-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V/Q0Fp8Wy3vvi5JLUsO3IiPzRiS/XirKlR4OBiR4gjLqXV8P4R+5SACTlL8Ryd+U ddZo9W3sAaGncR/d9cvAJA== 0000950144-98-010994.txt : 19980928 0000950144-98-010994.hdr.sgml : 19980928 ACCESSION NUMBER: 0000950144-98-010994 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORRECTIONS CORPORATION OF AMERICA CENTRAL INDEX KEY: 0000739404 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 621156308 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-13560 FILM NUMBER: 98715357 BUSINESS ADDRESS: STREET 1: 10 BURTON HILLS BOULEVARD CITY: NASHVILLE STATE: TN ZIP: 37215 BUSINESS PHONE: 6152633000 MAIL ADDRESS: STREET 1: 10 BURTON HILLS BOULEVARD CITY: NASHVILLE STATE: TN ZIP: 37215 10-K/A 1 CORRECTIONS CORPORATION OF AMERICA 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-13560 CORRECTIONS CORPORATION OF AMERICA (Exact name of Registrant as specified in its charter) AMENDMENT NO. 2 TENNESSEE 62-1156308 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 BURTON HILLS BOULEVARD, NASHVILLE, TENNESSEE 37215 (Address and Zip Code of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 263-3000 102 WOODMONT BLVD., SUITE 800, NASHVILLE, TENNESSEE 37205 (Former name, address and fiscal year if changed since last report) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ------------------ Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting common stock held by non-affiliates of the Registrant was $2,156,105,380 as of March 17, 1998, based upon the closing price of such stock as reported on the New York Stock Exchange ("NYSE") on that day. There were 80,187,742 shares of common stock, $1.00 par value per share, outstanding at March 17, 1998. DOCUMENTS INCORPORATED BY REFERENCE Part III of this report incorporates by reference information from the definitive Proxy Statement for the Annual Meeting of Shareholders, held on May 12, 1998. This Amendment No. 2 amends the 1997 Form 10-K Annual Report filed on March 30, 1998, as amended by Amendment No. 1 to the 1997 Form 10-K Annual Report filed on September 15, 1998 (the "Form 10-K"), by amending the following items as set forth in the pages attached hereto. ================================================================================ 2 PART I ITEM 2. PROPERTIES The Company currently operates facilities located in 19 states, the District of Columbia, Puerto Rico, Australia and the United Kingdom. As of March 20, 1998, the Company owns five of the 52 domestic facilities it operates, leases 34 domestic facilities from government agencies and non-profit corporations and leases 13 facilities from Prison Realty. On July 18, 1997, the Company and certain of its subsidiaries, sold the Initial Facilities to Prison Realty for an aggregate purchase price of $308.1 million. The Company sold the real property and all tangible property associated with each of the Initial Facilities to Prison Realty. Simultaneously with the sale of each of the facilities to Prison Realty, the Company entered into the Leases which require the Company to pay all operating expenses, taxes, insurance and other costs. All of the Leases provide for base rent with certain annual escalations and have primary terms ranging from 10-12 years which may be extended at the fair market rates for three additional five-year periods upon the mutual agreement of the Company and Prison Realty. In connection with the sale of facilities to Prison Realty, the Company and certain of its subsidiaries entered into Option Agreements pursuant to which the Company and certain of its subsidiaries granted Prison Realty exclusive options to acquire any or all of five correctional facilities until July 18, 2000 for a purchase price equal to the Company's cost of developing, constructing, and equipping such facilities plus 5% of such costs. The purchase price formula under the Option Agreements was not intended to represent fair value for any acquired facility. To date, Prison Realty has exercised its option to acquire two such facilities, the Northeast Ohio Correction Center located in Youngstown, 22 3 Ohio and the Torrance County Detention Facility located in Estancia, New Mexico, for an aggregate purchase price of $108.7 million. In addition, in connection with the sale and lease-back arrangements, the Company and Prison Realty entered into a Right to Purchase Agreement pursuant to which Prison Realty has an option to acquire at fair market value and lease-back to the Company any correctional or detention facility acquired or developed and owned by the Company in the future for a period of three years following the date inmates are first received at such facility. To date, Prison Realty has acquired two facilities, the Cimarron Correctional Facility located in Cushing, Oklahoma and the Davis Correctional Facility located in Holdenville, Oklahoma, pursuant to the Right to Purchase Agreement for an aggregate purchase price of $74.4 million. The location, name and rated capacity of each of the Company's operating facilities at March 20, 1998, grouped by state, are set forth in the following table:
NO. OF OWNED, MANAGED LOCATION CITY NAME BEDS OR LEASED - -------- ---- ---- ---- --------- DOMESTIC Arizona Eloy Eloy Detention Center 1,250 (250) Leased Florence Central Arizona 1,792 Leased Detention Center Colorado Las Animas Bent County Correctional 700 Managed Facility Walsenburg Huerfano County Correctional Center 752 Owned Florida Panama City Bay Correctional Facility 750 Managed Panama City Bay County Jail 276 Managed Panama City Bay County Jail Annex 401 Managed Brooksville Hernando County Jail 302 Managed Lake City Lake City Correctional Facility 350 Managed Lecanto Citrus County Detention 300 Managed Facility Okeechobee Okeechobee Juvenile Offender 100 Managed Correctional Center Indiana Vincennes Southwest Indiana Regional 132 Managed Youth Village Indianapolis Marion County Jail II 670 Managed Kansas Leavenworth Leavenworth Detention Center 327 Leased Louisiana Winnfield Winn Correctional Center 1,474 Managed Minnesota Appleton Prairie Correctional Facility 1,338 Managed Mississippi Greenwood Delta Correctional Facility 1,016 Managed Woodville Wilkinson County Correctional 500 Managed Center Nevada Las Vegas Southern Nevada Women's 500 Owned Correctional Facility New Jersey Elizabeth Elizabeth Detention Center 300 Managed New Mexico Estancia Torrance County Detention 910 Leased Facility Grants New Mexico Women's 322 Owned Correctional Facility
- -------- ( )Indicates number of expansion beds. 23 4
NO. OF OWNED, MANAGED LOCATION CITY NAME BEDS OR LEASED - -------- ---- ---- ---- --------- Ohio Youngstown Northeast Ohio Correction Center 2,016 Leased Oklahoma Cushing Cimarron Correctional Facility 960 Leased Hinton Great Plains Correctional 768 Managed Facility Holdenville Davis Correctional Facility 960 Leased Puerto Rico Guayama Guayama Correctional Center 1,000 Managed Ponce Ponce Correctional Center 1,000 Managed Ponce Ponce Young Adult Facility 500 Managed Tennessee Chattanooga Silverdale Facilities 414 Managed Clifton South Central Correctional 1,506 Managed Center Mason West Tennessee Detention 600 Leased Facility Memphis Shelby Training Center 200 Owned Memphis Tall Trees 63 Managed Nashville Davidson County Juvenile 100 Managed Detention Center Nashville Metro-Davidson County 1,092 Managed Detention Facility Whiteville Hardeman County Correctional 2,016 Managed Center Texas Bartlett Bartlett State Jail 962 Managed Bridgeport Bridgeport Pre-Parole Transfer 200 Leased Facility Brownfield Brownfield Intermediate 200 Managed Sanction Facility Cleveland Cleveland Pre-Release Center 520 Managed Dallas Jesse R. Dawson State Jail 2,000 Managed Eden Eden Detention Center 1,225 Managed Houston Houston Processing Center 411 Leased Laredo Laredo Processing Center 258 Leased Liberty Liberty County Jail 382 Managed Mineral Wells Mineral Wells Pre-Parole 1,503(300) Leased Transfer Facility Overton B.M. Moore Pre-Release 500 Managed Center Taylor T. Don Hutto Correctional 480 Leased Center Venus Venus Pre-Release Center 1,000 Managed District of Washington Correctional Treatment 866 Owned Columbia Facility INTERNATIONAL Australia Queensland Borallon Corrections Centre 455 Managed Victoria Metropolitan Women's 125 Owned Correctional Centre United Kingdom Redditch Blakenhurst HM Prison 649 Managed
- ----------------------------- ( ) Indicates number of expansion beds. 24 5 For the first ten months of 1997, the Company maintained its corporate headquarters in approximately 21,600 square feet of office space at 102 Woodmont Boulevard, Suite 800, Nashville, Tennessee 37205, at a rate comparable for similar space in the area. In addition, during the same period, the Company also leased approximately 13,000 square feet of office space in Brentwood, Tennessee, at a rate comparable for similar space in the area. In March 1996, the Company acquired approximately 3.25 acres in the Burton Hills Office Park, Nashville, Tennessee and began construction on a 75,000 square foot office building. Construction on the office building was completed in November 1997, at which time the Company terminated the office leases referred to above and moved the Company's corporate headquarters to the new building. The Company occupies substantially all of the building with approximately 844 square feet of the office space being leased by the Company to Prison Realty and approximately 2,284 square feet of office space being leased to DC Investment Partners, LLC, a Tennessee limited liability company ("DC Investments"), which serves as the general partner or investment advisor to five private investment limited partnerships. D. Robert Crants, III is a principal in DC Investments and is the son of Doctor R. Crants. The Company's wholly-owned subsidiary, TransCor, leases approximately 15,000 square feet of office space and a maintenance facility comprising approximately 8,000 square feet at 1510 Fort Negley Boulevard, Nashville, Tennessee, at a rate comparable for similar space in the area. 25 6 ITEM 6. SELECTED FINANCIAL DATA The selected historical financial data for the five years ended December 31, 1997 are derived from the Company's consolidated financial statements and include financial data reflecting the acquisitions of TransCor in December 1994, Concept in April 1995 and CPI in August 1995, all of which were accounted for as poolings-of-interests. All information contained in the following table should be read in conjunction with the consolidated financial statements and related notes of the Company included herein. 29 7 CORRECTIONS CORPORATION OF AMERICA SELECTED HISTORICAL FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS: Revenues $ 462,249 $292,513 $207,241 $152,375 $132,534 --------- -------- -------- -------- -------- Expenses: Operating 330,470 211,208 153,692 123,273 107,837 Lease 18,684 2,786 5,904 741 742 General and administrative 16,025 12,607 13,506 8,939 7,332 Depreciation and amortization 14,093 11,339 6,524 5,753 5,759 --------- -------- -------- -------- -------- 379,272 237,940 179,626 138,706 121,670 --------- -------- -------- -------- -------- Operating income 82,977 54,573 27,615 13,669 10,864 Interest expense (income), net (4,119) 4,224 3,952 3,439 4,424 --------- -------- -------- -------- -------- Income before income taxes 87,096 50,349 23,663 10,230 6,440 Provision for income taxes 33,141 19,469 9,330 2,312 832 --------- -------- -------- -------- -------- Net income 53,955 30,880 14,333 7,918 5,608 Preferred stock dividends -- -- -- 204 425 --------- -------- -------- -------- -------- Net income allocable to common stockholders $ 53,955 $ 30,880 $ 14,333 $ 7,714 $ 5,183 ========= ======== ======== ======== ======== Net income per share: Basic $ .70 $ .43 $ .23 $ .14 $ .10 Diluted $ .61 $ .36 $ .18 $ .12 $ .10 Weighted average shares outstanding: Basic 77,221 71,763 62,257 54,500 50,185 Diluted 90,239 87,040 81,595 62,384 52,155 BALANCE SHEET: Total assets $ 697,940 $468,888 $213,478 $141,792 $109,285 Long-term debt, less current portion 127,075 117,535 74,865 47,984 50,558 Total liabilities excluding deferred gain 214,112 187,136 116,774 80,035 75,103 Stockholders' equity 348,076 281,752 96,704 61,757 34,182
30 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following financial analysis should be read in conjunction with the above financial information concerning the Company. General The Company presently has contracts to manage 68 correctional and detention facilities with an aggregate design capacity of 54,944 beds. Of these 68 facilities, 55 are currently in operation and 13 are under development by the Company, eight of which are subject to an option to purchase by CCA Prison Realty Trust ("Prison Realty"), two of which will be financed and owned by the Company and three of which will be financed and owned by contracting government entities. The Company, through its United Kingdom joint venture, UK Detention Services ("UKDS"), manages one facility in the United Kingdom and, through its Australian joint venture, CC Australia, manages two facilities in Australia. The Company's ownership interest in UKDS and CC Australia is accounted for under the equity method. Of the 13 facilities under development by the Company, eight are scheduled to commence operations during 1998. In addition, at March 9, 1998, the Company had outstanding written responses to RFPs and other solicitations for nine projects with an aggregate design capacity of 11,604 beds. The following table sets forth the number of facilities under contract or award at the end of the periods shown:
AS OF DECEMBER 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- Contracts(1) 67 59 47 Facilities in operation 54 42 38 Design capacity of contracts 52,890 41,135 28,607 Design capacity of facilities in operation 38,509 24,310 20,252 Compensated mandays(2) 10,524,537 7,113,794 4,799,562
(1) Consists of facilities in operation and facilities under development for which contracts have been finalized. (2) Compensated mandays for a period ended are calculated, for per diem rate facilities, as the number of beds occupied by residents on a daily basis during the period ended and, for fixed rate facilities, as the design capacity of the facility multiplied by the number of days the facility was in operation during the period. The Company derives substantially all of its revenues from the management of correctional and detention facilities for national, federal, state and local government agencies in the United States and abroad. 31 9 Domestic Geographic Market Concentration. The Company currently manages facilities in 19 states, the District of Columbia and Puerto Rico. Management revenues by state, as a percentage of the Company's total revenues for the years ended December 31, 1997, 1996 and 1995, respectively, are as follows:
1997 1996 1995 --------------------- ------------------------ ------------------------ NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE OF OF TOTAL OF OF TOTAL OF OF TOTAL FACILITIES REVENUES FACILITIES REVENUES FACILITIES REVENUES ---------------------------------------------------------------------------------- Arizona 2 12.1% 2 14.7% 2 16.5% Colorado 2 1.9 1 0.3 -- -- Florida 7 8.9 5 10.3 5 7.8 Indiana 2 .3 1 0.4 1 1.4 Kansas 1 1.9 1 3.0 2 4.6 Louisiana 1 3.1 1 4.7 1 6.1 Minnesota 1 2.6 1 0.7 -- -- Mississippi 1 2.1 1 1.1 -- -- Nevada 1 .4 -- -- -- -- New Jersey 1 2.4 -- -- -- -- New Mexico 2 3.4 3 6.7 3 8.4 Ohio 1 3.5 -- -- -- -- Oklahoma 3 5.6 2 3.0 1 1.9 Puerto Rico 3 6.2 1 4.7 1 0.1 South Carolina -- .8 1 2.1 -- -- Tennessee 9 17.8 8 19.2 8 25.2 Texas 13 21.7 11 23.6 12 22.7 Washington, D.C. 1 3.6 -- -- -- --
To the extent favorable or unfavorable changes in regulations or market conditions occur in these markets, such changes would likely have a corresponding impact on the Company's results of operations. Revenues for operation of correctional and detention facilities are recognized as the services are provided, based on a gross rate per day per inmate or on a fixed monthly rate. Of the Company's 52 domestic facilities in operation, 48 are compensated on a per diem basis and four are compensated at fixed monthly rates. The per diem rates or fixed monthly rates vary according to the type of facility and the extent of services provided at the facility. The Company has certain contracts which provide for the realization of operating bonuses which are contingent upon various criteria. The Company also realizes development fee revenues on the percentage-of-completion method for certain correctional facilities. Transportation revenues are based on a per mile charge or a fixed fee per trip. The Company incurs all facility operating expenses, except for certain debt service and lease payments with respect to certain facilities that the Company does not own or lease. The Company currently owns five of the domestic facilities it manages, manages 34 domestic facilities that are owned or leased by a government agency, construction of which has been financed by the agency through one or more of a variety of methods and manages 13 domestic facilities that are owned and leased to the Company by Prison Realty. Facility payroll and related taxes constitute the majority of facility operating expenses for the Company. Substantially all other operating expenses consist of food, clothing, medical services, utilities, supplies, maintenance, insurance and other general operating expenses. As inmate populations increase following the start-up of a facility, operating expenses generally decrease as a percentage of related revenues. Each facility is fully staffed at the time it is opened or taken over by the Company, although it may be operating at a relatively low occupancy rate at such time. 32 10 The Company's general and administrative costs consist of salaries of officers and other corporate headquarters personnel, legal, accounting and other professional fees (including pooling expenses related to certain acquisitions), travel expenses, executive office rental, and promotional and marketing expenses. The most significant component of these costs relates to the hiring and training of experienced corrections and administrative personnel necessary for the implementation and maintenance of the facility management and transportation contracts. Operating income for each facility depends upon the relationship between operating costs, the rate at which the Company is compensated per manday, and the occupancy rate. The rates of compensation are fixed by contract and approximately two-thirds of all operating costs are fixed costs. Therefore, operating income will vary from period to period as occupancy rates fluctuate. Operating income will be affected adversely as the Company increases the number of newly-constructed or expanded facilities under management and experiences initial low occupancy rates. After a management contract has been awarded, the Company incurs facility start-up costs that consist principally of initial employee training, travel and other direct expenses incurred in connection with the contract. These costs are capitalized and amortized on a straight-line basis over the shorter of the term of the contract plus renewals, or five years. Depending on the contract, start-up costs are either fully recoverable as pass-through costs or are billable to the contracting agency over the initial term of the contract plus renewals. The Company has historically financed start-up costs through available cash, the issuance of various securities, cash from operations and borrowings under the Company's revolving credit facility. Newly opened facilities are staffed according to contract requirements when the Company begins receiving inmates. Inmates are typically assigned to a newly opened facility on a regulated, structured basis over a one-to-three month period. Until expected occupancy levels are reached, operating losses may be incurred. Results of Operations The following table sets forth, for the periods indicated, the percentage of revenues of certain items in the Company's statement of operations and the percentage change from period to period in such items:
PERCENTAGE OF REVENUES YEAR ENDED DECEMBER 31, 1997 1996 ----------------------- COMPARED COMPARED 1997 1996 1995 TO 1996 TO 1995 ----- ----- ----- ------- ------- Revenues 100.0% 100.0% 100.0% 58.0% 41.1% Expenses: Operating 71.5 72.2 74.2 56.5 37.4 Lease 4.0 1.0 2.8 570.6 (52.8) General and administrative 3.5 4.3 6.5 27.1 ( 6.7) Depreciation and amortization 3.0 3.9 3.2 24.3 73.8 ----- ----- ----- Operating income 18.0 18.6 13.3 52.0 97.6 ----- ----- ----- Interest expense, net ( .9) 1.4 1.9 (197.5) 6.9 ----- ----- ----- Income before income taxes 18.9 17.2 11.4 73.0 112.8 Provision for income taxes 7.2 6.6 4.5 70.2 108.7 ----- ----- ----- Net income 11.7% 10.6% 6.9% 74.7 115.4 ===== ===== =====
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996 Revenues. Total revenues increased 58.0% in 1997 as compared to 1996, with increases in both management and transportation services. Management revenues increased 59.5% in 1997, or $167.7 million. This increase was 33 11 primarily due to the opening of new facilities and the expansion of existing facilities by the Company in 1996 and 1997. In 1997, the Company opened 13 new facilities with an aggregate design capacity of 11,644 beds, assumed management of one facility with an aggregate design capacity of 866 beds and expanded six existing facilities to increase their design capacity by an aggregate of 2,290 beds. Accordingly, 14,800 new beds were brought on line in 1997. Due to the growth in beds, compensated mandays increased 47.9% in 1997 from 7,113,794 to 10,524,537. Average occupancy remained stable at 93.2% in 1997 as compared to 94.1% in 1996. Transportation revenues increased $2.0 million or 18.9% in 1997 as compared to 1996. This growth was primarily the result of an expanded customer base and increased compensated mileage realized through the opening of two new transportation hubs in the first quarter of 1997 and more "mass transports," which are generally moves of 40 or more inmates per trip. During the second quarter of 1997, the Company sold 30% of UKDS to Sodexho and recognized an after-tax gain of $777,000. Facility Operating Expenses. Facility operating expenses increased 56.5% to 330.5 million in 1997. This increase was due to the increased compensated mandays and compensated mileage that the Company realized in 1997 as previously mentioned. As a percentage of revenues, facility operating expenses decreased to 71.5% in 1997 as compared with 72.2% in 1996. The Company's management operating cost per compensated manday was $30.51 during 1997 as compared to $28.82 in 1996. This increase was primarily due to the Company bringing the 14,800 new beds on line and having multiple facilities in the start-up phase of operation throughout 1997 which resulted in increased personnel costs including employee training and overtime. The increase is also due to the expanded scope of services that the Company has recently encountered in some of its new contracts. Lease Expense. Lease expense increased 570.6% in 1997 compared to 1996. The significant increase in lease expense was the result of the Leases that the Company entered into with Prison Realty in 1997. Annual first year rent for these 12 facilities is expected to be approximately $50.0 million. Management expects that in the future, lease expense will increase as the Company enters into additional sale-leaseback transactions with Prison Realty. General and Administrative. General and administrative expenses increased 27.1% in 1997 over 1996. However, as a percentage of revenues, general and administrative expenses for 1997 declined to 3.5% as compared to 4.3% for 1996. Management expects that as the Company continues to grow, general and administrative expenses will increase in volume but continue to decrease as a percentage of revenues. Depreciation and Amortization. Depreciation and amortization expenses increased 24.3% in 1997 over 1996. The increase was due to the 58.4% growth in beds in operation at the end of 1997 as compared to 1996. Depreciation and amortization expenses should continue to increase as the Company brings more beds on line. Interest Expense, Net. Interest expense for 1997 was actually net interest income of $4.1 million as compared to $4.2 million of interest expense in 1996. This change in net interest was primarily the result of the sale of the 12 facilities to Prison Realty for an aggregate purchase price of approximately $455.1 million which allowed the Company to pay off approximately $182.6 million in debt and benefit from interest earnings on approximately $128.0 million invested for a portion of 1997. Year Ended December 31, 1996 Compared with Year Ended December 31, 1995 Revenues. The Company's total revenues increased 41% from 1995 to 1996 with increases in both management and transportation services. The Company's management revenues increased 43% in 1996, or $84.2 million. This increase was due to the opening of new facilities and the expansion of existing facilities by the Company 34 12 in 1995 and 1996. In 1996, the Company opened four new facilities with an aggregate design capacity of 2,501 beds, assumed management of two facilities with an aggregate design capacity of 899 beds and expanded five existing facilities to increase their design capacity by an aggregate of 1,058 beds. Accordingly, 4,458 new beds were brought on line in 1996. Due to the growth in beds, compensated mandays increased 48% in 1996 from 4,799,562 to 7,113,794. Average occupancy remained stable at 94.1% for 1996 as compared to 93.9% for 1995. Transportation revenues increased $1.1 million or 12% in 1996 as compared to 1995. The 1996 growth was due to a continued marketing effort that expanded the customer base and resulted in increased compensated mileage. During the second and fourth quarters of 1996, the Company purchased the remaining two-thirds of UKDS from its original joint venture partners. After consideration of several strategic alternatives related to UKDS, the Company sold 20% of the entity to Sodexho, and recognized an after-tax gain of $515,000. In conjunction with this transaction, Sodexho was also provided the option to purchase an additional 30% of UKDS, which option was exercised in the second quarter 1997. Facility Operating Expenses. Facility operating expenses increased 37.4% to $213.2 million in 1996 compared to $158.8 million in 1995. This increase was due to the additional beds on line that increased compensated mandays and the growth in the transportation services. The average management operating cost per manday was $28.82 for 1996 as compared to $31.59 for 1995. The decrease in average cost per manday was due to the Company's ability to realize more economies of scale as additional beds were brought on line. As a percentage of revenues, facility operating expenses decreased to 73% from 77%. This decrease was primarily attributable to the expansion of various facilities that added lower incremental operating expenses and improved economies of scale. Salary and related employee benefits constituted approximately 63% and 58% of facility operating expenses for 1996 and 1995, respectively. General and Administrative. General and administrative costs decreased 6.7% in 1996 to $13.4 million as compared to $14.3 million in 1995. This decrease was due to the non-recurring pooling expenses associated with acquisitions during fiscal 1995 as well as the Company's ability to reduce duplication in the general and administrative areas by integrating the acquired companies into its systems. Depreciation and Amortization. Depreciation and amortization increased 74% to $11.3 million in 1996 as compared to $6.5 million in 1995. The 1996 increase was due to the growth in total beds in owned facilities as well as the one-time, non-recurring reserve of $850,000 established for the termination of the Company's contract with South Carolina. Interest Expenses Net. Interest expense, net, increased 7% in 1996, consisting of a 48%, or $2.7 million, increase in interest expense, and a 151%, or $2.4 million, increase in interest income. Interest expense increased due primarily to the addition of $50.0 million in convertible subordinated notes issued in February and April 1996, bearing interest at 7.5%. Interest income increased as a result of the Company investing the net proceeds from an equity offering, which closed in June 1996. Year Ended December 31, 1995 Compared with Year Ended December 31, 1994 In 1994 and 1995, the Company expanded its service capabilities and broadened its geographic presence in the United States through a series of strategic acquisitions that complemented the Company's development activities (collectively, the "Acquisitions"). In December 1994, the Company acquired TransCor, a nationwide provider of inmate transportation services. In April 1995, the Company acquired Concept, a prison management company with eight facilities and 4,400 beds under contract at the time of acquisition. In August 1995, the Company acquired CPI, a prison management company with seven facilities and 2,900 beds under contract at the time of acquisition. The Company's operating results for 1995 were significantly affected by the Acquisitions. All of these business combinations were 35 13 accounted for as a pooling-of-interests and, accordingly, the operations of TransCor, Concept and CPI have been combined in the accompanying consolidated financial statements. The discussion herein is based upon the combined operations of the Company, TransCor, Concept and CPI for all periods presented in the accompanying consolidated financial statements. Revenues. Total revenues increased 36% from 1994 to 1995 with increases in both management and transportation services. Management revenues increased 37% in 1995, or $53.2 million. This increase was due to the opening of new facilities and the expansions of existing facilities in 1994 and 1995 by the Company and the related Acquisitions. In 1995, the Company opened five new facilities with an aggregate design capacity of 3,390 beds and assumed management of three facilities with an aggregate design capacity of 1,688 beds. The Company also realized the full-year effect of three facilities added in 1994 with an aggregate design capacity of 1,560 beds. The third contributing factor to growth was the expansion of 13 existing facilities to increase their design capacity by 1,887 beds. Due to the growth in the number of beds, compensated mandays increased 27% in 1995 from 3,768,095 to 4,799,562. Average occupancy remained stable at 93.9% for 1995 as compared to 93.5% for 1994. Transportation revenues increased $1.7 million or 21% in 1995 as compared to 1994. The 1995 growth was due to a continued marketing effort that expanded the customer base and resulted in increased compensated mileage. During the first quarter of 1995, the Company purchased the remaining 50% of CC Australia from its original joint venture partner. After consideration of several strategic alternatives related to CC Australia, the Company then sold 50% of the entity to Sodexho during the second quarter of 1995. The Company accounted for the 100% ownership period on the equity basis of accounting and recognized an after-tax gain of $783,000 on the sale. Facility Operating Expenses. Facility operating expenses increased 29% to $158.8 million in 1995 compared to $123.5 million in 1994. This increase was due to the additional beds on line that increased compensated mandays and the growth in the transportation services. The average management operating cost per manday was $31.59 for 1995 as compared to $31.16 for 1994. The increase in average cost per manday was due to the significant number of new beds brought on line in 1995. As the five new facilities were opened, the full complement of fixed costs was being incurred prior to full occupancy. As a percentage of revenues, however, facility operating expenses decreased to 77% from 81%. This decrease was primarily attributable to the expansion of various facilities that added lower incremental operating expenses and improved economies of scale. Salary and related employee benefits constituted approximately 58% and 55% of facility operating expenses for 1995 and 1994, respectively. General and Administrative. General and administrative costs increased 52% in 1995 to $14.3 million as compared to $9.4 million in 1994. Included in 1995 were approximately $950,000 of non-recurring pooling expenses related to the Acquisitions. The Company also expanded its management staff to manage its significant growth. Additional staff was added to bring new business on line, resulting in cost being incurred prior to revenue being realized. As all transition issues are finalized from the acquired operations and the duplicate services are consolidated, general and administrative cost decrease as a percentage of revenues. Depreciation and Amortization. Depreciation and amortization increased $771,000, to $6.5 million in 1995 as compared to $5.8 million in 1994. The 1995 increase was due to the growth in total beds in owned facilities. Interest Expenses, Net. Interest expense, net, increased 15% in 1995 due to the assumption of debt related to the Eloy Detention Center in Eloy, Arizona. In July 1995, the Company acquired the remaining 50% of the investment in a partnership and assumed the assets and debts. Income Taxes. In 1995, the Company's effective income tax rate increased to 39% as compared to 23% in 1994. This increase in taxes was due to the Company's complete utilization of net operating loss carry forwards, therefore becoming subject to full statutory tax rates. 36 14 Liquidity and Capital Resources The Company's business is capital intensive in relation to the development of a correctional facility. The Company's efforts to obtain contracts, construct additional facilities and maintain its day-to-day operations have required the continued acquisition of funds through borrowings and equity offerings. The Company has financed these activities through the sale of capital stock, warrants, subordinated convertible notes and senior secured debt, through the issuance of taxable and tax-exempt bonds, by bank borrowings, by assisting government agencies in the issuance of municipal bonds and most recently through the sale and leaseback of certain correctional facilities to Prison Realty. The Company's current ratio increased to 2.41 in 1997 as compared to 1.79 in 1996. This improvement was primarily the result of increased cash balances derived from the sale of the 12 facilities to Prison Realty in 1997. The ratio of long-term debt to total capitalization decreased to 26.7% at December 31, 1997 compared to 29.4% at December 31, 1996. Cash flow from operations for 1997 was $92.0 million as compared to $24.4 million for 1996. The Company has strengthened its cash flow through its expanded business, additional focus on larger, more profitable facilities, the expansion of existing facilities where economies of scale can be realized, and the continuing effort of cost containment. In February 1996, the Company issued $30.0 million of its convertible subordinated notes to an investor. The proceeds were used to repay the outstanding principal under the Company's working capital credit facility and construction loan. The notes bear interest at 7.5%, payable quarterly, and require the Company to maintain specific ratio requirements relating to net worth, cash flow and debt coverage. The notes are convertible into shares of the Company's common stock at a conversion price, as adjusted, of $25.91 per share. In April 1996, due to the triggering of its preemptive right in connection with the issuance of the convertible subordinated notes, Sodexho purchased $20.0 million of convertible subordinated notes under the same terms and conditions. In June 1996, the Company completed a public offering of 3,700,000 shares of its Common Stock at a price to the public of $37.50 per share. The proceeds of the offering, after deducting all associated costs, were $131.8 million. In October 1996, the Company invested $22.5 million in the 564-bed, medium security Prairie Correctional Facility located in Appleton, Minnesota through the purchase of Correctional Facility Revenue Bonds previously issued in connection with the construction of the facility. In 1997, through the expansion of the facility, the Company increased the capacity to 1,338 beds and increased its investment in the facility by approximately $36.4 million. The Company has a revolving credit facility with a group of banks which matures in September 1999. The credit facility provides for borrowings of up to $170.0 million for general corporate purposes and letters of credit. The credit facility bears interest, at the election of the Company, at either the bank's prime rate or a rate which is .5% above the applicable 30, 60, or 90 day LIBOR rate. Interest is payable quarterly with respect to prime rate loans and at the expiration of the applicable LIBOR period with respect to LIBOR based loans. There are no prepayment penalties associated with the credit facility. The credit facility requires the Company, among other things, to maintain maximum leverage ratios and a minimum debt service coverage ratio. The facility also limits certain payments and distributions. As of December 31, 1997, there was $70.0 million borrowed under this facility. Letters of credit totaling $1.6 million had been issued leaving the total unused commitment at $98.4 million. The Company also has a $2.5 million credit facility with a bank that provides for the issuance of letters of credit and matures in September 1999. As of December 31, 1997 there were $1.6 million in letters of credit issued, leaving the unused commitment at $0.9 million. In July 1997, the Company sold ten of its facilities to Prison Realty for approximately $378.3 million. The proceeds were used to pay off $131.0 million of credit facility debt, $42.2 million of first mortgage debt and $9.4 million of senior secured notes. The remaining proceeds were used to fund existing construction projects and for general 37 15 working capital purposes. In October 1997, the Company sold an additional facility to Prison Realty for approximately $38.5 million. In November and December 1997, the Company purchased two correctional facilities for $74.4 million. Subsequently, the Company sold these facilities to Prison Realty for $74.4 million. Management expects that as a result of this relationship, the Company will have access to additional capital that will help fund future growth. The Company anticipates making cash investments in connection with future acquisitions and expansions. In addition, in accordance with the developing trend of private prison managers toward making strategic financial investments in facilities, the Company plans to use a portion of its cash to finance start-up costs, leasehold improvements and equity investments in the facilities, if appropriate in connection with undertaking new contracts. The Company believes that the cash flow from operations, the availability of future capital from Prison Realty and amounts available under its credit facility will be sufficient to meet its capital requirements for the foreseeable future. Furthermore, management believes that additional resources may be available to the Company through a variety of other financing methods. The Company is currently undergoing routine IRS audits for certain tax years and adverse conclusions (if any) could negatively impact the Company's cash flows. Year 2000 Disclosure In 1997, the Company made significant improvements to its computer systems, software and applications. Although the Company believes that its software applications and programs are "Year 2000" compliant, there can be no assurance that coding errors or other defects will not be discovered in the future. Also, the Company has not initiated formal communications with any of the entities which contract with it to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company anticipates it will do so in 1998, in advance of any impact from the issue. Any Year 2000 compliance problem of the Company or other third parties could result in a material adverse effect on the Company's business, prospects, results of operations and financial condition. 38 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by Regulation S-X are included in this Report on Form 10-K commencing on page F-1 as indicated below. INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants....................................... F-1 Consolidated Balance Sheets as of December 31, 1997 and 1996....................................................................... F-2 Consolidated Statements of Operations for the years ended December 31, 1997, 1996, and 1995........................................ F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995....................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995........................................ F-6 Notes to Consolidated Financial Statements..................................... F-9
39 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: (1) Financial Statements. The Financial Statements as set forth under Item 8 of this Report on Form 10-K have been filed herewith beginning on Page F-1 of this Report. (2) Financial Statement Schedules. All schedules specified in the accounting regulations of the Securities and Exchange Commission have been omitted because they are either inapplicable or are not required. (3) The Exhibits are listed in the Index of Exhibits Required by Item 601 of Regulation S-K included herewith. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Report. (c) Certain Exhibits. See Item 14(a)(3) above. (d) Certain Financial Statements. See Item 14(a) (1) and (2) above. 40 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORRECTIONS CORPORATION OF AMERICA Date: September 25, 1998 By: /s/ Darrell K. Massengale ---------------------------------- Darrell K. Massengale Chief Financial Officer and Secretary (Principal Accounting Officer) 41 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Corrections Corporation of America: We have audited the accompanying consolidated balance sheets of CORRECTIONS CORPORATION OF AMERICA (a Tennessee corporation) AND SUBSIDIARIES as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corrections Corporation of America and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Nashville, Tennessee February 16, 1998 F-1 20 CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
ASSETS 1997 1996 - ----------------------------------------------- -------- -------- CURRENT ASSETS: Cash, cash equivalents and restricted cash $136,147 $ 8,282 Accounts receivable, net of allowances 89,822 100,551 Prepaid expenses 4,868 2,940 Deferred tax assets - 1,026 Other 2,585 1,643 -------- -------- Total current assets 233,422 114,442 PROPERTY AND EQUIPMENT, NET 266,493 288,697 OTHER LONG-TERM ASSETS: Notes receivable 59,264 22,859 Investment in direct financing leases 90,184 12,898 Deferred tax assets 10,195 - Restricted investments - 587 Other 38,382 29,405 -------- -------- Total assets $697,940 $468,888 ======== ========
(continued) F-2 21 CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS) (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 - ---------------------------------------------------------------- --------- --------- CURRENT LIABILITIES: Accounts payable $ 32,094 $ 39,224 Accrued salaries and wages 9,778 5,487 Income taxes payable 14,128 886 Deferred tax liabilities 1,229 - Other accrued expenses 20,361 10,016 Current portion of long-term debt 5,847 8,281 Current portion of deferred gain on real estate transactions 13,223 - --------- --------- Total current liabilities 96,660 63,894 LONG-TERM DEBT, NET OF CURRENT PORTION 127,075 117,535 DEFERRED TAX LIABILITIES - 4,717 DEFERRED GAIN ON REAL ESTATE TRANSACTIONS, NET OF CURRENT PORTION 122,529 - OTHER NONCURRENT LIABILITIES 3,600 990 --------- --------- Total liabilities 349,864 187,136 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - Series B - $1 (one dollar) par value; 400 shares authorized 380 - Common stock - $1 (one dollar) par value; 150,000 shares authorized 80,230 75,029 Additional paid-in capital 215,833 165,317 Retained earnings 92,475 42,132 Treasury stock, at cost (40,842) (726) --------- --------- Total stockholders' equity 348,076 281,752 --------- --------- Total liabilities and stockholders' equity $ 697,940 $ 468,888 ========= =========
The accompanying notes are an integral part of these consolidated statements. F-3 22 CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 --------- -------- -------- REVENUES $ 462,249 $292,513 $207,241 --------- -------- -------- EXPENSES: Operating 330,470 211,208 153,692 Lease 18,684 2,786 5,904 General and administrative 16,025 12,607 13,506 Depreciation and amortization 14,093 11,339 6,524 --------- -------- -------- 379,272 237,940 179,626 --------- -------- -------- OPERATING INCOME 82,977 54,573 27,615 INTEREST (INCOME) EXPENSE, NET (4,119) 4,224 3,952 --------- -------- -------- INCOME BEFORE INCOME TAXES 87,096 50,349 23,663 PROVISION FOR INCOME TAXES 33,141 19,469 9,330 --------- -------- -------- NET INCOME $ 53,955 $ 30,880 $ 14,333 ========= ======== ======== NET INCOME PER COMMON SHARE: Basic $ .70 $ .43 $ .23 ========= ======== ======== Diluted $ .61 $ .36 $ .18 ========= ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC 77,221 71,763 62,257 ========= ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, DILUTED 90,239 87,040 81,595 ========= ======== ========
The accompanying notes are an integral part of these consolidated statements. F-4 23 CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK --------------- ------------------------------------------ SERIES B ISSUED TREASURY STOCK --------------- ----------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ------ ------- BALANCE, DECEMBER 31, 1994 - $ - 59,380 $ 59,380 (78) $ (307) Issuance of common stock - - 1,158 1,158 - - Stock options exercised and warrants repurchased or converted to stock - - 2,228 2,228 74 270 Income tax benefits of incentive stock option exercises - - - - - - Conversion of long-term debt - - 1,774 1,774 - - Net income - - - - - - ---- ------ ------ -------- ------- -------- BALANCE, DECEMBER 31, 1995 - - 64,540 64,540 (4) (37) Issuance of common stock - - 3,700 3,700 - - Stock options exercised and warrants converted to stock - - 6,789 6,789 (19) (689) Income tax benefits of incentive stock option exercises - - - - - - Compensation expense related to deferred stock awards - - - - - - Net income - - - - - - ---- ------ ------ -------- ------- -------- BALANCE, DECEMBER 31, 1996 - - 75,029 75,029 (23) (726) Exchange of preferred stock for acquisition of American Corrections Transport 380 380 - - (760) (32,812) Stock options and warrants exercised - - 4,197 4,197 (41) (1,975) Stock repurchased - - - - (123) (5,329) Income tax benefits of incentive stock option exercises - - - - - - Conversion of long-term debt - - 1,004 1,004 - - Compensation expense related to deferred stock awards and stock options - - - - - - Net income - - - - - - ---- ------ ------ -------- ------- -------- BALANCE, DECEMBER 31, 1997 380 $ 380 80,230 $ 80,230 (947) $(40,842) ==== ====== ====== ======== ======= ========
ADDITIONAL TOTAL PAID-IN RETAINED STOCKHOLDERS' CAPITAL EARNINGS EQUITY ---------- -------- ---------- BALANCE, DECEMBER 31, 1994 $ (1,182) $ 3,866 $ 61,757 Issuance of common stock 7,184 - 8,342 Stock options exercised and warrants repurchased or 1,699 1,639 converted to stock (2,558) Income tax benefits of incentive stock option exercises 3,987 - 3,987 Conversion of long-term debt 4,872 - 6,646 Net income - 14,333 14,333 --------- -------- --------- BALANCE, DECEMBER 31, 1995 16,560 15,641 96,704 Issuance of common stock 128,112 - 131,812 Stock options exercised and warrants converted to stock 8,177 (4,389) 9,888 Income tax benefits of incentive stock option exercises 11,944 - 11,944 Compensation expense related to deferred stock awards 524 - 524 Net income - 30,880 30,880 --------- -------- --------- BALANCE, DECEMBER 31, 1996 165,317 42,132 281,752 Exchange of preferred stock for acquisition of American Corrections Transport 32,432 - - Stock options and warrants exercised 10,626 (3,612) 9,236 Stock repurchased - - (5,329) Income tax benefits of incentive stock option exercises 6,328 - 6,328 Conversion of long-term debt 673 - 1,677 Compensation expense related to deferred stock awards and stock options 457 - 457 Net income - 53,955 53,955 --------- -------- --------- BALANCE, DECEMBER 31, 1997 $ 215,833 $ 92,475 $ 348,076 ========= ======== =========
The accompanying notes are an integral part of these consolidated statements. F-5 24 CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
1997 1996 1995 --------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 53,955 $ 30,880 $ 14,333 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,093 11,339 6,524 Deferred and other noncash income taxes (6,329) 13,117 6,162 Other noncash items 457 524 - Gain on disposal of assets (881) (3,501) (1,284) Equity in earnings of unconsolidated entities (916) (1,098) (619) Recognized gain on real estate transactions (5,906) - - Changes in assets and liabilities, net of acquisitions: Accounts receivable 16,027 (55,993) (12,750) Prepaid expenses (1,928) (1,371) (18) Other current assets (942) (623) (87) Accounts payable (7,130) 28,467 1,991 Income taxes payable 13,242 190 374 Accrued expenses 14,636 2,459 3,140 Other liabilities 3,600 - - --------- --------- -------- Net cash provided by operating activities 91,978 24,390 17,766 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions of property and equipment (297,293) (165,703) (25,926) Acquisition of UCLP - - (5,250) (Increase) decrease in restricted cash and investments 4,037 (3,025) (619) Increase in other assets (17,868) (11,163) (8,500) Investments in affiliates, net 1,707 (3,138) (3,717) Proceeds from disposals of assets 457,802 6,747 3,763 Investment in notes receivable (38,156) (22,500) - Increase in direct financing leases (84,295) (3,693) - Payments received on direct financing leases and notes receivable 3,462 553 328 --------- --------- -------- Net cash provided by (used in) investing activities 29,396 (201,922) (39,921) --------- --------- --------
(continued) F-6 25 CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (continued)
1997 1996 1995 --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt $ - $ 74,700 $ 7,111 Payments on long-term debt (57,194) (24,443) (8,648) (Payments on) proceeds from line of credit, net 66,000 (10,500) 13,715 Payment of debt issuance costs and prepayment penalties (2,772) (433) (260) Proceeds from issuance of common stock - 131,006 7,859 Proceeds from exercise of stock options and warrants 9,236 9,889 868 Purchase of treasury stock and warrants (5,329) - (630) --------- --------- -------- Net cash provided by financing activities 9,941 180,219 20,015 --------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 131,315 2,687 (2,140) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,832 2,145 4,285 --------- --------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 136,147 $ 4,832 $ 2,145 ========= ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amounts capitalized) $ 6,579 $ 8,979 $ 5,145 ========= ========= ======== Income taxes $ 24,351 $ 6,630 $ 3,060 ========= ========= ========
(continued) F-7 26 CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (continued)
1997 1996 1995 ---------- ---------- --------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Long-term debt was converted into common stock through the exercise of stock warrants: Other assets $ - $ - $ 27 Long-term debt - - (1,428) Common stock - - 400 Additional paid-in capital - - 1,001 ---------- ---------- --------- $ - $ - $ - ========== ========== ========= Long-term debt was converted into common stock: Other assets $ 23 $ - $ 53 Long-term debt (1,700) - (6,700) Common stock 1,004 - 887 Additional paid-in capital 673 - 5,760 ---------- ---------- --------- $ - $ - $ - ========== ========== ========= The Company acquired property and equipment by assuming long-term debt: Property and equipment $ - $ - $ (27,392) Long-term debt - - 27,392 ---------- ---------- --------- $ - $ - $ - ========== ========== =========
The accompanying notes are an integral part of these consolidated statements. F-8 27 CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Corrections Corporation of America, a Tennessee corporation, (together with its subsidiaries, collectively referred to as the "Company") operates and manages prisons and other correctional facilities and provides prisoner transportation services for government agencies. The Company provides a full range of related services to government agencies, including managing, financing, designing and constructing new facilities and redesigning and renovating older facilities. All material intercompany transactions and balances have been eliminated in consolidation. At December 31, 1997, the Company has a 50% interest in Corrections Corporation of Australia PTY LTD ("CC Australia"). CC Australia provides services similar to the Company in Australia and surrounding countries. At December 31, 1997, the Company's wholly-owned subsidiary, CCA (UK) Limited, has a 50% interest in UK Detention Services Limited ("UKDS"), a United Kingdom joint venture. UKDS provides services similar to the Company in the United Kingdom. The Company accounts for these investments under the equity method. Assets and liabilities are converted from their functional currency into the U.S. dollar utilizing the conversion rate in effect at the balance sheet date. Revenue and expense items are converted using the weighted average rate during the period. The excess of the Company's investment in these unconsolidated subsidiaries over the underlying equity is being amortized over twenty-five years. Deferred project development costs consist of costs that can be directly associated with a specific anticipated contract and, if recovery from that contract is probable, are deferred until the anticipated contract has been awarded. At the time the contract is awarded to the Company, the deferred project development costs are either capitalized as part of property and equipment or are transferred to project development costs. Costs of unsuccessful or abandoned contracts are charged to depreciation and amortization expense when their recovery is not considered probable. Internal costs incurred in securing new clients including costs of responding to requests for proposals are expensed as incurred. Facility start-up costs, principally costs of initial employee training, travel and other direct expenses incurred in connection with opening of new facilities, to the extent recoverable under each negotiated contract, are deferred and recorded as other assets. Project development costs and start-up costs are amortized on a straight-line basis over the lesser of the initial term of the contract plus renewals or five years. The difference between amortization calculated under the Company's policy and amortization calculated over the initial term of the contract is not material. F-9 28 Debt issuance costs are amortized on a straight-line basis over the life of the related debt. This amortization is charged to depreciation and amortization expense. Property and equipment is carried at cost. Betterments, renewals and extraordinary repairs that extend the life of the asset are capitalized; other repairs and maintenance are expensed. Interest is capitalized to the asset to which it relates in connection with the construction of major facilities. The cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in income. Depreciation is computed by the straight-line method for financial reporting purposes and accelerated methods for tax reporting purposes based upon the estimated useful lives of the related assets. Investment in direct financing leases represents the portion of the Company's management contract with government agencies that represents payments on building and equipment leases. The leases are accounted for using the financing method and, accordingly, the minimum lease payments to be received over the term of the leases less unearned income are capitalized as the Company's investments in the leases. Unearned income is recognized as income over the term of the leases using the interest method. Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement generally requires the Company to record deferred income taxes for the differences between book and tax bases of its assets and liabilities. The Company maintains contracts with various government entities to manage their facilities for fixed per diem rates or monthly fixed rates. The Company also maintains contracts with various federal, state and local government entities for the housing of inmates in Company owned facilities at fixed per diem rates. These contracts usually contain expiration dates with renewal options ranging from annual to multi-year renewals. Most of these contracts have current terms that require renewal every two to five years. The Company expects to renew these contracts for periods consistent with the remaining renewal options allowed by the contracts or other reasonable extensions. Fixed monthly rate revenue is recorded in the month earned and fixed per diem revenue is recorded based on the per diem rate multiplied by the number of inmates housed during the respective period. The Company recognizes development revenue on the percentage-of-completion method and recognizes any additional management service revenues when earned or awarded by the respective authorities. To meet the reporting requirements of SFAS 107, "Disclosures About Fair Value of Financial Instruments," the Company calculates the fair value of financial instruments using quoted market prices. At December 31, 1997, there were no material differences in the book values of the Company's financial instruments and their related fair values, except for the Company's convertible subordinated notes (see Note 7) and the forward contract for convertible subordinated notes (see Note 13), which based on the conversion rate on the underlying equity securities, have an estimated fair market value of approximately $378,000. F-10 29 For purposes of the statements of cash flows, the Company excludes restricted cash from cash and cash equivalents. As of December 31, 1997, the Company has no restricted cash. The Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company continually evaluates the recoverability of the carrying values of its long-lived assets. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" effective for fiscal years beginning after December 15, 1997. This statement requires that changes in the amounts of certain items, including gains and losses on certain securities, be shown in the financial statements. The Company does not anticipate the adoption of SFAS 130 to have a material effect on the Company's financial statements. In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the provisions of SFAS 131 effective January 1, 1998 and, if appropriate, will begin disclosing information about its operating segments accordingly. The Company does not anticipate the adoption of SFAS 131 to have a material effect on the Company's financial statements. Certain reclassifications of 1996 and 1995 amounts have been made to conform with the 1997 presentation. F-11 30 2. MERGERS AND ACQUISITIONS On April 25, 1995, the Company issued 5,450 shares of its common stock for all the outstanding shares of Concept Incorporated ("Concept"). Concept operates and manages prisons and other correctional facilities for government agencies. On August 18, 1995, the Company issued 2,800 shares of its common stock for all the outstanding shares of Corrections Management Affiliates, Inc. ("CMA") and Correctional Services Group, Inc. ("CSG"). CMA and CSG operate and manage prisons and other correctional facilities for government agencies. The transactions above were accounted for under the pooling-of-interests method of accounting, and the Company has previously filed restated financial statements. In the preparation of the consolidated financial statements, the Company made certain immaterial adjustments and reclassifications to the historical financial statements of Concept, CMA and CSG to be consistent with the accounting policies of the Company. The Company exercised its option to acquire the remaining 50% of its investment in United-Concept Limited Partnership ("UCLP") during 1995. The acquisition was accounted for under the purchase method of accounting. The purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair market value at the date of the acquisition. The operations of UCLP on a consolidated basis prior to the acquisition are not material to the Company's results of operations. During the first quarter of 1995, the Company purchased the remaining 50% of CC Australia from its original joint venture partner for $3,717 cash. After consideration of several strategic alternatives related to CC Australia, the Company sold 50% of the entity to Sodexho S.A. ("Sodexho"), a French conglomerate, during the second quarter of 1995. The Company accounted for the 100% ownership period on the equity basis of accounting and recognized an after-tax gain of $783 on the sale. During the second and fourth quarters of 1996, the Company purchased the remaining two-thirds of UKDS from its original joint venture partners for an aggregate total of $4,504 cash. After consideration of several strategic alternatives related to UKDS, the Company sold 20% of the entity to Sodexho in December 1996 and recognized an after-tax gain of $515. In conjunction with this transaction, Sodexho was also provided the option to purchase an additional 30% of UKDS. In the second quarter of 1997, Sodexho exercised its option to purchase an additional 30% of UKDS, and the Company recognized an after-tax gain of $777 on the sale. On October 2, 1997, the Company exchanged 380 shares of Series B convertible preferred stock for substantially all of the assets of American Corrections Transport (primarily consisting of 760 shares of the Company's common stock) in a tax-free reorganization pursuant to Section 368(a)(l)(C) of the Internal Revenue Code of 1986, as amended. Of the preferred shares issued, 190 are held in escrow for the resolution of specified contingencies. F-12 31 3. PROPERTY AND EQUIPMENT Property and equipment, at cost, consists of the following:
DECEMBER 31, --------------------------- 1997 1996 --------- --------- Land $ 13,632 $ 14,276 Buildings and improvements 95,614 140,470 Equipment 19,863 19,376 Office furniture and fixtures 2,626 2,937 Construction in progress 152,042 137,405 --------- --------- 283,777 314,464 Less accumulated depreciation (17,284) (25,767) --------- --------- $ 266,493 $ 288,697 ========= =========
Depreciation expense was $9,710, $7,147, and $4,428 for 1997, 1996 and 1995, respectively. 4. NOTES RECEIVABLE Notes receivable consists of the following: DECEMBER 31, ------------------------- 1997 1996 -------- -------- Notes receivable, principal and interest payments of $535 monthly through September 2017, interest at 9.25%, secured by a first mortgage on a facility $ 58,154 $ 22,401 Notes receivable, $700 is secured by a third mortgage on a facility and is due in January 1999, remaining balance is due in monthly principal and interest payments through April 1999, weighted average interest rate at 11.14% 876 876 Other 1,310 - -------- -------- 60,340 23,277 Less current portion in accounts receivable (1,076) (418) -------- -------- $ 59,264 $ 22,859 ======== ========
F-13 32 5. INVESTMENT IN DIRECT FINANCING LEASES At December 31, 1997, the Company's investment in direct financing leases represents building and equipment leases between the Company and certain government agencies. Certain of the agreements contain provisions that allow the government agencies to purchase the buildings and equipment for predetermined prices at specific intervals during the contract period. A schedule of minimum future rentals to be received under the direct financing leases at December 31, 1997, is as follows:
YEAR AMOUNT ---- --------- 1998 $ 6,909 1999 6,909 2000 6,909 2001 6,909 2002 6,909 Thereafter 88,087 --------- Total minimum obligation 122,632 Less unearned income (28,226) --------- Present value of direct financing leases 94,406 Less current portion in accounts receivable (4,222) --------- Long-term portion $ 90,184 =========
6. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, 1997 1996 ------- ------- Deferred project development costs $ 786 $ 284 Project development costs, less accumulated amortization of $513 and $499, respectively 5,832 3,989 Facility start-up costs, less accumulated amortization of $5,351 and $4,296, respectively 20,459 11,404 Debt issuance costs, less accumulated amortization of $1,135 and $1,698, respectively 1,191 2,555 Deferred placement fees 2,404 2,404 Investments in affiliates 6,941 7,893 Other assets 769 876 ------- ------- $38,382 $29,405 ======= =======
F-14 33 7. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ---------------------------- 1997 1996 --------- --------- Revolving Credit Facility payable to a group of banks, principal due September 1999, interest payable quarterly at the bank's prime rate (8.5% at December 31, 1997) or LIBOR plus .5% (6.22% at December 31, 1997), collateralized by the pledge of stock of the Company's first tier domestic subsidiaries $ 70,000 $ 4,000 Convertible Subordinated Notes, principal due at maturity in 2002 with call provisions beginning in March 2000, interest payable quarterly at 7.5% 50,000 50,000 Convertible Subordinated Notes, principal due at maturity in 1999 with call provisions beginning in June 1999, interest payable semi-annually at 8.5% 7,000 7,000 Convertible Subordinated Notes, principal due at maturity in 1998 with call provisions beginning in June 1997, interest payable quarterly at 8.5% 5,800 7,500 Senior Secured Notes, principal paid in full in July 1997 - 10,328 Secured Notes Payable, principal paid in full in March 1997 - 1,210 Detention Center Revenue Bonds, principal paid in full in July 1997 - 24,700 Notes payable to a bank, principal paid in full in July 1997 - 20,911 Other 122 167 --------- --------- 132,922 125,816 Less current portion (5,847) (8,281) --------- --------- $ 127,075 $ 117,535 ========= =========
F-15 34 At December 31, 1997, the Company's revolving credit facility provides for borrowings up to $170,000. The facility bears interest at the bank's prime rate or LIBOR plus .50%, .75% or 1.0% depending on the Company's leverage ratio. The facility is used for working capital and letters of credit. Letters of credit totaling $1,600 have been issued to secure the Company's worker's compensation insurance policy. The unused commitment at December 31, 1997 was $98,400. The facility is subject to renewal on September 6, 1999. At December 31, 1997, the Company has a $2,500 letter of credit facility. Letters of credit totaling $1,615 have been issued to secure the Company's worker's compensation insurance policy, performance bonds and utility deposits. The unused commitment at December 31, 1997 was $885. The facility is subject to renewal on September 6, 1999. Restricted cash of $3,450 at December 31, 1996, represents cash held in sinking funds established for the funding of current year principal and interest on certain bonds and current construction obligations. The Company does not maintain any significant formal or informal compensating balance arrangements with financial institutions. The Convertible Subordinated Notes are convertible into the Company's common stock at prices ranging from $1.69 to $25.91 per share. The Company may require conversion under certain conditions after the stock has a market value of 150% of the conversion price for a specified period. In 1997, Convertible Subordinated Notes with a face value of $1,700 were converted into 1,004 shares of common stock. The provisions of the credit facilities and notes contain restrictive covenants, the most restrictive of which are limits on the payment of dividends, incurrence of additional indebtedness, investments and mergers. The agreements also require that the Company maintain specific ratio requirements relating to cash flow, tangible net worth, interest coverage and earnings. The Company was in compliance with the covenants at December 31, 1997. The Company capitalized interest of $6,263, $502 and $717 in 1997, 1996 and 1995, respectively. Interest (income) expense, net is comprised of the following for each year:
1997 1996 1995 -------- ------- ------- Interest expense $ 6,633 $ 8,200 $ 5,534 Interest income (10,752) (3,976) (1,582) -------- ------- ------- $ (4,119) $ 4,224 $ 3,952 ======== ======= =======
Maturities of long-term debt for the next five years and thereafter are: 1998 - $5,847; 1999 - $77,047; 2000 - $28; 2001 - $0; and 2002 - $50,000. F-16 35 8. RELATIONSHIP WITH CCA PRISON REALTY TRUST On July 18, 1997, the Company sold nine correctional and detention facilities (the "Initial Facilities") to CCA Prison Realty Trust, a Maryland real estate investment trust, ("Prison Realty") for an aggregate amount of $308,100. The Company entered into agreements with Prison Realty to lease the Initial Facilities back to the Company pursuant to long-term, non-cancelable triple net leases (the "Leases") which require the Company to pay all operating expenses, taxes, insurance and other costs. All of the Leases have initial terms ranging from 10-12 years which may be extended at the fair market rates for three additional five-year periods upon the mutual agreement of the Company and Prison Realty. The Company entered into option agreements with Prison Realty pursuant to which Prison Realty was granted the option to acquire and leaseback any or all of five option facilities to the Company at any time during the three-year period following the acquisition of the Initial Facilities. In addition, the Company granted Prison Realty an option to acquire, at fair market value, and leaseback to the Company any correctional or detention facility acquired or developed and owned by the Company in the future for a period of three years following the date the Company first receives inmates at such facility. Subsequent to the sale of the Initial Facilities through December 31, 1997, the Company individually sold three correctional and detention facilities to Prison Realty and immediately entered into 10-year lease agreements with Prison Realty with terms substantially similar to the Leases with respect to the Initial Facilities. As of December 31, 1997, the net property and equipment has been removed from the balance sheet, and the gains realized on the sale transactions have been deferred and are being recognized as lease expense reductions over the terms of the leases. The Chairman of the Board of Directors, President and Chief Executive Officer of the Company is also the Chairman of the Board of Trustees of Prison Realty. F-17 36 9. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The provision for income taxes is comprised of the following components:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 -------- ------- ------ CURRENT PROVISION Federal $ 35,930 $ 5,567 $2,853 State 3,540 785 315 -------- ------- ------ 39,470 6,352 3,168 -------- ------- ------ INCOME TAXES CHARGED TO EQUITY Federal 5,679 10,719 3,567 State 649 1,225 420 -------- ------- ------ 6,328 11,944 3,987 -------- ------- ------ DEFERRED PROVISION Federal (11,360) 1,052 1,946 State (1,297) 121 229 -------- ------- ------ (12,657) 1,173 2,175 -------- ------- ------ Provision for income taxes $ 33,141 $19,469 $9,330 ======== ======= ======
F-18 37 Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------------------- 1997 1996 -------- ------- CURRENT DEFERRED TAX ASSETS Asset reserves and liabilities not yet deductible for tax $ 2,546 $ 2,067 Deferred revenue 2,731 - -------- ------- Total current deferred tax assets 5,277 2,067 -------- ------- CURRENT DEFERRED TAX LIABILITIES Tax in excess of book amortization 6,480 - Income item not yet taxable and other 26 1,041 -------- ------- Total current deferred tax liabilities 6,506 1,041 -------- ------- Net current deferred tax assets (liabilities) $ (1,229) $ 1,026 ======== ======= NONCURRENT DEFERRED TAX ASSETS Deferred gain on real estate transactions $ 12,684 $ - Other 2,245 788 -------- ------- Total noncurrent deferred tax assets 14,929 788 -------- ------- NONCURRENT DEFERRED TAX LIABILITIES Tax in excess of book depreciation 2,443 3,876 Income items not yet taxable and other 2,291 1,629 -------- ------- Total noncurrent deferred tax liabilities 4,734 5,505 -------- ------- Net noncurrent deferred tax assets (liabilities) $ 10,195 $(4,717) ======== =======
F-19 38 A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income for the years ended December 31, is as follows:
1997 1996 1995 ---- ---- ---- Statutory federal rate 35.0% 35.0% 34.0% State taxes, net of federal tax benefit 4.0 4.0 4.0 Other items, net (.9) (.3) 1.4 ---- ---- ---- 38.1% 38.7% 39.4% ==== ==== ====
F-20 39 10.EARNINGS PER SHARE In the fourth quarter of 1997, the Company adopted the provisions of SFAS 128, "Earnings Per Share." Under the standards established by SFAS 128, earnings per share is measured at two levels: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to convertible preferred stock, convertible subordinated notes, options and warrants. Earnings per share for 1996 and 1995 have been restated to conform with the provisions of SFAS 128. In computing diluted earnings per common share, the Company's stock warrants and stock options are considered dilutive using the treasury stock method, and the Series B convertible preferred stock and the 8.5% convertible subordinated notes are considered dilutive using the if-converted method. The following table presents information necessary to calculate diluted earnings per share for the years ended December 31:
1997 1996 1995 ------- ------- ------- Net income $53,955 $30,880 $14,333 Interest expense applicable to convertible subordinated notes, net of tax 700 752 740 ------- ------- ------- Adjusted net income $54,655 $31,632 $15,073 ======= ======= ======= Weighted average common shares outstanding 77,221 71,763 62,257 Effect of dilutive options and warrants 7,279 9,028 13,089 Conversion of preferred stock 182 - - Conversion of convertible subordinated notes 5,557 6,249 6,249 ------- ------- ------- Adjusted diluted common shares outstanding 90,239 87,040 81,595 ======= ======= ======= Diluted earnings per share $ .61 $ .36 $ .18 ======= ======= =======
F-21 40 11.STOCKHOLDERS' EQUITY Preferred Stock - The Company has authorized 1,000 shares of $1 (one dollar) par value Series A preferred stock. At December 31, 1997, no Series A preferred stock was issued or outstanding. The Company has authorized 400 shares of $1 (one dollar) par value Series B convertible preferred stock. The preferred stock has the same voting rights as the Company's common stock. Dividends are paid on the preferred stock at a rate equal to two times the dividend being paid on each share of the Company's common stock. Each share of the preferred stock is convertible into 1.94 shares of the Company's common stock. The preferred stock is convertible at the Company's option any time on or after January 1, 1998 and at the holder's option in twenty-five percent increments beginning July 1, 1999 through January 1, 2001. At December 31, 1997, 380 shares of Series B convertible preferred stock were issued and outstanding. Stock Offering - On June 5, 1996, the Company completed a secondary public offering of 3,700 new shares of its common stock. The net proceeds of $131,812 were used to develop, acquire and expand correctional and detention facilities. Stock Split - On June 5, 1996, the Board of Directors declared a two-for-one stock split of the Company's common stock to be effective on July 2, 1996. An amount equal to the par value of the common shares outstanding as of July 2, 1996, was transferred from additional paid-in capital to the common stock account. On October 4, 1995, the Board of Directors declared a two-for-one stock split of the Company's common stock to be effective on October 31, 1995. An amount equal to the par value of the common shares outstanding as of October 31, 1995, was transferred from additional paid-in capital to the common stock account. All references to number of shares and to per share data in the consolidated financial statements have been adjusted for these stock splits. Stock Warrants - The Company has issued stock warrants to certain affiliated and unaffiliated parties for providing certain financing, consulting and brokerage services to the Company and to stockholders as a dividend. At December 31, 1997, 1,100 stock warrants were outstanding. The warrants were issued June 23, 1994 with an exercise price of $15.80 per warrant and an expiration date of December 31, 1999. Each warrant entitles the warrant holder to four common shares upon exercise. The warrants are exercisable from the date of issuance. F-22 41 Stock Option Plans - The Company has incentive and nonqualified stock option plans under which options may be granted to "key employees" as designated by the Board of Directors. The options are granted with exercise prices that equal market value on the date of grant. The options are exercisable after the later of two years from the date of employment or one year after the date of grant until ten years after the date of the grant. The Company's Board of Directors approved a stock repurchase program for up to an aggregate of 400 shares of the Company's stock for the purpose of funding the employee stock options, stock ownership and stock award plans. On September 30, 1997, the Company repurchased 123 shares of the Company's stock from a member of the Board of Directors of the Company at the market price pursuant to this program. Stock option transactions relating to the Company's incentive and nonqualified stock option plans are summarized below:
1997 ---------------------- WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE -------- ------- Outstanding at beginning of period 3,503 $ 9.96 Granted 454 23.83 Exercised (1,078) 7.60 Canceled (26) 26.21 ------ ------ Outstanding at end of period 2,853 $12.91 ====== ====== Available for future grant 2,802 - ====== ====== Exercisable 2,337 $ 9.98 ====== ======
1996 ---------------------- WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE -------- ------- Outstanding at beginning of period 3,916 $ 3.73 Granted 903 27.06 Exercised (1,297) 2.92 Canceled (19) 22.97 ------ ------ Outstanding at end of period 3,503 $ 9.96 ====== ====== Available for future grant 2,950 - ====== ====== Exercisable 2,601 $ 4.06 ====== ======
F-23 42
1995 ---------------------- WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- -------- Outstanding at beginning of period 3,470 $ 2.31 Granted 1,248 7.61 Exercised (754) 3.49 Canceled (48) 5.82 ------ ------ Outstanding at end of period 3,916 $ 3.73 ====== ====== Available for future grant 3,818 - ====== ====== Exercisable 2,680 $ 1.93 ====== ======
The weighted average fair value of options granted during 1997, 1996 and 1995 was $10.14, $12.28 and $3.21 per option, respectively. The options outstanding at December 31, 1997, have exercise prices between $1.04 and $33.13 and a weighted average remaining contractual life of 7 years. In addition to the plans mentioned above, the Company has a nonqualified stock option plan to encourage stock ownership by selected employees of the Company. Pursuant to the plan, stock options may be granted to key employees upon authorization by the Board of Directors. The aggregate number of options that may be granted under the plan is 1,440. As of December 31, 1997, 240 options were outstanding at an option price of $1.35 per share. During 1995, the Company authorized the issuance of 337 shares of common stock to certain key employees as a deferred stock award. The award becomes fully vested ten years from the date of grant based on continuous employment with the Company. The Company is expensing the $3,670 of awards over the vesting period. During 1997, the Company granted 80 stock options to a member of the Board of Directors of the Company to purchase the Company's common stock. The options were granted with an exercise price less than the market value on the date of grant. The options are exercisable immediately. The Company is expensing the $480 of compensation over the four year anticipated service period. F-24 43 In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 establishes new financial accounting and reporting standards for stock-based compensation plans. The Company has adopted the disclosure-only provisions of SFAS 123 and continues to account for stock-based compensation using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. As a result, no compensation cost has been recognized for the Company's stock option plans under the criteria established by SFAS 123. Had compensation cost for the stock option plans been determined based on the fair value of the options at the grant date for awards in 1997, 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below for the years ended December 31:
1997 1996 1995 ---------- ---------- ---------- Net income - as reported $ 53,955 $ 30,880 $ 14,333 Net income - pro forma 48,911 25,995 13,550 Net income per share - Basic - as reported $ .70 $ .43 $ .23 Net income per share - Basic - pro forma .63 .36 .22 Net income per share - Diluted - as reported $ .61 $ .36 $ .18 Net income per share - Diluted - pro forma .55 .31 .18
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1997 1996 1995 ------ ------- ------- Expected dividend yield 0.0% 0.0% 0.0% Expected stock price volatility 40.4% 49.5% 50.3% Risk-free interest rate 5.3% 5.9% 6.8% Expected life of options 4 years 4 years 4 years
F-25 44 Employee Stock Ownership Plan - The Company has an Employee Stock Ownership Plan whereby each employee of the Company who is at least 18 years of age is eligible for membership in the plan as of January 1 of their first anniversary year in which they have completed at least one thousand hours of service. Benefits, which become 40% vested after four years of service and 100% vested after five years of service, are paid on death, retirement or termination. The Board of Directors has discretion in establishing the amount of the Company contributions. The Company's contributions to the plan may be in the form of common stock, cash or other property. Contributions to the plan amounted to $3,723, $2,086 and $1,366 for the years ended December 31, 1997, 1996 and 1995, respectively. 12.REVENUES AND EXPENSES Approximately 98%, 99% and 99% of the Company's revenues for the years ended December 31, 1997, 1996 and 1995, respectively, relate to amounts earned from federal, state and local government management and transportation contracts. The Company had revenues of 21%, 21% and 23% from the federal government and 59%, 54% and 49% from state governments for the years ended December 31, 1997, 1996 and 1995, respectively. One state government accounted for revenues of 13%, 16% and 18% for the years ended December 31, 1997, 1996 and 1995, respectively. In 1997, the Company recognized $7,900 as additional management service revenues. For the years ended December 31, 1997 and 1996, the Company recognized after tax development fee income of $2,453 and $1,629, respectively, related to a contract to design, construct and equip a managed detention facility. Accounts receivable include $81,387 and $55,924 due from federal, state and local governments at December 31, 1997 and 1996, respectively. Accounts receivable and accounts payable at December 31, 1997, consist of the following:
ACCOUNTS ACCOUNTS RECEIVABLE PAYABLE ---------- ------- Trade $77,506 $21,021 Construction 3,394 11,073 Other 8,922 - ------- ------- $89,822 $32,094 ======= =======
Salaries and related benefits represented 66%, 64% and 60% of operating expenses for the years ended December 31, 1997, 1996 and 1995, respectively. F-26 45 13.INTERNATIONAL ALLIANCE The Company has entered into an International Alliance (the "Alliance") with Sodexho to pursue prison management business outside the United States. In conjunction with the Alliance, Sodexho purchased an equity position in the Company by acquiring several instruments. In 1994, the Company sold Sodexho 2,800 shares of common stock at $3.75 per share and a $7,000 convertible subordinated note bearing interest at 8.5%. Sodexho also received 1,100 warrants at $15.80 per warrant that expire December 1999. Each warrant entitles Sodexho to four common shares upon exercise. In consideration of the placement of the aforementioned securities, the Company agreed to pay Sodexho $3,960 over a four-year period ending in 1998. These fees include debt issuance costs and private placement equity fees. These fees have been allocated to the various instruments based on the estimated cost to the Company of raising the various components of capital and are charged to debt issuance costs or equity as the respective financings are completed. Sodexho is subject to a standstill agreement that limits their ownership to 25% in the Company and has certain preemptive rights to retain its percentage ownership. In 1995, Sodexho purchased 1,090 shares of common stock for $7.63 per share pursuant to their contractual preemptive right. Also during 1995, the Company and Sodexho entered into a forward contract whereby Sodexho would purchase up to $20,000 of convertible subordinated notes at any time prior to December 1997. In 1997, the Company and Sodexho extended the expiration date of this contract to December 1999. The notes will bear interest at LIBOR plus 1.35% and will be convertible into common shares at a conversion price of $6.83 per share. In 1996, the Company sold $20,000 of convertible notes to Sodexho pursuant to their contractual preemptive right. The notes bear interest at 7.5% and are convertible into common shares at a conversion price of $25.91 per share. 14.RELATED PARTY TRANSACTIONS The Company pays legal fees to a law firm of which one of the partners is a stockholder and a member of the Board of Directors of the Company. Legal fees, including fees related to the Company's mergers and acquisitions, paid to the law firm amounted to $1,109, $683 and $675 in 1997, 1996 and 1995, respectively. In 1997, the Company paid $382 to a member of the Board of Directors of the Company for consulting services related to various contractual relationships. Also in 1997, the Company paid $911 to National Corrections and Rehabilitation Corporation, a company that is majority-owned by a member of the Board of Directors, for services rendered at one of its facilities. F-27 46 15.COMMITMENTS AND CONTINGENCIES The Company leases certain facilities, office space and equipment under long-term operating leases expiring through 2009. Gross lease expense (before reductions associated with recognition of deferred gains on real estate transactions) was approximately $22,443, $2,786 and $5,904 for the years ended December 31, 1997, 1996 and 1995, respectively. Minimum lease commitments for noncancelable leases are as follows:
YEAR AMOUNT ---- -------- 1998 $ 52,580 1999 52,628 2000 53,470 2001 55,452 2002 57,670 Thereafter 340,667 -------- Total $612,467 ========
The nature of the Company's business results in claims and litigation alleging that the Company is liable for damages arising from the conduct of its employees or others. In the opinion of management, there are no pending legal proceedings that would have a material effect on the consolidated financial position or results of operations of the Company. Each of the Company's management contracts and the statutes of certain states require the maintenance of insurance. The Company maintains various insurance policies including employee health, worker's compensation, automobile liability and general liability insurance. These policies are fixed premium policies with various deductible amounts that are self-funded by the Company. Reserves are provided for estimated incurred claims within the deductible amounts. The Company guarantees $113 of a bank facility for CC Australia. The Company has provided a $1,000 performance bond in connection with UKDS's management contract with the United Kingdom. The Company provides a limited guarantee related to a bond issue on the Eden Detention Center in Eden, Texas. The maximum obligation as of December 31, 1997 was $22,290. In the event the Company is required to fund amounts pursuant to this limited guarantee, the Company will obtain ownership rights to the facility. F-28 47 16.EVENT SUBSEQUENT TO DECEMBER 31, 1997 On January 5, 1998, the Company sold the Davis Correctional Facility, located in Holdenville, Oklahoma, to Prison Realty for $36,100. In addition, the Company received proceeds of approximately $3,000 which have been deferred and is being recognized in reductions in lease expense over 10 years. The Company will continue to operate the medium-security correctional facility under the terms of a 10-year operating lease, with terms substantially similar to those of the Leases. Annual first year rent for the facility is expected to be approximately $4,000. F-29 48 Exhibit Index Exhibit 23.1 - Consent of Independent Public Accountants EX-23.1 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Annual Report on Form 10-K/A of Corrections Corporation of America and Subsidiaries into the Company's previously filed Registration Statement File Numbers 33-12503, 33-30825, 33-30826, 33-42068, 33-42614, 33-61173, 333-31711, 333-31743, 333-45193, 333-58339, 333-59155 and 333-63475-01. ARTHUR ANDERSEN LLP Nashville, Tennessee September 24, 1998 -----END PRIVACY-ENHANCED MESSAGE-----