wisconsin inmate population growth between now and the time of such openings,
it is difficult to estimate the impact on our financial statements.
During March 2004, we entered into an agreement with the State of Arizona to
manage 1,200 Arizona inmates. The contractual agreement represents the first
time the State has partnered with us to provide residential services for its
inmates. The contractual terms provide for the out-of-state management of
male, medium-security Arizona inmates at our Diamondback Correctional Facility.
The contract includes an initial term ending June 30, 2004 to correspond with
the Arizona fiscal year, and may be renewed by mutual agreement for three
consecutive terms of one year each, effective July 1, 2004 through June 30,
2007, subject to availability of appropriated funds. The Arizona Department of
Corrections has informed lawmakers that the first 200 inmates would be
transferred to Diamondback in mid-March, and that the remainder would follow
over the next several months.
During October 2002, we entered into a new agreement with Hardeman County,
Tennessee, with respect to the management of up to 1,536 medium security
inmates from the State of Tennessee in the Whiteville Correctional Facility.
Total management revenue increased during the year ended December 31, 2003 from
the comparable period in 2002 by $9.2 million at this facility.
Due to a combination of rate increases and/or an increase in population at
seven of our facilities, including our 2,304-bed Central Arizona Detention
Center, 1,600-bed Florence Correctional Center, 1,338-bed Prairie Correctional
Facility, 1,232-bed San Diego Correctional Facility, 910-bed Torrance County
Detention Facility, 483-bed Leavenworth Detention Center, and 480-bed Webb
County Detention Center, primarily from the BOP, the USMS, the ICE, and the
State of Wisconsin in the
44
case of Prairie Correctional Facility, total management and other revenue
increased during 2003 from 2002 by $36.0 million at these facilities.
During June 2003, we announced our first inmate management contract with the
State of Alabama to house up to 1,440 medium security inmates in our
Tallahatchie County Correctional Facility, located in Tutwiler, Mississippi,
under a temporary emergency agreement to provide the State of Alabama immediate
relief of its overcrowded prison system. The facility began receiving inmates
in July 2003. Prior to receiving inmates from the State of Alabama, this
facility was substantially idle. During January 2004, we received notice from
the Alabama Department of Corrections that it would withdraw its inmates housed
at the facility. The Alabama Department of Corrections took custody of all of
the inmates previously housed at the facility during the first quarter of 2004.
Based on the terms of the short-term contract, Alabama compensated us at a
guaranteed rate of 95% occupancy of the facility through March 11, 2004. We
are currently pursuing new management contracts to utilize the available beds
at the Tallahatchie County Correctional Facility, but can provide no assurance
that we will be successful.
Fixed expenses per compensated man-day for our owned and managed facilities
decreased from $29.62 during 2002 to $29.34 during 2003. The aforementioned
increase in fixed operating expense for salaries and benefits and insurance
across the portfolio of facilities we manage, was partially offset by decreases
in property tax expenses of $2.4 million for 2003, compared with 2002, or a
decrease of $0.35 per compensated man-day. The decrease in property tax
expense was primarily as the result of a successful settlement during the third
quarter of 2003 of a property tax dispute at our Northeast Ohio Correctional
Center. Further, as our occupancy levels increase, we are able to provide the
same quality of services without proportionately increasing our staffing
levels, resulting in reductions to our fixed expenses per compensation man-day.
Variable expenses per compensated man-day for our owned and managed facilities
decreased from $11.34 during 2002 to $10.13 for 2003. The aforementioned
decrease in variable expenses for reduced food and medical expenses across the
portfolio of facilities we manage was net of an increase in variable expenses
for an increase in litigation expenses during 2003 compared with 2002 of $4.9
million, or $0.34 per compensated man-day, at certain of our owned facilities
for legal proceedings in which we are involved. The amount of the increase was
also due to the settlement during the first quarter of 2002 of a number of
outstanding legal matters for amounts less than reserves previously established
for such matters, which resulted in a reversal of litigation expenses during
the first quarter of 2002 of $1.3 million.
During January 2004, we entered into an agreement with the State of Vermont to
manage up to 700 inmates. The contractual agreement represents the first time
the State of Vermont has partnered with the private corrections sector to
provide residential services for its inmates. The contractual terms provide
for the out-of-state management of male, medium-security Vermont inmates
primarily in two of our owned-and operated prisons in Kentucky, including Lee
Adjustment Center in Beattyville, and Marion Adjustment Center in St. Mary. We
began receiving inmates from the State of Vermont during the first quarter of
2004, and expect this contract to contribute to increased revenue and operating
income in 2004.
Managed-Only Facilities
During the fourth quarter of 2001, we committed to a plan to terminate a
management contract at the Southwest Indiana Regional Youth Village, a 188-bed
juvenile facility located in Vincennes, Indiana. During the first quarter of
2002, we entered into a mutual agreement with Children and Family Services
Corporation, or CFSC, to terminate our management contract at the facility,
effective April 1, 2002, prior to the contracts expiration date in 2004. In
connection with the mutual agreement to
45
terminate the management contract, CFSC also paid in full an outstanding note
receivable totaling $0.7 million, which was previously considered uncollectible
and was fully reserved.
On June 28, 2002, we received notice from the Mississippi Department of
Corrections terminating our contract to manage the 1,016-bed Delta Correctional
Facility located in Greenwood, Mississippi, due to the non-appropriation of
funds. We ceased operations of the facility during October 2002. However, the
State of Mississippi agreed to expand our management contract at the Wilkinson
County Correctional Facility located in Woodville, Mississippi to accommodate
an additional 100 inmates. As a result, the results of operations of the Delta
Correctional Facility are not reported in discontinued operations. Total
management and other revenue at Delta Correctional Facility was $6.3 million
during the year ended December 31, 2002, while we incurred $7.1 million in
operating expenses during the same period.
During July 2002, we renewed our contract with Tulsa County, Oklahoma for the
management of inmates at the David L. Moss Criminal Justice Center. The
contract renewal included an increase in the per-diem rate, and also shifted to
Tulsa County the burden of certain utility expenses, resulting in a modest
improvement in profitability for the management of this facility during the
year ended December 31, 2003, compared with 2002.
In November 2003, we announced that the Texas Department of Criminal Justice,
or TDCJ, awarded us new contracts to manage a total of 7,314 beds in six state
correctional facilities, as part of a procurement re-bid process. The
management contracts, all of which became effective January 15, 2004, consist
of four jails and two correctional facilities. Based on the TDCJ
recommendation, we also retained our contract to manage the 962-bed Bartlett
State Jail, but were not awarded the contract to continue managing the
1,000-bed Sanders Estes Unit located in Venus, Texas, which expired January 15,
2004. Total management and other revenue at Sanders Estes Unit was $11.8
million and $11.6 million, respectively, during the years ended December 31,
2003 and 2002, while we incurred $11.0 million and $10.6 million, respectively,
in operating expenses during the same period. While we expect the management
of an incremental 6,314 beds at these facilities to contribute to additional
revenues and operating income during 2004, because the pricing of our bid for
the management of these facilities took into consideration the volume of
potential business to be generated from such a bid, we currently expect the
operating margins on these facilities to be lower than the existing margins
from our managed-only business.
Additionally, we currently house approximately 1,400 adult male inmates for the
State of Florida, Correctional Privatization Commission, or the CPC, at two of
our managed-only facilities in Florida. Our contracts with the CPC expire in
June 2004. Rather than renew the contracts pursuant to their renewal
provisions, in September 2003 the CPC issued an Invitation to Negotiate, or
ITN, that covered substantially all inmates housed in three privately operated
prisons located in the State of Florida, including one facility managed by
another private prison operator. The CPC recently cancelled the ITN.
Accordingly, we expect to continue to operate the two Florida facilities
pursuant to our contracts with the CPC. However, the CPC is in discussions
with the authorities in the State of Florida to initiate a new competitive
procurement process. In the event the procurement is initiated, we would be
competing with other prison operators who respond to the solicitation,
including other private prison operators and, potentially, government
operators. Thus, no assurance can be given that we would be awarded any
contracts by the CPC to house the inmates subject to our existing contracts or
any additional inmates, or that any contracts we obtained would be on terms
comparable to our existing contracts. The failure to obtain contracts from the
CPC on terms comparable to our existing contracts could significantly reduce
our revenues and operating income and, accordingly, could have a material
adverse effect on our results of operations and cash flows.
46
On February 20, 2004, we provided notice to the Nevada Department of
Corrections that we do not intend to renew our contract to manage the Southern
Nevada Womens Correctional Center located in Las Vegas, Nevada, upon the
expiration of the contract in October 2004. Total management and other revenue
at the this facility was $7.5 million and $8.3 million, respectively, during
the years ended December 31, 2003 and 2002, while we incurred $8.8 million and
$8.7 million, respectively, in operating expenses during the same period.
General and administrative expense
For the years ended December 31, 2003 and 2002, general and administrative
expenses totaled $40.5 million and $36.9 million, respectively. General and
administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses, and increased
from 2002 primarily due to an increase in salaries and benefits, combined with
an increase in professional services, during 2003 compared with 2002. These
increases were net of a decrease of $4.0 million incurred in 2002 in connection
with the implementation of tax strategies to maximize opportunities created by
a settlement with the IRS with respect to our predecessors 1997 federal income
tax return combined with a change in tax law in March 2002.
We have expanded our infrastructure over the past year to implement and support
numerous technology initiatives, to maintain closer relationships with existing
and potentially new customers in order to identify their needs, to focus on
reducing facility operating expenses, and to comply with increasing corporate
governance requirements. While this is expected to result in an annual
increase in general and administrative expense in 2004, we believe our expanded
infrastructure and investments in technology will provide long-term benefits
enabling us to provide enhanced quality service to our customers while creating
scalable operating efficiencies.
Interest expense, net
Interest expense was reported net of interest income for the years ended
December 31, 2003 and 2002. Gross interest expense was $78.0 million and $91.9
million, respectively, for the years ended December 31, 2003 and 2002. Gross
interest expense is based on outstanding indebtedness, net settlements on
certain derivative instruments, and amortization of loan costs and unused
credit facility fees. The decrease in gross interest expense from the prior
year was primarily attributable to the refinancing of our senior indebtedness
completed on May 3, 2002, which resulted in a decrease in the interest rate
spread on our senior bank credit facility and the redemption of a substantial
portion of our 12% senior notes. Further, the recapitalization and refinancing
transactions completed during the second and third quarters of 2003 resulted in
the elimination of the regular and contingent interest associated with $40.0
million of convertible subordinated notes, a further reduction in the interest
rate spread on the term portion of our senior bank credit facility, a reduction
in the interest rate on our $30.0 million convertible subordinated notes, and
the repayment of the remaining balance of our 12% senior notes, partially
offset by additional borrowings used to repurchase and redeem a substantial
portion of our preferred stock. Interest expense also decreased due to the
termination of an interest rate swap agreement, lower amortization of loan
costs, and a lower interest rate environment.
Gross interest income was $3.6 million and $4.4 million, respectively, for the
years ended December 31, 2003 and 2002. Gross interest income is earned on
cash collateral requirements, a direct financing lease, notes receivable and
investments of cash and cash equivalents.
47
Expenses associated with debt refinancing and recapitalization transactions
For the years ended December 31, 2003 and 2002, expenses associated with debt
refinancing and recapitalization transactions were $6.7 million and $36.7
million, respectively. Charges during the third quarter of 2003 primarily
resulted from the write-off of existing deferred loan costs associated with the
repayment of the term loan portion of our senior bank credit facility made with
proceeds from the issuance of the $200.0 million 7.5% senior notes, premiums
paid to defease the remaining outstanding 12% senior notes, and certain fees
paid to amend the term portion of our senior bank credit facility. Charges
during the second quarter of 2003 included expenses associated with the tender
offer for our series B preferred stock, the redemption of our series A
preferred stock, and the write-off of existing deferred loan costs associated
with the repayment of the term loan portions of our senior bank credit facility
made with proceeds from the common stock and note offerings, a tender premium
paid to the holders of the 12% senior notes who tendered their notes to us at a
price of 120% of par, and fees associated with the modifications to the terms
of the $30.0 million of convertible subordinated notes.
As a result of the early extinguishment of our old senior bank credit facility
and the redemption of substantially all of the 12% senior notes in May 2002, we
recorded charges of $36.7 million during the second quarter of 2002, which
included the write-off of existing deferred loan costs, certain bank fees paid,
premiums paid to redeem the 12% senior notes, and certain other costs
associated with the refinancing.
Change in fair value of derivative instruments
On May 16, 2003, 0.3 million shares of common stock were issued, along with a
$2.9 million subordinated promissory note, in connection with the final
settlement of the state court portion of our stockholder litigation settlement.
Under the terms of the promissory note, the note and accrued interest were
extinguished in June 2003 once the average closing price of our common stock
exceeded a termination price equal to $16.30 per share for fifteen
consecutive trading days following the notes issuance. The terms of the note,
which allowed the principal balance to fluctuate dependent on the trading price
of our common stock, created a derivative instrument that was valued and
accounted for under the provisions of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, or SFAS 133, as amended. Since we had previously reflected the
maximum obligation of the contingency associated with the state portion of the
stockholder litigation on the balance sheet, the extinguishment of the note in
June 2003 resulted in a $2.9 million non-cash gain during the second quarter of
2003.
Income tax benefit
During the years ended December 31, 2003 and 2002, our financial statements
reflected income tax benefits of $52.4 million and $63.3 million, respectively.
The income tax benefit during the year ended December 31, 2003 was primarily
the result of our reversal of substantially all of the valuation allowance
previously established for our deferred tax assets.
Deferred income taxes reflect the available net operating losses and 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. Realization of the future tax benefits related to deferred tax
assets is dependent on many factors, including our past earnings history,
expected future earnings, the character and jurisdiction of such earnings,
unsettled circumstances that, if unfavorably resolved, would adversely affect
utilization of our deferred tax assets, carryback and carryforward periods, and
tax strategies that could potentially enhance the likelihood of realization of
a deferred tax asset. During the three years ended December 31, 2003, we
provided a valuation allowance to
48
substantially reserve our deferred tax assets in accordance with SFAS 109. As
a result, our financial statements did not reflect a provision for income
taxes. However, at December 31, 2003, we concluded that it was more likely
than not that substantially all of our deferred tax assets would be realized.
As a result, in accordance with SFAS 109, the valuation allowance applied to
such deferred tax assets was reversed.
The removal of the valuation allowance resulted in a significant non-cash
reduction in income tax expense during the fourth quarter of 2003. To the
extent no valuation allowance is established for our deferred tax assets,
beginning with the first quarter of 2004, our financial statements will reflect
a provision for income taxes at the applicable federal and state tax rates on
income before taxes, currently estimated to be approximately 40%.
The income tax benefit during the year ended December 31, 2002, primarily
resulted from the Job Creation and Worker Assistance Act of 2002, which was
signed into law on March 9, 2002. Among other changes, the tax law extended
the net operating loss carryback period to five years from two years for net
operating losses arising in tax years ending in 2001 and 2002, and allows use
of net operating loss carrybacks and carryforwards to offset 100% of the
alternative minimum tax. We experienced net operating losses during 2001
resulting primarily from the sale of assets at prices below the tax basis of
such assets. Under terms of the new law, we utilized certain of these net
operating losses to offset taxable income generated in 1997 and 1996. As a
result of this tax law change in 2002, we reported an income tax benefit and
claimed a refund of $32.2 million during the first quarter of 2002, which was
received in April 2002.
On October 24, 2002, we entered into a definitive settlement with the IRS in
connection with the IRSs audit of our predecessors 1997 federal income tax
return. Under the terms of the settlement, in consideration for the IRSs
final determinations with respect to the 1997 tax year, in December 2002 we
paid $52.2 million in cash to satisfy federal and state taxes and interest.
Due to the change in tax law in March 2002, the settlement created an
opportunity to utilize any 2002 tax losses to claim a refund of a portion of
the taxes paid. We experienced tax losses during 2002 primarily resulting from
a cumulative effect of accounting change in depreciable lives of property and
equipment for tax purposes. Under terms of the new law, we utilized our net
operating losses to offset taxable income generated in 1997, which was
increased substantially in connection with the settlement with the IRS. As a
result of the tax law change in 2002, combined with the adoption of an
accounting change in the depreciable lives of certain tax assets, as of
December 31, 2002 we claimed an income tax refund of $32.1 million, which was
received during the second quarter of 2003.
The cumulative effect of accounting change in tax depreciation resulted in the
establishment of a significant deferred tax liability for the tax effect of the
book over tax basis of certain assets in 2002. The creation of such a deferred
tax liability, and the significant improvement in our tax position since the
original valuation allowance was established to reserve our deferred tax
assets, resulted in the reduction of the valuation allowance, generating an
income tax benefit of $30.3 million during the fourth quarter of 2002, as we
determined that substantially all of these deferred tax liabilities would be
utilized to offset the reversal of deferred tax assets during the net operating
loss carryforward periods.
Discontinued Operations
In late 2001 and early 2002, we were provided notice from the Commonwealth of
Puerto Rico of its intention to terminate the management contracts at the
500-bed multi-security Ponce Young Adult Correctional Facility and the
1,000-bed medium security Ponce Adult Correctional Facility, located in Ponce,
Puerto Rico, upon the expiration of the management contracts in February 2002.
Attempts
49
to negotiate continued operation of these facilities were unsuccessful. As a
result, the transition period to transfer operation of the facilities to the
Commonwealth of Puerto Rico ended May 4, 2002, at which time operation of the
facilities was transferred to the Commonwealth of Puerto Rico. During the year
ended December 31, 2002, these facilities generated total revenue of $7.9
million and incurred total operating expenses of $7.4 million. We recorded a
non-cash charge of $1.8 million during the second quarter of 2002 for the
write-off of the carrying value of assets associated with the terminated
management contracts.
During the fourth quarter of 2001, we obtained an extension of our management
contract with the Commonwealth of Puerto Rico for the operation of the
1,000-bed Guayama Correctional Center located in Guayama, Puerto Rico, through
December 2006. However, on May 7, 2002, we received notice from the
Commonwealth of Puerto Rico terminating our contract to manage this facility,
which occurred on August 6, 2002. During the year ended December 31, 2002,
this facility generated total revenue of $12.3 million and incurred total
operating expenses of $9.9 million.
On June 28, 2002, we sold our interest in a juvenile facility located in
Dallas, Texas for $4.3 million. The facility, which was designed to
accommodate 900 at-risk juveniles, was leased to an independent third party
operator pursuant to a lease expiring in 2008. Net proceeds from the sale were
used for working capital purposes. This facility generated rental income of
$0.4 million during the year ended December 31, 2002.
During the fourth quarter of 2002, we were notified by the State of Florida of
its intention to not renew our contract to manage the 96-bed Okeechobee
Juvenile Offender Correctional Center located in Okeechobee, Florida, upon the
expiration of a short-term extension to the existing management contract, which
expired in December 2002. Upon expiration, which occurred March 1, 2003, the
operation of the facility was transferred to the State of Florida. During the
years ended December 31, 2003 and 2002, the facility generated total revenue of
$0.8 million and $4.8 million, respectively, and incurred total operating
expenses of $0.7 million and $4.0 million, respectively. Additionally, the
expiration of the contract resulted in the impairment of goodwill previously
recorded in connection with this facility, which totaled $0.3 million, during
the first quarter of 2003.
On March 18, 2003, we were notified by the Department of Corrections of the
Commonwealth of Virginia of its intention to not renew our contract to manage
the 1,500-bed Lawrenceville Correctional Center located in Lawrenceville,
Virginia, upon the expiration of the contract. Accordingly, we terminated our
operation of the facility on March 22, 2003 in connection with the expiration
of the contract. During the years ended December 31, 2003 and 2002, the
facility generated total revenue of $4.6 million and $20.3 million,
respectively, and incurred total operating expenses of $5.3 million and $18.7
million, respectively. Additionally, the expiration of the contract resulted
in the impairment of goodwill previously recorded in connection with this
facility, which totaled $0.3 million, during the first quarter of 2003.
During 2003, depreciation and amortization and income tax benefit totaled $1.1
million and $0.9 million, respectively, for these facilities. During 2002,
depreciation and amortization, interest income, and income tax expense totaled
$3.1 million, $0.6 million, and $0.6 million, respectively, for these
facilities.
Distributions to preferred stockholders
For the years ended December 31, 2003 and 2002, distributions to preferred
stockholders totaled $15.3 million and $21.0 million, respectively, and
decreased as the result of the redemption of a substantial portion of our
outstanding series A preferred stock and tender offer for our series B
50
preferred stock as further described under Liquidity and Capital Resources
Capital Transactions Completed During 2003.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
We incurred a net loss available to common stockholders of $28.9 million, or
$0.82 per diluted share, for the year ended December 31, 2002, compared with
net income available to common stockholders of $5.7 million, or $0.23 per
diluted share, for the year ended December 31, 2001.
The net loss in 2002 resulted from the combined effects of a non-cash charge
for the cumulative effect of accounting change for goodwill of $80.3 million,
or $2.49 per diluted share, related to the adoption of SFAS 142 during the
first quarter of 2002 and expenses associated with debt refinancings of $36.7
million, or $1.14 per diluted share, incurred in connection with the
comprehensive refinancing completed during the second quarter of 2002.
Offsetting these charges in 2002 was an aggregate income tax benefit of $63.3
million, which included a cash income tax benefit of $32.2 million recognized
during the first quarter of 2002 related to a change in tax law that became
effective in March 2002, which enabled us to utilize certain of our net
operating losses to offset taxable income generated in 1997 and 1996. In
addition, $30.3 million of the income tax benefit in 2002 was due to the
reduction of the tax valuation allowance applied to certain deferred tax assets
arising primarily as a result of 2002 tax deductions based on a cumulative
effect of accounting change for tax depreciation reported on our 2002 federal
income tax return. Additionally, net interest expense decreased $38.8 million
during 2002 compared with 2001 due to the comprehensive refinancing completed
in May 2002, as well as the reduction of debt balances outstanding through the
sale of fixed assets and internally generated cash, and lower market interest
rates.
The net income available to common stockholders during 2001 included a loss
from continuing operations after preferred stock distributions of $3.3 million,
or $0.14 per diluted share, while income from discontinued operations was $9.0
million, or $0.37 per diluted share. Contributing to the net income
attributable to common stockholders during 2001 was a non-cash gain of $25.6
million related to the extinguishment of a $26.1 million promissory note issued
in connection with our federal stockholder litigation settlement, as further
discussed hereafter under the caption Change in fair value of derivative
instruments. Results for 2001 also included the non-cash effect of an $11.1
million charge associated with the accounting for an interest rate swap
agreement required under prior terms of the old senior bank credit facility.
Facility Operations
Revenue and expenses per compensated man-day for all of the facilities we owned
or managed, exclusive of those discontinued (see further discussion below
regarding discontinued operations), were as follows for the years ended
December 31, 2002 and 2001:
51
Management and other revenue for the years ended December 31, 2002 and 2001,
totaled $934.1 million and $906.2 million, respectively. Our federal customers
generated 33% of our total revenue during 2002, compared with 30% during 2001.
Operating expenses totaled $721.4 million and $698.9 million for the years
ended December 31, 2002 and 2001, respectively. Salaries and benefits
represent the most significant component of fixed operating expenses and was
the primary cause of the increase in fixed expenses per compensated man-day.
During 2002 and 2001, we incurred wage increases due to tight labor markets for
correctional officers and benefit increases due to surging healthcare costs.
The increase in salaries and benefits contributed $0.53 per compensated man-day
to the increase in fixed expenses per compensated man-day from $27.36 during
2001 to $27.82 during 2002.
We also experienced a trend of increasing insurance expense during 2002
compared with 2001. Because we are significantly self-insured for employee
health, workers compensation, and automobile liability insurance, our
insurance expense is dependent on claims experience and our ability to control
our claims. Our insurance policies contain various deductibles and stop-loss
amounts intended to limit our exposure for individually significant
occurrences. However, the nature of our self-insurance provides little
protection for a deterioration in claims experience or increasing employee
medical costs in general.
During the first quarter of 2001, we hired a General Counsel to manage our
existing legal matters and to develop procedures to minimize the incidence of
litigation in the future. We have been able to settle numerous cases on terms
we believe are favorable. However, variable operating expenses included $4.9
million during 2002, compared with $0.3 million during 2001, for an overall
increase in potential exposure for certain legal proceedings, none of which was
individually significant. This increase of $4.6 million contributed $0.25 per
compensated man-day to the increase in variable expenses per compensated
man-day from $9.74 during 2001 to $10.23 during 2002.
The following tables display the revenue and expenses per compensated man-day
for the facilities we own and manage and for the facilities we manage but do
not own:
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The following discussions under Owned and Managed Facilities and
Managed-Only Facilities address significant events that impacted our results
of operations for the respective periods.
Owned and Managed Facilities
On May 30, 2002, we were awarded a contract by the BOP to house 1,524 federal
detainees at our McRae Correctional Facility located in McRae, Georgia. The
three-year contract, awarded as part of CAR II, also provides for seven
one-year renewals. The contract with the BOP guarantees at least 95% occupancy
on a take-or-pay basis, and commenced full operations in December 2002,
resulting in an increase in management and other revenue upon commencement.
However, start-up expenses were incurred prior to the commencement of the
contract, including but not limited to, salaries, utilities, medical and food
supplies and clothing, which resulted in additional operating expenses before
any revenue was generated, resulting in a reduction in net income during the
third and fourth quarters of 2002.
During 2001, we provided correctional services for the State of Wisconsin at
four of our facilities. During the fourth quarter of 2001, due to a short-term
decline in the State of Wisconsins inmate population, the State transferred
approximately 675 inmates out of our 1,536-bed Whiteville Correctional
Facility, located in Whiteville, Tennessee, to the States correctional system,
reducing the population of Wisconsin inmates in our facilities to approximately
3,400. Although the State of Wisconsin continued transferring inmates out of
our facilities during the first quarter of 2002, our population of Wisconsin
inmates has gradually increased, primarily at our 1,338-bed Prairie
Correctional Facility, located in Appleton, Minnesota. Total management and
other revenue at the Whiteville facility decreased $8.9 million, or 39.9%,
during 2002 compared with 2001.
During September 2002, we announced a contract award from the State of
Wisconsin to house up to a total of 5,500 medium security Wisconsin inmates.
The new contract replaced the existing contract
53
with the State of Wisconsin on December 22, 2002. As of December 31, 2002, we
managed approximately 3,500 Wisconsin inmates under the contract.
During October 2002, we entered into a new agreement with Hardeman County,
Tennessee, with respect to the management of up to 1,536 medium security
inmates from the State of Tennessee in the Whiteville Correctional Facility.
We began receiving Tennessee inmates at the facility during October 2002.
Due to an increase in population at our 2,304-bed Central Arizona Detention
Center, located in Florence, Arizona, and at our 910-bed Torrance County
Detention Facility, located in Estancia, New Mexico, primarily from the USMS
and ICE, management and other revenue increased $8.6 million and $6.8 million,
respectively, at these facilities during 2002 compared with 2001.
During the second quarter of 2001, we were informed that our contract with the
District of Columbia to house its inmates in our Northeast Ohio Correctional
Center, which expired September 8, 2001, would not be renewed due to a new law
that mandated that the BOP assume jurisdiction of all District of Columbia
offenders by the end of 2001. The Northeast Ohio Correctional Center is a
2,016-bed medium security prison. The District of Columbia began transferring
inmates out of the facility during the second quarter of 2001 and completed the
process in July 2001. Total management and other revenue at this facility was
$6.4 million during the year ended December 31, 2001. The related operating
expenses at this facility were $12.6 million during the year ended December 31,
2001. While no revenue was generated from this facility during 2002, we
incurred $2.9 million of operating expenses during the year ended December 31,
2002 for real estate taxes, utilities, insurance and other necessary expenses
associated with owning the facility. Overall, our occupancy decreased by
approximately 1,300 inmates at our facilities as a result of this mandate.
Managed-Only Facilities
During the fourth quarter of 2001, we committed to a plan to terminate our
management contract at the Southwest Indiana Regional Youth Village, a 188-bed
juvenile facility located in Vincennes, Indiana. During the first quarter of
2002, we entered into a mutual agreement with CFSC to terminate our management
contract at the facility, effective April 1, 2002, prior to the contracts
expiration date in 2004. In connection with the mutual agreement to terminate
the management contract, CFSC also paid in full an outstanding note receivable
totaling $0.7 million, which was previously considered uncollectible and was
fully reserved.
On June 28, 2002, we received notice from the Mississippi Department of
Corrections terminating our contract to manage the 1,016-bed Delta Correctional
Facility located in Greenwood, Mississippi, due to the non-appropriation of
funds. We ceased operations of the facility in October 2002. However, the
State of Mississippi agreed to expand the management contract at the Wilkinson
County Correctional Facility located in Woodville, Mississippi to accommodate
an additional 100 inmates. As a result, the results of operations of the Delta
Correctional Facility are not reported in discontinued operations.
During July 2002, we renewed our contract with Tulsa County, Oklahoma, for the
management of inmates at the David L. Moss Criminal Justice Center. The
contract renewal included an increase in the per-diem rate, and also shifted to
Tulsa County, the burden of certain utility expenses, resulting in a modest
improvement in profitability for the management of this facility during 2002,
compared with 2001.
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Rental Revenue
Rental revenue was $3.7 million for the year ended December 31, 2002, compared
with $5.7 million during the year ended December 31, 2001. Rental revenue was
generated from leasing correctional and detention facilities to governmental
agencies and other private operators. On March 16, 2001, we sold the Mountain
View Correctional Facility, and on June 28, 2001, we sold the Pamlico
Correctional Facility, two facilities that had been leased to governmental
agencies. Therefore, no further rental revenue was received for these
facilities during the year ended December 31, 2002. For the year ended
December 31, 2001, rental revenue for these facilities totaled $2.0 million.
General and administrative expense
For the years ended December 31, 2002 and 2001, general and administrative
expenses totaled $36.9 million and $34.6 million, respectively. General and
administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses, and increased
from 2001 primarily due to an increase in professional fees incurred in
connection with the implementation of tax strategies to maximize opportunities
created by a change in tax law in March 2002 and the aforementioned settlement
with the IRS with respect to our predecessors 1997 federal income tax return.
This increase was partially offset by a reduction in salaries and benefits,
including incentive compensation.
Depreciation and amortization
For the years ended December 31, 2002 and 2001, depreciation and amortization
expense totaled $51.3 million and $52.7 million, respectively. Amortization
expense for the year ended December 31, 2001 included $7.6 million for goodwill
and $1.2 million for amortization of workforce values, both of which were
established in connection with acquisitions occurring in 2000. Workforce
values were reclassified into goodwill, and goodwill was no longer subject to
amortization effective January 1, 2002, in accordance with SFAS 142.
Amortization expense during the year ended December 31, 2001 was also net of a
reduction to amortization expense of $8.5 million for the amortization of a
liability relating to contract values established in connection with the
mergers completed in 2000. Due to certain of these liabilities becoming fully
amortized during 2001, the reduction to amortization expense during the year
ended December 31, 2002 was $2.1 million, resulting in a net increase in
depreciation and amortization expense of $6.4 million from 2001 to 2002.
Interest expense, net
Interest expense, net, is reported net of interest income for the years ended
December 31, 2002 and 2001. Gross interest expense was $91.9 million and
$133.7 million, respectively, for the years ended December 31, 2002 and 2001.
Gross interest expense is based on outstanding convertible subordinated notes
payable balances, borrowings under the new senior bank credit facility, the old
senior bank credit facility, the 9.875% senior notes, the 12% senior notes, net
settlements on an interest rate swap, and amortization of loan costs and unused
facility fees. The decrease in gross interest expense from the prior year is
primarily attributable to lower average outstanding indebtedness, the
comprehensive refinancing completed on May 3, 2002, which decreased the
interest rate spread on the new senior bank credit facility, the termination of
the interest rate swap agreement, lower amortization of loan costs, and a lower
interest rate environment. During 2001, we paid-down $189.0 million in total
debt through a combination of $138.7 million in cash generated from asset sales
and internally generated cash.
Gross interest income was $4.4 million and $7.5 million, respectively, for the
years ended December 31, 2002 and 2001. Gross interest income is earned on
cash collateral requirements, direct financing
55
leases, notes receivable and investments of cash and cash equivalents. On
October 3, 2001, we sold our Southern Nevada Womens Correctional Center, which
had been accounted for as a direct financing lease. Therefore, no interest
income was received on this lease during 2002. For the year ended December 31,
2001, interest income for this lease totaled $0.9 million.
Expenses associated with debt refinancings
As a result of the early extinguishment of the old senior bank credit facility
and the redemption of substantially all of our 12% senior notes, we recorded
expenses associated with debt refinancings of $36.7 million for the year ended
December 31, 2002, which included the write-off of existing deferred loan
costs, certain bank fees paid, premiums paid to redeem the 12% senior notes,
and certain other costs associated with the refinancing.
Change in fair value of derivative instruments
In accordance with SFAS 133 we have reflected in earnings the change in the
estimated fair value of our interest rate swap agreement during the years ended
December 31, 2002 and 2001. We estimated the fair value of the interest rate
swap agreement using option-pricing models that value the potential for the
interest rate swap agreement to become in-the-money through changes in interest
rates during the remaining term of the agreement. A negative fair value
represented the estimated amount we would have to pay to cancel the contract or
transfer it to other parties.
Our swap agreement fixed LIBOR at 6.51% (prior to the applicable spread) on
outstanding balances of at least $325.0 million through its expiration on
December 31, 2002. In accordance with SFAS 133, we recorded a $2.2 million
non-cash gain and an $11.1 million non-cash charge, respectively, for the
change in fair value of the swap agreement for the years ended December 31,
2002 and 2001. These amounts included $2.5 million for amortization of the
transition adjustment, or the cumulative reduction in the fair value of the
swap from its inception to the date we adopted SFAS 133 on January 1, 2001,
during each year. We were no longer required to maintain the existing interest
rate swap agreement due to the early extinguishment of the old senior bank
credit facility. During May 2002, we terminated the swap agreement prior to
its expiration at a price of $8.8 million. In accordance with SFAS 133, we
continued to amortize the unamortized portion of the transition adjustment as a
non-cash expense through December 31, 2002.
The new senior bank credit facility required us to hedge at least $192.0
million of the term loan portions of the facility within 60 days following the
closing of the loan. In May 2002, we entered into an interest rate cap
agreement to fulfill this requirement, capping LIBOR at 5.0% (prior to the
applicable spread) on outstanding balances of $200.0 million through the
expiration of the cap agreement on May 20, 2004. We paid a premium of $1.0
million to enter into the interest rate cap agreement. We expect to amortize
this premium as the estimated fair values assigned to each of the hedged
interest payments expire throughout the term of the cap agreement, amounting to
$0.4 million in 2003 and $0.6 million in 2004. We have met the hedge
accounting criteria under SFAS 133 and related interpretations in accounting
for the interest rate cap agreement. As a result, the estimated fair value of
the interest rate cap agreement of $36,000 as of December 31, 2002 was included
in other assets in the consolidated balance sheet, and the change in the fair
value of the interest rate cap agreement of $964,000 during the year ended
December 31, 2002 was reported through other comprehensive income in the
statement of stockholders equity.
On December 31, 2001, we issued 2.8 million shares of common stock, along with
a $26.1 million subordinated promissory note, in conjunction with the final
settlement of the federal court portion of our stockholder litigation
settlement. Under the terms of the promissory note, the note and accrued
interest became extinguished in January 2002 once the average closing price of
the common stock
56
exceeded a termination price equal to $16.30 per share for fifteen
consecutive trading days following the issuance of such note. The terms of the
note, which allowed the principal balance to fluctuate dependent on the trading
price of our common stock, created a derivative instrument that was valued and
accounted for under the provisions of SFAS 133. As a result of the
extinguishment, we estimated the fair value of this derivative to approximate
the face amount of the note, resulting in an asset being recorded during the
fourth quarter of 2001. Since the estimated fair value of the derivative asset
was equal to the face amount of the note as of December 31, 2001, the
extinguishment had no financial statement impact in 2002.
Income tax benefit
We generated income tax benefits of $63.3 million and $3.4 million for the
years ended December 31, 2002 and 2001, respectively. The increase in the
income tax benefit during the year ended December 31, 2002, primarily resulted
from the Job Creation and Worker Assistance Act of 2002 which was signed into
law on March 9, 2002. Among other changes, the tax law extended the net
operating loss carryback period to five years from two years for net operating
losses arising in tax years ending in 2001 and 2002, and allows use of net
operating loss carrybacks and carryforwards to offset 100% of the alternative
minimum tax. We experienced net operating losses during 2001 resulting
primarily from the sale of assets at prices below the tax basis of such assets.
Under terms of the new law, we utilized certain of our net operating losses to
offset taxable income generated in 1997 and 1996. As a result of this tax law
change in 2002, we reported an income tax benefit and claimed a refund of $32.2
million during the first quarter of 2002, which was received in April 2002.
On October 24, 2002, we entered into a definitive settlement with the IRS in
connection with the IRSs audit of our predecessors 1997 federal income tax
return. Under the terms of the settlement, in consideration for the IRSs
final determination with respect to the 1997 tax year, in December 2002 we paid
$52.2 million in cash to satisfy federal and state taxes and interest.
Due to the change in tax law in March 2002, the settlement created an
opportunity to utilize any 2002 tax losses to claim a refund of a portion of
the taxes paid. We experienced tax losses during 2002 primarily resulting from
a cumulative effect of accounting change in depreciable lives of property and
equipment for tax purposes. Under terms of the new law, we utilized our net
operating losses to offset taxable income generated in 1997, which was
increased substantially in connection with the settlement with the IRS. As a
result of the tax law change in 2002, combined with the adoption of an
accounting change in the depreciable lives of certain tax assets, as of
December 31, 2002 we claimed an income tax refund of $32.1 million, which was
received during the second quarter of 2003.
The cumulative effect of accounting change in tax depreciation resulted in the
establishment of a significant deferred tax liability for the tax effect of the
book over tax basis of certain assets in 2002. The creation of such a deferred
tax liability, and the significant improvement in our tax position since the
original valuation allowance was established to reserve our deferred tax
assets, resulted in the reduction of the valuation allowance, generating an
income tax benefit of $30.3 million during the fourth quarter of 2002, as we
determined that substantially all of these deferred tax liabilities would be
utilized to offset the reversal of deferred tax assets during the net operating
loss carryforward periods.
Discontinued Operations
During 2002, the three facilities we managed in the Commonwealth of Puerto Rico
generated total revenue of $20.2 million and incurred operating expenses of
$17.3 million, respectively, through the dates we transferred operations to the
Commonwealth of Puerto Rico in May 2002 and August 2002. We also recorded a
non-cash charge as discontinued operations of $1.8 million during the second
57
quarter of 2002 for the write-off of the carrying value of assets associated
with these terminated management contracts. During 2001, these facilities
generated total revenue of $43.7 million and incurred operating expenses of
$32.0 million.
On June 28, 2002, we sold our interest in a juvenile facility located in
Dallas, Texas for $4.3 million. The facility, which was designed to
accommodate 900 at-risk juveniles, was leased to an independent third party
operator pursuant to a lease expiring in 2008. This facility generated rental
income of $0.4 million and $0.7 million during 2002 and 2001, respectively.
During the fourth quarter of 2002, we were informed by the State of Florida of
its intention to not renew our contract to manage the 96-bed Okeechobee
Juvenile Offender Correctional Center located in Okeechobee, Florida, upon the
expiration of a short-term extension to the existing management contract, which
expired in December 2002. During 2002, this facility generated total revenue
and operating expenses of $4.8 million and $4.0 million, respectively, compared
to total revenue of $4.8 million and total operating expenses of $4.0 million
during 2001.
On March 18, 2003, we were notified by the Department of Corrections of the
Commonwealth of Virginia of its intention to not renew our contract to manage
the 1,500-bed Lawrenceville Correctional Center, located in Lawrenceville,
Virginia, upon the expiration of the contract. Accordingly, we terminated our
operation of the facility on March 22, 2003, in connection with the expiration
of the contract. During 2002, this facility generated total revenue and total
operating expenses of $20.3 million and $18.7 million, respectively, compared
to total revenue of $19.7 million and total operating expenses of $18.6 million
during 2001.
During 2002, depreciation and amortization, interest income, and income tax
expense totaled $3.1 million, $0.6 million, and $0.6 million, respectively, for
these facilities. During 2001, depreciation and amortization, interest income,
and income tax expense totaled $1.4 million, $0.6 million, and $4.5 million,
respectively, for these facilities.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are for working capital, capital
expenditures and debt service payments. Capital requirements may also include
cash expenditures associated with our outstanding commitments and
contingencies, as further discussed in the notes to the financial statements.
Additionally, we may incur capital expenditures to expand the design capacity
of certain of our facilities in order to retain management contracts, and to
increase our inmate bed capacity for anticipated demand from current and future
customers. With lender consent, we may acquire additional correctional
facilities that we believe have favorable investment returns and increase value
to our stockholders. We will also consider opportunities for growth, including
potential acquisitions of businesses within our line of business and those that
provide complementary services, provided we believe such opportunities will
broaden our market share and/or increase the services we can provide to our
customers.
On September 10, 2003, we announced our intention to expand by 594 beds the
Crowley County Correctional Facility located in Olney Springs, Colorado, a
facility we acquired in January 2003. The anticipated cost of the expansion is
approximately $22.0 million and is estimated to be completed during the third
quarter of 2004. This expansion is being undertaken in anticipation of
increasing demand from the States of Colorado and Wyoming, the current
customers at this facility. We also announced on September 10, 2003, our
intention to complete construction of the Stewart County Correctional Facility
located in Stewart County, Georgia. The anticipated cost to complete the
Stewart facility is approximately $22.0 million, with completion also estimated
to occur during the third quarter of 2004. Construction on the 1,524-bed
Stewart County Correctional Facility began
58
in August 1999 and was suspended in May 2000. Our decision to complete
construction of this facility is based on anticipated demand from several
government customers having a need for inmate bed capacity in the Southeast
region of the country. However, we can provide no assurance that we will be
successful in utilizing the increased bed capacity resulting from these
projects. Additionally, in October 2003, we announced the signing of a new
contract with ICE for up to 905 detainees at our Houston Processing Center
located in Houston, Texas. We also announced our intention to expand the
facility by 494 beds from its current 411 beds to 905 beds. The anticipated
cost of the expansion is approximately $29.0 million and is estimated to be
completed during the first quarter of 2005. This expansion is being undertaken
in order to accommodate additional detainee populations that are anticipated as
a result of this contract, which contains a guarantee that ICE will utilize 679
beds at such time as the expansion is completed.
During January 2004, we announced our intention to expand the Florence
Correctional Center located in Florence, Arizona by 224 beds. The anticipated
cost of the expansion is approximately $6.2 million and is estimated to be
completed during the first quarter of 2005. Upon completion of the expansion,
the Florence Correctional Center will have a total design capacity of 1,824
beds. The facility currently houses federal inmates as well as inmates from
Hawaii and Alaska. The expansion is being undertaken in anticipation of
increasing demand from each of these customers. During January 2004, we also
announced the signing of a new contract with the USMS to manage up to 800
inmates at our Leavenworth Detention Center located in Leavenworth, Kansas. To
fulfill the requirements of this contract, we will expand this facility by 256
beds from its current design capacity of 483 beds increasing its total beds to
739 beds. The new contract provides a guarantee that the USMS will utilize 400
beds. The anticipated cost to expand the facility is approximately $10.4
million, with completion estimated to occur during the fourth quarter of 2004.
The following table summarizes the aforementioned construction and expansion
projects expected to be completed through the first quarter of 2005:
We may also pursue additional expansion opportunities to satisfy the needs of
an existing or potential customer or when the economics of an expansion are
compelling.
We have called for redemption the remaining outstanding shares of our series A
preferred stock and plan to redeem our series B preferred stock during 2004.
The series A preferred stock is currently redeemable at $25.00 per share plus
dividends accrued and unpaid to the redemption date, while the series B
preferred stock is redeemable during the second quarter of 2004 at $24.46 per share
plus dividends
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accrued and unpaid to the redemption date. As of December 31, 2003, we had
outstanding $7.5 million of series A preferred stock and $23.5 million of
series B preferred stock.
Additionally, we believe investments in technology can enable us to operate
safe and secure facilities with more efficient, highly skilled and
better-trained staff, and to reduce turnover through the deployment of
innovative technologies, many of which are unique and new to the corrections
industry. These investments in technology are expected to provide long-term
benefits enabling us to provide enhanced quality service to our customers while
creating scalable operating efficiencies. Accordingly, we expect to incur
approximately $21.0 million in information technology expenditures during 2004.
We expect to fund our capital expenditure requirements including completion of
construction of the Stewart County Correctional Facility and the four
aforementioned expansion projects, and the redemption of our preferred stock,
as well as our information technology expenditures, working capital, and debt
service requirements, with cash on hand, net cash provided by operations, and
borrowings available under our revolving credit facility.
During the years ended December 31, 2003, 2002, and 2001, we were not required
to pay income taxes, other than primarily for the alternative minimum tax and
certain state taxes, due to the utilization of existing net operating loss
carryforwards to offset our taxable income. During 2004 we expect to generate
sufficient taxable income to utilize our remaining federal net operating loss
carryforwards, except for certain annual limitations imposed under the Internal
Revenue Code. As a result, we expect to begin paying federal income taxes
during 2004, with an obligation to pay a full years taxes beginning in 2005.
As of December 31, 2003, our liquidity was provided by cash on hand of $84.2
million and $97.7 million available under our $125.0 million revolving credit
facility. During the year ended December 31, 2003 and 2002, we generated
$202.8 million and $101.4 million, respectively, in cash through operating
activities, and as of December 31, 2003 and 2002, we had net working capital of
$133.6 million and $68.4 million, respectively. We currently expect to be able
to meet our cash expenditure requirements for the next year utilizing these
resources. In addition, we have an effective shelf registration statement
under which we may issue up to $279.6 million in equity or debt securities,
preferred stock and warrants. The shelf registration statement provides us
with the flexibility to issue additional equity or debt securities, preferred
stock, and warrants from time to time when we determine that market conditions
and the opportunity to utilize the proceeds from the issuance of such
securities are favorable.
Operating Activities
Our net cash provided by operating activities for the year ended December 31,
2003 was $202.8 million, compared with $101.4 million for the same period in
the prior year and $92.8 million in 2001. Cash provided by operating
activities represents the year to date net income or loss plus depreciation and
amortization, changes in various components of working capital, and adjustments
for various non-cash charges, including primarily the reversal in 2003 of a
valuation allowance applied to deferred tax assets, the cumulative effect of
accounting change in 2002, the change in fair value of derivative instruments
each year, and expenses associated with debt refinancing and recapitalization
transactions completed in 2003 and 2002, which are reported as financing
activities to the extent such charges result from cash payments.
The increase in cash provided by operating activities for the year ended
December 31, 2003 was due to increased occupancy levels, improved margins, and
a reduction in interest expense, primarily resulting from the refinancing
transactions completed in 2003 and May 2002 and lower market
60
interest rates. Additionally, during 2003 we received payment of $13.5 million
from the Commonwealth of Puerto Rico as final payment of all outstanding
balances, as well as non-recurring income tax refunds of $33.7 million. These
increases were partially offset by the payment of $15.5 million of contingent
interest on the $40.0 million convertible subordinated notes that had accrued
but remained unpaid since June 2000 in accordance with the terms of such notes,
and which was paid in May 2003 in connection with the recapitalization.
Investing Activities
Our cash flow used in investing activities was $100.3 million for the year
ended December 31, 2003, and was primarily attributable to capital expenditures
during the year of $92.2 million, including $56.6 million for acquisition and
development activities and $35.6 million for other capital expenditures.
Capital expenditures for acquisition and development activities of $56.6
million during 2003 included capital expenditures of $47.5 million in
connection with the purchase of the Crowley County Correctional Facility.
Expenditures for other capital improvements included an increase in our
investments in numerous technology initiatives. In addition, during 2003 cash
was used to fund restricted cash for a capital improvements, replacements, and
repairs reserve totaling $5.6 million for our San Diego Correctional Facility.
Our cash flow used in investing activities was $9.7 million for the year ended
December 31, 2002, and was primarily attributable to capital expenditures
during the period of $17.1 million, net of proceeds received from the sale of
our interest in a juvenile facility located in Dallas, Texas, on June 28, 2002,
for $4.3 million. Capital expenditures during 2002 included $4.8 million for
acquisition and development activities, including primarily expenditures for
our McRae Correctional Facility to meet specifications required by the BOP in
connection with a new contract award, and $12.3 million for other capital
expenditures incurred for the betterment, renewal or significant repairs that
extended the useful life of a correctional facility, or for new furniture,
fixtures, and equipment. In addition, we received refunds of restricted cash
totaling $5.2 million primarily used as collateral for workers compensation
self-insured claims. We elected to post letters of credit from the revolving
loan portion of our senior bank credit facility to replace the collateral on
such claims.
Financing Activities
Our cash flow used in financing activities was $83.7 million for the year ended
December 31, 2003. During January 2003, we financed the purchase of the
Crowley County Correctional Facility through $30.0 million in borrowings under
our senior bank credit facility pursuant to an expansion of the term loan
portion of the facility. During May 2003, we completed the recapitalization
transactions, which included the sale and issuance of $250.0 million of 7.5%
senior notes and 6.4 million shares of common stock for $124.8 million. The
proceeds received from the sale and issuance of the senior notes and the common
stock were largely offset by the redemption of $192.0 million of our series A
preferred stock and our series B preferred stock; the prepayment of $132.0
million on the term loan portions of the senior bank credit facility with
proceeds from the recapitalization, cash on hand, and an income tax refund; the
prepayment of $7.6 million aggregate principal of our 12% senior notes; the
repurchase and subsequent retirement of 3.4 million shares of common stock for
$65.6 million; and the payment of $10.8 million in costs primarily associated
with the recapitalization transactions and prepayment of the 12% senior notes.
During August 2003, we completed the sale and issuance of $200.0 million of
7.5% senior notes at a price of 101.125% of the principal amount of the notes,
resulting in a premium of $2.25 million. The proceeds received from the sale
and issuance of the senior notes were offset by the prepayment of $240.3
million on the term loan portion of the senior bank credit facility with
proceeds from the sale and issuance of the senior notes and with cash on hand.
We paid $7.7 million in costs primarily associated with the debt refinancing
transactions during the third quarter of 2003. We also paid $7.4 million in
scheduled principal repayments during
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2003, and cash dividends of $12.7 million on our preferred stock, including a
tender premium of $5.8 million in connection with the completion of the tender
offer for our series B preferred stock.
Our cash flow used in financing activities was $72.6 million for the year ended
December 31, 2002. Proceeds from the issuance on May 3, 2002 of the $250.0
million 9.875% senior notes and the new senior bank credit facility were
largely offset by the repayment of the old senior bank credit facility and the
redemption of substantially all of the 12% senior notes. However, we also paid
debt issuance costs of $37.5 million in connection with the refinancing, and an
additional $8.8 million to terminate an interest rate swap agreement. Further,
during the first quarter of 2002, we paid cash dividends of $12.9 million on
our series A preferred stock for the fourth quarter of 2001 and for all five
quarters in arrears, as permitted under the terms of an amendment to our old
senior bank credit facility obtained in December 2001. Additionally, we paid
$2.2 million in cash dividends on our series A preferred stock during each of
the second, third, and fourth quarters of 2002.
Contractual Obligations
The following schedule summarizes our contractual obligations by the indicated
period as of December 31, 2003 (in thousands):
The cash obligations in the table above do not include future cash obligations
for interest associated with our outstanding indebtedness. During 2003, we
paid $80.0 million in interest, including capitalized interest. We had $27.3
million letters of credit outstanding at December 31, 2003 primarily to support
our requirement to repay fees and claims under our workers compensation plan
in the event we do not repay the fees and claims due in accordance with the
terms of the plan. The letters of credit are renewable annually. We did not
have any draws under any outstanding letters of credit during 2003, 2002, or
2001.
Capital Transactions Completed During 2003
Recapitalization
On April 2, 2003, we initiated a series of transactions as described below
intended to enhance our capital structure and to provide us with additional
financing flexibility that we believe enables us to more effectively execute
our business objectives.
Common Stock Offering
. On May 7, 2003, we completed the sale and issuance of
6.4 million shares of common stock at a price of $19.50 per share, resulting in
net proceeds of $117.0 million after the payment of estimated costs associated
with the issuance.
Note Offering.
Concurrently with the common stock offering, we also completed
the sale and issuance of $250.0 million aggregate principal amount of senior
notes. The senior notes pay interest
62
semi-annually at the rate of 7.5% per annum and are scheduled to mature on May
1, 2011. The notes are senior unsecured obligations and are guaranteed by our
domestic subsidiaries. At any time on or before May 1, 2006, we may redeem up
to 35% of the notes with the net proceeds from certain equity offerings, as
long as 65% of the aggregate principal amount of the notes remains outstanding
after the redemption. We may redeem all or a portion of the senior notes on or
after May 1, 2007. Redemption prices are set forth in the indenture governing
the senior notes.
As described below, proceeds from the common stock and note offerings were used
to purchase shares of common stock issued upon the conversion of our $40.0
million 10% convertible subordinated notes (and to pay accrued interest on the
notes through the date of purchase), to purchase shares of our series B
preferred stock that were tendered in the tender offer described below, to
redeem shares of our series A preferred stock and to pay-down a portion of our
senior bank credit facility.
Purchase of Shares of Common Stock Issuable Upon Conversion of the MDP Notes.
Pursuant to the terms of an agreement with MDP, the holder of our $40.0 million
aggregate principal amount of convertible subordinated notes due 2008 with a
stated rate of 10.0% plus contingent interest accrued at 5.5%, immediately
following the completion of the common stock and notes offerings, MDP converted
the notes into 3,362,899 shares of our common stock and subsequently sold such
shares to us. The aggregate purchase price of the shares, inclusive of accrued
interest of $15.5 million, was $81.1 million. The shares purchased from MDP
have been cancelled under the terms of our charter and Maryland law and now
constitute authorized but unissued shares of common stock.
Tender Offer for Series B Preferred Stock.
Following the completion of the
common stock and notes offerings in May 2003, we purchased 3.7 million shares
of our series B preferred stock for $97.4 million pursuant to the terms of a
cash tender offer. The tender offer price for the series B preferred stock
(inclusive of all accrued and unpaid dividends) was $26.00 per share. The
payment of the difference between the tender price ($26.00) and the liquidation
preference ($24.46) for the shares tendered was reported as a preferred stock
distribution in the second quarter of 2003. As the result of the repayment of
the balance of the remaining outstanding 12% senior notes, as further described
below, the remaining shares of series B preferred stock are redeemable
during the second quarter of 2004 at a price of $24.46 per share plus dividends
accrued and unpaid at the redemption date. We currently intend to redeem the
remaining outstanding shares of series B preferred stock during 2004.
Redemption of Series A Preferred Stock.
Immediately following consummation of
the common stock and notes offerings, we gave notice to the holders of our
outstanding series A preferred stock that we would redeem 4.0 million shares of
the 4.3 million shares of series A preferred stock outstanding at a redemption
price equal to $25.00 per share, plus accrued and unpaid dividends to the
redemption date. The redemption was completed in June 2003.
The remaining outstanding shares of our series A preferred stock are currently
redeemable at $25.00 per share plus dividends accrued and unpaid at the
redemption date. On February 19, 2004, we announced that we would redeem the
remaining 300,000 outstanding shares of series A preferred stock on or about
March 19, 2004. We expect to fund the aggregate redemption price of $7.5
million plus accrued and unpaid dividends to the redemption date of $0.1
million, with cash on hand.
Payments on and Amendments to our Senior Bank Credit Facility.
We used the
estimated remaining net proceeds of the common stock and notes offerings after
application as described above, combined with $25.3 million of cash on hand, to
pay-down $100.0 million outstanding under the term loan portions of our senior
bank credit facility. Further, during May 2003, we used cash received from a
federal income tax refund to pay-down an additional $32.0 million outstanding
under the term loan
63
portion of the senior bank credit facility. In connection with the common
stock and notes offerings, the requisite lenders under the senior bank credit
facility consented to the issuance of the $250.0 million 7.5% senior notes
described below and the use of all proceeds from the common stock and note
offerings to purchase the shares of common stock issuable upon conversion of
the $40.0 million convertible subordinated notes by MDP, redeem the series A
preferred stock and purchase shares of series B preferred stock pursuant to the
tender offer.
In connection with the consent, we also obtained modification to certain
provisions of the senior bank credit facility to generally provide us with
additional borrowing capacity and operational flexibility, including, but not
limited to, (i) providing for a future increase in the revolving credit portion
of the facility from $75.0 million to up to $110.0 million at our request
(subject to the receipt of lender commitments at the time of the increase),
(ii) increasing our ability to incur certain indebtedness, (iii) increasing our
permitted annual capital expenditures, and (iv) increasing our ability to
assume indebtedness in connection with, and otherwise complete, acquisitions.
These terms were further amended in August 2003 as described hereafter.
On April 3, 2003, Standard & Poors upgraded its rating of our senior secured
debt to BB- from B+ and our senior unsecured debt to B from B-. On May
14, 2003, Moodys Investors Service upgraded its rating of our senior secured
debt to Ba3 from B1, our senior unsecured debt to B1 from B2, and our
preferred stock to B3 from Caa1.
Repayment of Remaining 12% Senior Notes
In June 2003, pursuant to an offer to purchase the balance of the remaining
$100.0 million 12% senior notes due 2006 ($10.8 million), holders of $7.6
million principal amount of the notes tendered their notes at a price of 120%
of par. During July 2003, holders of an additional $0.1 million principal
amount of the notes tendered their notes at a price of 120% of par pursuant to
the offer to purchase, reducing the remaining amount of 12% senior notes
outstanding to $3.1 million.
During August 2003, pursuant to the indenture relating to the 12% senior notes,
we legally defeased the remaining outstanding 12% senior notes by depositing
with a trustee an amount sufficient to pay the principal and interest on such
notes through the maturity date in June 2006, and by meeting certain other
conditions required under the indenture. Under the terms of the indenture, the
12% senior notes were deemed to have been repaid in full.
Issuance of New 7.5% Senior Notes
During the third quarter of 2003, we took advantage of a favorable interest
rate environment and fixed the interest rate on a substantial portion of our
remaining outstanding variable rate debt and extended our debt maturities. On
August 8, 2003, we completed the sale and issuance of $200.0 million aggregate
principal amount of senior notes in a private placement to qualified
institutional buyers pursuant to Rule 144A under the Securities Act. The notes
pay interest semi-annually at the rate of 7.5% per annum and are scheduled to
mature May 1, 2011. The notes were issued at a price of 101.125% of the
principal amount of the notes, resulting in a premium of $2.25 million, which
will be amortized as a reduction to interest expense over the term of the
notes. The notes are senior unsecured obligations and are guaranteed by our
domestic subsidiaries. At any time on or before May 1, 2006, we may redeem up
to 35% of the notes with net proceeds from certain equity offerings, as long as
65% of the aggregate principal amount of the notes remains outstanding after
the redemption. We may redeem all or a portion of the senior notes on or after
May 1, 2007. Redemption prices are set forth in the indenture governing the
senior notes. Proceeds from the note offering, along with cash on hand, were
used to pay-down $240.3 million of the term loan portion of our senior bank
credit facility.
64
We have agreed to offer to exchange the notes for a new issue of identical debt
securities registered under the Securities Act as evidence of the same
underlying obligation of indebtedness. The exchange offer registration
statement must be filed with the SEC on or prior to May 15, 2004, and we must
use commercially reasonable efforts to have the registration statement declared
effective by the SEC on or prior to August 7, 2004. We have also agreed to
provide a shelf registration statement to cover resales of the notes under
certain circumstances. If we fail to satisfy these obligations, or if the
registration statement is not declared effective by the SEC on or prior to
August 7, 2004, we have agreed to pay liquidated damages to holders of the
notes under specified circumstances.
Amendment to Senior Bank Credit Facility
In connection with the prepayment in August 2003 of the term loan portion of
our senior bank credit facility with proceeds from the issuance of the $200.0
million 7.5% senior notes and with cash on hand, we obtained an amendment to
our senior bank credit facility. The amendment to the senior bank credit
facility provided: (i) an increase in the capacity of the revolving portion of
the facility to $125.0 million, which includes a $75.0 million subfacility for
letters of credit (increased from $50.0 million) that expires on March 31,
2006, and (ii) a $275.0 million term loan expiring March 31, 2008, which
replaced the existing term loan portion of the facility. The amended senior
bank credit facility is secured by liens on a substantial portion of the net
book value of our fixed assets (inclusive of our domestic subsidiaries), and
pledges of all of the capital stock of our domestic subsidiaries. The loans
and other obligations under the facility are guaranteed by each of our domestic
subsidiaries and secured by a pledge of up to 65% of the capital stock of our
foreign subsidiaries. In addition, the amendment provided for a reduction in
interest rates on the term portion of the facility to a base rate plus 1.75% or
LIBOR plus 2.75%, at our option, from a base rate plus 2.5% or LIBOR plus 3.5%
and, with respect to covenants, provides greater flexibility for, among other
matters, incurring unsecured indebtedness, capital expenditures, and permitted
acquisitions. The interest rates and commitment fee on the revolving portion
of the facility were unchanged under terms of the amendment. The amendment
also eliminated certain mandatory prepayment provisions.
The credit agreement governing the senior bank credit facility requires us to
meet certain financial covenants, including, without limitation, a minimum
fixed charge coverage ratio, leverage ratios and a minimum interest coverage
ratio. In addition, the senior bank credit facility contains certain covenants
which, among other things, limit the incurrence of additional indebtedness,
investments, payment of dividends, transactions with affiliates, asset sales,
acquisitions, capital expenditures, mergers and consolidations, prepayments and
modifications of other indebtedness, liens and encumbrances and other matters
customarily restricted in such agreements. In addition, the senior bank credit
facility contains cross-default provisions with our other indebtedness.
As a result of the completion of our recapitalization and refinancing
transactions during 2003, we have significantly reduced our exposure to
variable rate debt and now have no debt maturities on outstanding indebtedness
until 2007. At December 31, 2003, our total weighted average effective
interest rate was 7.74% and our total weighted average debt maturity was 5.9
years. We have historically been able to refinance debt when it has become due
on terms which we believe to be commercially reasonable. While we currently
expect to fund long-term liquidity requirements primarily through a combination
of cash generated from continuing operations and with borrowings under the bank
line of credit, there can be no assurance that we will be able to repay or
refinance our indebtedness when due on commercially reasonable or any other
terms.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 31, 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation Transition
65
and Disclosure, or SFAS 148. SFAS 148 amends Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, or
SFAS 123, to provide alternative methods of transition to SFAS 123s fair value
method of accounting for stock-based employee compensation. SFAS 148 also
amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entitys accounting policy with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While SFAS 148
does not amend SFAS 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of SFAS 148 are
applicable to all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair value method of
SFAS 123 or the intrinsic value method of APB Opinion No. 25, Accounting for
Stock Issued to Employees.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, or FIN 46. FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or in which equity investors do not bear the residual
economic risks. FIN 46 is effective for all entities other than special
purpose entities no later than the end of the first period that ends after
March 15, 2004. The Company has no investments in special purpose entities.
We have determined that our joint venture, Agecroft Prison Management, Ltd., or
APM, is a variable interest entity (VIE), of which we are not the primary
beneficiary. APM has a management contract for a correctional facility located
in Salford, England. All gains and losses under the joint venture are
accounted for using the equity method of accounting. During 2000, we extended
a working capital loan to APM, which totaled $5.6 million, including accrued
interest, as of December 31, 2003. The outstanding working capital loan
represents our maximum exposure to loss in connection with APM. APM has not
been, and in accordance with FIN 46 is not expected to be, consolidated with
our financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging
Activities, or SFAS 149. SFAS 149 amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003, and should be applied
prospectively. The provisions of SFAS 149 that relate to SFAS 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. The adoption of SFAS 149 did not have a material
impact on our financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, or SFAS 150. SFAS 150 establishes standards for
classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity. Instruments that are indexed to and potentially settled in an
issuers own shares that are not within the scope of SFAS 150 remain subject to
existing guidance. SFAS 150 is effective for all freestanding financial
instruments of public companies entered into or modified after May 31, 2003.
SFAS 150 became effective July 1, 2003. The adoption of SFAS 150 did not have
a material impact on our financial statements.
66
INFLATION
We do not believe that inflation has had or will have a direct adverse effect
on our operations. Many of our management contracts include provisions for
inflationary indexing, which mitigates an adverse impact of inflation on net
income. However, a substantial increase in personnel costs, workers
compensation or food and medical expenses could have an adverse impact on our
results of operations in the future to the extent that these expenses increase
at a faster pace than the per diem or fixed rates we receive for our management
services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risk exposures are to changes in U.S. interest rates and
fluctuations in foreign currency exchange rates between the U.S. dollar and the
British pound. We are exposed to market risk related to our senior bank credit
facility. The interest on our senior bank credit facility is subject to
fluctuations in the market. We were also exposed to market risk related to our
old senior bank credit facility prior to its refinancing in May 2002. If the
interest rate for our outstanding indebtedness under the old senior bank credit
facility and the new senior bank credit facility was 100 basis points higher or
lower during the years ended December 31, 2003, 2002, and 2001, our interest
expense, net of amounts capitalized, would have been increased or decreased by
approximately $4.8 million, $5.9 million and $5.5 million, respectively.
As of December 31, 2003, we had outstanding $250.0 million of senior notes with
a fixed interest rate of 9.875%, $450.0 million of senior notes with a fixed
rate of 7.5%, $30.0 million of convertible subordinated notes with a fixed
interest rate of 4.0%, $7.5 million of series A preferred stock with a fixed
dividend rate of 8.0%, which was called for redemption on February 19, 2004, to
be effective on March 19, 2004, and $23.5 million of series B preferred stock
with a fixed dividend rate of 12.0%. Because the interest and dividend rates
with respect to these instruments are fixed, a hypothetical 100 basis point
increase or decrease in market interest rates would not have a material impact
on our financial statements.
In order to satisfy a requirement of the new senior bank credit facility we
purchased an interest rate cap agreement, capping LIBOR at 5.0% (prior to the
applicable spread) on outstanding balances of $200.0 million through the
expiration of the cap agreement on May 20, 2004, for a price of $1.0 million.
We may, from time to time, invest our cash in a variety of short-term financial
instruments. These instruments generally consist of highly liquid investments
with original maturities at the date of purchase of three months or less. While these
investments are subject to interest rate risk and will decline in value if
market interest rates increase, a hypothetical 100 basis point increase or
decrease in market interest rates would not materially affect the value of
these instruments.
Our exposure to foreign currency exchange rate risk relates to our
construction, development and leasing of our Agecroft facility located in
Salford, England, which was sold in April 2001. We extended a working capital
loan to the operator of this facility, of which we own 50% through a
wholly-owned subsidiary. Such payments to us are denominated in British pounds
rather than the U.S. dollar. As a result, we bear the risk of fluctuations in
the relative exchange rate between the British pound and the U.S. dollar. At
December 31, 2003, the receivables due us and denominated in British pounds
totaled 3.2 million British pounds. A hypothetical 10% increase in the
relative exchange rate would have resulted in an increase of $0.6 million in
the value of these receivables and a corresponding unrealized foreign currency
transaction gain, and a hypothetical 10% decrease in the
67
relative exchange rate would have resulted in a decrease of $0.6 million in the
value of these receivables and a corresponding unrealized foreign currency
transaction loss.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X are
included in this annual report on Form 10-K commencing on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On May 14, 2002, we dismissed our independent public accountant, Arthur
Andersen LLP, and engaged the services of Ernst & Young LLP, as our new
independent auditors for our fiscal year ending December 31, 2002. The Audit
Committee of our Board of Directors and our Board of Directors authorized the
dismissal of Arthur Andersen and the immediate engagement of Ernst & Young.
Arthur Andersens reports on our consolidated financial statements for each of
the years ended December 31, 2001 and 2000 did not contain an adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles, except to the extent that
Arthur Andersens report for each of the years ended December 31, 2001 and 2000
contained explanatory statements regarding our pending debt maturities under
the terms of our then existing senior bank credit facility.
During the years ended December 31, 2001 and 2000, and the subsequent interim
period through the date of Arthur Andersens dismissal, there were no
disagreements with Arthur Andersen on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
disagreement, if not resolved to Arthur Andersens satisfaction, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report on our consolidated financial statements for such
years; and there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
We provided Arthur Andersen with a copy of the foregoing disclosures, and
requested that Arthur Andersen furnish us with a letter addressed to the
Securities and Exchange Commission stating whether or not Arthur Andersen
agreed with such statements. Arthur Andersens letter, dated May 15, 2002,
which is incorporated herein by reference to Exhibit 16.1 to our Form 8-K dated
May 15, 2002, affirmed its agreement with such statements.
During the fiscal years ended December 31, 2001 and 2000 and the subsequent
interim period through May 13, 2002, we did not consult with Ernst & Young
regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii)
of Regulation S-K. Notwithstanding the foregoing, during the fiscal year ended
December 31, 2000 and during the first quarter of 2001, Ernst & Young and/or an
affiliate thereof provided us with certain management consulting services as
required under the terms of our then existing senior bank credit facility. In
addition, during the fourth quarter of 2001 and to May 13, 2002, an affiliate
of Ernst & Young provided a subsidiary of ours with certain management
consulting services.
ITEM 9A. CONTROLS AND PROCEDURES.
An evaluation was performed under the supervision and with the participation of
our senior management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness
68
of the design and operation of our disclosure controls and procedures pursuant
to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of
the end of the period covered by this annual report. Based on that evaluation,
our senior management, including our Chief Executive Officer and Chief
Financial Officer, concluded that as of the end of the period covered by this
annual report our disclosure controls and procedures are effective in causing
material information relating to us (including our consolidated subsidiaries)
to be recorded, processed, summarized and reported by management on a timely
basis and to ensure that the quality and timeliness of our public disclosures
complies with SEC disclosure obligations. There have been no changes in our
internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are likely to
materially affect, our internal control over financial reporting.
69
PART III.
ITEM 10. OUR DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this Item 10 is hereby incorporated by reference
from the information under the headings Proposal I Election of
Directors-Directors Standing for Election, -Information Concerning Executive
Officers Who Are Not Directors, Corporate Governance Board of Directors
Meetings and Committees, and Security Ownership of Certain Beneficial Owners
and Management Section 16(a) Beneficial Ownership Reporting Compliance in
our definitive proxy statement for the 2004 annual meeting of stockholders,
which will be filed with the SEC pursuant to Regulation 14A no later than April
29, 2004.
As a part of our comprehensive Corporate Compliance Manual, our Board of
Directors has adopted a Code of Ethics and Business Conduct applicable to the
members of our Board of Directors and our officers, including our Chief
Executive Officer and Chief Financial Officer. In addition, the Board of
Directors has adopted Corporate Governance Guidelines and restated charters for
our Audit Committee, Compensation Committee, Nominating and Governance
Committee and Executive Committee. You can access our Code of Ethics and
Business Conduct, Corporate Governance Guidelines and current committee
charters on our website at www.correctionscorp.com or request a copy of any of
the foregoing by writing to the following address - Corrections Corporation of
America, Attention: Secretary, 10 Burton Hills Boulevard, Nashville, Tennessee
37215.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 will appear in, and is hereby
incorporated by reference from, the information under the headings Corporate
Governance Director Compensation, Executive Compensation, and Performance
Graph in our definitive proxy statement for the 2004 annual meeting of
stockholders, which will be filed with the SEC pursuant to Regulation 14A no
later than April 29, 2004.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The information required by this Item 12 will appear in, and is hereby
incorporated by reference from, the information under the heading Security
Ownership of Certain Beneficial Owners and Management in our definitive proxy
statement for the 2004 annual meeting of stockholders, which will be filed with
the SEC pursuant to Regulation 14A no later than April 29, 2004.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information as of December 31, 2003
regarding compensation plans under which our equity securities are authorized
for issuance.
70
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 will appear in, and is hereby
incorporated by reference from, the information under the heading Corporate
Governance Certain Relationships and Related Transactions in our definitive
proxy statement for the 2004 annual meeting of stockholders, which will be
filed with the SEC pursuant to Regulation 14A no later than April 29, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item 14 will appear in, and is hereby
incorporated by reference from, the information under the heading Corporate
Governance - Audit and Non-Audit Fees in our definitive proxy statement for
the 2004 annual meeting of stockholders, which will be filed with the SEC
pursuant to Regulation 14A no later than April 29, 2004.
71
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
72
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capabilities and on the dates indicated.
73
INDEX OF EXHIBITS
Exhibits marked with an * are filed herewith. Other exhibits have previously
been filed with the Securities and Exchange Commission (the Commission) and
are incorporated herein by reference.
74
75
76
77
78
79
80
81
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of Corrections Corporation of America and Subsidiaries
F - 1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
We have audited the accompanying consolidated balance sheets of Corrections
Corporation of America and Subsidiaries as of December 31, 2003 and 2002 and
the related consolidated statements of operations, stockholders equity and
cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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
consolidated 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 at December 31, 2003 and
2002, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States.
As discussed in Notes 2, 3, 13, and 14 to the consolidated financial
statements, the Company changed its methods of accounting for goodwill and
other intangibles and for the disposal of long lived assets in 2002 and changed
its method of accounting for derivative instruments in 2001.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
F - 2
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(Continued)
F - 5
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F - 6
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(Continued)
F - 7
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F - 8
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
F - 9
F - 10
F - 11
F - 12
F - 13
F - 14
F - 15
F - 16
F - 17
F - 18
F - 19
F - 20
F - 21
F - 22
F - 23
F - 24
F - 25
F - 26
F - 27
F - 28
F - 29
F - 30
F - 31
F - 32
F - 33
F - 34
F - 35
F - 36
F - 37
F - 38
F - 39
F - 40
F - 41
F - 42
F - 43
F - 44
F - 45
F - 46
F - 47
F - 48
F - 49
F - 50
(1) See Note 12 for a further explanation of the income tax benefits
recognized during the fourth quarter of 2003 and during the first and
fourth quarters of 2002.
(2) See Note 11 for a further explanation of the expenses associated with
debt refinancings during the second quarter of 2002.
(3) See Note 3 for a further explanation of the cumulative effect of
accounting change during the first quarter of 2002.
F - 51
MARYLAND
(State or other jurisdiction of
incorporation or organization)
62-1763875
(I.R.S. Employer
Identification No.)
(Address and zip code of principal executive office)
Title of each class
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
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FORM 10-K
For the fiscal year ended December 31, 2003
Item No.
Page
1.
5
5
7
13
14
15
16
17
18
19
19
20
2.
28
3.
29
4.
30
5.
31
31
32
32
6.
33
7.
36
36
37
39
58
65
67
7A.
67
8.
68
9.
68
9A.
68
10.
70
11.
70
12.
70
13.
71
14.
71
15.
72
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FORWARD-LOOKING INFORMATION
fluctuations in operating results because of changes in occupancy
levels, competition, increases in cost of operations, fluctuations in
interest rates and risks of operations;
changes in the privatization of the corrections and detention
industry and the public acceptance of our services;
our ability to obtain and maintain correctional facility management
contracts, including as the result of sufficient governmental
appropriations, and the timing of the opening of new facilities;
increases in costs to develop or expand correctional facilities
that exceed original estimates, or the inability to complete such
projects on schedule as a result of various factors, many of which are
beyond our control, such as weather, labor conditions and material
shortages, resulting in increased construction costs;
changes in government policy and in legislation and regulation of
the corrections and detention industry that adversely affect our
business;
the availability of debt and equity financing on terms that are favorable to us; and
general economic and market conditions.
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Correctional Facilities
. Correctional facilities house and provide
contractually agreed upon programs and services to sentenced adult
prisoners, typically prisoners on whom a sentence in excess of one year
has been imposed.
Detention Facilities
. Detention facilities house and provide
contractually agreed upon programs and services to prisoners being
detained by the ICE, prisoners who are awaiting trial who have been
charged with violations of federal criminal law, who are in the custody
of the USMS, or state criminal law, and prisoners who have been
convicted of crimes and on whom a sentence of one year or less has been
imposed.
Juvenile Facilities
. Juvenile facilities house and provide
contractually agreed upon programs and services to juveniles, typically
defined by applicable federal or state law as being persons below the
age of 18, who have been determined to be delinquents by a juvenile
court and who have been committed for an indeterminate period of time
but who typically remain confined for a period of six months or less.
Leased Facilities
. Leased facilities are facilities that are within
one of the above categories and that we own but do not manage.
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Remaining
Primary
Design
Security
Facility
Renewal
Facility Name
Customer
Capacity (A)
Level
Type (B)
Term
Options (C)
Florence, Arizona
USMS
2,304
Multi
Detention
May 2004
(4) 1 year
Eloy, Arizona
BOP, ICE
1,500
Medium
Detention
February 2004
(5) 1 year
Florence, Arizona
State of
Alaska
1,600
Multi
Correctional
June 2004
California City, California
BOP
2,304
Medium
Correctional
September 2004
(6) 1 year
San Diego, California
ICE
1,232
Minimum/
Medium
Detention
December 2004
Las Animas, Colorado
State of Colorado
700
Medium
Correctional
June 2004
(1) 1 year
Olney Springs, Colorado
State of Colorado
1,200
Medium
Correctional
June 2004
(1) 1 year
Walsenburg, Colorado
State of Colorado
752
Medium
Correctional
June 2004
(1) 1 year
Burlington, Colorado
State of Colorado
768
Medium
Correctional
June 2004
(1) 1 year
Nicholls, Georgia
State of
Georgia
1,524
Medium
Correctional
July 2004
(15) 1 year
McRae, Georgia
BOP
1,524
Medium
Correctional
December 2005
(7) 1 year
Alamo, Georgia
State of
Georgia
1,524
Medium
Correctional
July 2004
(15) 1 year
Leavenworth, Kansas
USMS
483
Maximum
Detention
December 2004
(1) 1 year
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Remaining
Primary
Design
Security
Facility
Renewal
Facility Name
Customer
Capacity (A)
Level
Type (B)
Term
Options (C)
Beattyville, Kentucky
Commonwealth of
Kentucky
756
Minimum/
Medium
Correctional
May 2005
(2) 2 year
St. Mary, Kentucky
Commonwealth of
Kentucky
790
Minimum
Correctional
December 2007
(3) 2 year
Wheelwright, Kentucky
State of
Indiana
656
Minimum/
Medium
Correctional
January 2011
Appleton, Minnesota
State of Wisconsin
1,338
Medium
Correctional
December 2005
(2) 1 year
Facility (G)
Tutwiler, Mississippi
State of Alabama
1,104
Medium
Correctional
Indefinite (H)
Shelby, Montana
State of Montana
512
Multi
Correctional
June 2005
(7) 2 year
Milan, New Mexico
BOP
1,072
Medium
Correctional
September 2004
(6) 1 year
Facility
Grants, New Mexico
State of
New Mexico
596
Multi
Correctional
June 2004
(1) 1 year
Estancia, New Mexico
USMS
910
Multi
Detention
Indefinite
Youngstown, Ohio
2,016
Medium
Correctional
Cushing, Oklahoma
State of Oklahoma
960
Medium
Correctional
January 2004
Holdenville, Oklahoma
State of Oklahoma
960
Medium
Correctional
January 2004
Watonga, Oklahoma
State of Hawaii
2,160
Medium
Correctional
June 2004
Sayre, Oklahoma
1,440
Medium
Correctional
Mason, Tennessee
USMS
600
Multi
Detention
February 2004
(3) 1 year
Memphis, Tennessee
Shelby County,
Tennessee
200
Secure
Juvenile
April 2015
Whiteville, Tennessee
State of Tennessee
1,536
Medium
Correctional
September 2005
(2) 1 year
Bridgeport, Texas
State of
Texas
200
Medium
Correctional
February 2007
(4) 1 year
Eden, Texas
BOP
1,225
Medium
Correctional
April 2004
Houston, Texas
ICE
411
Medium
Detention
September 2004
(4) 1 year
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Remaining
Primary
Design
Security
Facility
Renewal
Facility Name
Customer
Capacity (A)
Level
Type (B)
Term
Options (C)
Laredo, Texas
ICE
258
Minimum/
Medium
Detention
March 2004
(2) 3 month
Laredo, Texas
USMS
480
Medium
Detention
August 2005
Facility
Mineral Wells, Texas
State of
Texas
2,103
Minimum
Correctional
February 2007
(4) 1 year
Taylor, Texas
ICE
480
Minimum
Correctional
May 2004
(2) 2 year
Washington, D.C.
District of Columbia
866
Medium
Detention
March 2017
Panama City, Florida
State of
Florida
750
Medium
Correctional
June 2004
(1) 2 year
Panama City, Florida
Bay County, Florida
677
Multi
Detention
September 2006
Lecanto, Florida
Citrus County,
Florida
400
Multi
Detention
September 2005
(1) 5 year
Quincy, Florida
State of
Florida
896
Minimum/
Medium
Correctional
June 2004
Brooksville, Florida
Hernando County,
Florida
302
Multi
Detention
October 2010
Lake City, Florida
State of
Florida
350
Secure
Correctional
June 2004
(1) 2 year
Boise, Idaho
State of
Idaho
1,270
Minimum/
Medium
Correctional
June 2005
Indianapolis, Indiana
Marion County,
Indiana
670
Multi
Detention
November 2005
Winnfield, Louisiana
State of Louisiana
1,538
Medium/
Maximum
Correctional
September 2006
(1) 2 year
Woodville, Mississippi
State of Mississippi
1,000
Medium
Correctional
January 2004
(1) 2 year
Center (P)
Las Vegas, Nevada
State of
Nevada
500
Multi
Correctional
October 2004
3 year indefinite
Elizabeth, New Jersey
ICE
300
Minimum
Detention
January 2004
(1) 1 year
Tulsa, Oklahoma
Tulsa County,
Oklahoma
1,440
Multi
Detention
June 2005
(2) 1 year
Chattanooga, Tennessee
Hamilton County,
Tennessee
784
Multi
Detention
September 2004
(3) 4 year
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Remaining
Primary
Design
Security
Facility
Renewal
Facility Name
Customer
Capacity (A)
Level
Type (B)
Term
Options (C)
Clifton, Tennessee
State of Tennessee
1,506
Medium
Correctional
June 2005
(1) 2 year
Memphis, Tennessee
Shelby County,
Tennessee
63
Non-secure
Juvenile
Indefinite
Facility
Nashville, Tennessee
Davidson County,
Tennessee
1,092
Multi
Detention
July 2006
(2) 1 year
Whiteville, Tennessee
State of Tennessee
2,016
Medium
Correctional
July 2005
(1) 2 year
Overton, Texas
State of
Texas
500
Minimum/
Medium
Correctional
January 2007
(2) 1 year
Bartlett, Texas
State of
Texas
962
Minimum/
Medium
Correctional
January 2007
(4) 1 year
Henderson, Texas
State of
Texas
1,980
Minimum/
Medium
Correctional
January 2007
(4) 1 year
Dallas, Texas
State of
Texas
2,216
Minimum/
Medium
Correctional
January 2007
(4) 1 year
Diboll, Texas
State of
Texas
518
Minimum/
Medium
Correctional
January 2007
(2) 1 year
Liberty, Texas
Liberty County,
Texas
380
Multi
Detention
January 2005
(2) 1 year
Jacksboro, Texas
State of
Texas
1,031
Minimum/
Medium
Correctional
January 2007
(4) 1 year
Raymondville, Texas
State of
Texas
1,069
Minimum/
Medium
Correctional
January 2007
(4) 1 year
Live Oak, California
Cornell
Corrections
240
Minimum
Owned/Leased
June 2004
Cincinnati, Ohio
Hamilton County,
Ohio
850
Medium
Owned/Leased
February 2005
(2) 1 year
Houston, Texas
Community Education
Partners
Non-secure
Owned/Leased
June 2008
(3) 5 year
(A)
Design capacity measures the number of beds, and accordingly, the
number of sentenced inmates each facility is designed to accommodate.
Facilities housing detainees may exceed the design capacity for
sentenced inmates due to the lower level of services required. We
believe design capacity is an appropriate measure for evaluating prison
operations, because the revenue generated by each facility is based on
a per-diem or monthly rate per inmate housed at the facility paid by
the corresponding contracting governmental entity.
(B)
We manage numerous facilities that have more than a single function
(e.g., housing both long-term sentenced adult prisoners and pre-trial
detainees). The primary functional categories into which facility
types are identified were determined by the relative size of prisoner
populations in a particular facility on December 31, 2003. If, for
example, a 1,000-bed facility housed 900 adult prisoners with sentences
in excess of one year and 100 pre-trial detainees, the primary
functional category to which it would be assigned would be that of
correctional facilities and not detention facilities. It should be
understood that the primary functional category to which multi-user
facilities are assigned may change from time to time.
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(C)
Remaining renewal options represents the number of renewal options,
if applicable, and the term of each option renewal.
(D)
The facility is subject to a ground lease with the County of San
Diego whereby the initial lease term is 18 years from the commencement
of the contract, as defined. The County has the right to buy out all,
or designated portions of, the premises at various times prior to the
expiration of the term at a price generally equal to the cost of the
premises, or the designated portion of the premises, less an allowance
for the amortization over a 20-year period. Upon expiration of the
lease, ownership of the facility automatically reverts to the County of
San Diego.
(E)
The facility is subject to a purchase option held by Huerfano
County which grants Huerfano County the right to purchase the facility
upon an early termination of the contract at a price generally equal to
the cost of the facility plus 80% of the percentage increase in the
Consumer Price Index, cumulated annually.
(F)
The facility is subject to a purchase option held by the Georgia
Department of Corrections, or GDOC, which grants the GDOC the right to
purchase the facility for the lesser of the facilitys depreciated book
value or fair market value at any time during the term of the contract
between us and the GDOC.
(G)
The facility is subject to a purchase option held by the
Tallahatchie County Correctional Authority which grants Tallahatchie
County Correctional Authority the right to purchase the facility at any
time during the contract at a price generally equal to the cost of the
premises less an allowance for amortization over a 20-year period.
(H)
On January 13, 2004, we received notice from the Alabama Department
of Corrections that it would withdraw all of its inmates housed at the
Tallahatchie County Correctional Facility. The inmates had been housed
at this facility under a temporary emergency agreement to provide the
State of Alabama immediate relief to its overcrowded prison system.
All of the inmates were removed from the facility during the first
quarter of 2004.
(I)
The State of Montana has an option to purchase the facility at fair
market value generally at any time during the term of the contract.
(J)
All inmates were transferred out of this facility during 2001 due
to a new law that mandated that the BOP assume jurisdiction of all
District of Columbia offenders under the custody of the BOP by the end
of 2001.
(K)
The facility is subject to a purchase option held by the Oklahoma
Department of Corrections, or ODC, which grants the ODC the right to
purchase the facility at its fair market value at any time.
(L)
All of the Wisconsin inmates housed at the North Fork Correctional
Facility were transferred to the Diamondback Correctional Facility in
order to satisfy a contractual provision mandated by the State of
Wisconsin. Upon completion of the inmate transfers, North Fork
Correctional Facility was closed and will remain closed for an
indefinite period of time. We are currently pursuing new management
contracts and other opportunities to take advantage of the beds that
are available at the North Fork Correctional Facility, but can provide
no assurance that we will be successful in doing so.
(M)
Upon the conclusion of the thirty-year ground lease with Shelby
County, Tennessee, the facility will become the property of Shelby
County. Prior to such time, if the County terminates the lease without
cause, breaches the lease or the State fails to fund the contract, we
may purchase the property for $150,000. If we terminate the lease
without cause, or breach the contract, we will be required to purchase
the property for its fair market value as agreed to by the County and
us.
(N)
The State of Tennessee has the option to purchase the facility in
the event of our bankruptcy, or upon an operational breach, as defined,
at a price equal to the book value of the facility, as defined.
(O)
The District of Columbia has the right to purchase the facility at
any time during the term of the contract at a price generally equal to
the present value of the remaining lease payments for the premises.
Upon expiration of the lease, ownership of the facility automatically
reverts to the District of Columbia.
(P)
On February 20, 2004, we provided notice to the Nevada Department
of Corrections that we do not intend to renew our contract to manage
this facility upon expiration of the contract.
(Q)
On November 10, 2003, we announced that the Texas Department of
Criminal Justice awarded us contracts to manage a total of 8,315 beds
in seven state correctional facilities as part of a procurement re-bid
process. Bartlett State Jail, which we operated prior to the
announcement, was included as one of the seven facilities awarded to
us. The contracts became effective January 15, 2004.
(R)
The alternative educational facility is currently configured to
accommodate 900 at-risk juveniles and may be expanded to accommodate a
total of 1,400 at-risk juveniles.
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Maintaining our existing customer relationships and
continuing to fill existing beds within our facilities;
Enhancing the terms of our existing contracts; and
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Establishing relationships with new customers who have either
previously not outsourced their correctional management needs or
have utilized other private enterprises.
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authorize us to issue blank check preferred stock, which is
preferred stock that can be created and issued by our board of
directors, without stockholder approval, with rights senior to those of
common stock;
provide that directors may be removed with or without cause only by
the affirmative vote of at least a majority of the votes of shares
entitled to vote thereon; and
establish advance notice requirements for submitting nominations
for election to the board of directors and for proposing matters that
can be acted upon by stockholders at a meeting.
make it more difficult for us to satisfy our obligations with respect to our indebtedness;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby reducing
the availability of our cash flow to fund working capital, capital
expenditures, and other general corporate purposes;
limit our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our
competitors that have less debt; and
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limit our ability to borrow additional funds or refinance
existing indebtedness on favorable terms.
limitations on incurring additional indebtedness;
limitations on the sale of assets;
limitations on the declaration and payment of dividends or other restricted payments;
limitations on transactions with affiliates; and
limitations on liens.
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SALES PRICE
PER SHARE CASH
HIGH
LOW
DISTRIBUTION
$
18.35
$
16.42
$
0.00
$
25.74
$
17.48
$
0.00
$
27.36
$
21.00
$
0.00
$
29.48
$
24.40
$
0.00
$
19.25
$
12.15
$
0.00
$
18.63
$
12.80
$
0.00
$
17.22
$
11.69
$
0.00
$
18.30
$
13.95
$
0.00
SALES PRICE
PER SHARE CASH
HIGH
LOW
DISTRIBUTION
$
23.35
$
21.25
$
0.50
$
26.00
$
22.45
$
0.50
$
25.80
$
24.95
$
0.50
$
25.85
$
25.05
$
0.50
$
18.61
$
16.70
$
0.50
$
21.00
$
17.17
$
0.50
$
21.00
$
18.50
$
0.50
$
22.40
$
19.25
$
0.50
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SALES PRICE
PER SHARE CASH
HIGH
LOW
DISTRIBUTION
$
25.10
$
24.35
$
0.00
$
26.40
$
24.90
$
0.00
$
25.80
$
25.10
$
0.00
$
26.02
$
25.10
$
0.7338
$
20.64
$
19.11
$
0.00
$
24.35
$
19.00
$
0.00
$
24.10
$
21.50
$
0.00
$
25.00
$
22.90
$
0.00
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SELECTED HISTORICAL FINANCIAL INFORMATION
(in thousands, except per share data)
For the Years Ended December 31,
2003
2002
2001
2000
1999
$
1,032,995
$
934,050
$
906,177
$
240,473
$
3,742
3,701
5,718
40,232
269,486
7,566
8,699
1,036,737
937,751
911,895
288,271
278,185
775,311
721,352
698,941
199,683
40,467
36,907
34,568
45,463
24,125
52,937
51,292
52,729
59,341
43,970
1,401
11,920
65,677
527,919
76,433
868,715
809,551
786,238
845,727
210,205
168,022
128,200
125,657
(557,456
)
67,980
(119
)
153
358
11,638
(3,608
)
74,446
87,478
126,242
131,545
45,036
6,687
36,670
14,567
(3,099
)
(2,900
)
(2,206
)
(14,554
)
261
110
74
1,733
1,995
(556
)
(622
)
219
8,147
75,406
90,203
6,617
13,318
(782,826
)
9,990
52,352
63,284
3,358
48,738
(83,200
)
142,555
69,901
16,676
(734,088
)
(73,210
)
254
142,555
69,901
16,676
(733,834
)
(73,210
)
(772
)
2,459
9,018
3,052
556
(80,276
)
141,783
(7,916
)
25,694
(730,782
)
(72,654
)
(15,262
)
(20,959
)
(20,024
)
(13,526
)
(8,600
)
$
126,521
$
(28,875
)
$
5,670
$
(744,308
)
$
(81,254
)
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SELECTED HISTORICAL FINANCIAL INFORMATION
(in thousands, except per share data)
(continued)
For the Years Ended December 31,
2003
2002
2001
2000
1999
$
3.95
$
1.77
$
(0.14
)
$
(56.91
)
$
(7.11
)
(0.03
)
0.09
0.37
0.23
0.05
(2.90
)
$
3.92
$
(1.04
)
$
0.23
$
(56.68
)
$
(7.06
)
$
3.46
$
1.59
$
(0.14
)
$
(56.91
)
$
(7.11
)
(0.02
)
0.08
0.37
0.23
0.05
(2.49
)
$
3.44
$
(0.82
)
$
0.23
$
(56.68
)
$
(7.06
)
32,245
27,669
24,380
13,132
11,510
38,049
32,208
24,380
13,132
11,510
December 31,
2003
2002
2001
2000
1999
$
1,959,028
$
1,874,071
$
1,971,280
$
2,176,992
$
2,716,644
$
1,003,428
$
955,959
$
963,600
$
1,152,570
$
1,098,991
$
1,183,563
$
1,140,073
$
1,224,119
$
1,488,977
$
1,209,528
$
775,465
$
733,998
$
747,161
$
688,015
$
1,401,071
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Payments Due By Year Ended December 31,
2004
2005
2006
2007
2008
Thereafter
Total
$
856
$
2,934
$
2,884
$
229,203
$
65,422
$
700,000
$
1,001,299
24,144
140
24,284
9,172
9,172
638
91
729
$
34,810
$
3,165
$
2,884
$
229,203
$
65,422
$
700,000
$
1,035,484
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RELATED STOCKHOLDER MATTERS.
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(1)
Reflects shares of common stock available for issuance under our
Amended and Restated 1997 Employee Share Incentive Plan and Amended and
Restated 2000 Stock Incentive Plan, the only equity compensation plans
approved by our stockholders under which we continue to grant awards.
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(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 annual
report on Form 10-K have been filed herewith, beginning on page F-1
of this report.
(2)
Financial Statement Schedules.
Schedules for which provision is made in Regulation S-X are either
not required to be included herein under the related instructions
or are inapplicable or the related information is included in the
footnotes to the applicable financial statements and, therefore,
have been omitted.
(3)
The Exhibits are listed in the Index of Exhibits required by
Item 601 of Regulation S-K included herewith.
(b)
Reports on Form 8-K:
The following Form 8-K report was furnished to the SEC during the period
October 1, 2003 through December 31, 2003:
(1)
Filed November 5, 2003 (earliest event November 5, 2003)
reporting in Item 12., the issuance of a press release announcing
the Companys financial results for the third quarter ended
September 30, 2003.
The following Form 8-K report was furnished to the SEC subsequent to
December 31, 2003:
(1)
Filed February 11, 2004 (earliest event February 11, 2004)
reporting in Item 12., the issuance of a press release announcing
our financial results for the fourth quarter and year ended December
31, 2003.
Table of Contents
CORRECTIONS CORPORATION OF AMERICA
By:
/s/ John D. Ferguson
John D. Ferguson, President and Chief Executive Officer
John D. Ferguson, President and Chief Executive Officer and
March 12, 2004
March 12, 2004
Irving E. Lingo, Jr., Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
March 12, 2004
March 12, 2004
William F. Andrews, Chairman of the Board and Director
March 12, 2004
March 12, 2004
Donna M. Alvarado, Director
March 12, 2004
March 12, 2004
Lucius E. Burch, III, Director
March 12, 2004
March 12, 2004
John D. Correnti, Director
March 12, 2004
March 12, 2004
John R. Horne, Director
March 12, 2004
March 12, 2004
C. Michael Jacobi, Director
March 12, 2004
March 12, 2004
Thurgood Marshall, Jr., Director
March 12, 2004
March 12, 2004
Charles L. Overby, Director
March 12, 2004
March 12, 2004
John R. Prann, Jr., Director
March 12, 2004
March 12, 2004
Joseph V. Russell, Director
March 12, 2004
March 12, 2004
Henri L. Wedell, Director
March 12, 2004
March 12, 2004
Table of Contents
Exhibit
Number
Description of Exhibits
Amended and Restated Agreement and Plan of Merger, dated as of
September 29, 1998, by and among Corrections Corporation of America,
a Tennessee corporation (Old CCA), CCA Prison Realty Trust, a
Maryland real estate investment trust (Old Prison Realty), and
Prison Realty Corporation, a Maryland corporation currently known as
Corrections Corporation of America (the Company) (previously filed
as Appendix A to the Prospectus filed pursuant to Rule 424(b)(4)
included in the Companys Registration Statement on Form S-4
(Commission File no. 333-65017), filed with the Commission on
September 30, 1998, as declared effective on October 16, 1998, and
incorporated herein by this reference) (as directed by Item 601(b)(2)
of Regulation S-K, certain schedules and exhibits to this document
were omitted from that filing, and the Company has agreed to furnish
supplementally a copy of any omitted schedule or exhibit to the
Commission upon request).
Agreement and Plan of Merger, dated as of June 30, 2000, by and among
the Company, CCA of Tennessee, and Operating Company (previously
filed as Exhibit 2.1 to the Companys Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on July 3,
2000 and incorporated herein by this reference) (as directed by Item
601(b)(2) of Regulation S-K, certain schedules and exhibits to this
document were omitted from this filing, and the Company has agreed to
furnish supplementally a copy of any omitted schedule or exhibit to
the Commission upon request).
Agreement and Plan of Merger, dated as of November 17, 2000, by and
among the Company, CCA of Tennessee, and PMSI (previously filed as
Exhibit 2.5 to the Companys Annual Report on Form 10-K (Commission
File no. 001-16109), filed with the Commission on April 17, 2001 and
incorporated herein by this reference) (as directed by Item 601(b)(2)
of Regulation S-K, certain schedules and exhibits to this document
have been omitted, and the Company agrees to furnish supplementally a
copy of any omitted schedule or exhibit to the Commission upon
request).
Agreement and Plan of Merger, dated as of November 17, 2000, by and
among the Company, CCA of Tennessee, and JJFMSI (previously filed as
Exhibit 2.6 to the Companys Annual Report on Form 10-K (Commission
File no. 001-16109), filed with the Commission on April 17, 2001 and
incorporated herein by this reference) (as directed by Item 601(b)(2)
of Regulation S-K, certain schedules and exhibits to this document
have been omitted, and the Company has agreed to furnish
supplementally a copy of any omitted schedule or exhibit to the
Commission upon request).
Amended and Restated Charter of the Company (previously filed as
Exhibit 3.1 to the Companys Annual Report on Form 10-K (Commission
File no. 001-16109), filed with the Commission on April 17, 2001 and
incorporated herein by this reference).
Table of Contents
Exhibit
Number
Description of Exhibits
Amendment to the Amended and Restated Charter of the Company
effecting the reverse stock split of the Companys Common Stock and a
related reduction in the stated capital stock of the Company
(previously filed as Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q (Commission File no. 001-16109), filed with the Commission
on August 13, 2001 and incorporated herein by this reference).
Third Amended and Restated Bylaws of the Company (previously filed as
Exhibit 3.3 to the Companys Amendment No. 3 to its Registration
Statement on Form S-4 (Commission File no. 333-96721), filed with the
Commission on December 30, 2002 and incorporated herein by this
reference).
Provisions defining the rights of stockholders of the Company are
found in Article V of the Amended and Restated Charter of the
Company, as amended (included as Exhibits 3.1 and 3.2 hereto), and
Article II of the Third Amended and Restated Bylaws of the Company
(included as Exhibit 3.3 hereto).
Specimen of certificate representing shares of the Companys Common
Stock (previously filed as Exhibit 4.2 to the Companys Annual Report
on Form 10-K (Commission File no. 001-16109), filed with the
Commission on March 22, 2002 and incorporated herein by this
reference).
Specimen of certificate representing shares of the Companys 8.0%
Series A Preferred Stock (the Series A Preferred Stock) (previously
filed as Exhibit 4.3 to the Companys Annual Report on Form 10-K
(Commission File no. 001-16109), filed with the Commission on March
22, 2002 and incorporated herein by this reference).
Specimen of certificate representing shares of the Companys Series B
Cumulative Preferred Stock (the Series B Preferred Stock)
(previously filed as Exhibit 4.4 to the Companys Annual Report on
Form 10-K (Commission File no. 001-16109), filed with the Commission
on March 22, 2002 and incorporated herein by this reference).
Indenture, dated as of June 10, 1999, by and between the Company and
State Street Bank and Trust Company, as trustee, relating to the
issuance of debt securities (previously filed as Exhibit 4.1 to the
Companys Quarterly Report on Form 10-Q (Commission File no.
0-25245), filed with the Commission on August 16, 1999 and
incorporated herein by this reference).
First Supplemental Indenture, by and between the Company and State
Street Bank and Trust Company, as trustee, dated as of June 11, 1999,
relating to the $100.0 million aggregate principal amount of the
Companys 12% Senior Notes due 2006 (previously filed as Exhibit 4.2
to the Companys Quarterly Report on Form 10-Q (Commission File no.
0-25245), filed with the Commission on August 16, 1999 and
incorporated herein by this reference).
Second Supplemental Indenture by and between the Company and State
Street Bank and Trust Company, as Trustee, dated as of April 24,
2002, relating to the Companys 12% Senior Notes due 2006 (previously
filed as Exhibit 4.1 to the Companys Form 8-K (Commission File no.
001-16109), filed with the Commission on April 25, 2002 and
incorporated herein by this reference).
Table of Contents
Exhibit
Number
Description of Exhibits
Third Supplemental Indenture by and between the Company and U.S. Bank
National Association (formerly known as State Street Bank and Trust
Company), as Trustee, dated as of July 10, 2003, relating to the
Companys 12% Senior Notes due 2006 (previously filed as Exhibit 4.1
to the Companys Quarterly Report on Form 10-Q (Commission File no.
001-16109), filed with the Commission on August 12, 2003 and
incorporated herein by this reference).
Indenture, dated as of May 3, 2002, by and between the Company, and
State Street Bank and Trust Company, as Trustee, governing the
Companys 9.875% Senior Notes due 2009 (the 9.875% Senior Notes)
(previously filed as Exhibit 4.1 to the Companys Form 8-K
(Commission File no. 001-16109), filed with the Commission on May 7,
2002 and incorporated herein by this reference).
Form of promissory note and guarantee for the Companys 9.875% Senior
Notes in the aggregate principal amount of $250.0 million (previously
filed as Exhibit 4.9 to the Companys Annual Report on Form 10-K
(Commission File no. 001-16109), filed with the Commission on March
28, 2003 and incorporated herein by this reference).
Indenture, dated as of May 7, 2003, by and between the Company,
certain of its subsidiaries and U.S. Bank National Association, as
Trustee (previously filed as Exhibit 4.1 to the Companys Current
Report on Form 8-K. (Commission File no. 001-16109), filed with the
Commission on May 7, 2003 and incorporated herein by this reference).
Supplemental Indenture, dated as of May 7, 2003, by and between the
Company, certain of its subsidiaries and U.S. Bank National
Association, as Trustee, providing for the Companys 7.5% Notes due
2011, with form of note attached (previously filed as Exhibit 4.2 to
the Companys Current Report on Form 8-K (Commission File no.
001-16109), filed with the Commission on May 7, 2003 and incorporated
herein by this reference).
First Supplement, dated as of August 8, 2003, to the Supplemental
Indenture, dated as of May 7, 2003, by and between the Company,
certain of its subsidiaries and U.S. Bank National Association, as
Trustee, providing for the Companys 7.5% Notes due 2011 (previously
filed as Exhibit 4.2 to the Companys Quarterly Report on Form 10-Q
(Commission File no. 001-16109), filed with the Commission on August
12, 2003 and incorporated herein by this reference).
Second Supplement, dated as of August 8, 2003, to the Supplemental
Indenture, dated as of May 7, 2003, by and between the Company,
certain of its subsidiaries and U.S. Bank National Association, as
Trustee, providing for the Companys 7.5% Notes due 2011 (previously
filed as Exhibit 4.3 to the Companys Quarterly Report on Form 10-Q
(Commission File no. 001-16109), filed with the Commission on August
12, 2003 and incorporated herein by this reference).
Table of Contents
Exhibit
Number
Description of Exhibits
Third Amended and Restated Credit Agreement, dated as of May 3, 2002,
by and among the Company, as Borrower, the several lenders from time
to time party thereto, Lehman Brothers Inc., as Sole Lead Arranger
and Sole Book-Running Manager, Deutsche Bank Securities Inc. and UBS
Warburg LLC, as Co-Syndication Agents, Société Généralé, as
Documentation Agent, and Lehman Commercial Paper Inc., as
Administrative Agent (previously filed as Exhibit 10.1 to the
Companys Form 8-K (Commission File no. 001-16109), filed with the
Commission on May 7, 2002 and incorporated herein by this reference).
Second Amended and Restated Security Agreement, dated as of May 3,
2002, made by the Company and certain of its subsidiaries in favor of
Lehman Commercial Paper Inc., as Administrative Agent (previously
filed as Exhibit 10.2 to the Companys Form 8-K (Commission File no.
001-16109), filed with the Commission on May 7, 2002 and incorporated
herein by this reference).
First Amendment and Consent to Third Amended and Restated Credit
Agreement, dated as of December 27, 2002, by and among the Company,
as Borrower, the several lenders from time to time party thereto, and
Lehman Commercial Paper Inc., as Administrative Agent, and related
subsidiary Assumption Agreement, Consent of Guarantors and
Counterpart Signature Pages to Demand Promissory Note and related
Endorsement (previously filed as Exhibit 10.3 to the Companys Annual
Report on Form 10-K (Commission File no. 001-16109), filed with the
Commission on March 28, 2003 and incorporated herein by this
reference).
Second Amendment and Waiver to Third Amended and Restated Credit
Agreement, dated as of April 28, 2003, by and among the Company, as
Borrower, the several Lenders from time to time party thereto,
Deutsche Bank Securities Inc., as Syndication Agent, Société
Généralé, as Documentation Agent, Lehman Brothers Inc., as Arranger,
and Lehman Commercial Paper Inc., as Administrative Agent for the
Lenders, with related Consent of Guarantors attached thereto
(previously filed as Exhibit 10.4 to Amendment No. 2 to the Companys
Registration Statement on Form S-3 (Commission File no. 333-104240),
filed with the Commission on April 28, 2003 and incorporated herein
by this reference).
Third Amendment to Third Amended and Restated Credit Agreement, dated
as of August 8, 2003, by and among the Company, as Borrower, the
several Lenders from time to time party thereto, Deutsche Bank
Securities Inc., as Syndication Agent, Société Généralé, as
Documentation Agent, Lehman Brothers Inc., as Arranger, and Lehman
Commercial Paper Inc., as Administrative Agent for the Lenders
(previously filed as Exhibit 10.1 to the Companys Quarterly Report
on Form 10-Q (Commission File no. 001-16109), filed with the
Commission on November 11, 2003 and incorporated herein by this
reference).
Registration Rights Agreement, dated as of August 8, 2003, by and
among the Company, the Companys subsidiary guarantors, and the
Initial Purchasers (as defined therein) with respect to the 7.5%
Notes due 2011 (previously filed as Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q (Commission File no. 001-16109), filed
with the Commission on August 12, 2003 and incorporated herein by
this reference).
Table of Contents
Exhibit
Number
Description of Exhibits
Agreement as to Final Determination of Tax Liability and Specific
Matters by and between the Company, as successor to Old CCA and its
subsidiaries and as successor in interest to Mineral Wells R.E., L.P.
and United Concept Limited Partnership, and the Department of the
Treasury Internal Revenue Service of the United States (previously
filed as Exhibit 10.1 to the Companys Form 8-K (Commission File no.
001-16109), filed with the Commission on October 28, 2002 and
incorporated herein by this reference).
Agreement of Sale and Purchase, dated as of November 21, 2002, (as
amended) by and between the Company and certain subsidiaries of
Reckson Associates Realty Corporation, and related Designation of
Affiliate letter by the Company (previously filed as Exhibit 10.1 to
the Companys Form 8-K (Commission File no. 001-16109), filed with
the Commission on January 22, 2003 and incorporated herein by this
reference).
Note Purchase Agreement, dated as of January 1, 1999, by and between
the Company and PMI Mezzanine Fund, L.P., including, as Exhibit R-1
thereto, Registration Rights Agreement, dated as of January 1, 1999,
by and between the Company and PMI Mezzanine Fund, L.P. (previously
filed as Exhibit 10.22 to the Companys Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January
6, 1999 and incorporated herein by this reference).
Amendment to Note Purchase Agreement and Note by and between the
Company and PMI Mezzanine Fund, L.P., dated April 28, 2003
(previously filed as Exhibit 10.2 to Amendment No. 2 to the Companys
Registration Statement on Form S-3 (Commission File no. 333-104240),
filed with the Commission on April 28, 2003 and incorporated herein
by this reference).
7.5% Convertible, Subordinated Note, due February 28, 2005, made
payable to PMI Mezzanine Fund, L.P. in the aggregate principal amount
of $30.0 million (previously filed as Exhibit 4.6 to the Companys
Current Report on Form 8-K (Commission File no. 0-25245), filed with
the Commission on January 6, 1999 and incorporated herein by this
reference).
Waiver and Amendment, dated as of June 30, 2000, by and between the
Company and PMI Mezzanine Fund, L.P., with form of replacement note
attached thereto as Exhibit B (previously filed as Exhibit 10.5 to
the Companys Current Report on Form 8-K (File no. 0-25245), filed
with the Commission on July 3, 2000 and incorporated herein by this
reference).
Waiver and Amendment, dated as of March 5, 2001, by and between the
Company and PMI Mezzanine Fund, L.P., including, as an exhibit
thereto, Amendment to Registration Rights Agreement (previously filed
as Exhibit 10.10 to the Companys Annual Report on Form 10-K
(Commission File no. 001-16109), filed with the Commission on April
17, 2001 and incorporated herein by this reference).
Table of Contents
Exhibit
Number
Description of Exhibits
Form of Amendment No. 2 to Registration Rights Agreement by and
between the Company and PMI Mezzanine Fund, L.P. (previously filed as
Exhibit 10.3 to Amendment No. 2 to the Companys Registration
Statement on Form S-3 (Commission File no. 333-104240), filed with
the Commission on April 28, 2003 and incorporated herein by this
reference).
The Companys Amended and Restated 1997 Employee Share Incentive Plan.
Old Prison Realtys Non-Employee Trustees Compensation Plan
(previously filed as Exhibit 4.3 to Old Prison Realtys Registration
Statement on Form S-8 (Commission File no. 333-58339), filed with the
Commission on July 1, 1998 and incorporated herein by this
reference).
Old CCAs 1995 Employee Stock Incentive Plan, effective as of March
20, 1995 (previously filed as Exhibit 4.3 to Old CCAs Registration
Statement on Form S-8 (Commission File no. 33-61173), filed with the
Commission on July 20, 1995 and incorporated herein by this
reference).
Option Agreement, dated as of March 31, 1997, by and between Old CCA
and Joseph F. Johnson, Jr. relating to the grant of an option to
purchase 80,000 shares of Old CCA Common Stock (previously filed as
Appendix B to Old CCAs definitive Proxy Statement relating to Old
CCAs 1998 Annual Meeting of Shareholders (Commission File no.
001-13560), filed with the Commission on March 31, 1998 and
incorporated herein by this reference).
Old CCAs Non-Employee Directors Compensation Plan (previously filed
as Appendix A to Old CCAs definitive Proxy Statement relating to Old
CCAs 1998 Annual Meeting of Shareholders (Commission File no.
001-13560), filed with the Commission on March 31, 1998 and
incorporated herein by this reference).
The Companys Amended and Restated 2000 Stock Incentive Plan.
The Companys 2001 Restricted Stock Plan (previously filed as Exhibit
10.26 to the Companys Annual Report on Form 10-K (Commission File
no. 001-16109), filed with the Commission on March 28, 2003 and
incorporated herein by this reference).
The Companys 2001 Key Employee Series B Preferred Stock Restricted
Stock Plan (previously filed as Exhibit 10.27 to the Companys Annual
Report on Form 10-K (Commission File no. 001-16109), filed with the
Commission on March 28, 2003 and incorporated herein by this
reference).
The Companys 2001 Warden Series B Preferred Stock Restricted Stock
Plan (previously filed as Exhibit 10.28 to the Companys Annual
Report on Form 10-K (Commission File no. 001-16109), filed with the
Commission on March 28, 2003 and incorporated herein by this
reference).
Table of Contents
Exhibit
Number
Description of Exhibits
Employment Agreement, dated as of August 4, 2000, by and between the
Company and John D. Ferguson, with form of option agreement included
as Exhibit A thereto (previously filed as Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q (File no. 0-25245), filed
with the Commission on August 14, 2000 and incorporated herein by
this reference).
First Amendment to Employment Agreement with John D. Ferguson, dated
as of December 31, 2002, by and between the Company and John D.
Ferguson (previously filed as Exhibit 10.30 to the Companys Annual
Report on Form 10-K (Commission File no. 001-16109), filed with the
Commission on March 28, 2003 and incorporated herein by this
reference).
Employment Agreement, dated as of December 6, 2000, by and between
the Company and Irving E. Lingo, Jr. (previously filed as Exhibit
10.67 to the Companys Annual Report on Form 10-K (Commission File
no. 001-16109), filed with the Commission on April 17, 2001 and
incorporated herein by this reference).
Employment Agreement, dated as of July 1, 2002, by and between the
Company and James A. Seaton (previously filed as Exhibit 10.33 to the
Companys Annual Report on Form 10-K (Commission File no. 001-16109),
filed with the Commission on March 28, 2003 and incorporated herein
by this reference).
Employment Agreement, dated as of February 1, 2003, by and between
the Company and Kenneth A. Bouldin (previously filed as Exhibit 10.34
to the Companys Annual Report on Form 10-K (Commission File no.
001-16109), filed with the Commission on March 28, 2003 and
incorporated herein by this reference).
Employment Agreement dated as of May 1, 2003, by and between the
Company and G.A. Puryear IV (previously filed as Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q (Commission File no.
001-16109), filed with the Commission on August 12, 2003 and
incorporated herein by this reference).
Amendment Number One to Stock Acquisition Agreement, dated as of
November 13, 2000, by and among the Company, CCA of Tennessee, PMSI,
JJFMSI, CCA UK and Sodexho (previously filed as Exhibit 10.74 to the
Companys Annual Report on Form 10-K (Commission File no. 001-16109),
filed with the Commission on April 17, 2001 and incorporated herein
by this reference).
Option Agreement, dated as of September 11, 2000, by and between
JJFMSI and Sodexho (previously filed as Exhibit 10.3 to the Companys
Current Report on Form 8-K (Commission File no. 001-16109), filed
with the Commission on September 12, 2000 and incorporated herein by
this reference).
Amendment Number One to Option Agreement, dated as of November 13,
2000, by and between JJFMSI and Sodexho (previously filed as Exhibit
10.76 to the Companys Annual Report on Form 10-K (Commission File
no. 001-16109), filed with the Commission on April 17, 2001 and
incorporated herein by this reference).
Table of Contents
Exhibit
Number
Description of Exhibits
Stock Purchase Agreement, dated as of April 10, 2001, by and among
the Company; Abbey National Treasury Services plc, a public limited
company incorporated in England and Wales and registered with company
number 2338548; and Agecroft Properties (No. 2) Limited, a private
limited company incorporated in England and Wales and registered with
company number 4167343 (API 2), relating to the Companys sale of
all of the issued and outstanding capital stock of Agecroft
Properties, Inc., a Tennessee corporation and wholly-owned subsidiary
of the Company (API), to API 2 (previously filed as Exhibit 10.80
to the Companys Annual Report on Form 10-K (Commission File no.
001-16109), filed with the Commission on April 17, 2001 and
incorporated herein by this reference).
Letter from Arthur Andersen LLP regarding change in independent
auditor (previously filed as Exhibit 16.1 to the Companys Form 8-K
(Commission File no. 001-16109), filed with the Commission on May 15,
2002 and incorporated herein by this reference).
Subsidiaries of the Company.
Consent of Ernst & Young LLP.
Powers of Attorney (included on signature pages).
Certification of the Companys Chief Executive Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Companys Chief Financial Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Companys Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of the Companys Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Table of Contents
F-2
F-3
F-4
F-5
F-7
F-9
Table of Contents
Corrections Corporation of America
discussed in the eleventh paragraph of Note 15
and the second paragraph of Note 17,
as to which the date is February 19, 2004)
Table of Contents
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
2003
2002
$
84,231
$
65,406
12,823
7,363
136,465
119,197
50,473
32,499
8,028
12,299
1,158
17,583
293,178
254,347
1,586,979
1,551,781
17,751
18,346
15,563
20,902
6,739
38,818
28,211
484
$
1,959,028
$
1,874,071
$
156,656
$
151,516
913
3,685
150
5,330
1,146
23,054
761
2,381
159,626
185,966
1,002,282
932,905
21,655
21,202
1,183,563
1,140,073
7,500
107,500
23,528
107,831
350
280
1,441,742
1,343,066
(1,479
)
(1,604
)
(695,590
)
(822,111
)
(586
)
(964
)
775,465
733,998
$
1,959,028
$
1,874,071
Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Years Ended December 31,
2003
2002
2001
$
1,032,995
$
934,050
$
906,177
3,742
3,701
5,718
1,036,737
937,751
911,895
775,311
721,352
698,941
40,467
36,907
34,568
52,937
51,292
52,729
868,715
809,551
786,238
168,022
128,200
125,657
(119
)
153
358
74,446
87,478
126,242
6,687
36,670
(2,900
)
(2,206
)
(14,554
)
261
110
74
(556
)
(622
)
219
77,819
121,583
112,339
90,203
6,617
13,318
52,352
63,284
3,358
142,555
69,901
16,676
(772
)
2,459
9,018
(80,276
)
141,783
(7,916
)
25,694
(15,262
)
(20,959
)
(20,024
)
$
126,521
$
(28,875
)
$
5,670
$
3.95
$
1.77
$
(0.14
)
(0.03
)
0.09
0.37
(2.90
)
$
3.92
$
(1.04
)
$
0.23
$
3.46
$
1.59
$
(0.14
)
(0.02
)
0.08
0.37
(2.49
)
$
3.44
$
(0.82
)
$
0.23
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
2003
2002
2001
$
141,783
$
(7,916
)
$
25,694
54,011
54,388
54,135
7,505
11,816
22,652
80,276
6,687
36,670
(50,082
)
646
(3,531
)
(119
)
153
358
(556
)
(622
)
219
2,259
2,455
2,579
266
130
74
(2,900
)
(2,206
)
(14,554
)
2,892
7,706
(6,657
)
32,499
(32,141
)
32,207
12,294
5,405
(22,002
)
(3,692
)
(55,371
)
1,587
202,847
101,389
92,761
(56,673
)
(4,843
)
(35,522
)
(12,254
)
(6,435
)
(5,460
)
5,174
(3,328
)
487
4,595
140,277
(4,099
)
(3,199
)
(1,443
)
(321
)
986
1,175
1,861
(100,281
)
(9,673
)
130,932
482,250
890,000
39,000
(7,394
)
(17,764
)
(7,667
)
(387,266
)
(878,938
)
(220,303
)
(18,579
)
(37,478
)
(7,012
)
124,800
(7,674
)
(21
)
(20
)
1,276
433
(66,464
)
(191,984
)
(354
)
(12,706
)
(19,648
)
(2,182
)
(91
)
(8,847
)
(83,741
)
(72,617
)
(198,275
)
18,825
19,099
25,418
65,406
46,307
20,889
$
84,231
$
65,406
$
46,307
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
2003
2002
2001
$
79,068
$
73,067
$
104,438
$
2,183
$
56,396
$
3,014
$
(40,000
)
$
(1,114
)
$
34
1
39,512
1,113
454
$
$
$
$
$
(177
)
$
(21
)
(20
)
(578
)
300
175
$
$
(321
)
$
$
(5,998
)
$
$
(69,408
)
2,900
25,606
3
187
3,051
43,615
44
$
$
$
(7,736
)
$
(11,834
)
$
(11,070
)
7,736
11,834
11,070
$
$
$
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(in thousands)
Accumulated
Series A
Series B
Additional
Retained
Other
Total
Preferred
Preferred
Common
Paid-In
Deferred
Earnings
Treasury
Comprehensive
Stockholders
Stock
Stock
Stock
Capital
Compensation
(Deficit)
Stock
Income (Loss)
Equity
$
107,500
$
80,642
$
2,354
$
1,299,390
$
(2,723
)
$
(798,906
)
$
(242
)
$
$
688,015
25,694
25,694
(5,023
)
(5,023
)
2,512
2,512
25,694
(2,511
)
23,183
11,070
(20,024
)
(8,954
)
187
43,615
43,802
3
(3
)
1,305
1,305
4,904
(3,179
)
(1,735
)
(10
)
(2,265
)
2,240
(25
)
(50
)
(105
)
(155
)
107,500
96,566
279
1,341,958
(3,153
)
(793,236
)
(242
)
(2,511
)
747,161
(7,916
)
(7,916
)
(964
)
(964
)
2,511
2,511
(7,916
)
1,547
(6,369
)
11,834
(20,959
)
(9,125
)
1
1,113
1,114
(167
)
(223
)
1,549
1,159
(21
)
(21
)
433
433
(242
)
242
(402
)
48
(354
)
$
107,500
$
107,831
$
280
$
1,343,066
$
(1,604
)
$
(822,111
)
$
$
(964
)
$
733,998
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(in thousands)
Accumulated
Series A
Series B
Additional
Retained
Other
Total
Preferred
Preferred
Common
Paid-In
Deferred
Earnings
Treasury
Comprehensive
Stockholders
Stock
Stock
Stock
Capital
Compensation
(Deficit)
Stock
Income (Loss)
Equity
$
107,500
$
107,831
$
280
$
1,343,066
$
(1,604
)
$
(822,111
)
$
$
(964
)
$
733,998
141,783
141,783
378
378
141,783
378
142,161
7,736
(15,262
)
(7,526
)
64
117,103
117,167
(842
)
(842
)
2,643
2,643
(347
)
(347
)
(100,000
)
(91,637
)
(191,637
)
34
39,512
39,546
(34
)
(65,588
)
(65,622
)
1
1
3
3,051
3,054
(55
)
(71
)
1,720
1,594
1
1,594
(1,595
)
1
1,274
1,275
$
7,500
$
23,528
$
350
$
1,441,742
$
(1,479
)
$
(695,590
)
$
$
(586
)
$
775,465
Table of Contents
1.
ORGANIZATION AND OPERATIONS
Corrections Corporation of America (together with its subsidiaries, the
Company) is the nations largest owner and operator of privatized
correctional and detention facilities and one of the largest prison
operators in the United States, behind only the federal government and four
states. As of December 31, 2003, the Company owned 41 correctional,
detention and juvenile facilities, three of which the Company leases to
other operators, and one additional facility which is not yet in operation.
At December 31, 2003, the Company operated 59 facilities, including 38
facilities that it owned, with a total design capacity of approximately
59,000 beds in 20 states and the District of Columbia.
The Company specializes in owning, operating and managing prisons and other
correctional facilities and providing inmate residential and prisoner
transportation services for governmental agencies. In addition to
providing the fundamental residential services relating to inmates, the
Companys facilities offer a variety of rehabilitation and educational
programs, including basic education, religious services, life skills and
employment training and substance abuse treatment. These services are
intended to help reduce recidivism and to prepare inmates for their
successful reentry into society upon their release. The Company also
provides health care (including medical, dental and psychiatric services),
food services and work and recreational programs.
The Companys website address is www.correctionscorp.com. The Company
makes its Form 10-K, Form 10-Q, Form 8-K, and Section 16 reports under the
Securities Exchange Act of 1934, as amended (the Exchange Act) available
on its website, free of charge, as soon as reasonably practicable after
these reports are filed with or furnished to the Securities and Exchange
Commission (the SEC).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
on a consolidated basis with its wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all liquid debt instruments with a maturity of three
months or less at the time of purchase to be cash equivalents.
Restricted Cash
Restricted cash at December 31, 2003 was $12.8 million, of which $7.1
million represents cash collateral for a guarantee agreement as further
described in Note 17 and $5.7 million represents cash for a capital
improvements, replacements, and repairs reserve. Restricted cash at
December 31,
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2002 was $7.4 million, of which $7.1 million represents cash collateral for
the guarantee agreement and $0.3 million represents cash collateral for
outstanding letters of credit.
Accounts Receivable and Allowance for Doubtful Accounts
At December 31, 2003 and 2002, accounts receivable of $136.5 million and
$119.2 million were net of allowances for doubtful accounts totaling $2.0
million and $1.3 million, respectively. Accounts receivable consist
primarily of amounts due from federal, state, and local government agencies
for operating and managing prisons and other correctional facilities and
providing inmate residential and prisoner transportation services.
Accounts receivable are stated at estimated net realizable value. The
Company recognizes allowances for doubtful accounts to ensure receivables
are not overstated due to uncollectibility. Bad debt reserves are
maintained for customers in the aggregate based on a variety of factors,
including the length of time receivables are past due, significant one-time
events and historical experience. If circumstances related to customers
change, estimates of the recoverability of receivables would be further
adjusted.
Property and Equipment
Property and equipment is carried at cost. Assets acquired by the Company
in conjunction with acquisitions are recorded at estimated fair market
value in accordance with the purchase method of accounting. Betterments,
renewals and significant repairs that extend the life of an asset are
capitalized; other repair and maintenance costs are expensed. Interest is
capitalized to the asset to which it relates in connection with the
construction or expansion of 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 over the estimated useful lives of depreciable assets using the
straight-line method. Useful lives for property and equipment are as
follows:
5 20 years
5 50 years
3 5 years
5 years
The useful life used to depreciate certain assets may exceed the term of a
management contract, including renewal options, for a facility the Company
manages but does not own due to the Companys expectation that it will be
able to maintain the contract beyond the current term, including renewal
options.
Intangible Assets Other Than Goodwill
Intangible assets other than goodwill include value of workforce, contract
acquisition costs, a customer list and contract values established in
connection with certain business combinations. Contract acquisition costs
(included in other non-current assets in the accompanying consolidated
balance sheets) and contract values (included in other non-current
liabilities in the accompanying consolidated balance sheets) represent the
estimated fair values of the identifiable intangibles acquired in
connection with mergers and acquisitions completed during 2000. Prior to
January 1, 2002, value of workforce was amortized into amortization expense
over estimated useful lives ranging from 23 to 38 months using the
straight-line method. Contract acquisition costs and contract values are
generally amortized into amortization expense using the interest method
over the
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lives of the related management contracts acquired, which range from three
months to approximately 19 years. The customer list (included in other
non-current assets in the accompanying consolidated balance sheets), which
was acquired in connection with the acquisition of a prisoner extradition
company on December 31, 2002, is being amortized over seven years, which is
the expected life of the customer list.
Accounting for the Impairment of Long-Lived Assets Other Than Goodwill
Long-lived assets other than goodwill are reviewed for impairment when
circumstances indicate the carrying value of an asset may not be
recoverable. For assets that are to be held and used, an impairment is
recognized when the estimated undiscounted cash flows associated with the
asset or group of assets is less than their carrying value. If an
impairment exists, an adjustment is made to write the asset down to its
fair value, and a loss is recorded as the difference between the carrying
value and fair value. Fair values are determined based on quoted market
values, discounted cash flows or internal and external appraisals, as
applicable.
Goodwill
Goodwill represents the cost in excess of the net assets of businesses
acquired. Prior to January 1, 2002, goodwill was amortized into
amortization expense over 15 years using the straight-line method.
However, as further discussed in Note 3, beginning January 1, 2002,
goodwill is no longer subject to amortization, but is tested for impairment
at least annually using a fair-value based approach.
Investment in Direct Financing Lease
Investment in direct financing lease represents the portion of the
Companys management contract with a governmental agency that represents
capitalized lease payments on buildings and equipment. The lease is
accounted for using the financing method and, accordingly, the minimum
lease payments to be received over the term of the lease less unearned
income are capitalized as the Companys investment in the lease. Unearned
income is recognized as income over the term of the lease using the
interest method.
Investment in Affiliates
Investments in affiliates that are equal to or less than 50%-owned over
which the Company can exercise significant influence are accounted for
using the equity method of accounting.
Debt Issuance Costs
Generally, debt issuance costs, which are included in other assets in the
consolidated balance sheets, are capitalized and amortized into interest
expense on a straight-line basis, which is not materially different than
the interest method, over the term of the related debt. However, certain
debt issuance costs incurred in connection with debt refinancings are
charged to expense in accordance with Emerging Issues Task Force Issue No.
96-19, Debtors Accounting for a Modification or Exchange of Debt
Instruments.
Management and Other Revenue
The Company maintains contracts with certain governmental entities to
manage their facilities for fixed per diem rates. The Company also
maintains contracts with various federal, state and local
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governmental entities for the housing of inmates in company-owned
facilities at fixed per diem rates or monthly fixed 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. Additionally, most facility
management contracts contain clauses that allow the government agency to
terminate a contract without cause, and are generally subject to
legislative appropriations. The Company generally expects to renew these
contracts for periods consistent with the remaining renewal options allowed
by the contracts or other reasonable extensions; however, no assurance can
be given that such renewals will be obtained. 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 any additional
management service revenues when earned. Certain of the government
agencies also have the authority to audit and investigate the Companys
contracts with them. For contracts that actually or effectively provide
for certain reimbursement of expenses, if the agency determines that the
Company has improperly allocated costs to a specific contract, the Company
may not be reimbursed for those costs and could be required to refund the
amount of any such costs that have been reimbursed.
Other revenue consists primarily of revenues generated from prisoner
transportation services for governmental agencies.
Rental Revenue
Rental revenue is recognized based on the terms of the Companys leases.
Self-Funded Insurance Reserves
The Company is significantly self-insured for employee health, workers
compensation, and automobile liability insurance claims. As such, the
Companys insurance expense is largely dependent on claims experience and
the Companys ability to control its claims experience. The Company has
consistently accrued the estimated liability for employee health insurance
based on its history of claims experience and time lag between the incident
date and the date the cost is paid by the Company. The Company has accrued
the estimated liability for workers compensation and automobile insurance
based on a third-party actuarial valuation of the outstanding liabilities.
These estimates could change in the future.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 generally requires the Company to record deferred
income taxes for the tax effect of differences between book and tax bases
of its assets and liabilities.
Deferred income taxes reflect the available net operating losses and the
net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Realization of the future tax benefits
related to deferred tax assets is dependent on many factors, including the
Companys past earnings history, expected future earnings, the character
and jurisdiction of such earnings, unsettled circumstances that, if
unfavorably resolved, would adversely affect utilization of its deferred
tax assets, carryback and carryforward periods, and tax strategies that
could potentially enhance the likelihood of realization of a deferred tax
asset. During the three years ended December 31, 2003, the Company
provided a valuation allowance to substantially reserve its deferred tax
assets in accordance with
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SFAS 109. However, at December 31, 2003, the Company concluded that it was
more likely than not that substantially all of its deferred tax assets
would be realized. As a result, in accordance with SFAS 109, the valuation
allowance applied to such deferred tax assets was reversed.
Removal of the valuation allowance resulted in a significant non-cash
reduction in income tax expense. In addition, because a portion of the
previously recorded valuation allowance was established to reserve certain
deferred tax assets upon the acquisitions of two service companies during
2000, in accordance with SFAS 109, removal of the valuation allowance
resulted in a reduction to the remaining goodwill recorded in connection
with such acquisitions to the extent the reversal related to the valuation
allowance applied to deferred tax assets existing at the date the service
companies were acquired. In addition, removal of the valuation
allowance resulted in an increase in the Companys additional
paid-in capital related to the tax benefits of exercises of employee
stock options and of grants of restricted stock. The reduction to goodwill amounted to $4.5 million, while
additional paid-in capital increased $2.6 million. Future financial
statements will reflect a provision for income taxes at the applicable
federal and state tax rates on income before taxes.
Foreign Currency Transactions
The Company has extended a working capital loan to Agecroft Prison
Management, Ltd. (APM), the operator of a correctional facility
previously owned by the Company in Salford, England. The working capital
loan is denominated in British pounds; consequently, the Company adjusts
these receivables to the current exchange rate at each balance sheet date
and recognizes the unrealized currency gain or loss in current period
earnings. See Note 6 for further discussion of the Companys relationship
with APM.
Fair Value of Derivative and Financial Instruments
Derivative Instruments
The Company may enter into derivative financial instrument transactions
from time to time in order to mitigate its interest rate risk on a related
financial instrument. The Company accounts for these derivative financial
instruments in accordance with Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), which became effective January 1, 2001. SFAS 133, as
amended, requires that changes in a derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
The Company estimates the fair value of its derivative instruments using
third-party valuation specialists and option-pricing models that value the
potential for the derivative instruments to become in-the-money through
changes in interest rates during the remaining term of the agreements. A
negative fair value represents the estimated amount the Company would have
to pay to cancel the contract or transfer it to other parties.
See Note 13 for a further description of derivative instruments outstanding
during the three year period ended December 31, 2003.
Financial Instruments
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of Financial Instruments,
the Company calculates the estimated fair value of financial instruments
using quoted market prices of similar instruments or discounted cash flow
techniques. At December 31, 2003 and 2002, there were no material
differences between the carrying amounts and the estimated fair values of
the Companys financial instruments, other than as follows (in thousands):
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December 31,
2003
2002
Carrying
Carrying
Amount
Fair Value
Amount
Fair Value
$
18,346
$
23,919
$
18,873
$
26,057
$
5,610
$
9,323
$
5,061
$
9,099
$
(1,003,428
)
$
(1,051,629
)
$
(955,959
)
$
(993,335
)
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Concentration of Credit Risks
The Companys credit risks relate primarily to cash and cash equivalents,
restricted cash, accounts receivable and an investment in a direct
financing lease. Cash and cash equivalents and restricted cash are
primarily held in bank accounts and overnight investments. The Companys
accounts receivable and investment in direct financing lease represent
amounts due primarily from governmental agencies. The Companys financial
instruments are subject to the possibility of loss in carrying value as a
result of either the failure of other parties to perform according to their
contractual obligations or changes in market prices that make the
instruments less valuable.
The Company derives its revenues primarily from amounts earned under
federal, state, and local government management contracts. For the years
ended December 31, 2003, 2002, and 2001, federal correctional and detention
authorities represented 37%, 33%, and 30%, respectively, of the Companys
total revenue. Federal correctional and detention authorities consist of
the Federal Bureau of Prisons, or BOP, the United States Marshals Service,
or USMS, and the Bureau of Immigration and Customs Enforcement, or ICE
(formerly the Immigration and Naturalization Service, or INS). The BOP
accounted for 16%, 14%, and 13%, respectively, of total revenue for 2003,
2002, and 2001. The USMS accounted for 14%, 12%, and 9%, respectively, of
total revenue for 2003, 2002, and 2001. Both the BOP and USMS have
management contracts at facilities the Company owns and at facilities the
Company manages but does not own. No other customer generated more than
10% of total revenue during 2003, 2002, or 2001.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income encompasses all changes in
stockholders equity except those arising from transactions with
stockholders.
The Company reports comprehensive income in the consolidated statements of
stockholders equity.
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Accounting for Stock-Based Compensation
Restricted Stock
The Company amortizes the fair market value of restricted stock awards over
the vesting period using the straight-line method.
Other Stock-Based Compensation
On December 31, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation Transition
and Disclosure (SFAS 148). SFAS 148 amends Statement of Financial
Accounting Standards No. 123 Accounting for Stock-Based Compensation
(SFAS 123) to provide alternative methods of transition to SFAS 123s
fair value method of accounting for stock-based employee compensation.
SFAS 148 also amends the disclosure provisions of SFAS 123 and Accounting
Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to
require disclosure in the summary of significant accounting policies of the
effects of an entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in
annual and interim financial statements. While SFAS 148 does not amend
SFAS 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS 148 are applicable
to all companies with stock-based employee compensation, regardless of
whether they account for the compensation using the fair value method of
SFAS 123 or the intrinsic value method of APB Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25).
At December 31, 2003, the Company had equity incentive plans, which are
described more fully in Note 15. The Company accounts for those plans
under the recognition and measurement principles of APB 25. No employee
compensation cost for the Companys stock options is reflected in net
income, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and
earnings per share for the years ended December 31, 2003, 2002, and 2001 if
the Company had applied the fair value recognition provisions of SFAS 123
to stock-based employee compensation (in thousands, except per share data).
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For the Years Ended December 31,
2003
2002
2001
$
127,293
$
48,942
$
(3,348
)
(772
)
2,459
9,018
(80,276
)
$
126,521
$
(28,875
)
$
5,670
$
120,885
$
43,781
$
(7,584
)
(772
)
2,459
9,018
(80,276
)
$
120,113
$
(34,036
)
$
1,434
$
3.95
$
1.77
$
(0.14
)
(0.03
)
0.09
0.37
(2.90
)
$
3.92
$
(1.04
)
$
0.23
$
3.46
$
1.59
$
(0.14
)
(0.02
)
0.08
0.37
(2.49
)
$
3.44
$
(0.82
)
$
0.23
$
3.76
$
1.58
$
(0.31
)
(0.03
)
0.09
0.37
(2.90
)
$
3.73
$
(1.23
)
$
0.06
$
3.29
$
1.43
$
(0.31
)
(0.02
)
0.08
0.37
(2.49
)
$
3.27
$
(0.98
)
$
0.06
The effect of applying SFAS 123 for disclosing compensation costs under
such pronouncement may not be representative of the effects on reported net
income (loss) available to common stockholders for future years.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No.
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51 (FIN 46). FIN 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or in which equity investors do not bear the residual
economic risks. FIN 46 is effective for all entities other than special
purpose entities no later than the end of the first period that ends after
March 15, 2004. The Company has no investments in special purpose
entities.
The Company has determined that its joint venture in APM as discussed in
Note 6 is a variable interest entity (VIE), of which the Company is not
the primary beneficiary. APM has a management contract for a correctional
facility located in Salford, England. All gains and losses under the joint
venture are accounted for using the equity method of accounting. During
2000, the Company extended a working capital loan to APM, which totaled
$5.6 million, including accrued interest, as of December 31, 2003. The
outstanding working capital loan represents the Companys maximum exposure
to loss in connection with APM. APM has not been, and in accordance with
FIN 46 is not expected to be, consolidated with the Companys financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging
Activities (SFAS 149). SFAS 149 amends and clarifies the accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under SFAS 133. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003, and should be
applied prospectively. The provisions of SFAS 149 that relate to SFAS 133
implementation issues that have been effective for fiscal quarters that
began prior to June 15, 2003 should continue to be applied in accordance
with their respective effective dates. The adoption of SFAS 149 did not
have a material impact on the Companys financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity (SFAS 150). SFAS 150 establishes
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have characteristics
of both liabilities and equity. Instruments that are indexed to and
potentially settled in an issuers own shares that are not within the scope
of SFAS 150 remain subject to existing guidance. SFAS 150 is effective for
all freestanding financial instruments of public companies entered into or
modified after May 31, 2003. SFAS 150 became effective on July 1, 2003.
The adoption of SFAS 150 did not have a material impact on the Companys
financial statements.
3.
GOODWILL AND INTANGIBLES
Effective January 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS
142), which established new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS 142, all goodwill
amortization ceased effective January 1, 2002 and goodwill attributable to
each of the Companys reporting units was tested for impairment by
comparing the fair value of each reporting unit with its carrying value.
Fair value was determined using a collaboration of various common valuation
techniques, including market multiples, discounted cash flows, and
replacement cost methods. These impairment tests are required to be
performed at adoption of SFAS 142 and at least annually thereafter. The
Company performs its impairment tests during the fourth quarter, in
connection with the Companys annual budgeting process, and whenever
circumstances indicate the carrying value of goodwill may not be
recoverable.
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Based on the Companys initial impairment tests, the Company recognized an
impairment of $80.3 million to write-off the carrying value of goodwill
associated with the Companys locations included in the owned and managed
reporting segment during the first quarter of 2002. This goodwill was
established in connection with the acquisition of a company during 2000.
The remaining goodwill, which is associated with the facilities the Company
manages but does not own, was deemed to be not impaired. This remaining
goodwill was established in connection with the acquisitions of two service
companies during 2000. The implied fair value of goodwill of the locations
included in the owned and managed reporting segment did not support the
carrying value of any goodwill, primarily due to its highly leveraged
capital structure. No impairment of goodwill allocated to the locations
included in the managed-only reporting segment was deemed necessary,
primarily because of the relatively minimal capital expenditure
requirements, and therefore indebtedness, in connection with obtaining such
management contracts. Under SFAS 142, the impairment recognized at
adoption of the new rules was reflected as a cumulative effect of
accounting change in the Companys statement of operations for the first
quarter of 2002. Impairment adjustments recognized after adoption, if any,
are required to be recognized as operating expenses.
As a result of the expiration during the first quarter of 2003 of the
Companys contracts to manage the Okeechobee Juvenile Offender Correctional
Center and the Lawrenceville Correctional Center, as further described in
Note 14, the Company recognized goodwill impairment charges of $268,000 and
$340,000, respectively. These charges are included in loss from
discontinued operations, net of taxes, in the accompanying statement of
operations for the year ended December 31, 2003.
Also, as a result of the Texas Department of Criminal Justices (TDCJ)
decision in November 2003 to not renew the contract for the continued
management of the Sanders Estes Unit upon its expiration on January 15,
2004, the Company recognized a goodwill impairment charge of $244,000.
This charge was included in depreciation and amortization in the
accompanying statement of operations for the year ended December 31, 2003.
In connection with the adoption of SFAS 142, the Company also reassessed
the useful lives and the classification of its identifiable intangible
assets and liabilities and determined that they continue to be appropriate.
The components of the Companys intangible assets and liabilities are as
follows (in thousands):
December 31, 2003
December 31, 2002
Gross Carrying
Accumulated
Gross Carrying
Accumulated
Amount
Amortization
Amount
Amortization
$
873
$
(820
)
$
1,149
$
(1,020
)
765
(110
)
561
(35,688
)
15,336
(38,049
)
16,281
$
(34,050
)
$
14,406
$
(36,339
)
$
15,261
Contract acquisition costs and the customer list are included in other
non-current assets, and contract values are included in other non-current
liabilities in the accompanying balance sheets. Amortization income, net
of amortization expense, for intangible assets and liabilities during the
years ended December 31, 2003, 2002, and 2001 was $3.6 million, $1.8
million and $6.2 million, respectively. Estimated amortization income, net
of amortization expense, for the five succeeding fiscal years is as follows
(in thousands):
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$
(3,385
)
(4,223
)
(4,552
)
(4,552
)
(4,552
)
Pro forma results of operations for the year ended December 31, 2001 had
the Company applied the non-amortization provisions of SFAS 142 in that
year are as follows (in thousands, except per share amounts):
For the Year Ended
December 31, 2001
$
5,670
8,844
$
14,514
$
0.23
0.37
$
0.60
$
0.23
0.28
$
0.51
4.
PROPERTY AND EQUIPMENT
At December 31, 2003, the Company owned 44 real estate properties,
including 41 correctional, detention and juvenile facilities, three of
which the Company leases to other operators, two corporate office
buildings, and one correctional facility under construction. At December
31, 2003, the Company also managed 21 correctional and detention facilities
owned by government agencies. In January 2004 the Company also began
management of six additional correctional facilities owned by the State of
Texas, and ceased management of another correctional facility owned by the
State of Texas.
Property and equipment, at cost, consists of the following (in thousands):
December 31,
2003
2002
$
34,277
$
33,756
1,649,079
1,599,167
66,219
38,930
22,227
21,315
56,680
44,116
1,828,482
1,737,284
(241,503
)
(185,503
)
$
1,586,979
$
1,551,781
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Construction in progress primarily consists of a correctional facility
under construction in Stewart County, Georgia, and software under
development for internal use capitalized in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Interest is capitalized on construction in
progress in accordance with Statement of Financial Accounting Standards No.
34, Capitalization of Interest Cost and amounted to $0.9 million in 2003.
No interest was capitalized during 2002 or 2001.
Depreciation expense was $56.3 million, $53.1 million and $51.4 million for
the years ended December 2003, 2002, and 2001, respectively.
As of December 31, 2003, ten of the facilities owned by the Company are
subject to options that allow various governmental agencies to purchase
those facilities. In addition, three facilities, including two that are also subject to purchase options, are constructed on land that the
Company leases from governmental agencies under ground leases. Under the
terms of those ground leases, the facilities become the property of the
governmental agencies upon expiration of the ground leases. The Company
depreciates these properties over the shorter of the term of the applicable
ground lease or the estimated useful life of the property.
In June 2003, the Company secured a management contract with the State of
Alabama to house up to 1,440 medium security inmates in its Tallahatchie
County Correctional Facility, located in Tutwiler, Mississippi, under a
temporary emergency agreement to provide the State of Alabama immediate
relief to its overcrowded prison system. The facility began receiving
inmates in July 2003. Prior to receiving inmates from the State of
Alabama, this facility was substantially idle. During January 2004, the
Company received notice from the Alabama Department of Corrections that it
would withdraw its inmates housed at the facility. Based on the terms of
the short-term contract, the Company expects the Alabama Department of
Corrections to compensate the Company at a guaranteed rate of 95% occupancy
of the facility through March 11, 2004. The Company is currently pursuing
new management contracts to utilize the available beds at the Tallahatchie
County Correctional Facility but can provide no assurance that it will be
successful.
During the third quarter of 2003, the Company transferred all of the
Wisconsin inmates housed at its North Fork Correctional Facility located in
Sayre, Oklahoma to its Diamondback Correctional Facility located in
Watonga, Oklahoma in order to satisfy a contractual provision mandated by
the State of Wisconsin. As a result of the transfer, North Fork
Correctional Facility will remain closed for an indefinite period of time.
The Company is currently pursuing new management contracts and other
opportunities to take advantage of the beds that became available at the
North Fork Correctional Facility but can provide no assurance that it will
be successful in doing so.
During 2001, District of Columbia offenders under the custody of the BOP
residing in the Companys Northeast Ohio Correctional Facility located in
Youngstown, Ohio, were transferred out of the facility due to a new law
that mandated that the BOP assume jurisdiction of all such offenders by the
end of 2001. The facility remains substantially idle. The Company is
currently pursuing new management contracts to utilize the available beds
at this facility but can provide no assurance that it will be successful.
A substantial portion of the Companys property and equipment are pledged
as collateral on the Companys New Senior Bank Credit Facility, as defined
in Note 11.
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5.
FACILITY ACQUISITIONS, DISPOSITIONS AND EXPANSIONS
In March 2001, the Company sold the Mountain View Correctional Facility,
located in Spruce Pine, North Carolina, for a net sales price of $24.9
million. On June 28, 2001, the Company sold the Pamlico Correctional
Facility, located in Bayboro, North Carolina, for a net sales price of
$24.0 million. The net proceeds from both of these sales were used to
pay-down a like portion of amounts outstanding under the Companys Old
Senior Bank Credit Facility, as defined in Note 11.
On April 10, 2001, the Company sold its interest in the Agecroft facility,
located in Salford, England, for a net sales price of $65.7 million through
the sale of all the issued and outstanding capital stock of Agecroft
Properties, Inc., a wholly-owned subsidiary of the Company. The net
proceeds from the sale were used to pay-down a like portion of amounts
outstanding under the Old Senior Bank Credit Facility.
On October 3, 2001, the Company sold its Southern Nevada Womens
Correctional Center, a facility located in Las Vegas, Nevada, for a net
sales price of $24.1 million. The net proceeds were used to pay-down a
like portion of amounts outstanding under the Old Senior Bank Credit
Facility. Subsequent to the sale, the Company continues to manage the
facility pursuant to a contract with the State of Nevada.
On January 17, 2003, the Company purchased the Crowley County Correctional
Facility, a medium security adult male prison facility located in Olney
Springs, Crowley County, Colorado, for a purchase price of $47.5 million.
As part of the transaction, the Company also assumed a management contract
with the State of Colorado and entered into a new contract with the State
of Wyoming, and took over management of the facility effective January 18,
2003. The Company financed the purchase price through $30.0 million in
borrowings under its New Senior Bank Credit Facility, as defined in Note
11, pursuant to an expansion of the Term Loan B Facility, as defined in
Note 11, with the balance of the purchase price satisfied with cash on
hand. The Company expects to expand this facility during 2004.
In September 2003, the Company announced its intention to complete
construction of the Stewart County Correctional Facility located in Stewart
County, Georgia. The anticipated cost to complete construction of the
facility is approximately $22.0 million with completion estimated to occur
during the third quarter of 2004. Construction on the Stewart County
Correctional Facility began in August 1999 and was suspended in May 2000.
The Companys decision to complete the project is based on anticipated
demand from several government customers having a need for inmate bed
capacity in the Southeast region of the country. However, there can be no
assurances that the Company will be successful in securing a management
contract to utilize this facility.
In October 2003, the Company also announced a new contract with the ICE for
up to 905 detainees at its Houston Processing Center located in Houston,
Texas. In addition, the Company announced its intention to expand the
facility to accommodate detainees under the new contract which contains a
guarantee that ICE will utilize 679 beds at such time as the expansion is
completed. The anticipated cost of the expansion is approximately $29.0
million and is estimated to be completed during the first quarter of 2005.
During January 2004, the Company announced its intention to expand the
Florence Correctional Center located in Florence, Arizona. The anticipated
cost of the expansion is approximately $6.2 million and is estimated to be
completed during the first quarter of 2005. The facility currently houses
federal inmates as well as inmates from Hawaii and Alaska. The expansion
is being undertaken in anticipation of increasing demand from each of these
customers.
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During January 2004, the Company also announced the signing of a new
contract with the USMS to manage up to 800 inmates at its Leavenworth
Detention Center located in Leavenworth, Kansas. To fulfill the
requirements of this contract, the Company will expand the Leavenworth
Detention Center. The new contract provides a guarantee that the USMS will
utilize 400 beds. The anticipated cost to expand the facility is
approximately $10.4 million, with completion estimated to occur during the
fourth quarter of 2004.
6.
INVESTMENT IN AFFILIATE
For the year ended December 31, 2003, equity in earnings of joint venture
was $0.1 million, while the Companys equity in loss of joint venture was
$0.2 million, and $0.4 million, respectively, for the years ended December
31, 2002 and 2001. The losses resulted from the Companys 50% ownership
interest in APM, an entity holding the management contract for the Agecroft
facility under a 25-year prison management contract with an agency of the
United Kingdom government. The Agecroft facility, located in Salford,
England, was previously constructed and owned by a wholly-owned subsidiary
of the Company, which was sold in April 2001, as further discussed in Note
5. As discussed in Note 2, the Company has extended a working capital loan
to APM, which totaled $5.6 million, including accrued interest, as of
December 31, 2003.
7.
INVESTMENT IN DIRECT FINANCING LEASE
At December 31, 2003, the Companys investment in a direct financing lease
represents net receivables under a building and equipment lease between the
Company and the District of Columbia for the D.C. Correctional Treatment
Facility.
A schedule of future minimum rentals to be received under the direct
financing lease in future years is as follows (in thousands):
$
2,793
2,793
2,793
2,793
2,793
23,035
37,000
(18,654
)
(595
)
$
17,751
During the years ended December 31, 2003, 2002, and 2001, the Company
recorded interest income of $2.3 million, $2.3 million, and $4.3 million,
respectively, under its direct financing leases at the D.C. Correctional
Treatment Facility and two other facilities that were sold during 2001, as
further discussed in Note 5.
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8.
OTHER ASSETS
Other assets consist of the following (in thousands):
December 31,
2003
2002
$
22,298
$
15,961
6,102
5,892
53
129
8,629
4,714
655
561
1,081
954
$
38,818
$
28,211
9.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
December 31,
2003
2002
$
16,356
$
10,603
25,733
19,672
24,168
18,807
20,234
14,652
7,796
6,756
12,142
13,881
10,893
19,419
5,998
39,334
41,728
$
156,656
$
151,516
10.
DISTRIBUTIONS TO STOCKHOLDERS
Series A Preferred Stock
In connection with the June 2000 Waiver and Amendment, as defined in Note
11, the Company was prohibited from declaring or paying any further
dividends with respect to its outstanding series A preferred stock until
such time as the Company raised at least $100.0 million in equity. The
Company had last declared and paid a quarterly dividend on its shares of
series A preferred stock through the first quarter of 2000. Dividends
with respect to the series A preferred stock continued to accrue under the
terms of the Companys charter until such time as payment of such dividends
was permitted under the terms of the Old Senior Bank Credit Facility.
Under the terms of the Companys charter, in the event dividends are unpaid
and in arrears for six or more quarterly periods, the holders of the series
A preferred stock have the right to vote for the election of two additional
directors to the board of directors. During the third quarter of 2001, the
Company received a consent and waiver from its lenders under the Old Senior
Bank Credit Facility, which allowed the Companys board of directors to
declare a cash dividend with respect to the third
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quarter of 2001 on September 28, 2001. As a result of the boards
declaration, the holders of the Companys series A preferred stock received
$0.50 on October 15, 2001 for every share of the series A preferred stock
they held on the record date. The Company paid $2.2 million on October 15,
2001, as a result of this dividend.
As further discussed in Note 11, on December 7, 2001, the Company completed
an amendment and restatement of the Old Senior Bank Credit Facility. As a
result of the December 2001 Amendment and Restatement, as defined in Note
11, certain financial and non-financial covenants were amended, including
the removal of prior restrictions on the Companys ability to pay cash
dividends on shares of its series A preferred stock. Under the terms of
the December 2001 Amendment and Restatement, the Company was permitted to
pay quarterly dividends, when declared by the board of directors, on the
shares of its series A preferred stock, including all dividends in arrears.
Following the December 2001 Amendment and Restatement, on December 13,
2001, the Companys board of directors declared a cash dividend on the
series A preferred stock for the fourth quarter of 2001 and for the five
quarters in arrears, payable on January 15, 2002. As a result of the
boards declaration, the holders of the Companys series A preferred stock
received $3.00 for every share of series A preferred stock they held on the
record date. The dividend was based on a dividend rate of 8% per annum of
the stocks stated value of $25.00 per share. The Company paid $12.9
million on January 15, 2002, as a result of this dividend. The Company has
since declared and paid a cash dividend each quarter thereafter at a rate
of 8% per annum of the stocks stated value. See Note 15 for further
discussion of redemptions of the Companys series A preferred stock during
2003 and 2004.
Quarterly distributions and the resulting tax classification for the series
A preferred stock distributions are as follows for the years ended December
31, 2003, 2002, and 2001:
Record
Payment
Distribution Per
Return of
Declaration Date
Date
Date
Share
Ordinary Income
Capital
10/05/01
10/15/01
$
0.50
0.0
%
100.0
%
12/31/01
01/15/02
$
3.00
100.0
%
0.0
%
03/28/02
04/15/02
$
0.50
100.0
%
0.0
%
06/28/02
07/15/02
$
0.50
100.0
%
0.0
%
09/30/02
10/15/02
$
0.50
100.0
%
0.0
%
12/31/02
01/15/03
$
0.50
100.0
%
0.0
%
03/31/03
04/15/03
$
0.50
100.0
%
0.0
%
06/30/03
07/15/03
$
0.50
100.0
%
0.0
%
09/30/03
10/15/03
$
0.50
100.0
%
0.0
%
12/31/03
01/15/04
$
0.50
(A
)
(A
)
(A) Will be determined based on the extent the Company has current or
accumulated earnings and profits in 2004.
Series B Preferred Stock
On December 13, 2000, the Companys board of directors declared a
paid-in-kind dividend on the shares of series B preferred stock for the
period from September 22, 2000 (the original date of issuance) through
December 31, 2000, payable on January 2, 2001, to the holders of record of
the Companys series B preferred stock on December 22, 2000. As a result
of the boards declaration, the holders of the Companys series B preferred
stock were entitled to receive 3.3 shares of series B preferred stock for
every 100 shares of series B preferred stock they held on the record date.
The number of shares to be issued as the dividend was based on a dividend
rate of 12% per annum of the stocks stated value of $24.46 per share.
Thereafter, the Company declared and paid a paid-in-kind dividend each
quarter through the third quarter of 2003 at a rate of 12% per annum of the
stocks stated value. Beginning in the fourth quarter of 2003, pursuant to
the terms of the series B preferred stock, the Company declared and paid a
cash dividend on the outstanding shares of series B
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preferred stock, at a rate of 12% per annum of the stocks stated value.
See Note 15 for further discussion of the tender offer for the Companys
series B preferred stock during 2003.
The fair market value per share (tax basis) assigned to the shares issued
as paid-in-kind, as well as cash dividends for the quarterly distributions
and the resulting tax classification for the series B preferred stock
distributions are as follows for the years ended December 31, 2003, 2002,
and 2001:
Fair Market
Cash
Declaration
Record
Payment
Value Per
Distributions
Return of
Date
Date
Date
Share
Per Share
Ordinary Income
Capital
12/22/00
01/02/01
$
6.85
0.0
%
100.0
%
03/19/01
04/02/01
$
9.20
0.0
%
100.0
%
06/19/01
07/02/01
$
14.00
0.0
%
100.0
%
09/17/01
10/01/01
$
14.83
0.0
%
100.0
%
12/21/01
01/02/02
$
19.55
100.0
%
0.0
%
03/22/02
04/01/02
$
19.30
100.0
%
0.0
%
06/21/02
07/01/02
$
23.55
100.0
%
0.0
%
09/20/02
10/01/02
$
23.15
100.0
%
0.0
%
12/20/02
01/02/03
$
24.73
100.0
%
0.0
%
03/17/03
03/31/03
$
24.83
100.0
%
0.0
%
06/16/03
06/30/03
$
25.45
100.0
%
0.0
%
09/16/03
09/30/03
$
25.37
100.0
%
0.0
%
12/17/03
12/31/03
$
0.7338
100.0
%
0.0
%
Common Stock
No quarterly distributions for common stock were made for the years ended
December 31, 2003, 2002, and 2001. The New Senior Bank Credit Facility
restricts the Company from declaring or paying cash dividends on its common
stock. Moreover, even if such restriction is ultimately removed, the
Company does not currently intend to pay dividends on its common stock in
the future.
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11.
DEBT
Debt consists of the following (in thousands):
December 31,
2003
2002
$
$
63,750
560,763
270,813
250,000
250,000
250,000
202,129
10,795
40,000
30,000
30,000
486
651
1,003,428
955,959
(1,146
)
(23,054
)
$
1,002,282
$
932,905
Senior Indebtedness
Old Senior Bank Credit Facility
. During 1999, in an attempt to address its
liquidity constraints at that time, the Company obtained an amendment to
its senior secured bank credit facility (the Old Senior Bank Credit
Facility) to increase the capacity from $650.0 million to $1.0 billion.
The Old Senior Bank Credit Facility consisted of up to $600.0 million of
term loans with a maturity of December 31, 2002, and up to $400.0 million
of revolving loans with a maturity of January 1, 2002.
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During June 2000, the Company obtained a waiver and amendment to the Old
Senior Bank Credit Facility that waived or addressed all then existing
events of default under the provisions of the Old Senior Bank Credit
Facility (the June 2000 Waiver and Amendment). Pursuant to the terms of
the June 2000 Waiver and Amendment, the range of the spread for the
revolving loans became 1.0% to 2.75% for base rate loans and 2.5% to 4.25%
for the London Interbank Offered Rate (LIBOR) rate loans. The resulting
range of the spread for the term loans became 2.75% to 3.0% for base rate
loans and 4.25 % to 4.5% for LIBOR rate loans. Based on the Companys
credit rating at that time, the spread for revolving loans was 2.75% for
base rate loans and 4.25% for LIBOR rate loans, while the spread for term
loans was 3.0% for base rate loans and 4.5% for LIBOR rate loans.
During the third and fourth quarters of 2000, the Company was not in
compliance with certain applicable financial covenants contained in the
Companys Old Senior Bank Credit Facility, including: (i) debt service
coverage ratio; (ii) interest coverage ratio; (iii) leverage ratio; and
(iv) net worth. In November 2000, the Company obtained the consent of the
requisite percentage for the senior lenders (the November 2000 Consent and
Amendment) to replace previously existing financial covenants with amended
financial covenants.
As a result of the November 2000 Consent and Amendment, the interest rate
applicable to the Old Senior Bank Credit Facility remained unchanged from
the rate stipulated in the June 2000 Waiver and Amendment. This applicable
rate, however, was subject to (i) an increase of 25 basis points (0.25%) on
July 1, 2001 if the Company had not prepaid $100.0 million of the
outstanding loans under the Old Senior Bank Credit Facility, and (ii) an
increase of 50 basis points (0.50%) on October 1, 2001 if the Company had
not prepaid an aggregate of $200.0 million of the loans under the Old
Senior Bank Credit Facility.
The Company satisfied the condition to prepay, prior to July 1, 2001,
$100.0 million of outstanding loans under the Old Senior Bank Credit
Facility through the application of proceeds from the sales during the
first and second quarters of 2001 of the Mountain View Correctional
Facility for $24.9 million and the Pamlico Correctional Facility for $24.0
million, through the sale of all of the outstanding capital stock of
Agecroft Properties, Inc., a wholly-owned subsidiary of the Company, for
$65.7 million, and through the lump sum pay-down of $35.0 million of
outstanding loans under the Old Senior Bank Credit Facility with cash on
hand. Although the Company applied additional proceeds of $24.1 million
from the sale of the Southern Nevada Womens Correctional Center to further
pay-down the Old Senior Bank Credit Facility, the Company did not satisfy
the condition to prepay, prior to October 1, 2001, $200.0 million of
outstanding loans under the Old Senior Bank Credit Facility. As a result,
the interest rates under the Old Senior Bank Credit Facility were increased
by 0.50% until December 2001, when the Company completed an amendment and
restatement of the Old Senior Bank Credit Facility (the December 2001
Amendment and Restatement). As part of the December 2001 Amendment and
Restatement, the existing $269.4 million revolving portion of the Old
Senior Bank Credit Facility, which was to mature on January 1, 2002, was
replaced with a term loan of the same amount maturing on December 31, 2002,
to coincide with the maturity of the other $524.7 million of term loans
under the Old Senior Bank Credit Facility.
Pursuant to terms of the December 2001 Amendment and Restatement, interest
on all loans under the Old Senior Bank Credit Facility was payable at a
variable rate of 5.5% over LIBOR, or 4.5% over the base rate, at the
Companys option. As a result of the December 2001 Amendment and
Restatement, certain financial and non-financial covenants were amended,
including the removal of prior restrictions on the Companys ability to pay
cash dividends on its series A preferred stock, including all dividends in
arrears. During the first quarter of 2002, the Company paid $12.9 million
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to shareholders of series A preferred stock. See Note 10 for further
discussion of distributions to stockholders.
New Senior Bank Credit Facility
. In May 2002, the Company obtained a new
$715.0 million senior secured bank credit facility (the New Senior Bank
Credit Facility), which replaced the Old Senior Bank Credit Facility.
Lehman Commercial Paper Inc. serves as administrative agent under the
facility, which was comprised of a $75.0 million revolving loan with a term
of approximately four years (the Revolving Loan), a $75.0 million term
loan with a term of approximately four years (the Term Loan A Facility),
and a $565.0 million term loan with a term of approximately six years (the
Term Loan B Facility). The Term Loan A Facility was repaid during May
2003, with proceeds from the common stock and notes offerings described
below, as well as with cash on hand. As described in Note 5, the Term Loan
B Facility was expanded by $30.0 million during January 2003 in connection
with the purchase of the Crowley County Correctional Facility. All
borrowings under the New Senior Bank Credit Facility accrued interest at a
base rate plus 2.5%, or LIBOR plus 3.5%, at the Companys option. The
applicable margin for the Revolving Loan is subject to adjustment based on
the Companys leverage ratio. The Company is also required to pay a
commitment fee on the difference between committed amounts and amounts
actually utilized under the Revolving Loan equal to 0.50% per year subject
to adjustment based on the Companys leverage ratio.
In connection with a substantial prepayment in August 2003 with net
proceeds from the issuance of the $200 Million 7.5% Senior Notes (as
hereafter defined) along with cash on hand, the Company amended the New
Senior Bank Credit Facility to provide: (i) an increase in the capacity of
the Revolving Loan to $125.0 million, which includes a $75.0 million
subfacility for letters of credit (increased from $50.0 million) that
expires on March 31, 2006, and (ii) a $275.0 million term loan expiring
March 31, 2008 (the Term Loan C Facility), which replaced the Term Loan B
Facility. The Term Loan C Facility bears interest at a base rate plus
1.75%, or LIBOR plus 2.75%, at the Companys option. The interest rates
and commitment fee on the Revolving Loan were unchanged under terms of the
amendment. The amended New Senior Bank Credit Facility is secured by liens
on a substantial portion of the net book value of the Companys fixed
assets (inclusive of its domestic subsidiaries), and pledges of all of the
capital stock of the Companys domestic subsidiaries. The loans and other
obligations under the facility are guaranteed by each of the Companys
domestic subsidiaries and secured by a pledge of up to 65% of the capital
stock of the Companys foreign subsidiaries. Covenants under the amended
facility provide greater flexibility for, among other matters, incurring
unsecured indebtedness, capital expenditures, and permitted acquisitions,
that were further restricted prior to the amendment. In addition, certain
mandatory prepayment provisions were eliminated under the terms of the
amendment. Prepayments of loans outstanding under the New Senior Bank
Credit Facility are permitted at any time without premium or penalty, upon
the giving of proper notice.
The credit agreement governing the New Senior Bank Credit Facility requires
the Company to meet certain financial covenants, including, without
limitation, a minimum fixed charge coverage ratio, leverage ratios and a
minimum interest coverage ratio. In addition, the New Senior Bank Credit
Facility contains certain covenants which, among other things, limit the
incurrence of additional indebtedness, investments, payment of dividends,
transactions with affiliates, asset sales, acquisitions, capital
expenditures, mergers and consolidations, prepayments and modifications of
other indebtedness, liens and encumbrances and other matters customarily
restricted in such agreements. In addition, the New Senior Bank Credit
Facility is subject to certain cross-default provisions with terms of the
Companys other indebtedness.
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The amendment to the New Senior Bank Credit Facility and related pay-downs
with net proceeds from the issuance of the $200 Million 7.5% Senior Notes
resulted in a charge to expenses associated with refinancing transactions
during the third quarter of 2003 of $1.9 million representing the pro-rata
write-off of existing deferred loan costs and certain fees paid.
$250 Million 9.875% Senior Notes.
In May 2002, the Company completed the
sale and issuance of $250.0 million aggregate principal amount of its
9.875% unsecured senior notes (the 9.875% Senior Notes). The proceeds of
the offering of the 9.875% Senior Notes were used to repay a portion of
amounts outstanding under the Old Senior Bank Credit Facility, to redeem
$89.2 million of the Companys existing $100.0 million 12% Senior Notes due
2006 (the 12% Senior Notes) pursuant to a tender offer and consent
solicitation more fully described hereafter, and to pay related fees and
expenses.
Interest on the 9.875% Senior Notes accrues at the stated rate and is
payable semi-annually on May 1 and November 1 of each year. The 9.875%
Senior Notes are scheduled to mature on May 1, 2009. At any time on or
before May 1, 2005, the Company may redeem up to 35% of the notes with the
net proceeds of certain equity offerings, as long as 65% of the aggregate
principal amount of the notes remains outstanding after the redemption.
The Company may redeem all or a portion of the 9.875% Senior Notes on or
after May 1, 2006. Redemption prices are set forth in the indenture
governing the 9.875% Senior Notes. The 9.875% Senior Notes are guaranteed
on an unsecured basis by all of the Companys domestic subsidiaries.
12% Senior Notes.
Pursuant to the terms of a tender offer and consent
solicitation which expired on May 16, 2002, in connection with the
refinancing of the Companys Old Senior Bank Credit Facility and the
issuance of the 9.875% Senior Notes, in May 2002, the Company redeemed
$89.2 million in aggregate principal amount of its then outstanding 12%
Senior Notes with proceeds from the issuance of the 9.875% Senior Notes.
The notes were redeemed at a price of 110% of par, which included a 3%
consent payment, plus accrued and unpaid interest to the payment date. In
connection with the tender offer and consent solicitation, the Company
received sufficient consents and amended the indenture governing the 12%
Senior Notes to delete substantially all of the restrictive covenants and
events of default contained therein.
As a result of the early extinguishment of the Old Senior Bank Credit
Facility and the redemption of all but $10.8 million of the Companys 12%
Senior Notes, the Company recorded an extraordinary loss of $36.7 million
during the second quarter of 2002, which included the write-off of existing
deferred loan costs, certain bank fees paid, premiums paid to redeem the
12% Senior Notes, and certain other costs associated with the refinancing.
In June 2003, pursuant to an offer to purchase the balance of the remaining
12% Senior Notes, holders of $7.6 million principal amount of the notes
tendered their notes to the Company at a price of 120% of par, resulting in
a charge of $1.5 million during the second quarter of 2003. During July
2003, holders of an additional $0.1 million principal amount of the notes
tendered their notes at a price of 120% of par pursuant to the offer of
purchase, reducing the remaining amount of 12% Senior Notes outstanding to
$3.1 million. In connection with the tender offer for the notes, the
Company received sufficient consents and further amended the indenture
governing the 12% Senior Notes to remove certain restrictions related to
the legal defeasance of the notes and the solicitation of consents to waive
or amend the terms of the indenture.
During August 2003, pursuant to the indenture relating to the 12% Senior
Notes, the Company legally defeased the remaining outstanding 12% Senior
Notes by depositing with a trustee an amount sufficient to pay the
principal and interest on such notes through the maturity date in June
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2006, and by meeting certain other conditions required under the indenture.
Under the terms of the indenture, the 12% Senior Notes were deemed to have
been repaid in full. As a result, the Company reported a charge of $0.9
million during the third quarter of 2003 associated with the relief of its
obligation.
$250 Million 7.5% Senior Notes.
Concurrently with the common stock
offering further described in Note 15, on May 7, 2003, the Company
completed the sale and issuance of $250.0 million aggregate principal
amount of its 7.5% unsecured senior notes (the $250 Million 7.5% Senior
Notes). As further described in Note 15, proceeds from the common stock
and note offerings were used to purchase shares of common stock issued upon
the conversion of the Companys $40.0 Million Convertible Subordinated
Notes (as hereafter defined) (and to pay accrued interest on the notes
through the date of purchase), to purchase shares of the Companys series B
preferred stock that were tendered in a tender offer, to redeem shares of
the Companys series A preferred stock and to pay-down a portion of the New
Senior Bank Credit Facility.
Interest on the $250 Million 7.5% Senior Notes accrues at the stated rate
and is payable semi-annually on May 1 and November 1 of each year. The
$250 Million 7.5% Senior Notes are scheduled to mature on May 1, 2011. At
any time on or before May 1, 2006, the Company may redeem up to 35% of the
notes with the net proceeds of certain equity offerings, as long as 65% of
the aggregate principal amount of the notes remains outstanding after the
redemption. The Company may redeem all or a portion of the notes on or
after May 1, 2007. Redemption prices are set forth in the indenture
governing the $250 Million 7.5% Senior Notes. The $250 Million 7.5% Senior
Notes are guaranteed on an unsecured basis by all of the Companys domestic
subsidiaries.
The sales were completed pursuant to a prospectus supplement to a universal
shelf registration that was filed with the SEC and declared effective on
April 30, 2003 to register $700.0 million of debt securities, guarantees of
debt securities, preferred stock, common stock and warrants that the
Company may issue from time to time.
The Company reported expenses associated with the May 2003 debt refinancing
and recapitalization transactions of $2.3 million in connection with the
tender offer for the series B preferred stock, the redemption of the series
A preferred stock, and the write-off of existing deferred loan costs
associated with the repayment of the term loan portions of the New Senior
Bank Credit Facility made with proceeds from the common stock and note
offerings.
$200 Million 7.5% Senior Notes
. As previously described herein, on August
8, 2003, the Company completed the sale and issuance of $200.0 million
aggregate principal amount of its 7.5% unsecured senior notes (the $200
Million 7.5% Senior Notes) in a private placement to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of
1933, as amended. Proceeds from the note offering, along with cash on
hand, were used to pay-down $240.3 million of the Term Loan B Facility
portion of the New Senior Bank Credit Facility. The Company is required to
file a registration statement with the SEC on or prior to May 15, 2004 to
exchange the $200 Million 7.5% Senior Notes for a new issuance of identical
debt securities registered under the Securities Act of 1933, as amended.
The Company must use commercially reasonable efforts to have the
registration statement declared effective by the SEC on or prior to August
7, 2004. If the registration statement is not declared effective by the
SEC on or prior to August 7, 2004, the Company will be required to pay
liquidated damages to the holders of the notes under specified
circumstances.
Interest on the $200 Million 7.5% Senior Notes accrues at the stated rate
and is payable on May 1 and November 1 of each year. However, the notes
were issued at a price of 101.125% of the principal amount of the notes,
resulting in a premium of $2.25 million, which is amortized as a
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reduction to interest expense over the term of the notes. The $200 Million
7.5% Senior Notes were issued under the existing indenture and supplemental
indenture governing the $250 Million 7.5% Senior Notes.
Guarantees and Covenants.
In connection with the registration with the SEC
of the 9.875% Senior Notes pursuant to the terms and conditions of a
Registration Rights Agreement, after obtaining consent of the lenders under
the New Senior Bank Credit Facility, the Company transferred the real
property and related assets of the Company (as the parent corporation) to
certain of its subsidiaries effective December 27, 2002. Accordingly, the
Company (as the parent corporation to its subsidiaries) has no independent
assets or operations (as defined under Rule 3-10(f) of Regulation S-X). As
a result of this transfer, assets with an aggregate net book value of $1.6
billion are no longer directly available to the parent corporation to
satisfy the obligations under the 9.875% Senior Notes, the $250 Million
7.5% Senior Notes, or the $200 Million 7.5% Senior Notes (collectively,
the Senior Notes). Instead, the parent corporation must rely on
distributions of the subsidiaries to satisfy its obligations under the
Senior Notes. All of the parent corporations domestic subsidiaries,
including the subsidiaries to which the assets were transferred, have
provided full and unconditional guarantees of the Senior Notes. Each of
the Companys subsidiaries guaranteeing the Senior Notes are wholly-owned
subsidiaries of the Company; the subsidiary guarantees are full and
unconditional and are joint and several obligations of the guarantors; and
all non-guarantor subsidiaries are minor (as defined in Rule 3-10(h)(6) of
Regulation S-X).
As of December 31, 2003, neither the Company nor any of its subsidiary
guarantors had any material or significant restrictions on the Companys
ability to obtain funds from its subsidiaries by dividend or loan or to
transfer assets from such subsidiaries.
The indentures governing the Senior Notes contain certain customary
covenants that, subject to certain exceptions and qualifications, restrict
the Companys ability to, among other things; make restricted payments;
incur additional debt or issue certain types of preferred stock; create or
permit to exist certain liens; consolidate, merge or transfer all or
substantially all of the Companys assets; and enter into transactions with
affiliates. In addition, if the Company sells certain assets (and
generally does not use the proceeds of such sales for certain specified
purposes) or experiences specific kinds of changes in control, the Company
must offer to repurchase all or a portion of the Senior Notes. The offer
price for the Senior Notes in connection with an asset sale would be equal
to 100% of the aggregate principal amount of the notes repurchased plus
accrued and unpaid interest and liquidated damages, if any, on the notes
repurchased to the date of purchase. The offer price for the Senior Notes
in connection with a change in control would be 101% of the aggregate
principal amount of the notes repurchased plus accrued and unpaid interest
and liquidated damages, if any, on the notes repurchased to the date of
purchase. The Senior Notes are also subject to certain cross-default
provisions with the terms of the Companys other indebtedness, as more
fully described hereafter.
$40 Million Convertible Subordinated Notes
Prior to their conversion into shares of the Companys common stock, as
further described in Note 15, an aggregate of $40.0 million of 10%
convertible subordinated notes of the Company were due December 31, 2008
(the $40.0 Million Convertible Subordinated Notes). The conversion price
for the notes, which were convertible into shares of he Companys common
stock, had been established at $11.90, subject to adjustment in the future
upon the occurrence of certain events. At an adjusted conversion price of
$11.90, the $40.0 Million Convertible Subordinated Notes were convertible
into 3,362,899 shares of common stock. In connection with the
recapitalization transactions described in Note 15, during May 2003, Income
Opportunity Fund I, LLC, Millennium
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Holdings II LLC, and Millennium Holdings III LLC, which are collectively
referred to as MDP, the holders of the notes, converted the entire amount
of the notes into shares of the Companys common stock and subsequently
sold such shares to the Company. In addition, the company paid the
outstanding contingent interest balance, which totaled $15.5 million.
$30 Million Convertible Subordinated Notes
As of December 31, 2003, the Company had outstanding an aggregate of $30.0
million of convertible subordinated notes due February 28, 2007 (the $30.0
Million Convertible Subordinated Notes). Prior to the closing of the
Companys notes and common stock offerings completed in May 2003, these
notes accrued interest at 8% per year and were scheduled to mature February
28, 2005, subject to extension of such maturity until February 28, 2006 or
February 28, 2007 by the holder. Effective contemporaneously with the May
2003 closing of the Companys notes and common stock offerings, the Company
and the holder amended the terms of the notes, reducing the interest rate
to 4% per year and extending the maturity date to February 28, 2007. The
amendment also extended the date on which the Company could generally
require the holder to convert all or a portion of the notes into common
stock to any time after February 28, 2005 from any time after February 28,
2004. As a result of these modifications, the Company reported a charge of
$0.1 million during the second quarter of 2003 for the write-off of
existing deferred loan costs associated with the notes. The conversion
price for the notes has been established at $10.68, subject to adjustment
in the future upon the occurrence of certain events, including the payment
of dividends and the issuance of stock at below market prices by the
Company. The distribution of shares of the Companys common stock in
connection with the settlement of all outstanding stockholder litigation
against the Company caused an adjustment to the conversion price of the
notes. As a result of the stockholder litigation adjustment, which was
finalized on May 16, 2003, the $30.0 Million Convertible Subordinated Notes
will be convertible into 3.4 million shares of the Companys common stock,
subject to further adjustment in the future upon the occurrence of certain
events, which translates into a current conversion price of $8.92.
At any time after February 28, 2005, the Company may generally require the
holder to convert all or a portion of the notes if the average market price
of the Companys common stock meets or exceeds 150% of the notes
conversion price for 45 consecutive trading days. The Company may not
prepay the indebtedness evidenced by the notes at any time prior to their
maturity; provided, however, that in the event of a change of control or
other similar event, the notes are subject to mandatory prepayment in full
at the option of the holder. The current terms of the Companys senior
indebtedness, however, would prevent such a prepayment.
Other Debt Transactions
At December 31, 2003 and 2002, the Company had $27.3 million and $17.3
million, respectively, in outstanding letters of credit. The letters of
credit were issued to secure the Companys workers compensation and
general liability insurance policies, performance bonds and utility
deposits. The letters of credit outstanding at December 31, 2003 are
provided by a sub-facility under the New Senior Bank Credit Facility with a
maximum capacity of up to $125.0 million, thereby reducing the available
capacity under the Revolving Loan to $97.7 million.
Debt Maturities
Scheduled principal payments for the next five years and thereafter are as
follows (in thousands):
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$
856
2,934
2,884
229,203
65,422
700,000
1,001,299
2,129
$
1,003,428
For the Years Ended December 31,
2003
2002
2001
$
(4,603
)
$
(64,365
)
$
1,492
435
173
(3,111
)
(63,930
)
173
(44,191
)
580
(3,169
)
(5,050
)
66
(362
)
(49,241
)
646
(3,531
)
$
(52,352
)
$
(63,284
)
$
(3,358
)
The current income tax benefit for 2003 is net of $39.5 million of tax
benefits of operating loss carryforwards. The deferred income tax benefit
for 2003 is net of approximately $105.5 million of tax benefits related to
the reversal of the January 1, 2003 valuation allowance. Additionally, the
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deferred income tax benefit for 2003 includes $4.5 million that, upon
reversal of the valuation allowance, reduced goodwill, and $2.6 million
that, upon reversal of the valuation allowance, was credited directly to
additional paid-in capital.
Significant components of the Companys deferred tax assets and liabilities
as of December 31, 2003 and 2002, are as follows (in thousands):
2003
2002
$
21,638
$
19,612
28,835
(19,612
)
$
50,473
$
$
904
$
5,651
6,767
20,119
56,609
12,283
18,296
33,306
87,323
(4,241
)
(85,881
)
29,065
1,442
21,330
996
1,442
22,326
1,442
$
6,739
$
Deferred income taxes reflect the available net operating losses and 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. Realization of the future tax benefits
related to deferred tax assets is dependent on many factors, including the
Companys past earnings history, expected future earnings, the character
and jurisdiction of such earnings, unsettled circumstances that, if
unfavorably resolved, would adversely affect utilization of its deferred
tax assets, carryback and carryforward periods, and tax strategies that
could potentially enhance the likelihood of realization of a deferred tax
asset. During the three years ended December 31, 2003, the Company
provided a valuation allowance to substantially reserve its deferred tax
assets in accordance with SFAS 109. However, at December 31, 2003, the
Company concluded that it was more likely than not that substantially all
of its deferred tax assets would be realized. As a result, in accordance
with SFAS 109, the valuation allowance applied to such deferred tax assets
was reversed.
A reconciliation of the income tax provision (benefit) at the statutory
income tax rate and the effective tax rate as a percentage of income from
continuing operations before income taxes and cumulative effect of
accounting change for the years ended December 31, 2003, 2002, and 2001 is
as follows:
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2003
2002
2001
35.0
%
35.0
%
35.0
%
4.0
4.0
4.0
4.8
1.8
(103.9
)
(98.4
)
(1,000.8
)
38.4
(3.4
)
3.6
1.3
(58.0
)%
(956.4
)%
(25.2
)%
On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 was
signed into law. Among other changes, the law extended the net operating
loss carryback period to five years from two years for net operating losses
arising in tax years ending in 2001 and 2002, and allowed use of net
operating loss carrybacks and carryforwards to offset 100% of the
alternative minimum taxable income. The Company experienced tax losses
during 2002 primarily resulting from a cumulative effect of accounting
change in depreciable lives of property and equipment for tax purposes, and
the Company experienced tax losses during 2001 resulting primarily from the
sale of assets at prices below the tax basis of such assets. Under terms
of the new law, the Company utilized its net operating losses to offset
taxable income generated in 1997 and 1996. As a result of this tax law
change in 2002, the Company received an income tax refund of $32.2 million
relating to the 2001 tax year, and received an income tax refund of $32.1
million relating to the 2002 tax year.
The cumulative effect of accounting change in tax depreciation resulted in
the establishment of a significant deferred tax liability for the tax
effect of the book over tax basis of certain assets in 2002. The creation
of such a deferred tax liability, and the significant improvement in tax
position of the Company since the original valuation allowance was
established, resulted in the reduction of the valuation allowance,
generating an income tax benefit of $30.3 million during the fourth quarter
of 2002, as the Company determined that substantially all of these deferred
tax liabilities would be utilized to offset the reversal of deferred tax
assets during the net operating loss carryforward periods. The receipt in
April 2002 of an additional refund of $32.2 million relating to the 2001
tax year also reduced the valuation allowance and was reflected as an
income tax benefit during the first quarter of 2002.
The Companys net operating loss carryforwards, which will be used to
offset future taxable income, begin expiring in 2009.
The Company continues to evaluate additional tax strategies to maximize the
opportunities created by the new law, which could result in additional
income tax refunds and income tax benefits, although no assurance can be
provided that any such tax strategies will come to fruition.
13.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In accordance with the terms of the Old Senior Bank Credit Facility, the
Company entered into an interest rate swap agreement in order to hedge the
variable interest rate associated with portions of the debt. The swap
agreement fixed LIBOR at 6.51% (prior to the applicable spread) on
outstanding balances of at least $325.0 million through its expiration on
December 31, 2002. The difference between the floating rate and the swap
rate was recognized in interest expense. Upon adoption of SFAS 133, the
Company reported a transition adjustment of $5.0 million for the reduction
in the fair value of the interest rate swap agreement from its inception
through the adoption of SFAS 133 on January 1, 2001, reflected in other
comprehensive income (loss) effective January 1, 2001.
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The Company did not meet the hedge accounting criteria for the interest
rate swap agreement under SFAS 133, as amended, and thus reflected in
earnings the change in the estimated fair value of the interest rate swap
agreement each reporting period. In accordance with SFAS 133, as amended,
the Company recorded a non-cash gain of $2.2 million for the change in fair
value of the interest rate swap agreement for the year ended December 31,
2002, which is net of $2.5 million for amortization of the transition
adjustment. The Company was no longer required to maintain the existing
interest rate swap agreement due to the early extinguishment of the Old
Senior Bank Credit Facility. During May 2002, the Company terminated the
swap agreement prior to its expiration at a price of $8.8 million. In
accordance with SFAS 133, the Company continued to amortize the unamortized
portion of the transition adjustment as a non-cash expense through December
31, 2002, at which time the transition adjustment became fully amortized.
The New Senior Bank Credit Facility required the Company to hedge at least
$192.0 million of the term loan portions of the facility within 60 days
following the closing of the loan. In May 2002, the Company entered into
an interest rate cap agreement to fulfill this requirement, capping LIBOR
at 5.0% (prior to the applicable spread) on outstanding balances of $200.0
million through the expiration of the cap agreement on May 20, 2004. The
Company paid a premium of $1.0 million to enter into the interest rate cap
agreement. The Company has and expects to continue to amortize this
premium as the estimated fair values assigned to each of the hedged
interest payments expire throughout the term of the cap agreement,
amounting to $0.4 million in 2003 and $0.6 million in 2004. The Company
has met the hedge accounting criteria under SFAS 133 and related
interpretations in accounting for the interest rate cap agreement. As a
result, the interest rate cap agreement is marked to market each reporting
period, and the change in the fair value of the interest rate cap agreement
of $0.4 million during the year ended December 31, 2003 was reported
through other comprehensive income in the statement of stockholders
equity. The cap agreement was estimated to have no value at December 31,
2003. There can be no assurance that the interest rate cap agreement will
be effective in mitigating the Companys exposure to interest rate risk in
the future, or that the Company will be able to continue to meet the hedge
accounting criteria under SFAS 133.
On December 31, 2001, 2.8 million shares of the Companys common stock were
issued, along with a $26.1 million subordinated promissory note, in
conjunction with the final settlement of the federal court portion of the
stockholder litigation settlement. Under the terms of the promissory note,
the note and accrued interest became extinguished in January 2002 once the
average closing price of the common stock exceeded a termination price
equal to $16.30 per share for fifteen consecutive trading days following
the issuance of such note. The terms of the note, which allowed the
principal balance to fluctuate dependent on the trading price of the
Companys common stock, created a derivative instrument that was valued and
accounted for under the provisions of SFAS 133. As a result of the
extinguishment of the note in January 2002, management estimated the fair
value of this derivative to approximate the face amount of the note,
resulting in an asset being recorded in the fourth quarter of 2001. Since
the estimated fair value of the derivative asset was equal to the face
amount of the note as of December 31, 2001, the extinguishment had no
financial statement impact in 2002.
The change in fair value of derivate instruments during 2001 consisted of
the increase in the estimated fair value of the written option embedded in
the $26.1 million subordinated promissory note, net of a decrease in the
estimated fair value of the interest rate swap agreement during the year.
On May 16, 2003, 0.3 million shares of the Companys common stock were
issued, along with a $2.9 million subordinated promissory note, in
connection with the final settlement of the state court
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portion of the stockholder litigation settlement. Under the terms of the
promissory note, the note and accrued interest were extinguished in June
2003 once the average closing price of the Companys common stock exceeded
a termination price equal to $16.30 per share for fifteen consecutive
trading days following the notes issuance. The extinguishment of the note
in June 2003 resulted in a $2.9 million non-cash gain during 2003.
14.
DISCONTINUED OPERATIONS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), which broadened the scope of defining
discontinued operations. Under the provisions of SFAS 144, the
identification and classification of a facility as held for sale, or the
termination of any of the Companys management contracts by expiration or
otherwise, may result in the classification of the operating results of
such facility, net of taxes, as a discontinued operation, so long as the
financial results can be clearly identified, and so long as the Company
does not have any significant continuing involvement in the operations of
the component after the disposal or termination transaction.
The results of operations, net of taxes, and the assets and liabilities of
three correctional facilities and three juvenile facilities, one of which
was owned by the Company and operated by an independent third party, each
as further described below, have been reflected in the accompanying
consolidated financial statements as discontinued operations in accordance
with SFAS 144 for the years ended December 31, 2003, 2002, and 2001.
In late 2001 and early 2002, the Company was provided notice from the
Commonwealth of Puerto Rico of its intention to terminate the management
contracts at the Ponce Young Adult Correctional Facility and the Ponce
Adult Correctional Facility, upon the expiration of the management
contracts in February 2002. Attempts to negotiate continued operation of
these facilities were unsuccessful. As a result, the transition period to
transfer operation of the facilities to the Commonwealth of Puerto Rico
ended May 4, 2002, at which time operation of the facilities was
transferred to the Commonwealth of Puerto Rico. The Company recorded a
non-cash charge of $1.8 million during the second quarter of 2002 for the
write-off of the carrying value of assets associated with the terminated
management contracts.
During the fourth quarter of 2001, the Company obtained an extension of its
management contract with the Commonwealth of Puerto Rico for the operation
of the Guayama Correctional Center located in Guayama, Puerto Rico, through
December 2006. However, on May 7, 2002, the Company received notice from
the Commonwealth of Puerto Rico terminating the Companys contract to
manage this facility. As a result of the termination of the management
contract for the Guayama Correctional Center, which occurred on August 6,
2002, operation of the facility was transferred to the Commonwealth of
Puerto Rico.
On June 28, 2002, the Company sold its interest in a juvenile facility
located in Dallas, Texas for $4.3 million. The facility was leased to a
third party pursuant to a lease expiring in 2008. Net proceeds from the
sale were used for working capital purposes.
During the fourth quarter of 2002, the Company was notified by the State of
Florida of its intention to not renew the Companys contract to manage the
Okeechobee Juvenile Offender Correctional Center located in Okeechobee,
Florida, upon the expiration of a short-term extension to the existing
management contract, which expired in December 2002. Upon expiration of
the short-term
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extension, which occurred March 1, 2003, the operation of the facility was
transferred to the State of Florida.
On March 18, 2003, the Company was notified by the Department of
Corrections of the Commonwealth of Virginia of its intention to not renew
the Companys contract to manage the Lawrenceville Correctional Center
located in Lawrenceville, Virginia, upon the expiration of the contract.
The Company terminated its operation of the facility on March 22, 2003 in
connection with the expiration of the contract.
The following table summarizes the results of operations for these
facilities for the years ended December 31, 2003, 2002, and 2001 (in
thousands):
For the Years Ended December 31,
2003
2002
2001
$
5,366
$
45,265
$
68,183
360
713
5,366
45,625
68,896
5,979
40,025
54,580
1,074
3,095
1,406
7,053
43,120
55,986
(1,687
)
2,505
12,910
575
602
(5
)
(21
)
(5
)
554
602
(1,692
)
3,059
13,512
920
(600
)
(4,494
)
$
(772
)
$
2,459
$
9,018
The assets and liabilities of the discontinued operations presented in the
accompanying consolidated balance sheets are as follows (in thousands):
December 31,
2003
2002
$
1,158
$
17,447
136
1,158
17,583
484
$
1,158
$
18,067
$
761
$
1,461
920
$
761
$
2,381
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15.
STOCKHOLDERS EQUITY
Common Stock
As a result of a one-for-ten reverse stock split effective May 18, 2001,
every ten shares of the Companys common stock issued and outstanding
immediately prior to the reverse stock split has been reclassified and
changed into one fully paid and nonassessable share of the Companys common
stock. The Company paid its registered common stockholders cash in lieu of
issuing fractional shares in the reverse stock split at a post
reverse-split rate of $8.60 per share, totaling approximately $15,000. The
number of common shares and per share amounts have been retroactively
restated in the accompanying financial statements and these notes to the
financial statements to reflect the reduction in common shares and
corresponding increase in the per share amounts resulting from the reverse
stock split. In conjunction with the reverse stock split, during the
second quarter of 2001, the Company amended its charter to reduce the
number of shares of common stock which the Company was authorized to issue
to 80.0 million shares (on a post-reverse stock split basis) from 400.0
million shares (on a pre-reverse stock split basis). As of December 31,
2003, the Company had 35.0 million shares of common stock issued and
outstanding.
Common Stock Offering.
Concurrently with the sale and issuance of the $250
Million 7.5% Senior Notes further described in Note 11, on May 7, 2003, the
Company completed the sale and issuance of 6.4 million shares of common
stock at a price of $19.50 per share, resulting in net proceeds to the
Company of $117.0 million after the payment of estimated costs associated
with the issuance. Proceeds from the common stock and notes offerings were
used to purchase shares of common stock issued upon conversion of the
Companys $40.0 Million Convertible Subordinated Notes (and to pay accrued
interest on the notes to the date of purchase), to purchase shares of the
Companys series B preferred stock that were tendered in a tender offer, to
redeem shares of the Companys series A preferred stock, each as further
described hereafter, and to pay-down a portion of the New Senior Bank
Credit Facility, as further described in Note 11. A stockholder of the
Company also sold 1.2 million shares of common stock in the same offering.
In addition, the underwriters exercised an over-allotment option to
purchase an additional 1.1 million shares from the selling stockholder.
The Company did not receive any proceeds from the sale of shares from the
selling stockholder.
The sales were completed pursuant to a prospectus supplement to a universal
shelf registration that was filed with the SEC and declared effective on
April 30, 2003 to register $700.0 million of debt securities, guarantees of
debt securities, preferred stock, common stock and warrants that the
Company may issue from time to time.
Purchase of Shares of Common Stock Issuable Upon Conversion of the $40.0
Million Convertible Subordinated Notes.
Pursuant to the terms of an
agreement by and among the Company and MDP, immediately following the
completion of the offering of common stock and the $250 Million 7.5% Senior
Notes, MDP converted the $40.0 Million Convertible Subordinated Notes into
3,362,899 shares of the Companys common stock and subsequently sold such
shares to the Company. The aggregate purchase price of the shares,
inclusive of accrued interest of $15.5 million, was $81.1 million. The
shares purchased have been cancelled under the terms of the Companys
charter and Maryland law and now constitute authorized but unissued shares
of the Companys common stock.
Restricted shares.
During the fourth quarter of 2000, the Company issued
404,500 shares of restricted common stock to certain of the Companys
wardens, which were valued at $2.9 million on the date of the awards.
During the years ended December 31, 2003, 2002, and 2001, the Company
expensed $0.6 million, $0.4 million, and $0.7 million, net of forfeitures,
respectively,
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relating to the restricted common stock. On December 31, 2003, the
remaining unvested shares, totaling approximately 277,000 shares, became
fully vested.
During 2003, the Company issued 94,500 shares of restricted common stock to
certain of the Companys wardens, which were valued at $1.6 million on the
date of the awards. All of the shares vest during 2006 unless forfeited by
the recipients. During 2003, the Company expensed $0.4 million, net of
forfeitures, relating to the restricted common stock. As of December 31,
2003, 92,500 of these shares of restricted stock remained subject to
vesting.
Series A Preferred Stock
The Company has authorized 20.0 million shares of $0.01 par value
non-voting preferred stock, of which 4.3 million shares are designated as
series A preferred stock. The Company issued 4.3 million shares of its
series A preferred stock on January 1, 1999 in connection with a merger
completed during 1999. The shares of the Companys series A preferred
stock are redeemable at any time by the Company on or after January 30,
2003 at $25.00 per share, plus dividends accrued and unpaid to the
redemption date. Shares of the Companys series A preferred stock have no
stated maturity, sinking fund provision or mandatory redemption and are not
convertible into any other securities of the Company. Dividends on shares
of the Companys series A preferred stock are cumulative from the date of
original issue of such shares and are payable quarterly in arrears on the
fifteenth day of January, April, July and October of each year, to
shareholders of record on the last day of March, June, September and
December of each year, respectively, at a fixed annual rate of 8.0%.
In connection with the June 2000 Waiver and Amendment, the Company was
prohibited from declaring or paying any dividends with respect to the
series A preferred stock until such time as the Company had raised at least
$100.0 million in equity. As a result, at that time the Company had not
declared or paid any dividends on its shares of series A preferred stock
since the first quarter of 2000. Dividends continued to accrue under the
terms of the Companys charter until the Company received a consent and
waiver from its lenders under the Old Senior Bank Credit Facility in
September 2001, which allowed the Companys board of directors to declare a
one-time quarterly dividend on the issued and outstanding series A
preferred stock, which was paid on October 15, 2001.
In connection with the December 2001 Amendment and Restatement of the Old
Senior Bank Credit Facility, certain financial and non-financial covenants
were amended, including the removal of prior restrictions on the Companys
ability to pay cash dividends on shares of its issued and outstanding
series A preferred stock. Under the terms of the December 2001 Amendment
and Restatement, the Company was permitted to pay quarterly dividends on
the shares of its issued and outstanding series A preferred stock,
including all dividends in arrears. See Note 10 for further information on
distributions on the Companys shares of series A preferred stock.
Redemption of Series A Preferred Stock in 2003.
Immediately following
consummation of the offering of common stock and the $250 Million 7.5%
Senior Notes, the Company gave notice to the holders of its outstanding
series A preferred stock that it would redeem 4.0 million shares of the 4.3
million shares of series A preferred stock outstanding at a redemption
price equal to $25.00 per share, plus accrued and unpaid dividends to the
redemption date. The redemption was completed in June 2003.
Redemption of Series A Preferred Stock in 2004.
On February 19, 2004, the
Company announced that it would redeem the remaining 300,000 outstanding
shares of series A preferred stock on or
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about March 19, 2004 at a redemption price equal to $25.00 per share, plus
accrued and unpaid dividends to the redemption date.
Series B Preferred Stock
In order to satisfy the real estate investment trust (REIT) distribution
requirements with respect to its 1999 taxable year, during 2000 the Company
authorized an additional 30.0 million shares of $0.01 par value preferred
stock, designated 12.0 million shares of such preferred stock as non-voting
series B preferred stock and subsequently issued 7.5 million shares to
holders of the Companys common stock as a stock dividend.
The shares of series B preferred stock issued by the Company provide for
cumulative dividends payable at a rate of 12% per year of the stocks
stated value of $24.46. The dividends are payable quarterly in arrears, in
additional shares of series B preferred stock through the third quarter of
2003, and in cash thereafter, provided that all accrued and unpaid cash
dividends have been made on the Companys series B preferred stock. The
shares of the series B preferred stock are callable by the Company, at a
price per share equal to the stated value of $24.46, plus any accrued
dividends, at any time after six months following the later of (i) three
years following the date of issuance or (ii) the 91st day following the
redemption of the Companys 12% Senior Notes.
Approximately 4.2 million shares of series B preferred stock were converted
into 9.5 million shares of common stock during two conversion periods in
2000. The remaining shares of series B preferred stock, as well as any
currently outstanding and additional shares issued as dividends, are not
and will not be convertible into shares of the Companys common stock.
During 2003, 2002, and 2001, the Company issued 0.3 million, 0.5 million,
and 0.5 million shares of series B preferred stock, respectively, in
satisfaction of the regular quarterly distributions. See Note 10 for
further information on distributions on the Companys shares of series B
preferred stock.
Series B Restricted Stock.
During 2001, the Company issued 0.2 million
shares of series B preferred stock under two series B preferred stock
restricted stock plans (the Series B Restricted Stock Plans), which were
valued at $2.0 million on the date of the award. The restricted shares of
series B preferred stock were granted to certain of the Companys key
employees and wardens. Under the terms of the Series B Restricted Stock
Plans, the shares in the key employee plan vest in equal intervals over a
three-year period expiring in May 2004, while the shares in the warden plan
vest all at one time in May 2004. During the years ended December 31,
2003, 2002, and 2001, the Company expensed $0.6 million, $0.5 million, and
$0.4 million, net of forfeitures, respectively, relating to the Series B
Restricted Stock Plans.
Tender Offer for Series B Preferred Stock.
Following the completion of the
offering of common stock and the $250 Million 7.5% Senior Notes in May
2003, the Company purchased 3.7 million shares of its series B preferred
stock for $97.4 million pursuant to the terms of a cash tender offer. The
tender offer price of the series B preferred stock (inclusive of all
accrued and unpaid dividends) was $26.00 per share. The payment of the
difference between the tender price ($26.00) and the liquidation preference
($24.46) for the shares tendered was reported as a preferred stock
distribution in the second quarter of 2003.
As of December 31, 2003, the Company had 1.0 million shares of series B
preferred stock outstanding.
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Stock Warrants
In connection with a merger completed during 2000, the Company issued stock
purchase warrants for the purchase of 0.2 million shares of the Companys
common stock as partial consideration to acquire the voting common stock of
the acquired entity. The warrants issued allow the holder to purchase
approximately 142,000 shares of the Companys common stock at an exercise
price of $0.01 per share and approximately 71,000 shares of the Companys
common stock at an exercise price of $14.10 per share. These warrants
expire September 29, 2005. On May 27, 2003, the holder of the warrants
purchased approximately 142,000 shares of common stock pursuant to the
warrants at an exercise price of $0.01 per share. Also in connection with
the merger completed during 2000, the Company assumed the obligation to
issue warrants for up to approximately 75,000 shares of its common stock,
at a price of $33.30 per share, through the expiration date of such
warrants on December 31, 2008.
Stock Option Plans
The Company has equity incentive plans under which, among other things,
incentive and non-qualified stock options are granted to certain employees
and non-employee directors of the Company by the compensation committee of
the Companys board of directors. The options are generally granted with
exercise prices equal to the market value at the date of grant. Vesting
periods for options granted to employees generally range from one to four
years. Options granted to non-employee directors vest at the date of
grant. The term of such options is ten years from the date of grant.
Stock option transactions relating to the Companys incentive and
non-qualified stock option plans are summarized below (in thousands, except
exercise prices):
Weighted
Number of
average exercise
options
price per option
979
$
54.54
1,613
$
8.84
(160
)
$
37.05
2,432
$
25.30
926
$
17.04
(207
)
$
58.86
(49
)
$
8.77
3,102
$
20.86
774
$
17.29
(84
)
$
19.74
(122
)
$
10.43
3,670
$
20.48
The weighted average fair value of options granted during 2003, 2002, and
2001 was $7.39, $8.10, and $7.05 per option, respectively, based on the
estimated fair value using the Black-Scholes option-pricing model.
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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:
2003
2002
2001
0.0
%
0.0
%
0.0
%
42.0
%
45.8
%
89.4
%
2.8
%
4.0
%
4.8
%
6 years
6 years
7 years
Stock options outstanding at December 31, 2003, are summarized below:
Weighted
Options
average
Options
outstanding at
remaining
exercisable at
Weighted average
December 31, 2003
contractual life
December 31, 2003
exercise price of
Exercise Price
(in thousands)
in years
(in thousands)
options exercisable
3,236
7.83
1,433
$
11.64
80
9.07
41
$
21.85
131
6.49
131
$
30.13
223
3.46
223
$
119.43
3,670
7.55
1,828
$
26.33
At the Companys 2003 annual meeting of stockholders held in May 2003, the
Companys stockholders approved an increase in the number of shares of
common stock available for issuance under the 2000 Stock Incentive Plan by
1.5 million shares raising the total to 4.0 million shares. In addition,
the stockholders approved the adoption of the Companys Non-Employee
Directors Compensation Plan, authorizing the Company to issue up to 75,000
shares of common stock pursuant to the plan. These changes were made in
order to provide the Company with adequate means to retain and attract
quality directors, officers and key employees through the granting of
equity incentives. As of December 31, 2003, the Company had 2.1 million
shares available for issuance under the 2000 Stock Incentive Plan and
another existing plan, and 0.1 million shares available for issuance under
the Non-Employee Directors Compensation Plan.
The Company has adopted the disclosure-only provisions of SFAS 123 and
accounts for stock-based compensation using the intrinsic value method as
prescribed in APB 25. As a result, no compensation cost has been
recognized for the Companys stock option plans under the criteria
established by SFAS 123. The pro forma effects on net income and earnings
per share as if compensation cost for the stock option plans had been
determined based on the fair value of the options at the grant date for
2003, 2002, and 2001, consistent with the provisions of SFAS 123, are
disclosed in Note 2.
16.
EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share (SFAS 128), basic earnings per share is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the year. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. For the Company, diluted
earnings per share is computed by dividing net income (loss), as adjusted,
by the weighted average number of common shares after considering the
additional dilution related to convertible subordinated notes, shares
issued under the settlement terms of the Companys stockholder litigation,
restricted common stock plans, and stock options and warrants.
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A reconciliation of the numerator and denominator of the basic earnings
(loss) per share computation to the numerator and denominator of the
diluted earnings (loss) per share computation is as follows (in thousands,
except per share data):
For the Years Ended December 31,
2003
2002
2001
$
127,293
$
48,942
$
(3,348
)
(772
)
2,459
9,018
(80,276
)
$
126,521
$
(28,875
)
$
5,670
$
127,293
$
48,942
$
(3,348
)
4,496
2,400
131,789
51,342
(3,348
)
(772
)
2,459
9,018
(80,276
)
$
131,017
$
(26,475
)
$
5,670
32,245
27,669
24,380
32,245
27,669
24,380
917
621
115
310
4,523
3,370
249
238
38,049
32,208
24,380
$
3.95
$
1.77
$
(0.14
)
(0.03
)
0.09
0.37
(2.90
)
$
3.92
$
(1.04
)
$
0.23
$
3.46
$
1.59
$
(0.14
)
(0.02
)
0.08
0.37
(2.49
)
$
3.44
$
(0.82
)
$
0.23
For the year ended December 31, 2002, the Companys $40.0 Million
Convertible Subordinated Notes were convertible into 3.4 million shares of
common stock, using the if-converted method. These incremental shares were
excluded from the computation of diluted earnings per share for the year
ended December 31, 2002, as the effect of their inclusion was
anti-dilutive.
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For the year ended December 31, 2001, all of the Companys convertible
subordinated notes were convertible into 6.8 million shares of common
stock, using the if-converted method. The Companys restricted stock,
stock options, and warrants were convertible into 0.6 million shares for
the year ended December 31, 2001, using the treasury stock method. These
incremental shares were excluded from the computation of diluted earnings
per share for the year ended December 31, 2001, as the effect of their
inclusion was anti-dilutive.
For the year ended December 31, 2001, 3.4 million shares of common stock
were contingently issuable under terms of the settlement agreement of all
formerly existing stockholder litigation against the Company and certain of
its existing and former directors and executive officers completed during
the first quarter of 2001. These contingently issuable shares were
excluded from the computation of diluted earnings per share for the year
ended December 31, 2001, as the effect of their inclusion was
anti-dilutive. All of these shares, with the exception of 0.3 million
shares, were issued during 2001. The remaining 0.3 million shares were
issued during 2003.
17.
COMMITMENTS AND CONTINGENCIES
Legal Proceedings
General.
The nature of the Companys business results in claims and
litigation alleging that it is liable for damages arising from the conduct
of its employees, inmates or others. In the opinion of management, other
than those described below, there are no pending legal proceedings that
would have a material effect on the Companys consolidated financial
position, results of operations or cash flows. Adversarial proceedings and
litigation are, however, subject to inherent uncertainties, and unfavorable
decisions and rulings could occur which could have a material adverse
impact on the Companys consolidated financial position, results of
operations or cash flows for a period in which such decisions or rulings
occur, or future periods.
Litigation
During the second quarter of 2002, the Company completed the settlement of
certain claims made against it as the successor to U.S. Corrections
Corporation (USCC), a privately-held owner and operator of correctional
and detention facilities which was acquired by a predecessor of the Company
in April 1998, by participants in USCCs Employee Stock Ownership Plan
(ESOP). As a result of the settlement, the Company made a cash payment
of $575,000 to the plaintiffs in the action. As described below, the
Company is currently in litigation with USCCs insurer seeking to recover
all or a portion of this settlement amount. The USCC ESOP litigation
entitled
Horn v. McQueen
, continued to proceed, however, against two other
defendants, Milton Thompson and Robert McQueen, both of whom were
stockholders and executive officers of USCC and trustees of the ESOP prior
to the Companys acquisition of USCC. In the
Horn
litigation, the ESOP
participants allege numerous violations of the Employee Retirement Income
Security Act, including breaches of fiduciary duties to the ESOP by causing
the ESOP to overpay for employer securities. The plaintiffs in the action
are seeking damages in excess of $30.0 million plus prejudgment interest
and attorneys fees, although expert testimony in the litigation has
indicated actual damages of a significantly less amount. On July 29, 2002,
the United States District Court of the Western District of Kentucky found
that McQueen and Thompson had breached their fiduciary duties to the ESOP,
but made no determination as to the amount of any damages.
A report of a special master has fixed damages at approximately $10.0 million
(exclusive of interest, which could more than double the damages). The
court has not yet acted on this report.
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In or about the second quarter of 2001, Northfield Insurance Co.
(Northfield), the issuer of the liability insurance policy to USCC and
its directors and officers, filed suit against McQueen, Thompson and the
Company seeking a declaration that it did not owe coverage under the policy
for any liabilities arising from the
Horn
litigation. Among other things,
Northfield claimed that it did not receive timely notice of the litigation
under the terms of the policy. McQueen and Thompson subsequently filed a
cross-claim in the
Northfield
litigation against the Company, claiming
that, as the result of the Companys alleged failure to timely notify the
insurance carrier of the
Horn
case on their behalf, they were entitled to
indemnification or contribution from the Company for any loss incurred by
them as a result of the
Horn
litigation if there were no insurance
available to cover the loss, if any. On September 30, 2002, the Court in
the
Northfield
litigation found that Northfield was not obligated to cover
McQueen and Thompson or the Company. Though it did not resolve the
cross-claim, the Court did note that there was no basis for excusing
McQueen and Thompson from their independent obligation to provide timely
notice to the carrier because of the Companys alleged failure to provide
timely notice to the carrier. McQueen and Thompson have since filed a
state court action essentially duplicating their cross-claim in the federal
case, and the Company has initiated claims against the lawyer who jointly
represented the Company, McQueen and Thompson in the
Horn
litigation. Upon
the entry of a final order by the Court, the Company intends to appeal the
Courts decision that Northfield is not obligated to provide coverage, and
the Company intends to continue to assert its position that coverage is
required.
The Company cannot currently predict whether it will be successful in
recovering all or a portion of the amount it has paid in settlement of the
Horn
litigation. With respect to the cross-claim and the state court
claims made by McQueen and Thompson, the Company believes that such
cross-claim claims are without merit and that the Company will be able to
defend itself successfully against such claims and/or any additional claims
of such nature that may be brought in the future. No assurance can be
given, however, that the Company will prevail.
On April 21, 2003, a putative class action lawsuit was filed in the
Superior Court of California for the County of San Diego against the
Company styled
Sanchez v. Corrections Corporation of America
. The lawsuit
was brought by a former employee on his own behalf and on behalf of other
former and currently similarly-situated employees. Plaintiff alleged that
the Company did not comply with certain wage and hour laws and regulations
primarily concerning meal periods and other specified breaks, which laws
and regulations are imposed by the State of California pursuant to the
California Labor Code and Business and Professions Code. Plaintiff was
seeking damages on his behalf and the alleged class for such violations as
well as certain penalties allegedly due and owing as a consequence of such
alleged violations. Following service of the complaint and during the
third quarter of 2003, the Company undertook certain investigations in
response to the allegations and an answer to the complaint was filed. The
Company has entered into a settlement agreement with the plaintiff, which
is subject to class certification and court approval, that is not expected
to have a material impact on the financial position, results of operations
or cash flows of the Company.
Insurance Contingencies
Each of the Companys management contracts and the statutes of certain
states require the maintenance of insurance. The Company maintains various
insurance policies including employee health, workers 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.
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Guarantees
Hardeman County Correctional Facilities Corporation (HCCFC) is a
nonprofit, mutual benefit corporation organized under the Tennessee
Nonprofit Corporation Act on November 17, 1995 to purchase, construct,
improve, equip, finance, own and manage a detention facility located in
Hardeman County, Tennessee. HCCFC was created as an instrumentality of
Hardeman County to implement the Countys incarceration agreement with the
State of Tennessee to house certain inmates.
During 1997, HCCFC issued $72.7 million of revenue bonds, which were
primarily used for the construction of a 2,016-bed medium security
correctional facility. In addition, HCCFC entered into a construction and
management agreement with the Company in order to assure the timely and
coordinated acquisition, construction, development, marketing and operation
of the correctional facility.
HCCFC leases the correctional facility to Hardeman County in exchange for
all revenue from the operation of the facility. HCCFC has, in turn,
entered into a management agreement with the Company for the correctional
facility.
In connection with the issuance of the revenue bonds, the Company is
obligated, under a debt service deficit agreement, to pay the trustee of
the bonds trust indenture (the Trustee) amounts necessary to pay any
debt service deficits consisting of principal and interest requirements
(outstanding principal balance of $59.6 million at December 31, 2003 plus
future interest payments). In the event the State of Tennessee, which is
currently utilizing the facility to house certain inmates, exercises its
option to purchase the correctional facility, the Company is also obligated
to pay the difference between principal and interest owed on the bonds on
the date set for the redemption of the bonds and amounts paid by the State
of Tennessee for the facility plus all other funds on deposit with the
Trustee and available for redemption of the bonds. Ownership of the
facility reverts to the State of Tennessee in 2017 at no cost. Therefore,
the Company does not currently believe the State of Tennessee will exercise
its option to purchase the facility. At December 31, 2003, the outstanding
principal balance of the bonds exceeded the purchase price option by $13.0
million. The Company also maintains a restricted cash account of $7.1
million as collateral against a guarantee it has provided for a forward
purchase agreement related to the bond issuance.
Retirement Plan
All employees of the Company are eligible to participate in the Corrections
Corporation of America 401(k) Savings and Retirement Plan (the Plan) upon
reaching age 18 and completing one year of qualified service. Prior to
January 1, 2002, employees could elect to defer from 1% to 15% of their
compensation. The provisions of the Plan provide for discretionary
employer basic and matching contributions to those participants credited
with at least one thousand hours of employment in a plan year, and who are
employed by the Company on the last day of the plan year. During the year
ended December 31, 2001, the Company provided a discretionary basic
contribution to each eligible employee equal to 2% of the employees
compensation for the first year of eligibility, and 1% of the employees
compensation for each year of eligibility following. In addition, the
Company provided a discretionary matching contribution equal to 100% of the
employees contributions up to 4% of the employees compensation. The
Companys contributions and investment earnings or losses thereon become
40% vested after four years of service and 100% vested after five years of
service.
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Effective January 1, 2002, the maximum compensation deferral was increased
to 20% of the employees compensation, and for the years ended December 31,
2003 and 2002, the Company provided a discretionary matching contribution
equal to 100% of the employees contributions up to 5% of the employees
compensation. Further, effective January 1, 2002, the Company amended the
vesting schedule so that employer contributions and investment earnings or
losses thereon become vested 20% after two years of service, 40% after
three years of service, 80% after four years of service, and 100% after
five or more years of service.
During the years ended December 31, 2003, 2002, and 2001, the Companys
discretionary contributions to the Plan, net of forfeitures, were $4.7
million, $4.3 million, and $5.7 million, respectively.
Deferred Compensation Plans
During 2002, the compensation committee of the board of directors approved
the Companys adoption of two non-qualified deferred compensation plans
(the Deferred Compensation Plans) for non-employee directors and for
certain senior executives that elect not to participate in the Companys
401(k) Plan. The Deferred Compensation Plans are unfunded plans maintained
for the purpose of providing the Companys directors and certain of its
senior executives the opportunity to defer a portion of their compensation.
Under the terms of the Deferred Compensation Plans, certain senior
executives may elect to contribute on a pre-tax basis up to 50% of their
base salary and up to 100% of their cash bonus, and non-employee directors
may elect to contribute on a pre-tax basis up to 100% of their director
retainer and meeting fees. The Company matches 100% of employee
contributions up to 5% of total cash compensation. The Company also
contributes a fixed rate of return on balances in the Deferred Compensation
Plans, determined at the beginning of each plan year. Matching
contributions and investment earnings thereon vest over a three-year period
from the date of each contribution. Distributions are generally payable no
earlier than five years subsequent to the date an individual becomes a
participant in the Plan, or upon termination of employment (or the date a
director ceases to serve as a director of the Company), at the election of
the participant, but not later than the fifteenth day of the month
following the month the individual attains age 65.
During 2003 and 2002, the Company provided a fixed return of 8.2% and 8.6%,
respectively, to participants in the Deferred Compensation Plan. The
Company has purchased life insurance policies on the lives of certain
employees of the Company, which are intended to fund distributions from the
Deferred Compensation Plans. The Company is the sole beneficiary of such
policies. At the inception of the Deferred Compensation Plans, the Company
established an irrevocable Rabbi Trust to secure the plans obligations.
However, assets in the Deferred Compensation Plans are subject to creditor
claims in the event of bankruptcy. During 2003 and 2002, the Company
recorded $184,000 and $45,000, respectively, of matching contributions as
general and administrative expense associated with the Deferred
Compensation Plans. As of December 31, 2003 and 2002, the Companys
liability related to the Deferred Compensation Plans was $0.8 million and
$0.2 million, respectively, which was reflected in accounts payable,
accrued expenses and other liabilities in the accompanying balance sheet.
Employment and Severance Agreements
The Company currently has employment agreements with several of its
executive officers which provide for the payment of certain severance
amounts upon an event of termination or change of control, as further
defined in the agreements.
Table of Contents
18.
SEGMENT REPORTING
As of December 31, 2003, the Company owned and managed 38 correctional and
detention facilities, and managed 21 correctional and detention facilities
it does not own. Management views the Companys operating results in two
reportable segments: owned and managed correctional and detention
facilities and managed-only correctional and detention facilities. The
accounting policies of the reportable segments are the same as those
described in Note 2. Owned and managed facilities include the operating
results of those facilities owned and managed by the Company. Managed-only
facilities include the operating results of those facilities owned by a
third party and managed by the Company. The Company measures the operating
performance of each facility within the above two reportable segments,
without differentiation, based on facility contribution. The Company
defines facility contribution as a facilitys operating income or loss from
operations before interest, taxes, depreciation and amortization. Since
each of the Companys facilities within the two reportable segments exhibit
similar economic characteristics, provide similar services to governmental
agencies, and operate under a similar set of operating procedures and
regulatory guidelines, the facilities within the identified segments have
been aggregated and reported as one reportable segment.
The revenue and facility contribution for the reportable segments and a
reconciliation to the Companys operating income (loss) is as follows for
the three years ended December 31, 2003, 2002, and 2001 (in thousands):
For the Years Ended December 31,
2003
2002
2001
$
732,465
$
639,104
$
619,652
281,524
278,917
269,766
1,013,989
918,021
889,418
523,202
479,336
464,392
230,217
225,021
217,886
753,419
704,357
682,278
209,263
159,768
155,260
51,307
53,896
51,880
260,570
213,664
207,140
22,748
19,730
22,475
(21,892
)
(16,995
)
(16,661
)
(40,467
)
(36,907
)
(34,568
)
(52,937
)
(51,292
)
(52,729
)
$
168,022
$
128,200
$
125,657
The following table summarizes capital expenditures for the reportable
segments for the years ended December 31, 2003 and 2002 (in thousands):
Table of Contents
For the Years Ended December 31,
2003
2002
$
60,523
$
10,110
2,827
1,439
28,843
5,411
2
137
$
92,195
$
17,097
The assets for the reportable segments are as follows (in thousands):
December 31,
2003
2002
$
1,606,675
$
1,558,491
74,154
84,743
277,041
212,770
1,158
18,067
$
1,959,028
$
1,874,071
19.
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information for each of the quarters in the
years ended December 31, 2003 and 2002 is as follows (in thousands, except
per share data):
June 30,
September 30,
December 31,
March 31, 2003
2003
2003
2003
$
250,304
$
254,142
$
263,431
$
268,860
$
42,347
$
40,802
$
40,801
$
44,072
$
170
$
$
(277
)
$
52,459
(1)
$
24,594
$
20,230
$
19,037
$
78,694
$
(1,692
)
$
$
$
920
$
17,422
$
12,140
$
18,201
$
78,758
$
0.69
$
0.38
$
0.53
$
2.24
(0.06
)
0.03
$
0.63
$
0.38
$
0.53
$
2.27
$
0.61
$
0.34
$
0.47
$
1.99
(0.05
)
0.02
$
0.56
$
0.34
$
0.47
$
2.01
Table of Contents
June 30,
September 30,
December 31,
March 31, 2002
2002
2002
2002
$
224,427
$
231,857
$
239,442
$
242,025
$
29,746
$
32,388
$
34,696
$
31,370
$
$
(36,670
)(2)
$
$
$
32,769
(1)
$
119
$
375
$
30,021
(1)
$
37,065
$
(26,366
)
$
16,503
$
42,699
$
1,959
$
176
$
(238
)
$
562
$
(80,276
)(3)
$
$
$
$
(46,329
)
$
(31,395
)
$
10,973
$
37,876
$
1.16
$
(1.15
)
$
0.41
$
1.35
0.07
0.01
(0.01
)
0.02
(2.91
)
$
(1.68
)
$
(1.14
)
$
0.40
$
1.37
$
0.96
$
(1.15
)
$
0.37
$
1.12
0.06
0.01
(0.01
)
0.02
(2.25
)
$
(1.23
)
$
(1.14
)
$
0.36
$
1.14
EXHIBIT 10.15
AMENDED AND RESTATED
CORRECTIONS CORPORATION OF AMERICA
1997 EMPLOYEE SHARE INCENTIVE PLAN
CCA Prison Realty Trust, a Maryland real estate investment trust and predecessor by merger to Corrections Corporation of America, a Maryland corporation formerly known as Prison Realty Trust, Inc. and Prison Realty Corporation (the "Company"), initially adopted the Corrections Corporation of America 1997 Employee Share Incentive Plan (formerly known as the CCA Prison Realty Trust 1997 Employee Share Incentive Plan) (the "Plan") effective April 21, 1997 for the benefit of, among others, its key employees and the key employees of its Subsidiaries and Affiliates (each as defined herein). The Company hereby amends and restates the Plan, effective February 18, 2004.
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the Plan is to enable the Company to attract, retain and reward key employees of the Company and the Chairman of the Company's Board of Directors (the "Board"), and strengthen the mutuality of interests between such individuals and the Company's shareholders, by offering such individuals performance-based share incentives and/or other equity interests or equity-based incentives in the Company, as well as performance-based incentives payable in cash.
For purposes of the Plan, the following terms shall be defined as set forth below:
a. "Affiliate" means any entity other than the Company and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity.
b. "Award" means a Share Option, Share Appreciation Right, Restricted Share, Deferred Share, Share Purchase Right and/or other Share-Based Award granted hereunder.
c. "Board" means the Board of Directors of the Company.
d. "Book Value" means, as of any given date, on a per share basis
(i) the shareholders' equity in the Company as of the end of the immediately
preceding fiscal year as reflected in the Company's consolidated balance sheet,
subject to such adjustments as the Committee shall specify at or after grant,
divided by (ii) the number of then outstanding Shares as of such year-end date
(as adjusted by the Committee for subsequent events).
e. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto.
f. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board.
g. "Company" means Corrections Corporation of America, a Maryland corporation formerly known as Prison Realty Trust, Inc. and Prison Realty Corporation and successor by merger to CCA Prison Realty Trust, a Maryland real estate investment trust, or any successor corporation or trust.
h. "Deferral Period" means the period described in Section 8(a) below.
i. "Deferred Shares" means an award made pursuant to Section 8 below of the right to receive Shares at the end of a specified Deferral Period.
j. "Disability" means disability as determined under procedures established by the Committee for purposes of this Plan.
k. "Early Retirement" means retirement, with the express consent for purposes of this Plan of the Company at or before the time of such retirement, from active employment with the Company and any Subsidiary or Affiliate on or after attainment of age sixty-two (62) but before attainment of age sixty-five (65).
l. "Fair Market Value" means, as of any given date, unless otherwise determined by the Committee in good faith, the reported closing price of the Shares on the New York Stock Exchange or, if no such sale of Shares is reported on the New York Stock Exchange on such date, the fair market value of the Shares as determined by the Committee in good faith.
m. "Immediate Family Member" means a person described in Section 5(e) below.
n. "Incentive Option" means any Share Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code.
o. "Non-Qualified Option" means any Share Option that is not an Incentive Option.
p. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Affiliate on or after age 65.
q. "Other Share-Based Award" means an award under Section 10 below that is valued in whole or in part by reference to, or is otherwise based on, Shares.
r. "Plan" means this Corrections Corporation of America 1997 Employee Share Incentive Plan, as amended and restated to date and as hereinafter amended and/or restated from time to time.
s. "Restricted Shares" means an award of Shares that is subject to restrictions under Section 7 below.
t. "Restriction Period" means the period described in Section 7(c) below.
u. "Retirement" means Normal or Early Retirement.
v. "Shares" means shares of the Company's common stock, $.01 par value per share (on a post-May 2001 reverse stock split basis).
w. "Share Appreciation Right" means the right pursuant to an Award granted under Section 6 below to receive upon exercise an amount equal to the excess of the Fair Market Value of one Share over the price per share specified in the Award agreement multiplied by the number of Shares in respect of which a Share Appreciation Right has been exercised.
x. "Share Option" or "Option" means any option to purchase Shares (including Restricted Shares and Deferred Shares, if the Committee so determines) granted pursuant to Section 5 below.
y. "Share Purchase Right" means the right to purchase Shares pursuant to Section 9 below.
z. "Subsidiary" means any corporation (or other entity) in an unbroken chain of corporations and other entities beginning with the Company if each of the corporations and other entities (other than the last corporation or other entity in the unbroken chain) owns equity interests possessing more than 50% of the total combined voting power of all classes of equity interests in one of the other corporations or entities in the chain.
In addition, the terms "Change in Control", "Potential Change in Control" and "Change in Control Price" shall have meanings set forth, respectively, in Sections 11(b), (c) and (d) below.
SECTION 2. ADMINISTRATION.
This Plan shall be administered by a committee (the "Committee") appointed by the Board. The Committee shall consist of two or more outside, disinterested members of the Board. The Committee, in the judgment of the Board, shall be qualified to administer the Plan as contemplated by (a) Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (or any successor rule), (b) Section 162(m) of the Code, as amended, and the regulations thereunder (and any successor section and regulations), and (c) any rules and regulations of a stock exchange on which the Company's Common Stock is listed and traded. In the event the Board does not appoint the Committee to administer the Plan, the Plan shall be administered by the Board and any references to the Committee in the Plan shall be deemed to refer to the Board.
The Committee shall have full authority to grant, pursuant to the terms
of the Plan, to officers and other key employees eligible under Section 4 below:
(i) Share Options, (ii) Share Appreciation Rights, (iii) Restricted Shares, (iv)
Deferred Shares, (v) Share Purchase Rights and/or (vi) Other Share-Based Awards.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the Company and its Subsidiaries and Affiliates to whom Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Awards, or any combination thereof, are to be granted hereunder to one or more eligible employees;
(iii) to determine the number of shares to be covered by each such Award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Share Option or other Award and/or the Shares relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion);
(v) to determine whether and under what circumstances a Share Option may be settled in cash, Restricted Shares and/or Deferred Shares under Section 5(k) or (l), as applicable, instead of Shares that are neither Restricted Shares nor Deferred Shares;
(vi) to determine whether, to what extent and under what circumstances Option grants and/or other Awards under the Plan and/or other cash awards made by the Company are to be made, and operate, on a tandem basis vis-a-vis other Awards under the Plan and/or cash awards made outside of the Plan, or on an additive basis;
(vii) to determine whether, to what extent and under what circumstances Shares and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); and
(viii) to determine the terms and restrictions applicable to Share Purchase Rights and the Shares purchased by exercising such rights.
The Committee shall have the authority to adopt, alter and repeal such rules (subject to the provision of Section 14 below), guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award
issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Company and Plan participants.
SECTION 3. SHARES SUBJECT TO PLAN.
The total number of Shares reserved and available for distribution under the Plan shall be 1,500,000 shares (on a post-May 2001 reverse stock split basis). Such Shares may consist, in whole or in part, of authorized and unissued Shares or treasury Shares.
Subject to Section 6(b)(iv) below, if any Shares that have been optioned cease to be subject to a Share Option, or if any such Shares that are subject to any Restricted Shares or Deferred Shares Award, Share Purchase Right or Other Share-Based Award granted hereunder are forfeited or any such Award otherwise terminates without a payment being made to the participant in the form of Shares, such Shares shall again be available for distribution in connection with future Awards under the Plan.
In the event of any merger, reorganization, consolidation, recapitalization, Share dividend, Share split or other change in corporate structure affecting the Shares, an adjustment shall be made in the aggregate number of Shares reserved for issuance under the Plan, in the number and option price of Shares subject to outstanding Options granted under the Plan, in the number and purchase price of Shares subject to outstanding Share Purchase Rights under the Plan, and in the number of Shares subject to other outstanding Awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of Shares subject to any Award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Share Appreciation Right associated with any Share Option.
SECTION 4. ELIGIBILITY.
The Chairman of the Board, all officers and other key employees of the Company and its Subsidiaries and Affiliates (but excluding members of the Committee) who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its Subsidiaries and Affiliates are eligible to be granted Awards under the Plan; provided, however, that the Chairman of the Board shall not be eligible to receive Incentive Options hereunder. Except as provided in the preceding sentence, any reference herein to "employees" and their employment by the Company shall be deemed to include the Chairman of the Board and his service as a director of the Company, unless otherwise determined by the Committee. Without limiting the generality of the foregoing, the Committee shall have the full authority to interpret the provisions of the Plan as they may apply (or may not apply) to the Chairman of the Board, and any determination by the Committee in this regard shall be final and conclusive.
SECTION 5. SHARE OPTIONS.
Share Options may be granted alone, in addition to or in tandem with other Awards granted under the Plan and/or cash awards made outside of the Plan. Any Share Option granted under the Plan shall be in such form as the Committee may from time to time approve.
Share Options granted under the Plan may be of two types: (i) Incentive Options and (ii) Non-Qualified Options.
The Committee shall have the authority to grant to any optionee Incentive Options, Non-Qualified Options, or both types of Share Options (in each case with or without Share Appreciation Rights).
Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) Option Price. The option price per Share purchasable under a Share Option shall be determined by the Committee at the time of grant, but shall be not less than 100% of the Fair Market Value of the Shares at the time of the grant.
(b) Option Term. The term of each Share Option shall be fixed by the Committee, but no Share Option shall be exercisable more than ten years after the date the Option is granted.
(c) Exercisability. Share Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Committee at or after grant; provided, however, that, except as provided in
Section 5(f) and (g) and Section 11 below, unless otherwise determined by the
Committee at or after grant, no Share Option shall be exercisable prior to the
later of (i) the first anniversary date of the granting of the Option, or (ii)
the second anniversary date of employment of the employee by the Company. If the
Committee provides, in its sole discretion, that any Share Option is exercisable
only in installments, the Committee may waive such installment exercise
provisions at any time at or after grant in whole or in part, based on such
factors as the Committee shall determine, in its sole discretion.
Notwithstanding any provision of this Section 5(c), the Board may authorize the
grant of a Share Option, all or a portion of which is immediately exercisable
upon the date of grant of such Share Option.
(d) Method of Exercise. Subject to whatever installment exercise provisions apply under Section 5(c), Share Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of Shares to be purchased.
Such notice shall be accompanied by payment in full of the purchase price, either by check, note or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of a Share Option or unrestricted Shares already owned by the optionee or, in the case
of the exercise of a Non-Qualified Option, Restricted Shares or Deferred Shares subject to an Award hereunder (based, in each case, on the Fair Market Value of the Share Option or the Shares on the date the option is exercised, as determined by the Committee).
If payment of the option exercise price of a Non-Qualified Option is made in whole or in part in the form of Restricted Shares or Deferred Shares, such Restricted Shares or Deferred Shares (and any replacement Shares relating thereto) shall remain (or be) restricted or deferred, as the case may be, in accordance with the original terms of the Restricted Shares Award or Deferred Shares Award in question, and any additional Shares received upon the exercise shall be subject to the same forfeiture restrictions or deferral limitations, unless otherwise determined by the Committee, in its sole discretion, at or after grant.
No Shares shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends or other rights of a shareholder with respect to Shares subject to the Option when the optionee has given written notice of exercise, has paid in full for such Shares, and, if requested, has given the representation described in Section 14(a).
(e) Transferability of Options. Incentive Options shall be transferable by the optionee only by will or by the laws of descent and shall be exercisable, during the optionee's lifetime, only by the optionee. Non-Qualified Options shall be transferable by the optionee by will or by the laws of descent or to (i) the spouse, children or grandchildren of the optionee ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, (iii) a partnership in which such Immediate Family Members are the only partners, or (iv) one or more entities in which the optionee has a 10% or greater equity interest, provided that (y) the Share option agreement pursuant to which such Non-Qualified Options are granted must be approved by the Committee, and (z) subsequent transfers of transferred Non-Qualified Options shall be prohibited except those in accordance with this subparagraph (e). Following transfer, any such Non-Qualified Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of this Plan or the option agreement executed pursuant hereto, the term "optionee" shall be deemed to refer to the transferee.
(f) Termination by Death.
(i) With respect to Share Options granted prior to December 13, 2001, subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of death, any Share Option held by such optionee may thereafter be exercised, to the extent such option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Share Option, whichever period is the shorter.
(ii) With respect to Share Options granted on or following December 13, 2001, subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of death, any Share Option held by such optionee (whether or not then exercisable) may thereafter be exercised by the legal representative of the estate or by the legatee of the optionee under the will of the optionee for the stated term of such Share Option.
(g) Termination by Reason of Disability.
(i) With respect to Share Options granted prior to December 13, 2001, subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of Disability, any Share Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of three years (or such other period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Share Option, whichever period is the shorter; provided, however, that, if the optionee dies within such three-year period (or such other period as the Committee shall specify at grant), any unexercised Share Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Share Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Share Option will thereafter be treated as a Non-Qualified Option.
(ii) With respect to Share Options granted on or following
December 13, 2001, subject to Section 5(j), if an optionee's employment
by the Company and any Subsidiary or Affiliate terminates by reason of
Disability, any Share Option held by such optionee (whether or not then
exercisable) may thereafter be exercised by the optionee (or, in the
event of the optionee's death prior to the expiration of the stated
term of such Share Option, by the legal representative of the
optionee's estate or by the legatee under the will of the optionee) for
the stated term of such Share Option. In the event of termination of
employment by reason of Disability, if an Incentive Option is exercised
after the expiration of the exercise periods that apply for purposes of
Section 422 of the Code, such Share Option will thereafter be treated
as a Non-Qualified Option.
(h) Termination by Reason of Retirement.
(i) With respect to Share Options granted prior to December 13, 2001, subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of Normal or early Retirement, any Share Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee
may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of three years (or such other period as the Committee may specify at grant) from the date of such termination of employment or the expiration of the stated term of such Share Option, whichever period is the shorter; provided, however, that, if the optionee dies within such three-year period (or such other period as the Committee may specify at grant), any unexercised Share Option held by such optionee shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year from the date of such death or until the expiration of the stated term of such Share Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the Option will thereafter be treated as a Non-Qualified Option.
(ii) With respect to Share Options granted on or following December 13, 2001, subject to Section 5(j), if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of Normal or Early Retirement, any Share Option held by such optionee (whether or not then exercisable) may thereafter be exercised by the optionee (or, in the event of the optionee's death prior to the expiration of the stated term of such Share Option, by the legal representative of the optionee's estate or by the legatee under the will of the optionee) for the stated term of such Share Option. In the event of termination of employment by reason of Retirement, if an Incentive Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the Option will thereafter be treated as a Non-Qualified Option.
(i) Other Termination. Unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or after grant, if an optionee's employment by the Company and any Subsidiary or Affiliate terminates for any reason other than death, Disability or Normal or Early Retirement, the Share Option shall thereupon terminate.
(j) Incentive Options. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Option under such Section 422.
If an Incentive Option granted under this Plan is first exercisable in any calendar year to obtain Shares having a fair market value (determined at the time of grant) in excess of $100,000, the option is treated as an Incentive Option for Shares having a fair market value (determined at the time of grant) equal to $100,000 and as a Non-Qualified Option for the remaining Shares. In making this determination, the rules specified in Section 422(d) of the Code shall be determinative, including the aggregate of all Incentive Options which are first exercisable in that calendar year under any plan of the Company.
To the extent permitted under Section 422 of the Code or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement:
(i) if (x) a participant's employment is terminated by reason of death, Disability or Retirement and (y) the portion of any Incentive Option that is otherwise exercisable during the post-termination period specified under Section 5(f), (g) or (h), applied without regard to the $100,000 limitation contained in Section 422(b)(7) of the Code, is greater than the portion of such option that is immediately exercisable as an "Incentive Stock Option" during such post-termination period under Section 422, such excess shall be treated as a Non-Qualified Option; and
(ii) if the exercise of an Incentive Option is accelerated by reason of a Change in Control, any portion of such option that is not exercisable as an Incentive Option by reason of the $100,000 limitation contained in Section 422(b)(7) of the Code shall be treated as a Non-Qualified Option.
An employee who owns Shares representing more than ten percent (10%) of the total combined voting power of all classes of shares of the Company shall not be eligible to receive an Incentive Option.
(k) Buyout Provisions. The Committee may at any time offer to buy out for a payment in cash, Shares, Deferred Shares or Restricted Shares an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made.
(l) Settlement Provisions. If the option agreement so provides at grant or is amended after grant and prior to exercise to so provide (with the optionee's consent), the Committee may require that all or part of the Shares to be issued with respect to the spread value of an exercised Option take the form of Deferred or Restricted Shares, which shall be valued on the date of exercise on the basis of the Fair Market Value (as determined by the Committee) of such Deferred or Restricted Shares determined without regard to the deferral limitations and/or forfeiture restrictions involved.
SECTION 6. SHARE APPRECIATION RIGHTS.
(a) Grant and Exercise. Share Appreciation Rights may be granted either alone, in addition to or in conjunction with other Awards granted under the Plan.
A Share Appreciation Right may be exercised by a right holder, subject to Section 6(b), in accordance with the procedures established by the Committee for such purpose. Upon such exercise, the right holder shall be entitled to receive an amount determined in the manner prescribed in Section 6(b).
(b) Terms and Conditions. Share Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following:
(i) Share Appreciation Rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that, except as provided in Section 6(b)(iv) and (v) and Section 11 below, unless otherwise determined by the Committee at or after grant, no Share Appreciation Right shall be exercisable prior to the later of (i) the first anniversary date of the granting of the Share Appreciation Right, or (ii) the second anniversary date of employment of the employee by the Company. The exercise of Share Appreciation Rights held by right holders who are subject to Section 16(b) of the Exchange Act shall comply with Rule 16b-3 thereunder, to the extent applicable.
(ii) Upon the exercise of a Share Appreciation Right, a right holder shall be entitled to receive an amount in cash (or, if expressly provided in the Award agreement, an amount in cash and/or Shares) equal in value to the excess of the Fair Market Value of one Share over the price per Share specified in the Award agreement multiplied by the number of Shares in respect of which the Share Appreciation Right shall have been exercised. The amount of cash and, if applicable, the number of Shares to be paid shall be calculated on the basis of the Fair Market Value of the Shares on the date of exercise.
(iii) Share Appreciation Rights shall be transferable by the right holder by will or by the laws of descent or to (A) the Immediate Family Members of the right holder, (B) a trust or trusts for the exclusive benefit of such Immediate Family Members, (C) a partnership in which such Immediate Family Members are the only partners, or (D) one or more entities in which the right holder has a 10% or greater equity interest, provided that (y) the Award agreement pursuant to which such Share Appreciation Rights are granted must be approved by the Committee, and (z) subsequent transfers of transferred Share Appreciation Rights shall be prohibited except those in accordance with this subparagraph (iii). Following transfer, any such Share Appreciation Rights shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of this Plan or the Award agreement executed pursuant hereto, the term "right holder" shall be deemed to refer to the transferee.
(iv) Except as otherwise provided in the Award agreement, if a right holder's employment by the Company and any Subsidiary or Affiliate terminates by reason of death, any Share Appreciation Right held by such right holder may thereafter be exercised, to the extent such right was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), by the legal representative of the estate or by the legatee of the right holder under the will of the right holder, for a period of one year (or such other period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Share Appreciation Right, whichever period is the shorter.
(v) Except as otherwise provided in the Award agreement, if a right holder's employment by the Company and any Subsidiary or Affiliate terminates by reason of Disability, any Share Appreciation Right held by such right holder may thereafter be exercised by the right holder, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of three years (or such other period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Share Appreciation Right, whichever period is the shorter; provided, however, that, if the right holder dies within such three-year period (or such other period as the Committee shall specify at grant), any unexercised Share Appreciation Right held by such right holder shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Share Appreciation Right, whichever period is the shorter.
(vi) Except as otherwise provided in the Award agreement, if a right holder's employment by the Company and any Subsidiary or Affiliate terminates by reason of Normal or Early Retirement, any Share Appreciation Right held by such right holder may thereafter be exercised by the right holder, to the extent it was exercisable at the time of such Retirement or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of three years (or such other period as Committee may specify at grant) from the date of such termination of employment or the expiration of the stated term of such Share Appreciation Right, whichever period is the shorter; provided, however, that, if the right holder dies within such three-year period (or such other period as the Committee may specify at grant), any unexercised Share Appreciation Right held by such right holder shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one year from the date of such death or until the expiration of the stated term of such Share Appreciation Right, whichever period is the shorter.
(vii) In its sole discretion, the Committee may grant "Limited" Share Appreciation Rights under this Section 6, i.e., Share Appreciation Rights that become exercisable only in the event of a Change in Control and/or a Potential Change in Control, subject to such terms and conditions as the Committee may specify at grant. Such Limited Share Appreciation Rights shall be settled solely in cash.
(viii) The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, the amount to be paid upon the exercise of a Share Appreciation Right or Limited Share Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant.
SECTION 7. RESTRICTED SHARES.
(a) Administration. Restricted Shares may be issued either alone, in addition to or in tandem with other Awards granted under the Plan and/or cash awards made outside the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Shares will be made, the number of Shares to be awarded, the price (if any) to be paid by the recipient of Restricted Shares (subject to Section 7(b)), the time or times within which such Awards may be subject to forfeiture, and all other terms and conditions of the Awards; provided, however, that no grant of Restricted Shares shall vest in full prior to the third (3rd) anniversary of the date of such grant.
The Committee may condition the grant of Restricted Shares upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion.
The provisions of Restricted Shares Awards need not be the same with respect to each recipient.
(b) Awards and Certificates. The prospective recipient of a Restricted Shares Award shall not have any rights with respect to such Award, unless and until such recipient has executed an agreement evidencing the Award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award.
(i) The purchase price for Restricted Shares shall be equal to or less than their par value and may be zero.
(ii) Awards of Restricted Shares must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the Award date, by executing a Restricted Shares Award agreement and paying whatever price (if any) is required under Section 7(b)(i).
(iii) Each participant receiving a Restricted Shares Award shall be issued a Share certificate in respect of such Restricted Shares. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award.
(iv) The Committee shall require that the share certificates evidencing such Shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Shares Award, the participant shall have delivered a share power, endorsed in blank, relating to the Shares covered by such Award.
(c) Restrictions and Conditions. The Restricted Shares awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of this Plan and the Award agreement, during a period set by the Committee commencing with the date of such Award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign Restricted Shares awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine, in its sole discretion.
(ii) Except as provided in this paragraph (ii) and Section
7(c)(i), the participant shall have, with respect to the Restricted
Shares, all of the rights of a shareholder of the Company, including
the right to vote the Restricted Shares, and the right to receive any
cash dividends. The Committee, in its sole discretion, as determined at
the time of Award, may permit or require the payment of cash dividends
to be deferred and, if the Committee so determines, reinvested, subject
to Section 16(e) below, in additional Restricted Shares to the extent
Shares are available under Section 3, or otherwise reinvested. Pursuant
to Section 3 above, Share dividends issued with respect to Restricted
Shares shall be treated as additional Restricted Shares that are
subject to the same restrictions and other terms and conditions that
apply to the Shares with respect to which such dividends are issued.
(iii) Subject to the applicable provisions of the Award agreement and this Section 7, upon termination of a participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Restriction Period, all Restricted Shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant.
(iv) If and when the Restriction Period expires without a prior forfeiture of the Restricted Shares, certificates for an appropriate number of unrestricted Shares shall be delivered to the participant promptly.
(d) Minimum Value Provisions. In order to better ensure that Award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Shares to the recipient of a Restricted Shares Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee.
SECTION 8. DEFERRED SHARES.
(a) Administration. Deferred Shares may be awarded either alone, in addition to or in tandem with other Awards granted under the Plan and/or cash awards made outside of the Plan. The Committee shall determine the eligible persons to whom and the time or times at which Deferred Shares shall be awarded, the number of Deferred Shares to be awarded to any person, the duration of the period (the "Deferral Period") during which, and the conditions under which,
receipt of the Shares will be deferred, and the other terms and conditions of the Award in addition to those set forth in Section 8(b).
The Committee may condition the grant of Deferred Shares upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine, in its sole discretion.
The provisions of Deferred Shares Awards need not be the same with respect to each recipient.
(b) Terms and Conditions. The Deferred Shares awarded pursuant to this Section 8 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the Award agreement referred to in Section 8(b)(vi) below, Deferred Shares Awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or the Elective Deferral Period referred to in Section 8(b)(v), where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the Shares covered by the Deferred Shares Award.
(ii) Unless otherwise determined by the Committee at grant, amounts equal to any dividends declared during the Deferral Period with respect to the number of Shares covered by a Deferred Shares Award will be paid to the participant currently, or deferred and deemed to be reinvested in additional Deferred Shares, or otherwise reinvested, all as determined at or after the time of the Award by the Committee, in its sole discretion.
(iii) Subject to the provisions of the Award agreement and this Section 8, upon termination of a participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Deferral Period for a given Award, the Deferred Shares in question will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant.
(iv) Based on service, performance and/or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Deferred Shares Award and/or waive the deferral limitations for all or any part of such Award.
(v) A participant may elect to further defer receipt of an Award (or an installment of an Award) for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made at least 12 months prior to completion of the Deferral Period for such Deferred Shares Award (or such installment).
(vi) Each Award shall be confirmed by, and subject to the terms of, a Deferred Shares agreement executed by the Company and the participant.
(c) Minimum Value Provisions. In order to better ensure that Award payments actually reflect the performance of the Company and the service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Shares to the recipient of a Deferred Shares Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee.
SECTION 9. SHARE PURCHASE RIGHTS.
(a) Awards and Administration. Subject to Section 3 above, the Committee may grant eligible participants Share Purchase Rights which shall enable such participants to purchase Shares (including Deferred Shares and Restricted Shares) at its Fair Market Value on the date of grant.
The Committee shall also impose such deferral, forfeiture and/or other terms and conditions as it shall determine, in its sole discretion, on such Share Purchase Rights or the exercise thereof.
The terms of Share Purchase Rights Awards need not be the same with respect to each participant.
Each Share Purchase Right Award shall be confirmed by, and be subject to the terms of, a Share Purchase rights agreement.
(b) Exercisability. Share Purchase Rights shall generally be exercisable for such period after grant as is determined by the Committee not to exceed 30 days. However, the Committee may provide, in its sole discretion, that the Share Purchase Rights of persons potentially subject to Section 16(b) of the Exchange Act shall not become exercisable until six months and one day after the grant date, and shall then be exercisable for 10 trading days at the purchase price specified by the Committee in accordance with Section 9(a).
SECTION 10. OTHER SHARE-BASED AWARDS.
(a) Administration. Other Awards of Shares and other Awards that are valued in whole or in part by reference to, or are otherwise based on, Shares ("Other Share-Based Awards"), including, without limitation, performance shares, convertible preferred stock, convertible debentures, exchangeable securities and Share Awards or options may be granted either alone or in addition to or in tandem with Share Options, Share Appreciation Rights, Restricted Shares, Deferred Shares or Share Purchase Rights granted under the Plan and/or cash awards made outside of the Plan.
Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of Shares to be awarded pursuant to such Awards, and all other conditions of the Awards. The Committee may also provide for the grant of Shares upon the completion of a specified performance period.
The provisions of Other Share-Based Awards need not be the same with respect to each recipient.
(b) Terms and Conditions. Other Share-Based Awards made pursuant to this Section 10 shall be subject to the following terms and conditions:
(i) Subject to the provisions of this Plan and the Award agreement referred to in Section 10(b)(v), Shares subject to Awards made under this Section 10 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses.
(ii) Subject to the provisions of this Plan and the
Award agreement and unless otherwise determined by the
Committee at grant, the recipient of an Award under this
Section 10 shall be entitled to receive, currently or on a
deferred basis, interest or dividends or interest or dividend
equivalents with respect to the number of Shares covered by
the Award, as determined at the time of the Award by the
Committee, in its sole discretion, and the Committee may
provide that such amounts (if any) shall be deemed to have
been reinvested in additional Shares or otherwise reinvested.
(iii) Any Award under Section 10 and any Shares covered by any such Award shall vest or be forfeited to the extent so provided in the Award agreement, as determined by the Committee, in its sole discretion; provided, however, that any Award based on a Restricted Share Award shall not vest in full prior to the third anniversary of the date of grant.
(iv) In the event of the participant's Retirement,
Disability or death, or in cases of special circumstances, the
Committee may, in its sole discretion, waive in whole or in
part any or all of the remaining limitations imposed hereunder
(if any) with respect to any or all of an Award under this
Section 10.
(v) Each Award under this Section 10 shall be confirmed by, and subject to the terms of, an agreement or other instrument by the Company and by the participant.
(vi) Shares (including securities convertible into Shares) issued on a bonus basis under this Section 10 may be issued for no cash consideration. Shares (including securities convertible into Shares) purchased pursuant to a purchase
right awarded under this Section 10 shall be priced at the Fair Market Value of the Shares on the date of grant.
SECTION 11. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. In the event of:
(1) a "Change in Control" as defined in Section 11(b), or
(2) a "Potential Change in Control" as defined in section 11(c), but only if and to the extent so determined by the Committee or the Board at or after grant (subject to any right of approval expressly reserved by the Committee or the Board at the time of such determination), the following acceleration and valuation provisions shall apply:
(i) Any Share Appreciation Rights (including, without limitation, any Limited Share Appreciation Rights) outstanding for at least six months and any Share Option awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested.
(ii) The restrictions and deferral limitations applicable to any Restricted Shares, Deferred Shares, Share Purchase Rights and Other Share-Based Awards, in each case to the extent not already vested under the Plan, shall lapse and such Shares and Awards shall be deemed fully vested.
(iii) The value of all outstanding Awards, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the "Change in Control Price" as defined in Section 11(d) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control.
(b) Definition of "Change in Control". For purposes of Section
11(a), a "Change in Control" means the happening of any of the following:
(i) any person or entity, including a "group" as defined in Section 13(d)(3) of the Exchange Act, other than the Company or a wholly-owned subsidiary thereof or any employee benefit plan of the Company or any of its Subsidiaries, becomes the beneficial owner of the Company's securities having 20% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or
(ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions less than a majority of the combined voting
power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the trustees of the Company or such other corporation or entity after such transaction are held in the aggregate by the holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were trustees of the Company at the beginning of any such period.
(c) Definition of Potential Change in Control. For purposes of
Section 11(a), a "Potential Change in Control" means the happening of any one of
the following:
(i) The approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 11(b); or
(ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of such plan acting as such trustee)) of securities of the Company representing 10% or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan.
(d) Definition of Change in Control Price. For purposes of this
Section 11, "Change in Control Price" means the highest price per share paid in
any transaction reported on the New York Stock Exchange or paid or offered in
any bona fide transaction related to a potential or actual Change in Control of
the Company at any time during the 60 day period immediately preceding the
occurrence of the Change in Control (or, where applicable, the occurrence of the
Potential Change in Control event), in each case as determined by the Committee
except that, in the case of Incentive Options and Share Appreciation Rights
relating to Incentive Options, such price shall be based only on transactions
reported for the date on which the optionee exercises such Share Appreciation
Rights (or Limited Share Appreciation Rights) or, where applicable, the date on
which a cashout occurs under Section 11(a)(2)(iii).
SECTION 12. 1999 REIT ELECTION.
Notwithstanding anything herein to the contrary, no provision in this Plan shall be construed in a manner so as to adversely affect the Company's ability to elect taxable status as a REIT (as contemplated by the Code) for its 1999 taxable year and any Award which shall be deemed to have such an adverse effect shall be void ab initio.
SECTION 13. REPRICING PROHIBITED.
Except for adjustments made pursuant to Section 3 above, notwithstanding any provision in this Plan to the contrary, unless approved by the holders of a majority of the shares of the Company's capital stock present and entitled to vote on the matter at a duly convened meeting of the Company's stockholders (or by such other number as may be required by law or securities exchange listing requirement applicable to the Company), an Award may not: (i) be amended to reduce the option price (or the purchase price, as applicable) per share of the Shares subject to the Award below the option price (or purchase price) as of the date such Award is granted; or (ii) be granted in exchange for, or in connection with, the cancellation or surrender of an Award having a higher option price (or purchase price) or less favorable vesting schedule.
SECTION 14. TERMINATION AND AMENDMENTS.
Unless suspended or terminated sooner by action of the Committee, no
Awards may be granted under this Plan after April 21, 2007 (i.e., the tenth
(10th) anniversary of the Effective Date (as hereinafter defined) of the Plan).
This Plan may be suspended or terminated at any time by the Board. Rights and
obligations under any Award granted while the Plan is in effect shall not be
impaired by suspension or termination of the Plan except with the consent of the
person to whom the Award was granted.
The Board at any time, and from time to time, may amend the Plan.
However, (i) except as provided in Section 3 above relating to adjustments upon
changes in stock, no amendment with respect to a material revision to the Plan
or where stockholder approval is necessary for the Plan to satisfy the
requirements of Section 422 of the Code, Rule 16b-3 promulgated under the
Exchange Act or any securities exchange listing requirements applicable to the
Company shall be effective unless approved by the holders of a majority of the
shares of the Company's capital stock present and entitled to vote on the matter
at a duly convened meeting of the Company's stockholders (or by such other
number as may be required by law or securities exchange listing requirement
applicable to the Company). For the purpose of the foregoing, a material
revision shall be deemed to include (but shall not be limited to): (i) a
material increase in the number of Shares subject to the Plan under Section 3;
(ii) an expansion of the types of Awards under the Plan; (iii) a material
expansion of the class of employees eligible to participate in the Plan; (iv) a
material extension of the term of the Plan; (v) a material change to the method
of determining the option price under the Plan; and (vi) an amendment to Section
13 of the Plan. A material revision shall not include any revision that
curtails, rather than expands, the scope of the Plan. The Board may in its sole
discretion submit any other amendment to the Plan for stockholder approval,
including, but not limited to, amendments to the Plan intended to satisfy the
requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. It is expressly contemplated that, subject to this Section 14, the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Options and/or to bring the Plan and/or Incentive Options granted under it into compliance therewith. Rights and obligations under any Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Award was granted and (ii) such person consents in writing. The Committee at any time, and from time to time, may amend the terms of any one or more Awards; provided, however, that the rights and obligations under any Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Award was granted, and (ii) such person consents in writing.
SECTION 15. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Shares or payments in lieu of or with respect to Awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan.
SECTION 16. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing Shares pursuant to a Share Option or other Award under the Plan to represent to and agree with the Company in writing that the optionee or participant is acquiring the Shares without a view to distribution thereof. The certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer.
All certificates for Shares or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is
required; and such arrangements may be either generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary or Affiliate any right to continued employment with the Company or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary or Affiliate to terminate the employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes includable in the gross income of the participant for Federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Shares, including Shares that are part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Shares (or in Deferred Shares or other types of Plan Awards) at the time of any dividend payment shall only be permissible if sufficient Shares are available under Section 3 above for such reinvestment (taking into account then outstanding Share Options, Share Purchase Rights and other Plan Awards).
(f) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Maryland.
SECTION 17. EFFECTIVE DATE OF PLAN.
The original effective date of the Plan was April 21, 1997 (the "Effective Date"). The Plan set forth herein constitutes an amendment and restatement of the Corrections Corporation of America 1997 Employee Share Incentive Plan, as previously adopted by the Board and the stockholders of the Company and/or its predecessor, as the case may be and shall supercede and replace in its entirety the previously adopted plan and all amendments thereto. The amended and restated Plan became effective February 18, 2004.
SECTION 18. RESTRICTIONS ON TRANSFER.
Awards of derivative securities (as defined in Rule 16a-1(c) under the Exchange Act or any successor definition adopted by the Securities and Exchange Commission) granted under the Plan shall not be transferable except (a) by will or the laws of descent and distribution, or (b) as provided in Sections 5(e) and 6(b)(iii) of the Plan.
Exhibit 10.20
AMENDED AND RESTATED
CORRECTIONS CORPORATION OF AMERICA
2000 STOCK INCENTIVE PLAN
Corrections Corporation of America, a Maryland corporation (the "Company"), initially adopted the Corrections Corporation of America 2000 Stock Incentive Plan (the "Plan") effective December 14, 2000 for the benefit of its employees, consultants and Non-Employee Directors (as hereinafter defined) and employees and consultants of Affiliate Corporations (as hereinafter defined). The Company hereby amends and restates the Plan effective February 18, 2004.
1. Purpose of the Plan. This Plan is intended to encourage stock ownership by employees, consultants and Non-Employee Directors of the Company, and employees and consultants of Affiliate Corporations, so that they may acquire or increase their proprietary interest in the Company, and to encourage such employees, consultants and Non-Employee Directors to remain in the employ and/or service of the Company and to put forth maximum efforts for the success of the business of the Company. It is further intended that options granted by the Committee pursuant to Section 7 of this Plan shall constitute "incentive stock options" ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and the regulations issued thereunder (the "Code"), and all other options granted by the Committee hereunder shall constitute "nonqualified stock options" ("Nonqualified Stock Options"). Grants under this Plan may consist of Incentive Stock Options, Nonqualified Stock Options (collectively, "Options"), stock appreciation rights ("Rights"), which Rights may be either granted in conjunction with Options ("Related Rights") or unaccompanied by Options ("Free Standing Rights"), restricted stock awards ("Restricted Shares"), or performance awards ("Performance Awards"), as hereinafter set forth.
2. Definitions. As used in this Plan, the following words and phrases shall have the meanings indicated:
(a) "Affiliate Corporation" or "Affiliate" shall mean any corporation, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company.
(b) "Annual Grant Amount" shall have the meaning ascribed to it in
Section 8 hereof.
(c) "Award" shall mean an Option, Right, Restricted Share, or Performance Award granted hereunder.
(d) "Award Agreement" shall have the meaning ascribed to it in
Section 3 hereof.
(e) "Board" shall have the meaning ascribed to it in Section 3 hereof.
(f) "Change in Control" shall mean the happening of any of the following:
(i) any person or entity, including a "group" as defined in Section 13(d)(3) of the Exchange Act, other than the Company or a wholly-owned subsidiary thereof or any employee benefit plan of the Company or any of its Subsidiary Corporations, becomes the beneficial owner of the Company's securities having 20% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or
(ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transaction are held in the aggregate by the holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period.
(g) "Code" shall have the meaning ascribed to it in Section 1 hereof.
(h) "Committee" shall have the meaning ascribed to it in Section 3 hereof.
(i) "Common Stock" shall mean shares of the Company's Common Stock (on a post-May 2001 reverse stock split basis).
(j) "Company" shall have the meaning ascribed to it in the preamble hereof.
(k) "Covered Officer" shall mean, as of a particular date, (i) any individual who, with respect to the previous taxable year of the Company, was a "covered employee" of the Company within the meaning of Section 162(m) of the Code, provided that such term shall not include any such individual who is designated by the Committee, in its discretion, at the time of any Award or at any subsequent time, as reasonably expected not to be such a "covered employee" with respect to the current taxable year of the Company, and (ii) any individual who is designated by the Committee, in its discretion, at the time of any Award or at any subsequent time, as reasonably expected to be such a covered employee" with respect to the current taxable year of the Company or with respect to the taxable year of the Company in which any applicable Award will be paid.
(l) "Disability" shall mean a Participant's inability to engage in any substantial gainful activity by reason of medically determinable physical or mental impairment that can be
expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve (12) months.
(m) "Effective Date" shall mean the effective date of the plan as set forth in Section 18 hereof.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
(o) "Excise Tax" shall have the meaning ascribed to it in Section 15 hereof.
(p) "Fair Market Value" per share as of a particular date shall mean (i) the closing sales price per share of Common Stock on a national securities exchange for the last preceding date on which there was a sale of such Common Stock on such exchange, or (ii) if the shares of Common Stock are then traded on an over-the-counter market, the average of the closing bid and asked prices for the shares of Common Stock in such over-the-counter market for the last preceding date on which there was a sale of such Common Stock in such market, or (iii) if the shares of Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee in its discretion may determine.
(q) "Free Standing Rights" shall have the meaning ascribed to it in Section 1 hereof.
(r) "Gross-Up Payment" shall have the meaning ascribed to it in
Section 15 hereof.
(s) "Incentive Stock Options" shall have the meaning ascribed to it in Section 1 hereof.
(t) "Meeting Grant Date" shall have the meaning ascribed to it in
Section 8 hereof.
(u) "Non-Employee Directors" shall mean a member of the Board who is not an employee of the Company or an Affiliate Corporation.
(v) "Nonqualified Stock Options" shall have the meaning ascribed to it in Section 1 hereof.
(w) "Optionee" shall have the meaning ascribed to it in Section 4 hereof.
(x) "Option Price" shall have the meaning ascribed to it in
Section 3 hereof.
(y) "Options" shall have the meaning ascribed to it in Section 1 hereof.
(z) "Participant" shall have the meaning ascribed to it in Section 4 hereof.
(aa) "Performance Awards" shall have the meaning ascribed to it in
Section 1 hereof.
(bb) "Related Rights" shall have the meaning ascribed to it in
Section 1 hereof.
(cc) "Restricted Shares" shall have the meaning ascribed to it in
Section 1 hereof.
(dd) "Rights" shall have the meaning ascribed to it in Section 1 hereof.
(ee) "Retirement" shall mean a Participant's termination of employment in accordance with the provisions of the Corrections Corporation of America 401(k) Savings and Retirement Plan on or after such Participant's Normal Retirement Date, as defined in such plan.
(ff) "Subsidiary Corporation" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting an option, each of such corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
(gg) "Ten Percent Stockholder" shall mean a Participant who, at the time an Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company.
(hh) "Withholding Tax" shall have the meaning ascribed to it in
Section 14 hereof.
3. Administration. This Plan shall be administered by a committee (the "Committee") appointed by the Board of Directors of the Company (the "Board"). The Committee shall consist of two or more outside, disinterested members of the Board. The Committee, in the judgment of the Board, shall be qualified to administer the Plan as contemplated by (a) Rule 16b-3 promulgated under the Exchange Act (or any successor rule), (b) Section 162(m) of the Code, as amended, and the regulations thereunder (and any successor section and regulations), and (c) any rules and regulations of a stock exchange on which the Company's Common Stock is listed and traded. In the event the Board does not appoint the Committee to administer the Plan, the Plan shall be administered by the Board and any references to the Committee in the Plan shall be deemed to refer to the Board.
The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of this Plan, to administer this Plan and to exercise all the powers and authorities either specifically granted to it under this Plan or necessary or advisable in the administration of this Plan, including, without limitation, the authority: to grant Awards; to designate Participants, other than as set forth in Section 8 hereof; to determine the type or types of Awards to be granted to a Participant; to determine which Options shall constitute Incentive Stock Options and which Options shall constitute Nonqualified Stock Options; to determine which Rights (if any) shall be granted in conjunction with Options; to determine the purchase price of the shares of Common Stock covered by each Option (the "Option Price"); to determine the persons to whom, and the time or times at which, Awards shall be granted; to determine the number of shares to be covered by each Award; to interpret this Plan; to prescribe, amend and
rescind rules and regulations relating to this Plan; to determine the terms and provisions of the agreements (which need not be identical) entered into in connection with Awards granted under this Plan (each an "Award Agreement"); and to make all other determinations deemed necessary or advisable for the administration of this Plan. Subject to applicable law and regulations, the Committee may delegate to one or more of its members or to one or more agents such administrative duties as may be deemed advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under this Plan.
No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to this Plan or any Award granted hereunder.
4. Eligibility. Awards may be granted to key employees (including, without limitation, officers and directors who are employees) and Non-Employee Directors of the Company or its present or future Affiliate Corporations. For purposes of the foregoing, "employee" shall mean any employee, independent contractor, consultant, advisor, or similar individual who is providing or who has agreed to provide services to the Company or to any of its present or future Affiliate Corporations. Notwithstanding any provision of this paragraph, Incentive Stock Options shall be granted only to individuals who, on the date of such grant, are employees of the Company or a Subsidiary Corporation. In determining the persons to whom Awards shall be granted and the number of shares to be covered by each Award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of this Plan. A person to whom an Award has been granted hereunder is sometimes referred to herein as a "Participant" or "Optionee."
A Participant shall be eligible to receive more than one grant of an Award during the term of this Plan, but only on the terms and subject to the restrictions hereinafter set forth.
5. Stock. The stock subject to Awards hereunder shall be shares of Common Stock. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or that may be reacquired by the Company. The aggregate number of shares of Common Stock as to which Awards may be granted from time to time under this Plan shall not exceed 4,000,000 shares (on a post-May 2001 reverse stock split basis). The limitation established by the preceding sentence shall be subject to adjustment as provided in Section 13 hereof.
To the extent that (i) any Award granted under the Plan expires, is terminated or forfeited without being exercised, settled or, with respect to Restricted Shares, vested, (ii) any Option granted under the Plan is surrendered on exercise of a Right for cash or the issuance of fewer shares of Common Stock than issuable under such surrendered Option, or (iii) any Free Standing Right granted under the Plan expires or is terminated without being exercised, the shares of Common Stock issuable thereunder, less such shares issued, shall become available for grants of Awards.
6. Options. Each Option granted pursuant to this Plan shall be evidenced by a written Award Agreement between the Company and the Participant, which agreement shall comply with and be subject to the following terms and conditions:
(a) Number of Shares. Each Award Agreement shall state the number of shares of Common Stock to which the Option relates.
(b) Type of Option. Each Award Agreement shall specifically identify the portion, if any, of the Option which constitutes an Incentive Stock Option and the portion, if any, which constitutes a Nonqualified Stock Option.
(c) Option Price. Each Award Agreement shall state the
Option Price per share of Common Stock, which shall be not less than one hundred
percent (100%) of the Fair Market Value of a share of Common Stock of the
Company on the date of grant of the Option and which, in the case of an
Incentive Stock Option, shall be further subject to the limitations described in
Section 7(d) hereof. The Option Price shall be subject to adjustment as provided
in Section 13 hereof. The later of the date on which the Committee approves the
issuance of an Option and the date on which all conditions to the issuance of an
Option is satisfied shall be considered the day on which such Option is granted.
(d) Medium And Time of Payment. The Option Price shall be paid or satisfied in full, at the time of exercise, in cash, in shares of Common Stock owned by the Participant for at least six months having a Fair Market Value equal to such Option Price or in a combination of cash and such shares of Common Stock. In addition, if permitted by the Committee in its sole discretion, payment may also be made in whole or in part in the form of an option to acquire Common Stock or in the form of another Award hereunder (based, in each case, on the Fair Market Value of such option or Award on the date the Option is exercised, as determined by the Committee).
(e) Term and Exercise of Options. Options shall be exercisable over the exercise period as and at the times and upon the conditions that the Committee may determine, as reflected in the Award Agreement; provided, however, that the Committee shall have the authority to accelerate the exercisability of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate. The exercise period shall be determined by the Committee; provided, however, that in the case of any Incentive Stock Option, such exercise period shall be subject to the limitations described in Section 7 hereof. The exercise period shall be subject to earlier termination as provided in subparagraphs (f) and (g) below. An Option may be exercised as to any or all full shares of Common Stock as to which the Option has become exercisable by giving written notice of such exercise to the Committee; provided, however, that an Option may not be exercised at any one time as to fewer than one hundred (100) shares (or such number of shares as to which the Option is then exercisable if such number of shares is less than one hundred (100)).
(f) Termination of Employment. Except as provided in this subparagraph (f) and in subparagraph (g) below, an Option may not be exercised unless the Participant is then in the employ or service of (i) the Company, (ii) an Affiliate Corporation or (iii) a corporation issuing or assuming the Option in a transaction to which Code Section 424 applies or a Subsidiary Corporation of the corporation described in this clause (iii), and unless the Participant has remained continuously so employed since the date of grant of the Option. In the event that the employment or service of a Participant shall terminate (other than by reason of death, Disability or Retirement), all Options of such Participant that are exercisable at the time of such termination may, unless earlier terminated in accordance with their terms, be exercised within three (3) months after such termination. Nothing in this Plan or in any Option or Right granted pursuant hereto shall confer upon an individual any right to continue in the employ or service of the Company or any of its Affiliate Corporations or interfere in any way with the right of the Company or any such Affiliate Corporation to terminate such employment or service at any time. The Committee in its discretion may alter the foregoing limitations at or after the date of grant of an Option.
(g) Acceleration of Benefits upon Death, Disability or Retirement of Participant or a Change in Control.
(i) Acceleration of Benefits upon Death, Disability or Retirement of Participant or a Change in Control with Respect to Options Granted Prior to December 13, 2001. With respect to Options granted prior to December 13, 2001, if (x) a Participant shall die while in the employ or service of the Company or an Affiliate Corporation or within a period of three (3) months after the termination of such employment or service, (y) a Participant's employment or service with the Company shall terminate by reason of Disability or Retirement, or (z) there occurs a Change in Control, then in any such case all Options theretofore granted to such Participant (whether or not then exercisable) may, unless earlier terminated or expired in accordance with their terms, be exercised by the Participant or by the Participant's estate or by a person who acquired the right to exercise such Option by bequest or inheritance or otherwise by reason of the death or Disability of the Participant, at any time within one year after the date of death, Disability or Retirement of the Participant or the Change in Control. The Committee in its discretion may alter the foregoing limitations at or after the date of grant of an Option.
(ii) Acceleration of Benefits upon Death,
Disability or Retirement of Participant or a Change in Control with Respect to
Options Granted on or Following December 13, 2001. With respect to Options
granted on or following December 13, 2001, if (x) a Participant shall die while
in the employ or service of the Company or an Affiliate Corporation or within a
period of three (3) months after the termination of such employment or service,
(y) a Participant's employment or service with the Company shall terminate by
reason of Disability, or (z) the Participant's employment or service with the
Company shall terminate by reason of Retirement, then in any such case all
Options theretofore granted to such Participant (whether or not then
exercisable) may, unless earlier terminated or expired in accordance with their
terms, be exercised by the Participant or by the Participant's estate or by a
person who acquired the right to exercise such Option by bequest or inheritance
or otherwise by reason of the death or Disability
of the Participant, for the stated term of the Option. If there occurs a Change in Control, then in any such case all Options theretofore granted to such Participant (whether or not then exercisable) may, unless earlier terminated or expired in accordance with their terms, be exercised by the Participant (or by the Participant's estate or by a person who acquired the right to exercise such Option by bequest or inheritance or otherwise by reason of the death or Disability of the Participant) at any time within one year after the Change in Control. The Committee in its discretion may alter the foregoing limitations at or after the date of grant of an Option.
(h) Nontransferability of Options. Except as otherwise provided in an Award Agreement, Options granted under this Plan shall not be transferable otherwise than by will or by the laws of descent and distribution, and Options may be exercised, during the lifetime of the Participant, only by the Participant or by his guardian or legal representative.
(i) Rights as a Stockholder. A Participant who is the holder of an Option or a transferee of an Option shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of a stock certificate to him or her for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 13 hereof.
(j) Other Provisions. The Award Agreements authorized under this Plan may contain such other provisions as the Committee deems advisable, including without limitation (i) the granting of Rights, (ii) the imposition of restrictions upon the exercise of an Award, and (iii) in the case of an Incentive Stock Option, the inclusion of any condition not inconsistent with the qualification of such Option as an Incentive Stock Option.
7. Incentive Stock Options. Options granted pursuant to this
Section 7 are intended to constitute Incentive Stock Options and shall be
subject to the following special terms and conditions, in addition to the
general terms and conditions specified herein:
(a) Option Price. Subject to the limitations of Sections 6(c) and 7(d) herein, the Option Price per share of Common Stock shall be determined by the Committee at the time of grant.
(b) Option Term. The term of each Incentive Stock Option shall be determined by the Committee at the time of grant, but no Incentive Stock Option shall be exercisable more than ten (10) years after the date such Incentive Stock Option is granted.
(c) Limitations on Exercise. The aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the shares of Common Stock with respect to which Options granted under this Plan and all other option plans of the Company and any Subsidiary Corporation become exercisable for the first time by a Participant during any calendar year shall not exceed $100,000. In the event the foregoing limitation is violated, the Option shall
be treated as an Incentive Stock Option with respect to shares having a fair market value (determined at the time of grant) equal to $100,000 and as a Nonqualified Stock Option with respect to the remaining shares. In making this determination, the rules specified in Section 422(d) of the Code shall be determinative.
(d) Ten Percent Stockholders. In the case of an Incentive
Stock Option granted to a Ten Percent Stockholder, (i) the Option Price shall
not be less than one hundred ten percent (110%) of the Fair Market Value of a
share of Common Stock on the date of grant of such Incentive Stock Option, and
(ii) such Incentive Stock Option shall not be exercisable more than five (5)
years after the date such Incentive Stock Option is granted.
8. Director Nonqualified Stock Options.
(a) Grant Amounts. Each Non-Employee Director shall be granted a Nonqualified Stock Option to purchase 4,000 shares of Common Stock (on a post-May 2001 reverse stock split basis) (the "Annual Grant Amount") following the meeting of the stockholders of the Company at which such individual is elected or reelected to the office of director (the "Meeting Grant Date"), commencing with the next meeting of the stockholders of the Company following the Effective Date, with each such grant effective as of each Meeting Grant Date. In addition, notwithstanding the foregoing, (i) options will be granted to directors on the Effective Date for 4,000 shares (on a post-May 2001 reverse stock split basis) to be effective as of the Effective Date, (ii) the Option Price per share shall equal one hundred percent (100%) of the Fair Market Value per share on the date of grant, and (iii) with respect to any director who is elected or nominated to become a director other than in connection with an annual meeting of the stockholders of the Company, such director shall be granted an Option, to be effective as of the date of his or her election or appointment, in an amount equal to the product of the Annual Grant Amount and a fraction, the numerator of which is the number of months from the date of such election or appointment until the expected date of the next annual meeting and the denominator of which is twelve (12).
(b) Fractional Shares. No fractional shares shall be issued under this Section 8. Any fractional share that would otherwise be granted in connection with the Annual Grant Amount shall be rounded down to the nearest whole share, with the remainder being paid in cash.
(c) No Discretion. With respect to the Options granted pursuant to this Section 8, neither the Board nor the Committee shall have discretion with respect to the selection of directors to receive Options, the number of shares subject to such Options, the purchase price thereunder or the timing of the grant of Options under this Section 8; provided, however, that with respect to the Options to be granted on the Effective Date and with respect to the Company's 2000 Annual Meeting of Stockholders, the Board and Committee shall have the discretion to postpone the automatic grants related thereto until such time as the Board or the Committee deems its advisable that such grant should be made.
9. Stock Appreciation Rights.
(a) Grant and Exercise. Related Rights may be granted either at or after the time of the grant of an Option. A Related Right or applicable portion thereof granted with respect to a given Option shall terminate and no longer be exercisable upon the termination or exercise of the related Option, except that, unless otherwise provided by the Committee at the time of grant, a Related Right granted with respect to less than the full number of shares covered by a related Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Option exceeds the number of shares not covered by the Right.
A Related Right may be exercised by a Participant, in accordance with
paragraph (b) of this Section 9, by surrendering the applicable portion of the
related Option. Upon such exercise and surrender, the Participant shall be
entitled to receive an amount determined in the manner prescribed in paragraph
(b) of this Section 9. Options which have been so surrendered, in whole or in
part, shall no longer be exercisable to the extent the Related Rights have been
exercised.
(b) Terms and Conditions. Rights shall be subject to such terms and conditions, not inconsistent with the provisions of this Plan, as shall be determined from time to time by the Committee and as evidenced by a written Award Agreement between the Company and the Participant, including the following:
(i) Related Rights shall be exercisable only at such time or times and to the extent that the Options to which they relate shall be exercisable in accordance with the Award Agreement and the provisions of this Plan.
(ii) Upon the exercise of a Related Right, a Participant shall be entitled to receive up to, but not more than, an amount in cash or shares of Common Stock equal in value to the excess of the Fair Market Value of one (1) share of Common Stock over the Option Price per share with respect to the related Option, multiplied by the number of shares in respect of which the Related Right shall have been exercised, with the Committee having the right to determine the form of payment.
(iii) Related Rights shall be transferable only when and to the extent that the underlying Option would be transferable under paragraph (h) of Section 6 of this Plan.
(iv) Rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant.
(v) The term of each Free Standing Right shall be fixed by the Committee, but no Free Standing Right shall be exercisable more than ten (10) years after the date such Right is granted.
(vi) Upon the exercise of a Free Standing Right, a Participant shall be entitled to receive up to, but not more than, an amount in cash or shares of Common Stock equal in value to the excess of the Fair Market Value of one share of Common Stock over the price per share specified in the Award Agreement relating to the Free Standing Right (which shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock on the date of grant), multiplied by the number of shares in respect of which the Right is being exercised, with the Committee having the right to determine the form of payment.
(vii) No Free Standing Right shall be transferable by the Participant otherwise than by will or by the laws of descent and distribution, and all such rights shall be exercisable, during the Participant's lifetime, only by the Participant or his legal guardian or legal representative.
(viii) In the event of the termination of employment of a recipient of a Free Standing Right, such right shall be exercisable to the same extent that an Option would have been exercisable in the event of the termination of employment of a Participant.
10. Restricted Shares.
(a) Grant. Subject to the provisions of this Plan, the Committee shall have sole and complete authority to determine the Participants to whom Restricted Shares shall be granted, the number of Restricted Shares to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Shares may be forfeited to the Company, and the other terms and conditions of such Awards (including whether or not such Restricted Shares shall qualify as Performance Awards); provided, however, that no grant of Restricted Shares shall vest in full prior to the third (3rd) anniversary of the date of such grant.
(b) Transfer Restrictions. Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered, except as otherwise provided in an Award Agreement. Certificates issued in respect of Restricted Shares shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. Upon the lapse of the restrictions applicable to such Restricted Shares, the Company shall deliver such certificates to the Participant or the Participant's legal representative.
(c) Dividends and Distributions. Dividends and other distributions paid on or in respect of Restricted Shares, if any, may be paid directly to the Participant, or may be reinvested in additional Restricted Shares, as determined by the Committee in its sole discretion.
(d) Acceleration of Benefits upon Death, Disability or Retirement of Participant or a Change in Control. If (i) a Participant shall die while in the employ or service of the Company or an Affiliate Corporation thereof or within a period of three (3) months thereafter, (ii) a Participant's employment or service with the Company shall terminate by reason of Disability or Retirement, or (iii) there occurs a Change in Control, then in any such case all
Restricted Shares theretofore granted to such Participant shall become immediately vested and nonforfeitable.
11. Performance Awards.
(a) Grant. Subject to the provisions of this Plan, the Committee shall have sole and complete authority to determine the Participants to whom Performance Awards shall be granted, the number of shares of Common Stock subject to Performance Awards, the duration of the period during which, and the conditions under which, the Performance Awards may be forfeited to the Company, and the other terms and conditions of such Awards. Performance Awards may be (i) denominated in cash or shares of Common Stock, (ii) valued, as determined by the Committee, in accordance with the achievement of such performance goals during such performance periods as the Committee shall establish, and (iii) payable at such time and in such form as the Committee shall determine.
(b) Terms and Conditions. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount and kind of any payment or transfer to be made pursuant to any Performance Award. Unless otherwise provided in an Award Agreement, Performance Awards may not be sold, assigned, transferred, pledged or otherwise encumbered.
(c) Payment of Performance Awards. Performance Awards may be paid in a lump sum or in installments following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis.
12. Provisions Applicable to Covered Officers. The Committee in its discretion may grant performance-based Options, Rights and/or Restricted Shares to Covered Officers as Performance Awards which shall be subject to the terms and provisions of this Section 12.
(a) Nature of Performance Goals. Performance goals shall be limited to one or more of the following Company, subsidiary, operating unit or division financial performance measures:
(i) earnings before interest, taxes, depreciation and/or amortization;
(ii) operating income or profit;
(iii) return on equity, assets, capital, capital employed, or investment;
(iv) after-tax operating income;
(v) net income;
(vi) earnings or book value per share;
(vii) cash flow(s);
(viii) total sales or revenues or sales or revenues per employee;
(ix) stock price or total shareholder return; or
(x) strategic business objectives, consisting of one or more objectives based on meeting specified cost targets, business expansion goals, and goals relating to acquisitions or divestitures or any combination thereof.
Each goal may be expressed on an absolute and/or relative basis, may be based on or otherwise employ comparisons based on internal targets, the past performance of the Company and/or the past or current performance of other companies, and in the case of earnings-based measures, may use or employ comparisons relating to capital, shareholders' equity and/or shares outstanding, or to assets or net assets.
(b) Maximum Awards. The maximum number of shares in respect of which Performance Awards may be granted under the Plan to any Covered Officer shall be 1,500,000 (on a post May 2001 reverse stock split basis) during any three (3) year period, and the maximum amount of any such Awards which may be settled in cash shall be $750,000 during any three (3) year period.
(c) Option Price for Options Granted as Performance Awards. The Option Price per share of Common Stock for any Options granted as Performance Awards shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the date of grant.
(d) Section 162(m) Compliance. To the extent necessary to comply with Section 162(m) of the Code, the Committee, not later than 90 days following the commencement of each performance period (or such other time as may be required or permitted by Section 162(m) of the Code), shall in writing (i) select the performance goal or goals applicable to the performance period, (ii) establish the various targets and bonus amounts which may be earned for such performance period and (iii) specify the relationship between performance goals and targets and the amounts to be earned by each Covered Officer for such performance period. Following the completion of each performance period, the Committee shall certify in writing whether the applicable performance targets have been achieved and the amounts, if any, payable to Covered Officers for such performance period. In determining the amount earned for a given performance period, subject to any applicable Award Agreement, the Committee shall have the right to reduce (but not increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the performance period.
13. Effect of Certain Changes.
(a) Certain Changes in Capitalization. If there is any change in the number of outstanding shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination, exchange of shares, merger, consolidation, liquidation, split-up, spin-off or other similar change in capitalization, any distribution to stockholders, including a rights offering, other than cash dividends, or any like change, then the number of shares of Common Stock available for Awards, the maximum number of shares of Common Stock that may be subject to Awards, the number of such shares of Common Stock covered by outstanding Awards, and the price per share of Options or the applicable market value of Rights, shall be proportionately adjusted by the Committee to reflect such change or distribution; provided, however, that any fractional shares resulting from such adjustment shall be eliminated.
(b) Change in Par Value. In the event of a change in the Common Stock as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be Common Stock within the meaning of this Plan.
(c) Determination by Committee. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive, provided that each Incentive Stock Option granted pursuant to this Plan shall not be adjusted in a manner that causes such option to fail to continue to qualify as an Incentive Stock Option within the meaning of Section 422 of Code.
14. Agreement by Participant Regarding Withholding Taxes. If the Committee shall so require, as a condition of grant, exercise or settlement or otherwise, each Participant shall agree that:
(a) no later than the date a Participant recognizes taxable income in connection with an Award granted hereunder in connection with the exercise or settlement of such Award or otherwise, the Participant will pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the exercise or settlement of such Award (any such tax, a "Withholding Tax"); and
(b) the Company shall, to the extent permitted or required by law, have the right to deduct any Withholding Tax from any payment of any kind otherwise due to the Participant.
15. Gross-Up for Excise Tax. An Award Agreement may provide that in the event that a Participant becomes entitled by reason of a Change in Control to the accelerated vesting of an Award, if such Participant is subject to excise tax (the "Excise Tax") under Section 4999 of
the Code, the Company shall pay to such Participant as additional compensation
an amount (the "Gross-Up Payment") which, after payment by such Participant of
all taxes (including any federal, state and local income tax and excise tax upon
the payment provided for by this Section 15) allows Participant to retain an
amount of the Gross-Up Payment equal to the Excise Tax. For purposes of
determining whether a Participant will be subject to the Excise Tax and the
amount of such Excise Tax, (i) any other payments or benefits received or to be
received by such Participant in connection with a Change in Control of the
Company or the Participant's termination of employment (whether pursuant to the
terms of the Award Agreement or any other plan, arrangement or agreement with
the Company, any entity whose actions result in a Change in Control of the
Company or any entity affiliated with the Company or such entity) shall be
treated as "parachute payments" within the meaning of Section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in
the opinion of tax counsel selected by the Company's independent auditors and
reasonably acceptable to the Participant such other payments or benefits (in
whole or in part) do not constitute parachute payments, including by reason of
Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services actually rendered,
within the meaning of Section 280G(b)(4)(B) of the Code, or are otherwise not
subject to the Excise Tax, (ii) the amount of payments or benefits treated as
subject to the Excise Tax shall be equal to the lesser of (A) the total amount
of payments or benefits conferred on such Participant by reason of the Change in
Control or (B) the amount of excess parachute payments within the meaning of
Section 280G(b)(1) of the Code (after applying clause (i), above), and (iii) the
value of any noncash benefits or any deferred payment or benefit shall be
determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Participant shall be deemed
to pay federal income taxes at the highest marginal rate of federal income
taxation in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Participant's residence on the date on which the
Excise Tax is incurred, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes. In the
event that the Excise Tax is subsequently determined to be less than the amount
taken into account hereunder, the Participant shall repay to the Company, at the
time that the amount of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income tax deduction) plus interest on the amount of such
repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken into account
hereunder (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Participant with respect to such
excess) at the time that the amount of such excess finally is determined. The
Participant and the Company each shall reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax.
16. Repricing Prohibited. Except for adjustments made pursuant to
Section 13, notwithstanding any provision in this Plan to the contrary, unless
approved by the holders of a majority of the shares of the Company's capital
stock present and entitled to vote on the matter at a duly convened meeting of
the Company's stockholders (or by such other number as may be required by law or
securities exchange listing requirement applicable to the Company), an Award may
not: (i) be amended to reduce the Option Price (or the purchase price, as
applicable) per share of the shares subject to the Award below the Option Price
(or purchase price) as of the date such Award is granted; or (ii) be granted in
exchange for, or in connection with, the cancellation or surrender of an Award
having a higher Option Price (or purchase price) or less favorable vesting
schedule.
17. Termination and Amendment. Unless suspended or terminated sooner by action of the Committee, no Awards may be granted under this Plan after December 14, 2010 (i.e., the tenth (10th) anniversary of the Effective Date (as hereinafter defined) of the Plan). This Plan may be suspended or terminated at any time by the Board. Rights and obligations under any Award granted while the Plan is in effect shall not be impaired by suspension or termination of the Plan except with the consent of the person to whom the Award was granted.
The Board at any time, and from time to time, may amend the Plan.
However, (i) except as provided in Section 13 relating to adjustments upon
changes in stock, no amendment with respect to a material revision to the Plan
or where stockholder approval is necessary for the Plan to satisfy the
requirements of Section 422 of the Code, Rule 16b-3 promulgated under the
Exchange Act or any securities exchange listing requirements applicable to the
Company shall be effective unless approved by the holders of a majority of the
shares of the Company's capital stock present and entitled to vote on the matter
at a duly convened meeting of the Company's stockholders (or by such other
number as may be required by law or securities exchange listing requirement
applicable to the Company). For the purpose of the foregoing, a material
revision shall be deemed to include (but shall not be limited to): (i) a
material increase in the number of shares subject to the Plan under Section 5;
(ii) an expansion of the types of Awards under the Plan; (iii) a material
expansion of the class of employees, directors or other participants eligible to
participate in the Plan; (iv) a material extension of the term of the Plan; (v)
a material change to the method of determining the Option Price under the Plan;
and (vi) an amendment to Section 16 of the Plan. A material revision shall not
include any revision that curtails rather than expands the scope of the Plan.
The Board may in its sole discretion submit any other amendment to the Plan for
stockholder approval, including, but not limited to, amendments to the Plan
intended to satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to certain
executive officers. It is expressly contemplated that, subject to this Section
17, the Board may amend the Plan in any respect the Board deems necessary or
advisable to provide eligible employees, directors or consultants with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under it into
compliance therewith. Rights and obligations under any Award granted before
amendment of the Plan shall not be impaired by any
amendment of the Plan unless (i) the Company requests the consent of the person to whom the Award was granted and (ii) such person consents in writing. The Committee at any time, and from time to time, may amend the terms of any one or more Awards; provided, however, that the rights and obligations under any Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the person to whom the Award was granted, and (ii) such person consents in writing.
18. Effectiveness. The original effective date of the Plan was December 14, 2000 (the "Effective Date"). The Plan as set forth herein constitutes an amendment and restatement of the Corrections Corporation of America 2000 Stock Incentive Plan, as previously adopted by the Board and the stockholders of the Company and shall supercede and replace in its entirety the previously adopted Plan and all amendments thereto. The amended and restated Plan became effective February 18, 2004.
19. Effect of Headings. The section and subsection headings contained herein are for convenience only and shall not affect the construction hereof.
20. Governing Law. The validity, construction and effect of the Plan shall be determined in accordance with the laws of the State of Tennessee.
EXHIBIT 21
LIST OF SUBSIDIARIES OF CORRECTIONS CORPORATION OF AMERICA
First Tier Subsidiaries: CCA of Tennessee, Inc., a Tennessee corporation Prison Realty Management, Inc., a Tennessee corporation CCA Properties of America, LLC, a Tennessee limited liability company CCA Properties of Texas, L.P., a Delaware limited partnership Second Tier Subsidiaries: CCA Properties of Arizona, LLC, a Tennessee limited liability company CCA Properties of Tennessee, LLC, a Tennessee limited liability company CCA International, Inc., a Delaware corporation Technical and Business Institutes of America, Inc., a Tennessee corporation TransCor America, LLC, a Tennessee limited liability company TransCor Puerto Rico, Inc., a Puerto Rico corporation CCA (UK) Ltd., a United Kingdom corporation Viccor Investments PTY. LTD., a Victoria (Australia) corporation Third Tier Subsidiaries: Ronald Lee Suttles Tri-County Extradition, Inc., a California corporation |
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of Corrections Corporation of America of our report dated February 6, 2004 (except with respect to the matters discussed in the eleventh paragraph of Note 15 and the second paragraph of Note 17, as to which the date is February 19, 2004), with respect to the consolidated financial statements of Corrections Corporation of America and Subsidiaries, included in this Annual Report (Form 10-K) for the year ended December 31, 2003:
Registration Statement (Form S-8 No. 333-70625) pertaining to the Corrections Corporation of America (formerly Prison Realty Trust) Amended and Restated 1997 Employee Share Incentive Plan
Registration Statement (Form S-4 No. 333-41778) pertaining to the merger of Corrections Corporation of America, a Tennessee corporation, with and into CCA of Tennessee, Inc.
Registration Statement (Form S-8 No. 333-69352) pertaining to the Corrections Corporation of America Amended and Restated 2000 Stock Incentive Plan
Registration Statement (Form S-8 No. 333-69358) pertaining to the Corrections Corporation of America 401(k) Savings and Retirement Plan
Registration Statement (Form S-3/A No. 333-104240) pertaining to a shelf registration of debt securities, guarantees of debt securities, preferred stock, common stock, or warrants
/s/ Ernst & Young LLP Nashville, Tennessee March 9, 2004 |
EXHIBIT 31.1
CERTIFICATION OF THE CEO PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, John D. Ferguson, certify that:
1. I have reviewed this annual report on Form 10-K of Corrections Corporation of America;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 12, 2004 /s/ John D. Ferguson ---------------------------------------- John D. Ferguson President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF THE CFO PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Irving E. Lingo, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Corrections Corporation of America;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 12, 2004 /s/ Irving E. Lingo, Jr. ------------------------------------------- Irving E. Lingo, Jr. Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Corrections Corporation of America (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John D. Ferguson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ John D. Ferguson ----------------------------------------- John D. Ferguson President and Chief Executive Officer March 12, 2004 |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Corrections Corporation of America (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Irving E. Lingo, Jr., Executive Vice President and Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Irving E. Lingo, Jr. ----------------------------------------- Irving E. Lingo, Jr. Executive Vice President and Chief Financial Officer March 12, 2004 |