UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2003
OR
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-16109
CORRECTIONS CORPORATION OF AMERICA
(615) 263-3000(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each class of common stock as of October 31, 2003:35,034,297 shares of Common Stock, $0.01 par value per share.
TABLE OF CONTENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
INDEX
PART I – FINANCIAL INFORMATION
ITEM 1. – FINANCIAL STATEMENTS.
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED AND AMOUNTS IN THOUSANDS)
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003(UNAUDITED AND AMOUNTS IN THOUSANDS)
[Additional columns below]
[Continued from above table, first column(s) repeated]
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002(UNAUDITED AND AMOUNTS IN THOUSANDS)
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSEPTEMBER 30, 2003
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The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
This quarterly report on Form 10-Q contains statements as to our beliefs and expectations of the outcome of future events that are forward-looking statements as defined within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of current or historical fact contained herein, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “projects,” “will,” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. These include, but are not limited to, the risks and uncertainties associated with:
Any or all of our forward-looking statements in this quarterly report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties and assumptions described in risk factors disclosed in detail in our annual report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2003 (File No. 001-16109) (the “2002 Form 10-K”) and in other reports we file with the SEC from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report and in the 2002 Form 10-K.
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OVERVIEW
The Company
As of September 30, 2003, we owned 41 correctional, detention and juvenile facilities, three of which we lease to other operators, and one additional facility which is not yet in operation. As of September 30, 2003, we operated 59 facilities, with a total design capacity of approximately 59,000 beds in 20 states and the District of Columbia.
We specialize in owning, operating and managing prisons and other correctional facilities and providing inmate residential and prisoner transportation services for governmental agencies. In addition to providing the fundamental residential services relating to inmates, our facilities offer a variety of rehabilitation and education programs, including basic education, religious services, life skills and employment training and substance abuse treatment. These services are intended to reduce recidivism and to prepare inmates for their successful re-entry into society upon their release. We also provide health care (including medical, dental and psychiatric services), food services and work and recreational programs.
Our website address is www.correctionscorp.com. Please note that our website address is provided as an inactive textual reference only. We make our Form 10-K, Form 10-Q, Form 8-K, and Section 16 reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), available on our website, free of charge, as soon as reasonably practicable after these reports are filed with or furnished to the SEC.
CRITICAL ACCOUNTING POLICIES
The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. A summary of our significant accounting policies is described in the audited financial statements included in our 2002 Form 10-K and in our July 2003 Form 8-K. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Asset impairments. As of September 30, 2003, we had approximately $1.6 billion in long-lived assets. We evaluate the recoverability of the carrying values of our long-lived assets, other than intangibles, when events suggest that an impairment may have occurred. In these circumstances, we utilize estimates of undiscounted cash flows to determine if an impairment exists. If an impairment exists, it is measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
Goodwill impairments. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” or SFAS 142, which established new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS 142, all goodwill amortization ceased effective January 1, 2002 and goodwill attributable to each of our reporting units was tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined using a collaboration of various common valuation
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techniques, including market multiples, discounted cash flows, and replacement cost methods. These impairment tests are required to be performed at adoption of SFAS 142 and at least annually thereafter. On an ongoing basis (absent any impairment indicators), we expect to continue to perform our impairment tests during the fourth quarter, in connection with our annual budgeting process.
Based on our initial impairment tests, we recognized an impairment of $80.3 million to write-off the carrying value of goodwill associated with our locations included in the owned and managed reporting segment during the first quarter of 2002. This goodwill was established in connection with the acquisition of Correctional Management Services Corporation, referred to herein as Operating Company. The remaining goodwill, which is associated with the facilities we manage but do not own, was deemed to be not impaired. This remaining goodwill was established in connection with the acquisitions of Prison Management Services, Inc., or PMSI, and Juvenile and Jail Facility Management Services, Inc., or JJFMSI, both of which were privately-held service companies, referred to herein as the Service Companies, that managed certain government-owned adult and juvenile prison and jail facilities. The implied fair value of goodwill of the locations included in the owned and managed reporting segment did not support the carrying value of any goodwill, primarily due to the highly leveraged capital structure. No impairment of goodwill allocated to the locations included in the managed-only reporting segment was deemed necessary, primarily because of the relatively minimal capital expenditure requirements, and therefore indebtedness, in connection with obtaining such management contracts. Under SFAS 142, the impairment recognized at adoption of the new rules was reflected as a cumulative effect of accounting change in our statement of operations for the first quarter of 2002. Impairment adjustments recognized after adoption, if any, are required to be recognized as operating expenses.
Income taxes. As of September 30, 2003, we had approximately $90.2 million in net deferred tax assets. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including our ability to generate taxable income within the net operating loss carryforward period. Since the change in tax status in connection with our comprehensive restructuring in 2000, as further described in the 2002 Form 10-K, and as of September 30, 2003, we have provided a valuation allowance to substantially reserve the deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” or SFAS 109. The valuation allowance is recognized based on the weight of available evidence indicating that it is more likely than not that the deferred tax assets will not be realized. This evidence primarily consists of, but is not limited to, cumulative operating losses.
Our assessment of the valuation allowance could change in the future based upon our actual and projected taxable income. Removal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of removal. In addition, because a portion of the valuation allowance as of September 30, 2003 was established to reserve certain deferred tax assets upon the acquisitions of PMSI and JJFMSI, in accordance with SFAS 109, removal of the valuation allowance would result in a reduction to any remaining goodwill recorded in connection with such acquisitions to the extent the reversal relates to the valuation allowance applied to deferred tax assets existing at the date PMSI and JJFMSI were acquired. If the valuation allowance as of September 30, 2003 were to be removed in its entirety, the reduction to goodwill would amount to approximately $4.5 million. To the extent no valuation allowance is established for our deferred tax assets, future financial statements would reflect a provision for income taxes at the
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applicable federal and state tax rates on income before taxes. Based upon our current and projected taxable income, we expect to remove a substantial portion of the valuation allowance at December 31, 2003, which would result in a significant non-cash reduction in income tax expense reported during the fourth quarter of 2003.
The IRS completed an audit of our federal tax return for the taxable year ended December 31, 2000, and had proposed to require us to accrue rent and interest income related to certain lease and loan agreements with Operating Company, which was forgiven in September 2000 when Operating Company was unable to pay such amounts due. The proposed adjustment would have required us to pay approximately $56.0 million in cash plus penalties and interest. We protested this finding with the Appeals Office of the IRS and did not establish a reserve for this matter because we believed the proposed adjustment was without merit. During October 2003, the Appeals Office of the IRS notified us that it had withdrawn the proposed adjustment and accordingly closed the audit with no material impact to our financial position, results of operations, or cash flows.
Self-funded insurance reserves. As of September 30, 2003, we had approximately $31.1 million in accrued liabilities for employee health, workers’ compensation, and automobile insurance. We are significantly self-insured for employee health, workers’ compensation, and automobile liability insurance. As such, our insurance expense is largely dependent on claims experience and our ability to control our claims. We have consistently accrued the estimated liability for employee health insurance based on our history of claims experience and time lag between the incident date and the date the cost is paid by us. We have accrued the estimated liability for workers’ compensation and automobile insurance based on a third-party actuarial valuation of the outstanding liabilities. These estimates could change in the future.
Legal reserves. As of September 30, 2003, we had approximately $20.2 million in accrued liabilities for litigation for certain legal proceedings in which we are involved. We have accrued our estimate of the probable costs for the resolution of these claims based on a range of potential outcomes. In addition, we are subject to current and potential future legal proceedings for which little or no accrual has been reflected because our current assessment of the potential exposure is nominal. These estimates have been developed in consultation with our General Counsel’s office and, as appropriate, outside counsel handling these matters, and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are for working capital, capital expenditures and debt service payments. Capital requirements may also include cash expenditures associated with our outstanding commitments and contingencies, as further discussed in the notes to the financial statements and as further described in our 2002 Form 10-K and July 2003 Form 8-K. Additionally, we may incur capital expenditures to expand the design capacity of certain of our facilities in order to retain management contracts, and to increase our inmate bed capacity for anticipated demand from current and future customers. With lender consent, we may acquire additional correctional facilities that we believe have favorable investment returns and increase value to our stockholders. We will also consider opportunities for growth, including potential acquisitions of businesses within our line of business and those that provide complementary services, provided we believe such opportunities will broaden our market and/or increase the services we can provide to our customers.
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On September 10, 2003, we announced our intention to expand by 624 beds the Crowley County Correctional Facility located in Olney Springs, Colorado, a facility we acquired in January 2003. The anticipated cost of the expansion is approximately $22 million and is estimated to be completed during the third quarter of 2004. This expansion is being undertaken in anticipation of increasing demand from the States of Colorado and Wyoming, the current customers at this facility. We also announced on September 10, 2003, our intention to complete construction of the Stewart County Correctional Facility located in Stewart County, Georgia. The anticipated cost to complete the Stewart facility is approximately $19 million, with completion also estimated to occur during the third quarter of 2004. Construction on the 1,524-bed Stewart County Correctional Facility began in August 1999 and was suspended in May 2000. Our decision to complete construction of this facility is based on anticipated demand from several government customers having a need for inmate bed capacity in the Southeast region of the country. However, we can provide no assurance that we will be successful in utilizing the increased bed capacity resulting from these projects. Additionally, in October 2003, we announced the signing of a new contract with the Bureau of Immigration and Customs Enforcement agency (“ICE”) for up to 905 detainees at our Houston Processing Center located in Houston, Texas. We also announced our intention to expand the facility by 494 beds from its current 411 beds to 905 beds. The anticipated cost of the expansion is approximately $29 million and is estimated to be completed during the first quarter of 2005. This expansion is being undertaken in order to accommodate additional detainee populations that are anticipated as a result of this contract, which contains a guarantee that ICE will utilize 679 beds at such time as the expansion is completed.
We currently expect to be able to meet substantially all of our expansion costs, including the completion of construction of the Stewart County Correctional Facility, as well as our working capital and debt service requirements, with cash on hand and net cash provided by operations.
As of September 30, 2003, our liquidity was provided by cash on hand of approximately $68.9 million and $98.1 million available under a $125.0 million revolving credit facility. During the nine months ended September 30, 2003, we generated $157.7 million in cash through operating activities, and as of September 30, 2003, we had net working capital of $65.5 million. We currently expect to be able to meet our cash expenditure requirements for the next year.
Recapitalization
On April 2, 2003, we initiated a series of transactions as described below intended to enhance our capital structure and to provide us with additional financing flexibility that we believe will enable us to more effectively execute our business objectives in the future.
Common Stock Offering. On May 7, 2003, we completed the sale and issuance of 6.4 million shares of common stock at a price of $19.50 per share, resulting in net proceeds of approximately $117.0 million after the payment of costs associated with the issuance. A stockholder also sold 1.2 million shares of common stock in the same offering. In addition, the underwriters exercised an over-allotment option to purchase an additional 1.14 million shares from the selling stockholder. We did not receive any proceeds from the sale of shares from the selling stockholder.
The sales were completed pursuant to a prospectus supplement to a universal shelf registration that was filed with the SEC and declared effective on April 30, 2003 to register $700.0 million of debt securities, guarantees of debt securities, preferred stock, common stock and warrants that we may issue from time to time.
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Note Offering. Concurrently with the common stock offering, we also completed the sale and issuance of $250.0 million aggregate principal amount of senior notes under a separate prospectus supplement to the universal shelf registration. The new senior notes pay interest semi-annually at the rate of 7.5% per annum and are scheduled to mature on May 1, 2011. The new senior notes are senior unsecured obligations and are guaranteed by our domestic subsidiaries. At any time on or before May 1, 2006, we may redeem up to 35% of the notes with the net proceeds of certain equity offerings, as long as 65% of the aggregate principal amount of the notes remains outstanding after the redemption. We may redeem all or a portion of the new senior notes on or after May 1, 2007. Redemption prices are set forth in the indenture governing the new senior notes.
As described below, proceeds from the common stock and note offerings were used to purchase shares of common stock issued upon the conversion of our $40.0 million 10% convertible subordinated notes (and to pay accrued interest on the notes to the date of purchase), to purchase shares of our series B preferred stock that were tendered in the tender offer described below, to redeem shares of our series A preferred stock and to pay-down a portion of our senior bank credit facility.
Purchase of Shares of Common Stock Issuable Upon Conversion of the MDP Notes.Pursuant to the terms of an agreement by and among Income Opportunity Fund I, LLC, Millennium Holdings II LLC and Millennium Holdings III LLC, which are collectively referred to herein as MDP, and us, immediately following the completion of the common stock and notes offerings, MDP converted the $40.0 million aggregate principal amount of our convertible subordinated notes due 2008 with a stated rate of 10.0%, plus contingent interest accrued at 5.5%, into 3,362,899 shares of our common stock and subsequently sold such shares to us. The aggregate purchase price of the shares, inclusive of accrued interest of $15.5 million, was approximately $81.1 million. The shares purchased from MDP have been cancelled under the terms of our charter and Maryland law and now constitute authorized but unissued shares of common stock.
Tender Offer for Series B Preferred Stock. Following the completion of the common stock and notes offerings in May 2003, we purchased approximately 3.7 million shares of series B preferred stock for approximately $97.4 million pursuant to the terms of a cash tender offer. The tender offer price for the series B preferred stock (inclusive of all accrued and unpaid dividends) was $26.00 per share. The payment of the difference between the tender price ($26.00) and the liquidation preference ($24.46) for the shares tendered was reported as a preferred stock distribution in the second quarter of 2003. As the result of the repayment of the balance of the remaining outstanding 12% Senior Notes, as further described below, the remaining shares of series B preferred stock are redeemable at any time on or before April 30, 2004 at a price of $24.46 per share plus dividends accrued and unpaid at the redemption date.
Redemption of Series A Preferred Stock. Immediately following consummation of the common stock and the notes offerings, we gave notice to the holders of our outstanding series A preferred stock that we would redeem 4.0 million shares of the 4.3 million shares of series A preferred stock outstanding at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends to the redemption date. The redemption was completed in June 2003.
Payments on and Amendments to our Senior Bank Credit Facility. We used the estimated remaining net proceeds of the common stock and notes offerings after application as described above, combined with $25.3 million of cash on hand, to pay-down $100.0 million outstanding under the term loan portions of our senior bank credit facility. Further, during May 2003, we used cash
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received from a federal income tax refund to pay-down an additional $32.0 million outstanding under the term loan portion of the senior bank credit facility. In connection with the common stock offering and the notes offering, the requisite lenders under the senior bank credit facility consented to the issuance of the new senior notes and the use of all proceeds from the common stock and note offerings to purchase the shares of common stock issuable upon conversion of the $40.0 million convertible subordinated notes by MDP, redeem the series A preferred stock and purchase shares of series B preferred stock pursuant to the offer to purchase.
In connection with the consent, we also obtained modification to certain provisions of the senior bank credit facility to generally provide us with additional borrowing capacity and operational flexibility, including, but not limited to, (i) providing for a future increase in the revolving credit portion of the facility from $75.0 million to up to $110.0 million at our request (subject to the receipt of lender commitments at the time of the increase), (ii) increasing our ability to incur certain indebtedness, (iii) increasing our permitted annual capital expenditures, and (iv) increasing our ability to assume indebtedness in connection with, and otherwise complete, acquisitions.
On April 3, 2003, Standard & Poor’s upgraded its rating of our senior secured debt to “BB-” from “B+” and our senior unsecured debt to “B” from “B-”. On May 14, 2003, Moody’s Investors Service upgraded its rating of our senior secured debt to “Ba3” from “B1,” our senior unsecured debt to “B1” from “B2,” and our preferred stock to “B3” from “Caa1.”
Repayment of Remaining 12% Senior Notes
In June 2003, pursuant to an offer to purchase the balance of the $10.8 million remaining $100.0 million 12% senior notes due 2006, referred to herein as the 12% Senior Notes, holders of approximately $7.6 million principal amount of the notes tendered their notes at a price of 120% of par. During July 2003, holders of an additional $0.1 million principal amount of the notes tendered their notes at a price of 120% of par pursuant to the offer to purchase, reducing the remaining amount of 12% Senior Notes outstanding to $3.1 million.
During August 2003, pursuant to the indenture relating to the 12% Senior Notes, we legally defeased the remaining outstanding 12% Senior Notes by depositing with a trustee an amount sufficient to pay the principal and interest on such notes through the maturity date in June 2006, and by meeting certain other conditions required under the indenture. Under the terms of the indenture, the 12% Senior Notes were deemed to have been repaid in full. As a result, we reported a charge of approximately $0.9 million during the third quarter of 2003 associated with the relief of our obligation.
Issuance of New 7.5% Senior Notes
During the third quarter of 2003, we took advantage of a favorable interest rate environment and fixed the interest rate of a substantial portion of our remaining outstanding variable rate debt and extended our debt maturities. On August 8, 2003, we completed the sale and issuance of $200.0 million aggregate principal amount of senior notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). These notes are referred to herein as the $200 Million Senior Notes. The $200 Million Senior Notes pay interest semi-annually at the rate of 7.5% per annum and are scheduled to mature May 1, 2011. The notes were issued at a price of 101.125% of the principal amount of the notes, resulting in a premium of $2.25 million, which will be amortized as a reduction to interest expense over the term
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of the notes. The $200 Million Senior Notes are senior unsecured obligations of ours and are guaranteed by our domestic subsidiaries. Proceeds from the note offering, along with cash on hand, were used to pay-down approximately $240.3 million of the term loan portion of our senior bank credit facility.
Amendment to Senior Bank Credit Facility
In connection with the prepayment in August 2003 of the term loan portion of our senior bank credit facility with proceeds from the issuance of the $200 Million Senior Notes and with cash on hand, we obtained an amendment to our senior bank credit facility. The amendment to the senior bank credit facility provided: (i) an increase in the capacity of the revolving portion of the facility to $125.0 million (increased from $75.0 million), which includes a $75.0 million subfacility for letters of credit (increased from $50.0 million) that expires on March 31, 2006, and (ii) a $275.0 million term loan expiring March 31, 2008, which replaced the existing term loan portion of the facility. The amended senior bank credit facility is secured by liens on a substantial portion of the net book value of our fixed assets (inclusive of our domestic subsidiaries), and pledges of all of the capital stock of our domestic subsidiaries. The loans and other obligations under the facility are guaranteed by each of our domestic subsidiaries and secured by a pledge of up to 65% of the capital stock of our foreign subsidiaries. In addition, the amendment provided for a reduction in interest rates on the term portion of the facility to a base rate plus 1.75% or LIBOR plus 2.75%, at our option, from a base rate plus 2.5% or LIBOR plus 3.5% and, with respect to covenants, provides greater flexibility for, among other matters, incurring unsecured indebtedness, capital expenditures, and permitted acquisitions. The interest rates and commitment fee on the revolving portion of the facility were unchanged under terms of the amendment. The amendment also eliminated certain mandatory prepayment provisions.
The credit agreement governing the senior bank credit facility requires us to meet certain financial covenants, including, without limitation, a minimum fixed charge coverage ratio, leverage ratios and a minimum interest coverage ratio. In addition, the senior bank credit facility contains certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, payment of dividends, transactions with affiliates, asset sales, acquisitions, capital expenditures, mergers and consolidations, prepayments and modifications of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. In addition, the senior bank credit facility contains cross-default provisions with our other indebtedness.
The amendment to the senior bank credit facility and related pay-downs with net proceeds from the issuance of the $200 Million Senior Notes resulted in a charge to expenses associated with refinancing transactions during the third quarter of 2003 of approximately $1.9 million representing the pro-rata write-off of existing deferred loan costs and certain fees paid.
As a result of the completion of our recapitalization and refinancing transactions during 2003, we have significantly reduced our exposure to variable rate debt and now have minimal debt service requirements and no debt maturities on outstanding indebtedness until 2007. At September 30, 2003, our total weighted average effective interest rate was 7.63% and our total weighted average debt maturity was 6.1 years.
Operating Activities
Our net cash provided by operating activities for the nine months ended September 30, 2003, was
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$157.7 million, compared with $122.2 million for the same period in the prior year. Cash provided by operating activities represents the year to date net income or loss plus depreciation and amortization, changes in various components of working capital, adjustments for various non-cash charges, including primarily the cumulative effect of accounting change in 2002, the change in fair value of derivative instruments, and the charges related to the comprehensive refinancing completed in May 2002 and the expenses associated with debt refinancing and recapitalization transactions completed in 2003, which are reported as financing activities to the extent such charges result from cash payments.
The increase in cash provided by operating activities for the nine months ended September 30, 2003 was due to increased occupancy levels and improved margins and due to a reduction in interest expense, primarily resulting from the refinancing of our senior debt completed in May 2002 and due to lower market interest rates. Additionally, we received payment of $13.5 million from the Commonwealth of Puerto Rico as final payment of all outstanding balances, as well as income tax refunds of $33.7 million, which also resulted in an increase in cash provided by operating activities during the nine months ended September 30, 2003. These increases were partially offset by the payment of $15.5 million of contingent interest on the $40.0 million convertible subordinated notes that had accrued but remained unpaid since June 2000 in accordance with the terms of such notes, and which was paid in May 2003 in connection with the recapitalization.
Investing Activities
Our cash flow used in investing activities was $75.3 million for the nine months ended September 30, 2003, and was primarily attributable to capital expenditures during the period of $70.7 million, which included capital expenditures of $47.5 million in connection with the purchase of the Crowley County Correctional Facility and an increase in our investments in numerous technology initiatives. In addition, cash was used to fund restricted cash for a capital improvements, replacements, and repairs reserve totaling $5.6 million for our San Diego Correctional Facility. Our cash flow used in investing activities was $3.4 million for the nine months ended September 30, 2002, and was primarily attributable to capital expenditures during the period of $11.9 million, net of proceeds received from the sale of our interest in a juvenile facility located in Dallas, Texas, on June 28, 2002, for $4.3 million. In addition, we received refunds of restricted cash totaling approximately $5.2 million primarily used as collateral for workers’ compensation claims. We elected to post letters of credit from the revolving loan portion of our senior bank credit facility to replace the collateral on such claims.
Financing Activities
Our cash flow used in financing activities was $78.8 million for the nine months ended September 30, 2003. During January 2003, we financed the purchase of the Crowley County Correctional Facility through $30.0 million in borrowings under our senior bank credit facility pursuant to an expansion of the term loan portion of the facility. During May 2003, we completed the recapitalization transactions, which included the sale and issuance of $250.0 million of 7.5% senior notes and 6.4 million shares of common stock for $124.8 million. The proceeds received from the sale and issuance of the senior notes and the common stock were largely offset by the redemption of $192.0 million of our series A preferred stock and our series B preferred stock; the prepayment of $132.0 million on the term loan portions of the senior bank credit facility with proceeds from the recapitalization, cash on hand, and an income tax refund; the prepayment of $7.6 million aggregate principal of the 12% Senior Notes; the repurchase and subsequent retirement of 3.4 million shares of
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common stock for $65.6 million; and the payment of $10.8 million in costs primarily associated with the recapitalization transactions and prepayment of the 12% Senior Notes. During August 2003, we completed the sale and issuance of $200.0 million of 7.5% senior notes at a price of 101.125% of the principal amount of the notes, resulting in a premium of $2.25 million. The proceeds received from the sale and issuance of the senior notes were offset by the prepayment of $240.6 million on the term loan portion of the senior bank credit facility with proceeds from the sale and issuance of the senior notes and with cash on hand. We also paid $7.7 million in costs primarily associated with the debt refinancing transactions during the third quarter of 2003. We also paid $7.4 million in scheduled principal repayments during the first nine months of 2003, and cash dividends of $11.9 million on our preferred stock, including a tender premium of $5.8 million in connection with the completion of a tender offer for our series B preferred stock.
Our cash flow used in financing activities was $63.3 million for the nine months ended September 30, 2002. Proceeds from the issuance on May 3, 2002 of the 9.875% Senior Notes and the new senior bank credit facility were largely offset by the repayment of the old senior bank credit facility and the redemption of substantially all of the 12% Senior Notes. However, we also paid debt issuance costs of $35.4 million in connection with the refinancing, and an additional $8.8 million to terminate an interest rate swap agreement. Further, during the first quarter of 2002, we paid cash dividends of $12.9 million on our series A preferred stock for the fourth quarter of 2001 and for all five quarters in arrears, as permitted under the terms of an amendment to our old senior bank credit facility obtained in December 2001. Additionally, we paid $2.2 million in cash dividends on our series A preferred stock during each of the second and third quarters of 2002.
Material Commitments
The following schedule summarizes our contractual cash obligations by the indicated period as of September 30, 2003 (in thousands):
We had $26.9 million of letters of credit outstanding at September 30, 2003 primarily to support our requirement to repay fees under our workers’ compensation plan in the event we do not repay the fees due in accordance with the terms of the plan. The letters of credit are renewable annually. We did not have any draws under any outstanding letters of credit during the nine months ended September 30, 2003 or 2002.
RESULTS OF OPERATIONS
Our results of operations are impacted by, and the following table sets forth for the periods presented, the number of facilities we owned and managed, the number of facilities we managed but did not own, the number of facilities we leased to other operators, and the facilities we owned that were not yet in operation.
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Three and Nine Months Ended September 30, 2003 Compared to the Three and Nine Months Ended September 30, 2002
We generated net income available to common stockholders of $18.2 million, or $0.47 per diluted share, for the three months ended September 30, 2003, compared with net income available to common stockholders of $11.0 million, or $0.36 per diluted share, for the three months ended September 30, 2002. Contributing to the net income for the three-month period in 2003, as compared to the same period in the previous year, was an increase in operating income of $6.1 million, from $34.7 million during the third quarter of 2002 to $40.8 million during the third quarter of 2003, due to the commencement of operations at our McRae Correctional Facility in December 2002 and the acquisition of the Crowley County Correctional Facility in January 2003, as well as increased occupancy levels and improved margins. Net income available to common stockholders for the three months ended September 30, 2003 was favorably impacted by a reduction in distributions to preferred stockholders during the third quarter of 2003 compared with the third quarter of 2002 resulting from the purchase and redemption of a substantial portion of our preferred stock outstanding in connection with our recapitalization during the second quarter of 2003, partially offset by a $1.1 million increase in interest expense. Weighted average common shares outstanding also increased by 7.0 million shares primarily as a result of the issuance of 6.4 million shares in connection with the recapitalization. Results for the third quarter also included $2.6 million in expenses associated with the debt refinancing transactions completed in August 2003.
During the nine months ended September 30, 2003, we generated net income available to common stockholders of $47.8 million, or $1.36 per diluted share, compared with a net loss available to common stockholders of $66.8 million, or $2.31 per diluted share, for the same period in the previous year. Contributing to the net income for the first nine months in 2003, as compared to the
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same period in the previous year, was an increase in operating income of $27.2 million, from $96.8 million during the first nine months of 2002 to $124.0 million during the first nine months of 2003. As noted above, the increase was due to the commencement of operations at our McRae Correctional Facility in December 2002 and the acquisition of the Crowley County Correctional Facility in January 2003, as well as increased occupancy levels and improved margins. Contributing to the net loss for the nine-month period in 2002 was a non-cash charge for the cumulative effect of accounting change of $80.3 million, or $2.78 per diluted share, related to the adoption of SFAS 142, in addition to expenses associated with debt refinancing transactions of $36.7 million during the second quarter of 2002. The debt refinancing completed during 2002 also contributed to the reduction in interest expense, from $69.4 million to $56.5 million during the nine-month period in 2003. The cumulative effect of accounting change and the costs of refinancing were partially offset by a cash income tax benefit of $32.2 million during the first quarter of 2002 related to a change in tax law that became effective in March 2002, which enabled us to utilize certain of our net operating losses to offset taxable income generated in 1997 and 1996 to obtain a refund.
Facility Operations
A key performance indicator we use to measure the revenue and expenses associated with the operation of the facilities we own or manage is expressed in terms of a compensated man-day, and represents the revenue we generate and expenses we incur for one inmate for one calendar day. Revenue and expenses per compensated man-day are computed by dividing facility revenue and expenses by the total number of compensated man-days during the period. A compensated man-day represents a calendar day for which we are paid for the occupancy of an inmate. We believe the measurement is useful because we are compensated for operating and managing facilities at an inmate per-diem rate based upon actual or minimum guaranteed occupancy levels. We also measure our ability to contain costs on a per-compensated man-day basis, which is largely dependent upon the number of inmates we accommodate. Further, per man-day measurements are also used to estimate our potential profitability based on certain occupancy levels relative to design capacity. Revenue and expenses per compensated man-day for all of the facilities we owned or managed, exclusive of those discontinued (see further discussion below regarding discontinued operations), were as follows for the three and nine months ended September 30, 2003 and 2002:
Management and other revenue consists of revenue earned from the operation and management of adult and juvenile correctional and detention facilities we own or manage and from our inmate transportation subsidiary, which, for the three months ended September 30, 2003 and 2002, totaled $262.5 million and $238.6 million, respectively, while management and other revenue totaled $765.1
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million and $692.9 million, respectively, during the nine months ended September 30, 2003 and 2002. Business from our federal customers, including the Federal Bureau of Prisons, or the BOP, the U.S. Marshals Service, or the USMS, and ICE, remains strong, while many of our state customers are currently experiencing budget difficulties. Our federal customers generated approximately 38.0% and 37.6%, respectively, of our total management revenue for the three and nine months ended September 30, 2003. While the budget difficulties experienced by our state customers present challenges with respect to our per-diem rates resulting in pressure on our management revenue in future quarters, these governmental entities are also constrained with respect to funds available for prison construction. As a result, because we believe inmate populations will continue to rise, we currently expect the lack of new bed supply to lead to higher occupancies in the long-term.
Operating expenses totaled $199.7 million and $183.4 million for the three months ended September 30, 2003 and 2002, respectively, while operating expenses for the nine months ended September 30, 2003 and 2002 totaled $575.5 million and $537.3 million, respectively. Operating expenses consist of those expenses incurred in the operation and management of adult and juvenile correctional and detention facilities, and for our inmate transportation subsidiary.
Salaries and benefits represent the most significant component of fixed operating expenses. During the three and nine months ended September 30, 2003, salaries and benefits expense increased $13.6 million and $30.8 million, respectively, as compared to the same periods in the prior year. The increase in salaries and benefits expense was primarily due to the arrival of inmates at the McRae Correctional Facility beginning in December 2002 and the purchase of the Crowley County Correctional Facility in January 2003. Salaries and benefits per compensated man-day increased $1.14 per compensated man-day during the third quarter of 2003 as compared to the same quarter in the prior year, while salaries and benefits per compensated man-day increased $0.51 per compensated man-day during the nine months ended September 30, 2003 as compared to the same period in the prior year. The turnover rate for correctional officers for our company, and for the corrections industry in general, also remains high. We continue to develop strategies to reduce our turnover rate, but we can provide no assurance that these strategies will be successful. In addition, eleven of our facilities currently have contracts with the federal government requiring that our wage and benefit rates comply with wage determination rates set forth, and as adjusted from time to time, under the Service Contract Act of the U.S. Department of Labor. Our contracts generally provide for reimbursement of a portion of the increased costs resulting from wage determinations in the form of increased per-diems, thereby mitigating the effect of increased salaries and benefits expenses at those facilities. We may also be subject to adverse claims, or government audits, relating to alleged violations of wage and hour laws applicable to us, which may result in adjustments to amounts previously paid as wages and, potentially, interest and/or monetary penalties.
We also experienced a trend of increasing insurance expense during the three and nine months ended September 30, 2003 as compared with the same periods in 2002. Because we are significantly self-insured for employee health, workers’ compensation, and automobile liability insurance, our insurance expense is dependent on claims experience and our ability to control our claims. Our insurance policies contain various deductibles and stop-loss amounts intended to limit our exposure for individually significant occurrences. However, the nature of our self-insurance provides little protection for a deterioration in claims experience or increasing employee medical costs in general.
We continue to incur increasing insurance expense due to adverse claims experience primarily resulting from rising healthcare costs throughout the country. We continue to develop new strategies to improve the management of our future loss claims, but can provide no assurance that these
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strategies will be successful. Additionally, general liability insurance costs have risen substantially since the terrorist attacks on September 11, 2001, and other types of insurance, such as directors and officers liability insurance, have increased due to several high profile business failures and concerns about corporate governance and accounting in the marketplace. Unanticipated additional insurance expenses resulting from adverse claims experience or a continued increasing cost environment for general liability and other types of insurance could result in increasing expenses in the future.
The reduction in variable operating expenses per compensated man-day to $10.12 and $9.81 per compensated man-day, respectively, during the three and nine months ended September 30, 2003 from $10.50 and $10.12 per compensated man-day, respectively, during the three and nine months ended September 30, 2002 was primarily due to the renegotiation of our contract for food services. The Company decided to outsource food services at almost all of the facilities we operate. Outsourcing our food services to one vendor for substantially all of the facilities we manage generated opportunities to produce economies of scale. We also achieved reductions in inmate medical expenses primarily due to the renegotiation of our management contract for the Correctional Treatment Facility located in the District of Columbia, as well as through the negotiation of a national contract with our pharmaceutical provider and reduced reliance on outsourced nursing.
The operation of the facilities we own carries a higher degree of risk associated with a management contract than the operation of the facilities we manage but do not own because we incur significant capital expenditures to construct or acquire facilities we own. Additionally, correctional and detention facilities have a limited or no alternative use. Therefore, if a management contract is terminated on a facility we own, we continue to incur certain operating expenses, such as real estate taxes, utilities, and insurance, that we would not incur if a management contract was terminated for a managed-only facility. As a result, revenue per compensated man-day is typically higher for facilities we own and manage than for managed-only facilities. Because we incur higher expenses, such as repairs and maintenance, real estate taxes, and insurance, on the facilities we own and manage, our cost structure for facilities we own and manage is also higher than the cost structure for the managed-only facilities. The following tables display the revenue and expenses per compensated man-day for the facilities we own and manage and for the facilities we manage but do not own:
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Owned and Managed Facilities
On May 30, 2002, we were awarded a contract by the BOP to house 1,524 federal detainees at our McRae Correctional Facility located in McRae, Georgia. The three-year contract, awarded as part of the Criminal Alien Requirement Phase II Solicitation, or CAR II, also provides for seven one-year renewals. The contract with the BOP guarantees at least 95% occupancy on a take-or-pay basis, and commenced full operations in December 2002. Total management and other revenue at this facility was $9.5 million and $26.4 million, respectively, during the three and nine months ended September 30, 2003. As of September 30, 2003 this facility had an actual occupancy of approximately 94%, despite generating revenues at the guaranteed 95% rate. During much of the nine-month period in 2003, we benefited from a relatively low level of operating expenses resulting from lower physical occupancies while generating revenue at the guaranteed occupancy rate. While no revenue was generated by this facility during the nine months of 2002, we incurred $1.0 million and $1.5 million, respectively, of operating expenses during the three and nine months ended September 30, 2002.
Results for the first nine months of 2003 were also favorably impacted by the acquisition, on January 17, 2003, of the Crowley County Correctional Facility, a 1,200-bed medium security adult male prison facility located in Olney Springs, Crowley County, Colorado. The facility currently houses inmates from the States of Colorado and Wyoming. As part of the transaction, we also assumed a management contract with the State of Colorado and entered into a new management contract with the State of Wyoming, and took over management of the facility effective January 18, 2003.
During the third quarter of 2003, we transferred all of the Wisconsin inmates currently housed at our 1,440-bed medium security North Fork Correctional Facility located in Sayre, Oklahoma to our 2,160-bed medium security Diamondback Correctional Facility located in Watonga, Oklahoma in order to satisfy a contractual provision mandated by the State of Wisconsin. As a result of the
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transfer, North Fork Correctional Facility will remain closed for an indefinite period of time. We are currently pursuing new management contracts and other opportunities to take advantage of the beds that became available at the North Fork Correctional Facility, but can provide no assurance that we will be successful in doing so. We currently expect the operational consolidations to have no material impact on our 2003 financial statements. However, long-term, the consolidation will result in certain operational efficiencies.
Additionally, during the second quarter of 2003, the State of Wisconsin approved legislation to open various prison facilities owned by the State. The opening of these facilities is currently expected to lead to a reduction in the number of inmates we house from the State of Wisconsin at our Diamondback Correctional Facility and our Prairie Correctional Facility, totaling approximately 2,100 inmates at September 30, 2003. However, given the uncertainty regarding the exact timing of the openings, and the extent of Wisconsin inmate population growth between now and the time of such openings, it is difficult to estimate the impact on the Company’s financial statements.
During October 2002, we entered into a new agreement with Hardeman County, Tennessee, with respect to the management of up to 1,536 medium security inmates from the State of Tennessee in the Whiteville Correctional Facility. Total management revenue increased during the three and nine month periods ended September 30, 2003 from the comparable periods in 2002, by $2.8 million and $7.2 million, respectively, at this facility.
Due to a combination of rate increases and/or an increase in population at seven of our facilities, including our 2,304-bed Central Arizona Detention Center, 1,600-bed Florence Correctional Center, 1,338-bed Prairie Correctional Facility, 1,232-bed San Diego Correctional Facility, 910-bed Torrance County Detention Facility, 483-bed Leavenworth Detention Center, and 480-bed Webb County Detention Center, primarily from the BOP, the USMS, the ICE, and the State of Wisconsin in the case of Prairie Correctional Facility, total management and other revenue increased during the three and nine month periods ended September 30, 2003 from the comparable periods in 2002, by $7.2 million and $28.1 million, respectively, at these facilities.
During June 2003, we announced our first inmate management contract with the State of Alabama to house up to 1,440 medium security inmates in our Tallahatchie County Correctional Facility, located in Tutwiler, Mississippi pursuant to an emergency contract authorized by the governor and the Alabama Department of Corrections to aid the State’s corrections agency in relieving its overcrowded system that is under court order. We began housing inmates pursuant to this management contract in July 2003. The contract is intended to be short-term in nature while Alabama prepares a longer term Request for Proposal for this inmate population. However, due to the close proximity to Alabama, we believe our otherwise substantially idle Tallahatchie County Correctional Facility, for which construction was completed in 2000, represents an ideal long-term solution in meeting Alabama’s growing demand for prison capacity. Nevertheless, we can provide no assurance that we will be awarded the contract that is expected to result from the Request for Proposal.
Fixed expenses per compensated man-day for our owned and managed facilities increased slightly from $29.29 during the third quarter of 2002 to $29.33 for the third quarter of 2003, but decreased from $29.87 during the nine-month period in 2002 to $29.52 during the nine-month period in 2003. The aforementioned increase in fixed operating expenses for salaries and benefits and insurance across the portfolio of facilities we manage was partially offset by decreases in property tax expenses of $2.5 million for the three- and nine-month periods of 2003, compared with the same periods in
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2002, or a decrease of $0.93 per compensated man-day for the three-month period and a decrease of $0.44 per compensated man-day for the nine-month period. The decrease in property tax expense was the result of the successful settlement during the third quarter of 2003 of a property tax dispute at our Northeast Ohio Correctional Center.
Variable expenses per compensated man-day for our owned and managed facilities decreased from $11.64 during the third quarter of 2002 to $10.68 for the third quarter of 2003, and from $11.32 during the nine-month period in 2002 to $10.13 during the nine-month period in 2003. The aforementioned decrease in variable expenses for reduced food and medical expenses across the portfolio of facilities we manage was net of an increase in variable expenses for an increase in litigation expenses during the three- and nine-month periods of 2003, compared with the same periods in the prior year, of approximately $1.8 million and $5.7 million, respectively, or $0.43 and $0.56 per compensated man-day, respectively, at certain of our owned facilities for legal proceedings in which we are involved. The increase in litigation expense during the three-month period resulted from an increase in our overall exposure to outstanding litigation. The amount of the increase during the nine-month period reflected the settlement during the first quarter of 2002 of a number of outstanding legal matters for amounts less than reserves previously established for such matters, which resulted in a reversal of litigation expenses during the first quarter of 2002 of approximately $1.3 million.
We currently house approximately 2,250 adult male inmates for the Texas Department of Criminal Justice, or the TDCJ, at two of our owned pre-parole transfer facilities located in Texas. Our contracts with the TDCJ for these facilities will expire in February 2004. Rather than renew the contracts pursuant to their renewal provisions, the TDCJ has issued a Request for Proposal, or RFP, that covers substantially all inmates currently housed in these facilities. (As further described below, the TDCJ has also issued an RFP and awarded contracts for its inmates housed in the several privately operated state jails and correctional centers located in the state of Texas, including at two facilities we manage but do not own.) The TDCJ has indicated that the purpose of the RFP is to establish consistent terms and scope of services among all of the TDCJ’s contracts with private operators. We have submitted our response to the RFP, which was due in October 2003; however, a final date for the awards has not yet been set. We expect to continue to operate the two Texas facilities pursuant to our contracts with the TDCJ through the completion of the RFP process. We will be competing with other prison operators who respond to the RFP, including other private prison operators and, potentially, government operators. No assurance can be given that we will be awarded any contracts by the TDCJ to house the inmates subject to our existing contracts or any additional inmates, or that any contracts we do obtain will be on terms comparable to our existing contracts. The failure to obtain contracts from the TDCJ on terms comparable to our existing contracts could significantly reduce our revenues and operating income, and, accordingly, could have a material adverse effect on our results of operations and cash flows. In the event the TDCJ does not renew our management contracts for either of these facilities, we can provide no assurance that we will be able to replace the revenue lost at these facilities.
Managed-Only Facilities
On June 28, 2002, we received notice from the Mississippi Department of Corrections terminating our contract to manage the 1,016-bed Delta Correctional Facility located in Greenwood, Mississippi, due to the non-appropriation of funds. We ceased operations of the facility during October of 2002. However, the State of Mississippi agreed to expand the management contract at the Wilkinson County Correctional Facility located in Woodville, Mississippi to accommodate an additional 100
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inmates. As a result, the results of operations of the Delta Correctional Facility are not reported in discontinued operations. Total management and other revenue at Delta Correctional Facility was $1.9 million and $6.3 million, respectively, during the three and nine months ended September 30, 2002, while we incurred $1.9 million and $6.9 million, respectively, in operating expenses during the same period.
In November 2003, the Texas Department of Criminal Justice, or the TDCJ, awarded us contracts to manage a total of 8,315 beds in seven state correctional facilities, one of which contains 1,001 beds that we currently manage, as part of a RFP process. The new management contracts are expected to become effective mid-January, 2004. As part of this RFP, the TDCJ did not award us the contract for the continued management of a 1,000-bed correctional facility located in Venus, Texas, that we currently operate. We expect to continue to manage this facility until mid-January, 2004. While we expect the management of an incremental 6,314 beds at these facilities to contribute to additional revenues and operating income during 2004, because the pricing of our bid for the management of these facilities took into consideration the volume of potential business to be generated from such a bid, we currently expect the operating margins on these facilities to be lower than the existing margins from our managed-only business.
We currently house approximately 1,380 adult male inmates for the State of Florida, Correctional Privatization Commission, or the CPC, at two of our managed-only facilities in Florida. Our contracts with the CPC expire in June 2004. Rather than renew the contracts pursuant to their renewal provisions, in September 2003 the CPC issued an Invitation to Negotiate, or ITN, that covered substantially all inmates housed in three privately operated prisons located in the State of Florida, including one facility managed by another private prison operator. Responses to the ITN are due in December 2003, and final awards are expected to be made in 2004. We expect to continue to operate the two Florida facilities pursuant to our contacts with the CPC through the completion of the ITN process. We will be competing with other prison operators who respond to the ITN, including other private prison operators and, potentially, government operators. No assurance can be given that we will be awarded any contracts by the CPC to house the inmates subject to our existing contracts or any additional inmates, or that any contracts we do obtain will be on terms comparable to our existing contracts. The failure to obtain contracts from the CPC on terms comparable to our existing contracts could significantly reduce our revenues and operating income and, accordingly, could have a material adverse effect on our results of operations and cash flows. Our revenues and operating income, however, could increase in the future if we are successful in securing an award for additional inmates or for the facility we do not manage.
Rental revenue
Rental revenue was $0.9 million for both the three months ended September 30, 2003 and 2002. Rental revenue for each of the nine month periods ended September 30, 2003 and 2002 was $2.8 million. Rental revenue was generated from leasing three correctional and detention facilities to governmental agencies and other private operators.
General and administrative expense
For the three months ended September 30, 2003 and 2002, general and administrative expenses totaled $9.8 million and $8.1 million, respectively, while general and administrative expenses totaled $29.4 million and $23.7 million, respectively, during the nine months ended September 30, 2003 and 2002. General and administrative expenses consist primarily of corporate management salaries and
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benefits, professional fees and other administrative expenses, and increased from the periods in 2002 primarily due to an increase in salaries and benefits, combined with an increase in professional services, during 2003 compared with 2002.
We have expanded our infrastructure over the past several quarters to implement and support numerous technology initiatives, to maintain closer relationships with existing and potentially new customers in order to identify their needs, to focus on reducing facility operating expenses, and to comply with increasing corporate governance requirements. We believe our expanded infrastructure and investments in technology will provide long-term benefits enabling us to provide enhanced quality service to our customers while creating scalable operating efficiencies.
Depreciation and amortization
For the three months ended September 30, 2003 and 2002, depreciation and amortization expense totaled $13.2 million and $13.3 million, respectively, while depreciation and amortization expense totaled $39.1 million and $37.9 million, respectively, for the nine months ended September 30, 2003 and 2002. The change in depreciation and amortization for the three and nine month periods primarily resulted from an increase in depreciation for the acquisition of the Crowley County Correctional Facility in January 2003, and due to placing into service in December 2002 our McRae Correctional Facility, partially offset by an increase in the amortization of a liability relating to contract values established in connection with certain mergers completed in 2000.
Interest expense, net
Interest expense is reported net of interest income for the three and nine months ended September 30, 2003 and 2002. Gross interest expense was $20.0 million and $19.3 million, respectively, for the three months ended September 30, 2003 and 2002, and gross interest expense was $59.1 million and $72.8 million, respectively, for the nine months ended September 30, 2003 and 2002. Gross interest expense is based on outstanding indebtedness, net settlements on certain derivative instruments, and amortization of loan costs and unused facility fees. The decrease in gross interest expense from the prior year was primarily attributable to the comprehensive refinancing of our senior indebtedness completed on May 3, 2002, which resulted in a decrease in the interest rate spread on our senior bank credit facility and the redemption of a significant portion of our 12% Senior Notes. Further, the recapitalization and refinancing transactions completed during the second and third quarters of 2003 resulted in the elimination of the regular and contingent interest associated with the convertible subordinated notes held by MDP, a further reduction in the interest rate spread on the term portion of our senior bank credit facility, a reduction in the interest rate on our $30.0 million convertible subordinated notes, and the repayment of the remaining balance of our 12% Senior Notes, partially offset by additional borrowings used to repurchase and redeem a substantial portion of our preferred stock. Interest expense also decreased due to the termination of an interest rate swap agreement, lower amortization of loan costs, and a lower interest rate environment.
Gross interest income was $0.9 million and $1.3 million, respectively, for three months ended September 30, 2003 and 2002. For the nine months ended September 30, 2003 and 2002, gross interest income was $2.6 million and $3.4 million, respectively. Gross interest income is earned on cash collateral requirements, a direct financing lease, notes receivable and investments of cash and cash equivalents.
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Expenses associated with debt refinancing and recapitalization transactions
For the three months ended September 30, 2003, expenses associated with refinancing and recapitalization transactions were $2.6 million. For the nine months ended September 30, 2003 and 2002, expenses associated with refinancing and recapitalization transactions were $6.7 million and $36.7 million, respectively. Charges during the third quarter of 2003 primarily resulted from the write-off of existing deferred loan costs associated with the repayment of the term loan portion of our senior bank credit facility made with proceeds from the issuance of the $200 Million Senior Notes, premiums paid to defease the remaining outstanding 12% Senior Notes, and certain fees paid to amend the term portion of our senior bank credit facility. Charges during the second quarter of 2003 included expenses associated with the tender offer for our series B preferred stock, the redemption of our series A preferred stock, and the write-off of existing deferred loan costs associated with the repayment of the term loan portions of our senior bank credit facility made with proceeds from the common stock and note offerings, a tender premium paid to the holders of the 12% Senior Notes who tendered their notes to us at a price of 120% of par, and fees associated with the modifications to the terms of the $30.0 million of convertible subordinated notes.
As a result of the early extinguishment of our old senior bank credit facility and the redemption of substantially all of the 12% Senior Notes in May 2002, we recorded charges of $36.7 million during the second quarter of 2002, which included the write-off of existing deferred loan costs, certain bank fees paid, premiums paid to redeem the 12% Senior Notes, and certain other costs associated with the refinancing.
Change in fair value of derivative instruments
In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or SFAS 133, as amended, we have reflected in earnings the change in the estimated fair value of an interest rate swap agreement during the three and nine months ended September 30, 2002. We estimated the fair value of the interest rate swap agreement using option-pricing models that value the potential for the interest rate swap agreement to become in-the-money through changes in interest rates during the remaining term of the agreement.
Our swap agreement fixed LIBOR at 6.51% (prior to the applicable spread) on outstanding balances of at least $325.0 million through its expiration on December 31, 2002. In accordance with SFAS 133, we recorded a non-cash charge of $0.6 million and a non-cash gain of $2.8 million, respectively, for the change in fair value of the swap agreement for the three and nine months ended September 30, 2002, which included $0.6 million and $1.9 million, respectively, for amortization of the transition adjustment, or the cumulative reduction in the fair value of the swap from its inception to the date we adopted SFAS 133 on January 1, 2001. We were no longer required to maintain the existing interest rate swap agreement due to the early extinguishment of the old senior bank credit facility. During May 2002, we terminated the swap agreement prior to its expiration at a price of approximately $8.8 million. In accordance with SFAS 133, we continued to amortize the unamortized portion of the transition adjustment as a non-cash expense, through December 31, 2002. The new senior bank credit facility obtained in May 2002 required us to hedge at least $192.0 million of the term loan portions of the facility within 60 days following the closing of the loan. In May 2002, we entered into an interest rate cap agreement to fulfill this requirement, capping LIBOR at 5.0% (prior to the applicable spread) on outstanding balances of $200.0 million through the expiration of the cap agreement on May 20, 2004. We paid a premium of $1.0 million to enter into
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the interest rate cap agreement. We expect to amortize this premium into interest expense as the estimated fair values assigned to each of the hedged interest payments expire throughout the term of the cap agreement, amounting to $0.4 million in 2003 and $0.6 million in 2004. We have met the hedge accounting criteria under SFAS 133 and related interpretations in accounting for the interest rate cap agreement. As a result, the interest rate cap agreement is marked to market each reporting period, and the change in the fair value of the interest rate cap agreement, amounting to $144,000 during the nine months ended September 30, 2003, is reported through other comprehensive income in the statement of stockholders’ equity. The cap agreement was estimated to have no value at September 30, 2003. There can be no assurance that the interest rate cap agreement will be effective in mitigating our exposure to interest rate risk in the future, or that we will be able to continue to meet the hedge accounting criteria under SFAS 133.
On May 16, 2003, approximately 0.3 million shares of common stock were issued, along with a $2.9 million subordinated promissory note, in connection with the final settlement of the state court portion of our stockholder litigation settlement. Under the terms of the promissory note, the note and accrued interest were extinguished in June 2003 once the average closing price of our common stock exceeded a “termination price” equal to $16.30 per share for fifteen consecutive trading days following the note’s issuance. The terms of the note, which allowed the principal balance to fluctuate dependent on the trading price of our common stock, created a derivative instrument that was valued and accounted for under the provisions of SFAS 133. Since we had previously reflected the maximum obligation of the contingency associated with the state portion of the stockholder litigation on the balance sheet, the extinguishment of the note in June 2003 resulted in a $2.9 million non-cash gain during the second quarter of 2003.
Income tax expense
We incurred income tax expense for the three and nine months ended September 30, 2003 of $0.3 million and $0.1 million, respectively. During the three and nine months ended September 30, 2002, we generated an income tax benefit of approximately $0.4 million and $33.3 million, respectively. The income tax benefit during the nine months ended September 30, 2002, primarily resulted from the “Job Creation and Worker Assistance Act of 2002,” which was signed into law on March 9, 2002. Among other changes, the tax law extended the net operating loss carryback period to five years from two years for net operating losses arising in tax years ending in 2001 and 2002, and allows use of net operating loss carrybacks and carryforwards to offset 100% of the alternative minimum taxable income. We experienced net operating losses during 2001 resulting primarily from the sale of assets at prices below the tax basis of such assets. Under terms of the new law, we utilized certain of these net operating losses to offset taxable income generated in 1997 and 1996. As a result of this tax law change in 2002, we reported an income tax benefit and claimed a refund of approximately $32.2 million during the first quarter of 2002, which was received in April 2002.
As of September 30, 2003, our net deferred tax assets totaled approximately $90.2 million. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including our ability to generate taxable income within the net operating loss carryforward period. Since the change in tax status in connection with our comprehensive restructuring in 2000, as further described in the 2002 Form 10-K, and as of September 30, 2003, we have provided a valuation allowance to reserve the deferred tax assets in accordance with SFAS 109. The valuation allowance was recognized based on the weight of available evidence indicating that it was more likely than not
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that the deferred tax assets would not be realized. This evidence primarily consisted of, but was not limited to, cumulative operating losses.
Our assessment of the valuation allowance could change in the future based upon our actual and projected taxable income. Removal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of removal. To the extent no valuation allowance is established for our deferred tax assets, future financial statements would reflect a provision for income taxes at the applicable federal and state tax rates on income before taxes. Based upon our current and projected taxable income, we expect to remove a substantial portion of the valuation allowance at December 31, 2003, which would result in a significant non-cash reduction in income tax expense reported during the fourth quarter of 2003.
The use of our current net operating loss carryforwards, which could be used to offset future taxable income, may be subject to annual limitations under the Internal Revenue Code as a result of the aforementioned recapitalization transactions or otherwise. Any such limitations in the future could require us to pay federal income taxes, resulting in an income tax provision to the extent paid.
Discontinued Operations
In late 2001 and early 2002, we were provided notice from the Commonwealth of Puerto Rico of its intention to terminate the management contracts at the 500-bed multi-security Ponce Young Adult Correctional Facility and the 1,000-bed medium security Ponce Adult Correctional Facility, located in Ponce, Puerto Rico, upon the expiration of the management contracts in February 2002. Attempts to negotiate continued operation of these facilities were unsuccessful. As a result, the transition period to transfer operation of the facilities to the Commonwealth of Puerto Rico ended May 4, 2002, at which time operation of the facilities was transferred to the Commonwealth of Puerto Rico. During the nine months ended September 30, 2002, these facilities generated total revenue of $7.9 million and incurred total operating expenses of $7.4 million. The Company recorded a non-cash charge of approximately $1.8 million during the second quarter of 2002 for the write-off of the carrying value of assets associated with the terminated management contracts.
During the fourth quarter of 2001, we obtained an extension of our management contract with the Commonwealth of Puerto Rico for the operation of the 1,000-bed Guayama Correctional Center located in Guayama, Puerto Rico, through December 2006. However, on May 7, 2002, we received notice from the Commonwealth of Puerto Rico terminating our contract to manage this facility, which occurred on August 6, 2002. During the three and nine months ended September 30, 2002, this facility generated total revenue of $2.2 million and $12.3 million, respectively, and incurred total operating expenses of $2.7 million and $9.7 million, respectively.
On June 28, 2002, we sold our interest in a juvenile facility located in Dallas, Texas for approximately $4.3 million. The facility, which was designed to accommodate 900 at-risk juveniles, was leased to an independent third party operator pursuant to a lease expiring in 2008. Net proceeds from the sale were used for working capital purposes. This facility generated rental income of $0.4 million during the nine months ended September 30, 2002.
During the fourth quarter of 2002, we were notified by the State of Florida of its intention to not renew our contract to manage the 96-bed Okeechobee Juvenile Offender Correctional Center located in Okeechobee, Florida, upon the expiration of a short-term extension to the existing management contract, which expired in December 2002. Upon expiration, which occurred March 1, 2003, the
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operation of the facility was transferred to the State of Florida. During the three months ended September 30, 2002, the facility generated $1.2 million of total revenue and incurred total operating expenses of $1.0 million. During the nine months ended September 30, 2003 and 2002, the facility generated total revenue of $0.8 million and $3.6 million, respectively, and incurred total operating expenses of $0.7 million and $3.0 million, respectively. Additionally, the expiration of the contract resulted in the impairment of all goodwill previously recorded in connection with this facility, which totaled $0.3 million, during the first quarter of 2003.
On March 18, 2003, we were notified by the Department of Corrections of the Commonwealth of Virginia of its intention to not renew our contract to manage the 1,500-bed Lawrenceville Correctional Center located in Lawrenceville, Virginia, upon the expiration of the contract. Accordingly, we terminated our operation of the facility on March 22, 2003 in connection with the expiration of the contract. During the three months ended September 30, 2002, the facility generated $5.1 million of total revenue and incurred total operating expenses of $4.7 million, respectively. During the nine months ended September 30, 2003 and 2002, the facility generated total revenue of $4.6 million and $15.2 million, respectively, and incurred total operating expenses of $5.3 million and $14.1 million, respectively. Additionally, the expiration of the contract resulted in the impairment of all goodwill previously recorded in connection with this facility, which totaled $0.3 million, during the first quarter of 2003.
Distributions to preferred stockholders
For the three months ended September 30, 2003 and 2002, distributions to preferred stockholders totaled $0.8 million and $5.3 million, respectively, while distributions to preferred stockholders totaled $14.4 million and $15.6 million, respectively, during the nine months ended September 30, 2003 and 2002.
Following the completion of the common stock and notes offering in May 2003, we purchased approximately 3.7 million shares of series B preferred stock for approximately $97.4 million pursuant to the terms of a cash tender offer. The tender offer price for the series B preferred stock (inclusive of all accrued and unpaid dividends) was $26.00 per share. The tender premium payment of the difference between the tender price ($26.00) and the liquidation preference ($24.46) for the shares tendered was reported as a preferred stock distribution in the second quarter of 2003. The payment of the $1.54 tender premium resulted in approximately $5.8 million of preferred stock dividends in the second quarter of 2003. Dividends will continue to accrue on the remaining outstanding shares of series B preferred stock at the rate of 12% per year of the stated value of $24.46. The dividends are payable quarterly in arrears, in additional shares of series B preferred stock through the third quarter of 2003, and in cash thereafter, provided that all accrued and unpaid cash dividends have been made on our series A preferred stock.
Also during the second quarter of 2003, we redeemed 4.0 million, or approximately 93%, of our 4.3 million shares of outstanding series A preferred stock at a price of $25.00 per share plus accrued dividends to the redemption date as part of the recapitalization. Dividends continued to accrue on the shares redeemed at the face rate of 8% through the redemption date on June 6, 2003. The redemption resulted in the reduction in series A preferred stock dividends in the second and third quarters of 2003 as compared to the same quarters in the prior year. Dividends will continue to accrue on the remaining outstanding shares of series A preferred stock at the rate of 8% per year of the stated value of $25.00, and are payable quarterly in arrears in cash.
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Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” or SFAS 145. SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” will now be used to classify those gains and losses. The provisions of SFAS 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and interim periods within those fiscal years.
During the second quarter of 2002, prior to the required adoption of SFAS 145, we reported an extraordinary charge of approximately $36.7 million associated with the refinancing of our senior debt in May 2002. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods that does not meet the criteria in APB 30 for classification as an extraordinary item shall be reclassified. We adopted SFAS 145 on January 1, 2003. Accordingly, the extraordinary charge reported in the second quarter of 2002 was reclassified to a component of income (loss) from continuing operations in the statement of operations for the nine months ended September 30, 2002.
On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” or SFAS 148. SFAS 148 amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” or SFAS 123, to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employees.”
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, or FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or in which equity investors do not bear the residual economic risks. The interpretation was immediately applicable to variable interest entities (“VIE’s”) created after January 31, 2003, and to VIE’s in which an enterprise obtains an interest after that date. As originally issued, it applied in the fiscal year or interim period beginning after June 15, 2003, to VIE’s in which an enterprise holds a variable interest that was acquired before February 1, 2003. In October 2003, the FASB issued FASB Staff Position No. 46-6, which defers the effective date for FIN 46 to the first interim or annual period ending after December 15, 2003 for VIE’s created before February 1, 2003.
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We have determined that a joint venture, Agecroft Prison Management, Ltd., or APM, which was entered into by a wholly-owned subsidiary, is a VIE, of which we are not the primary beneficiary. APM has a management contract for a correctional facility located in Salford, England. All gains and losses under the joint venture are accounted for using the equity method of accounting. During 2000, we extended a working capital loan to APM, which totaled $5.4 million, including accrued interest, as of September 30, 2003. The outstanding working capital loan represents our maximum exposure to loss in connection with APM. APM has not been, and in accordance with FIN 46 will not be, consolidated with our financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities,” or SFAS 149. SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, and should be applied prospectively. The provisions of SFAS 149 that relate to SFAS 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. We do not expect the adoption of SFAS 149 to have a material impact on our financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” or SFAS 150. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Instruments that are indexed to and potentially settled in an issuer’s own shares that are not within the scope of SFAS 150 remain subject to existing guidance. SFAS 150 is effective for all freestanding financial instruments of public companies entered into or modified after May 31, 2003. SFAS 150 became effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on our financial statements.
Inflation
We do not believe that inflation has had or will have a direct adverse effect on our operations. Many of our management contracts include provisions for inflationary indexing, which mitigates an adverse impact of inflation on net income. However, a substantial increase in personnel costs, workers’ compensation or food and medical expenses could have an adverse impact on our results of operations in the future to the extent that these expenses increase at a faster pace than the per diem or fixed rates we receive for our management services.
Our primary market risk exposure is to changes in U.S. interest rates and fluctuations in foreign currency exchange rates between the U.S. dollar and the British pound. We are exposed to market risk related to our senior bank credit facility. The interest on the senior bank credit facility is subject to fluctuations in the market. If the interest rate for our outstanding indebtedness under the senior bank credit facility was 100 basis points higher or lower during the three and nine months ended September 30, 2003, our interest expense would have been increased or decreased by approximately $1.0 million and $4.1 million, respectively, including the effects of our interest rate cap agreement
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discussed below.
As of September 30, 2003, we had outstanding $250.0 million of senior notes with a fixed interest rate of 9.875%, $450.0 million of senior notes with a fixed rate of 7.5%, $30.0 million of convertible subordinated notes with a fixed interest rate of 4.0%, $7.5 million of series A preferred stock with a fixed dividend rate of 8.0% and $23.5 million of series B preferred stock with a fixed dividend rate of 12.0%. Because the interest and dividend rates with respect to these instruments are fixed, a hypothetical 100 basis point increase or decrease in market interest rates would not have a material impact on our financial statements.
In order to satisfy a requirement of the senior bank credit facility, we purchased an interest rate cap agreement, capping LIBOR at 5.0% (prior to the applicable spread) on outstanding balances of $200.0 million through the expiration of the cap agreement on May 20, 2004, for a price of $1.0 million.
We may, from time to time, invest our cash in a variety of short-term financial instruments. These instruments generally consist of highly liquid investments with original maturities at the date of purchase between three and twelve months. While these investments are subject to interest rate risk and will decline in value if market interest rates increase, a hypothetical 100 basis point increase or decrease in market interest rates would not materially affect the value of these investments.
Our exposure to foreign currency exchange rate risk relates to our Agecroft facility located in Salford, England, which we sold on April 10, 2001. We extended a working capital loan to the operator of this facility, of which we own 50% through a wholly-owned subsidiary. Such payments to us are denominated in British pounds rather than the U.S. dollar. As a result, we bear the risk of fluctuations in the relative exchange rate between the British pound and the U.S. dollar. At September 30, 2003, the receivables due to us and denominated in British pounds totaled 3.3 million British pounds. A hypothetical 10% increase in the relative exchange rate would have resulted in an increase of $0.5 million in the value of these receivables and a corresponding unrealized foreign currency transaction gain, and a hypothetical 10% decrease in the relative exchange rate would have resulted in a decrease of $0.5 million in the value of these receivables and a corresponding unrealized foreign currency transaction loss.
An evaluation was performed under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this quarterly report. Based on that evaluation, our senior management, including our Chief Executive Officer and Chief Financial Officer, concluded that as of the end of the period covered by this quarterly report our disclosure controls and procedures are effective in causing material information relating to us (including our consolidated subsidiaries) to be recorded, processed, summarized and reported by management on a timely basis and to ensure that the quality and timeliness of our public disclosures complies with SEC disclosure obligations. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have been materially affected, or are likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
See Note 12 to the financial statements included in Part I.
See Notes 8 and 9 to the financial statements included in Part I.
Pursuant to the provisions of the Company’s Non-Employee Directors’ Compensation Plan, on September 30, 2003, the Company issued an aggregate of 519 shares of its common stock to three non-employee directors of the Company. The shares were issued in lieu of the payment of a portion of such directors’ quarterly cash director fees, based on a Fair Market Value (as defined in the plan) of the shares of $24.54 per share. The shares issued under the plan on September 30, 2003 are not registered under the Securities Act.
None.
Audit Committee Matters.
Section 10A(i)(1) of the Exchange Act, as added by Section 202 of the Sarbanes-Oxley Act of 2002, requires that the Company’s Audit Committee (or one or more designated members of the Audit Committee who are independent directors of the Company’s board of directors) pre-approve all audit and non-audit services provided to the Company by its external auditor, Ernst & Young LLP. Section 10A(i)(2) of the Exchange Act further requires that the Company disclose in its periodic reports required by Section 13(a) of the Exchange Act any non-audit services approved by the Audit Committee to be performed by Ernst & Young.
Consistent with the foregoing requirements, during the third quarter, the Company’s Audit Committee pre-approved the engagement of Ernst & Young for audit and audit-related services, as defined by the SEC, for assistance with filing certain statements with the SEC. During the third quarter, the Company’s Audit Committee also pre-approved non-audit services to be provided by Ernst & Young comprised of: (1) tax compliance; (2) tax consulting; and (3) the purchase of accounting research software.
(a) Exhibits.
The following exhibits are filed herewith:
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(b) Reports on Form 8-K.
The following reports on Form 8-K were filed with the SEC during the period July 1, 2003 through September 30, 2003:
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The following reports on Form 8-K were filed with the SEC subsequent to September 30, 2003 and prior to the date of this report:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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