UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM      TO

CORRECTIONS CORPORATION OF AMERICA

MARYLAND (State or other jurisdiction of incorporation or organization)		62-1763875 (I.R.S. Employer Identification Number)

(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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each class of Common Stock as of April 30, 2006:

Shares of Common Stock, $0.01 par value per share: 40,091,994 shares outstanding.

 

 

CORRECTIONS CORPORATION OF AMERICA

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

INDEX

		PAGE
PART 1 – FINANCIAL INFORMATION
Item 1. Financial Statements
a)     Consolidated Balance Sheets (Unaudited) as of March 31, 2006 and December 31, 2005			1
b)     Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2006 and 2005			2
c)     Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2006 and 2005			3
d)     Consolidated Statement of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2006			4
e)     Consolidated Statement of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2005			5
f)     Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
PART II – OTHER INFORMATION
Item 1.    Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3.    Defaults Upon Senior Securities			43
Item 4.    Submission of Matters to a Vote of Security Holders			43
Item 5.    Other Information			43
Item 6.    Exhibits			44
SIGNATURES			45
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		March 31,				December 31,
		2006				2005
ASSETS
Cash and cash equivalents		$	64,924			$	64,901
Restricted cash			11,399				11,284
Investments			49,481				19,014
Accounts receivable, net of allowance of $1,622 and $2,258, respectively			167,554				176,560
Deferred tax assets			27,076				32,488
Prepaid expenses and other current assets			9,453				15,884
Total current assets			329,887				320,131
Property and equipment, net			1,722,742				1,710,794
Investment in direct financing lease			16,118				16,322
Goodwill			15,246				15,246
Other assets			26,057				23,820
Total assets		$	2,110,050			$	2,086,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses		$	137,797			$	141,090
Income taxes payable			1,715				1,435
Current portion of long-term debt			381				11,836
Current liabilities of discontinued operations			682				1,774
Total current liabilities			140,575				156,135
Long-term debt, net of current portion			976,185				963,800
Deferred tax liabilities			13,906				12,087
Other liabilities			37,719				37,660
Total liabilities			1,168,385				1,169,682
Commitments and contingencies
Common stock – $0.01 par value; 80,000 shares authorized; 40,095 and 39,694 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively			401				397
Additional paid-in capital			1,504,322				1,506,184
Deferred compensation			—				(5,563	)
Retained deficit			(563,058	)			(584,387	)
Total stockholders’ equity			941,665				916,631
Total liabilities and stockholders’ equity		$	2,110,050			$	2,086,313

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		For the Three Months
		Ended March 31,
		2006				2005
REVENUE:
Management and other		$	314,978			$	279,915
Rental			1,036				972
			316,014				280,887
EXPENSES:
Operating			236,034				214,750
General and administrative			14,377				12,538
Depreciation and amortization			15,703				14,037
			266,114				241,325
OPERATING INCOME			49,900				39,562
OTHER (INCOME) EXPENSE:
Interest expense, net			15,126				17,428
Expenses associated with debt refinancing and recapitalization transactions			982				35,032
Other income			(12	)			(124	)
			16,096				52,336
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			33,804				(12,774	)
Income tax (expense) benefit			(12,475	)			4,455
INCOME (LOSS) FROM CONTINUING OPERATIONS			21,329				(8,319	)
Income (loss) from discontinued operations, net of taxes			—				(620	)
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS		$	21,329			$	(8,939	)
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations		$	0.54			$	(0.22	)
Income (loss) from discontinued operations, net of taxes			—				(0.02	)
Net income (loss) available to common stockholders		$	0.54			$	(0.24	)
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations		$	0.52			$	(0.22	)
Income (loss) from discontinued operations, net of taxes			—				(0.02	)
Net income (loss) available to common stockholders		$	0.52			$	(0.24	)

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS)

		For the Three Months
		Ended March 31,
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	21,329			$	(8,939	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			15,703				14,200
Amortization of debt issuance costs and other non-cash interest			1,235				1,378
Expenses associated with debt refinancing and recapitalization transactions			982				35,032
Deferred income taxes			6,916				(4,777	)
Income tax benefit of equity compensation			—				1,892
Other income			(17	)			(124	)
Other non-cash items			1,390				766
Changes in assets and liabilities, net:
Accounts receivable, prepaid expenses and other assets			15,184				3,950
Accounts payable, accrued expenses and other liabilities			(3,436	)			938
Income taxes payable			280				(15,803	)
Net cash provided by operating activities			59,566				28,513
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for acquisitions, development, and expansions			(19,159	)			(8,618	)
Expenditures for other capital improvements			(9,846	)			(7,632	)
(Increase) decrease in restricted cash			(54	)			1,970
Purchases of investments			(30,467	)			(58	)
Proceeds from sale of assets			49				946
Decrease (increase) in other assets			84				(28	)
Payments received on direct financing leases and notes receivable			181				154
Net cash used in investing activities			(59,212	)			(13,266	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt			150,000				375,000
Scheduled principal repayments			(48	)			(43	)
Other principal repayments			(148,950	)			(360,000	)
Payment of debt issuance and other refinancing and related costs			(3,923	)			(34,855	)
Income tax benefit of equity compensation			5,239				—
Purchase and retirement of common stock			(6,964	)			—
Proceeds from exercise of stock options			4,315				2,120
Net cash used in financing activities			(331	)			(17,778	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			23				(2,531	)
CASH AND CASH EQUIVALENTS, beginning of period			64,901				50,938
CASH AND CASH EQUIVALENTS, end of period		$	64,924			$	48,407
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized of $1,269 and $1,095 in 2006 and 2005, respectively)		$	12,373			$	13,112
Income taxes		$	—			$	13,761

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS)

										Additional
		Common Stock								Paid-in				Deferred				Retained
		Shares				Par Value				Capital				Compensation				Deficit				Total
Balance as of December 31, 2005			39,694			$	397			$	1,506,184			$	(5,563	)		$	(584,387	)		$	916,631
Comprehensive income:			—
Net income			—				—				—				—				21,329				21,329
Total comprehensive income			—				—				—				—				21,329				21,329
Issuance of common stock			—				—				12				—				—				12
Retirement of common stock			(167	)			(2	)			(6,962	)			—				—				(6,964	)
Amortization of deferred compensation, net of forfeitures			(6	)			—				991				—				—				991
Income tax benefit of equity compensation			—				—				5,239				—				—				5,239
Restricted stock grant			164				2				(2	)			—				—				—
Reclassification of deferred compensation on nonvested stock upon adoption of SFAS 123R			—				—				(5,563	)			5,563				—				—
Compensation of unvested stock options			—				—				112				—				—				112
Stock options exercised			410				4				4,311				—				—				4,315
Balance as of March 31, 2006			40,095			$	401			$	1,504,322			$	—			$	(563,058	)		$	941,665

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS)

										Additional
		Common Stock								Paid-in				Deferred				Retained
		Shares				Par Value				Capital				Compensation				Deficit				Total
Balance as of December 31, 2004			35,415			$	354			$	1,451,885			$	(1,736	)		$	(634,509	)		$	815,994
Comprehensive income:			—
Net income			—				—				—				—				(8,939	)			(8,939	)
Total comprehensive income			—				—				—				—				(8,939	)			(8,939	)
Conversion of subordinated notes			3,362				34				29,944				—				—				29,978
Issuance of common stock			—				—				17				—				—				17
Amortization of deferred compensation, net of forfeitures			(4	)			—				(58	)			536				—				478
Income tax benefit of equity compensation			—				—				1,892				—				—				1,892
Restricted stock grant			183				2				6,439				(6,441	)			—				—
Stock options exercised			173				1				2,119				—				—				2,120
Balance as of March 31, 2005			39,129			$	391			$	1,492,238			$	(7,641	)		$	(643,448	)		$	841,540

The accompanying notes are an integral part of these consolidated financial statements.

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2006

1.		ORGANIZATION AND OPERATIONS
		As of March 31, 2006, Corrections Corporation of America, a Maryland corporation (together with its subsidiaries, the “Company”), owned 42 correctional, detention and juvenile facilities, three of which are leased to other operators. As of March 31, 2006, the Company operated 63 facilities, including 39 facilities that it owned, located in 19 states and the District of Columbia. The Company is also constructing two additional correctional facilities in Eloy, Arizona, one that is expected to be completed during the third quarter of 2006 and the other that is expected to be completed during the second half of 2007.
		The Company specializes in owning, operating and managing prisons and other correctional facilities and providing inmate residential and prisoner transportation services for governmental agencies. In addition to providing the fundamental residential services relating to inmates, the Company’s facilities offer a variety of rehabilitation and educational programs, including basic education, religious services, life skills and employment training, and substance abuse treatment. These services are intended to reduce recidivism and to prepare inmates for their successful re-entry into society upon their release. The Company also provides health care (including medical, dental and psychiatric services), food services and work and recreational programs.
		The Company’s website address is www.correctionscorp.com. The Company makes its Form 10-K, Form 10-Q, Form 8-K, and Section 16 reports under the Securities Exchange Act of 1934, as amended, available on its website, free of charge, as soon as reasonably practicable after these reports are filed with or furnished to the Securities and Exchange Commission (the “SEC”).
2.		BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		The accompanying interim condensed consolidated financial statements have been prepared by the Company without audit and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results for the unaudited interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year. Reference is made to the audited financial statements of the Company included in its Annual Report on Form 10-K as of and for the year ended December 31, 2005 (the “2005 Form 10-K”) with respect to certain significant accounting and financial reporting policies as well as other pertinent information of the Company.

		Reclassifications have been made to certain 2005 balance sheet amounts to conform with the 2006 presentation.
3.		ACCOUNTING FOR STOCK-BASED COMPENSATION
		In December 2004, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and amends Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
		The Company adopted the fair value recognition provisions of SFAS 123R on January 1, 2006 using the “modified prospective” method. The “modified prospective” method requires compensation cost to be recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date.
		Effective December 30, 2005, the Company’s board of directors approved the acceleration of the vesting of outstanding options previously awarded to executive officers and employees under its Amended and Restated 1997 Employee Share Incentive Plan and its Amended and Restated 2000 Stock Incentive Plan. As a result of the acceleration, approximately 980,000 unvested options became exercisable, 45% of which would have vested in February 2006 under the original terms. All of the unvested options were “in-the-money” on the effective date of acceleration with a range of exercise prices from $15.40 to $39.50 per share.
		The purpose of the accelerated vesting of stock options was to enable the Company to avoid recognizing compensation expense associated with these options in future periods as required by SFAS 123R, estimated at the date of acceleration to be $3.8 million in 2006, $2.0 million in 2007, and $0.5 million in 2008. In order to prevent unintended benefits to the holders of these stock options, the Company imposed resale restrictions to prevent the sale of any shares acquired from the exercise of an accelerated option prior to the original vesting date of the option. The resale restrictions automatically expire upon the individual’s termination of employment. All other terms and conditions applicable to such options, including the exercise prices, remained unchanged. As a result of the acceleration, the Company recognized a non-cash, pre-tax charge of $1.0 million in the fourth quarter of 2005 for the estimated value of the stock options that would have otherwise been forfeited.

		At March 31, 2006, the Company has equity incentive plans under which, among other things, incentive and non-qualified stock options are granted to certain employees and non-employee directors of the Company by the compensation committee of the Company’s board of directors. The options are generally granted with exercise prices equal to the market value at the date of grant. Vesting periods for options recently granted to employees generally range from three to four years. Options granted to non-employee directors vest at the date of grant. The term of such options is ten years from the date of grant.
		The weighted average fair value of options granted during the three months ended March 31, 2006 and 2005 was $14.51 and $13.33, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

		For the Three Months
		Ended March 31,
		2006				2005
Expected dividend yield			0.0	%			0.0	%
Expected stock price volatility			25.2	%			27.1	%
Risk-free interest rate			4.6	%			4.1	%
Expected life of options		6 years				6 years

The Company estimates expected stock price volatility based on actual historical changes in the market value of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield with a term that is consistent with the expected life of the stock options. The expected life of stock options is based on the Company’s historical experience and is calculated separately for groups of employees that have similar historical exercise behavior.

As previously described herein, the Company’s board of directors approved the acceleration of the vesting effective December 30, 2005 of all outstanding stock options previously awarded to the Company’s executive officers and employees. Stock options outstanding at March 31, 2006, are summarized below (in thousands, except per share data and years):

						Weighted-				Weighted-Average
						Average				Remaining				Aggregate
		No. of				Exercise Price				Contractual				Intrinsic
		options				of options				Term				Value
Outstanding at December 31, 2005			3,329			$	25.86
Granted			231				42.80
Exercised			(410	)			10.51
Cancelled			(33	)			111.46
Outstanding at March 31, 2006			3,117			$	28.24				6.5			$	60,154
Exercisable at March 31, 2006			2,886			$	27.08				6.2			$	60,045

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s average stock price during the first

quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised for the three months ended March 31, 2006 was $13.0 million.

Nonvested stock option transactions relating to the Company’s incentive and non-qualified stock option plans as of March 31, 2006 and changes during the three months ended March 31, 2006 are summarized below (in thousands, except exercise prices):

						Weighted
		Number of				average exercise
		options				price per option
Nonvested at December 31, 2005			—			$	—
Granted			231			$	42.80
Cancelled			—			$	—
Vested			—			$	—
Nonvested at March 31, 2006			231			$	42.80

As of March 31, 2006, $2.8 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 3.4 years from the grant date. The impact on net income for the first quarter of 2006 as a result of the additional stock-based compensation under SFAS 123R was immaterial ($0.1 million) as there were fewer stock options issued in the current year as compared to historical practices and, as further discussed herein, the Company vested all options granted prior to adoption of SFAS 123R on December 30, 2005 to avoid future compensation charges. The Company changed its historical business practices in 2005 with respect to awarding stock-based employee compensation by reducing the amount of stock options being issued and issuing restricted common stock to many employees who have historically been issued stock options. See Note 8 for further discussion of the compensation charges associated with the issuance of restricted common stock.

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (the “FSP”). The FSP provides that companies may elect to use a specified “short-cut” method to calculate the historical pool of windfall tax benefits upon adoption of SFAS 123R. The Company elected to use the “short-cut” method when SFAS 123R was adopted on January 1, 2006. Prior to the adoption of SFAS 123R, the Company reported all tax benefits of equity compensation as operating cash flows in our consolidated statement of cash flows. In accordance with SFAS 123R, for the three months ended March 31, 2006 the presentation of our statement of cash flows has changed from prior periods to report tax benefits from equity compensation resulting from tax deductions in excess of the compensation cost recognized for those equity awards (excess tax benefits) as financing cash flows.

Prior to adoption of SFAS 123R on January 1, 2006, the Company accounted for equity incentive plans under the recognition and measurement principles of APB 25. As such,

no employee compensation cost for the Company’s stock options is reflected in net income prior to January 1, 2006, except for $1.0 million recognized in the fourth quarter of 2005 as a result of the accelerated vesting of outstanding options on December 30, 2005 as previously described herein. The following table illustrates the effect on net loss and loss per share for the three months ended March 31, 2005 assuming the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share data).

		For the Three
		Months Ended
		March 31, 2005
As Reported:
Loss from continuing operations		$	(8,319	)
Loss from discontinued operations, net of taxes			(620	)
Net loss available to common stockholders		$	(8,939	)
Pro Forma:
Loss from continuing operations		$	(9,220	)
Loss from discontinued operations, net of taxes			(620	)
Net loss available to common stockholders		$	(9,840	)
As Reported:
Basic earnings (loss) per share:
Loss from continuing operations		$	(0.22	)
Loss from discontinued operations, net of taxes			(0.02	)
Net loss available to common stockholders		$	(0.24	)
As Reported:
Diluted earnings per share:
Loss from continuing operations		$	(0.22	)
Loss from discontinued operations, net of taxes			(0.02	)
Net loss available to common stockholders		$	(0.24	)
Pro Forma:
Basic earnings per share:
Loss from continuing operations		$	(0.25	)
Loss from discontinued operations, net of taxes			(0.02	)
Net loss available to common stockholders		$	(0.27	)
Pro Forma:
Diluted earnings per share:
Loss from continuing operations		$	(0.25	)
Loss from discontinued operations, net of taxes			(0.02	)
Net loss available to common stockholders		$	(0.27	)

The effect of applying SFAS 123 for disclosing compensation costs under such pronouncement may not be representative of the effects on reported net income (loss) available to common stockholders for future years.

Refer to Note 8 for further information regarding additional stock-based compensation awarded during 2006 and 2005.

4.		GOODWILL AND OTHER INTANGIBLE ASSETS
		Goodwill was $15.2 million as of March 31, 2006 and December 31, 2005 and was associated with the facilities the Company manages but does not own. This goodwill was established in connection with the acquisitions of two service companies during 2000. During the first quarter of 2005, the Company recognized $138,000 of goodwill impairment resulting from the pending termination of the Company’s contract to manage the David L. Moss Criminal Justice Center located in Tulsa, Oklahoma. This charge is included in income (loss) from discontinued operations, net of taxes, in the accompanying statement of operations for the three months ended March 31, 2005.
		The components of the Company’s amortized intangible assets and liabilities are as follows (in thousands):

		March 31, 2006								December 31, 2005
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Contract acquisition costs		$	873			$	(856	)		$	873			$	(855	)
Customer list			765				(355	)			765				(328	)
Contract values			(35,688	)			20,054				(35,688	)			19,294
Total		$	(34,050	)		$	18,843			$	(34,050	)		$	18,111

Contract acquisition costs and the customer list are included in other non-current assets, and contract values are included in other non-current liabilities in the accompanying balance sheets. Contract values are amortized using the interest method. Amortization income, net of amortization expense, for intangible assets and liabilities during the three months ended March 31, 2006 and 2005 was $1.2 million and $1.1 million, respectively. Interest expense associated with the amortization of contract values for the three months ended March 31, 2006 and 2005 was $0.4 and $0.5 million, respectively. Estimated amortization income, net of amortization expense, for the remainder of 2006 and the five succeeding fiscal years is as follows (in thousands):

2006 (remainder)		$	3,414
2007			4,552
2008			4,552
2009			3,095
2010			2,632
2011			134

5.		FACILITY OPERATIONS
		During the first quarter of 2006, the Company re-opened its 1,440-bed North Fork Correctional Facility located in Sayre, Oklahoma with a small population of inmates from the state of Vermont. Although the Company expects to accommodate additional inmate populations from the state of Vermont at the North Fork Correctional Facility due to that state’s overcrowding, the facility was re-opened in anticipation of additional inmate population needs from various existing state and federal customers. However, the Company can provide no assurance that inmate populations will increase further at the North Fork Correctional Facility. Prior to its re-opening, this facility had been

		vacant since the third quarter of 2003, when all of the Wisconsin inmates housed at the facility were transferred in order to satisfy a contractual provision mandated by the state of Wisconsin.
		In April 2006, the Company modified an agreement with Williamson County, Texas to house non-criminal detainees from the U.S. Immigration and Customs Enforcement (“ICE”) under an Inter-Governmental Service Agreement between Williamson County and the ICE. The agreement will enable the ICE to accommodate non-criminal aliens being detained for deportation at the Company’s 512-bed T. Don Hutto Residential Center in Taylor, Texas. The Company originally announced an agreement in December 2005 to house up to 600 male detainees for the ICE. However, for various reasons the initial intake of detainees originally scheduled to occur in February 2006 was delayed. The modified agreement, which is effective beginning May 8, 2006, provides for an indefinite term and a fixed monthly payment.
6.		DISCONTINUED OPERATIONS
		The results of operations, net of taxes, and the assets and liabilities of discontinued operations have been reflected in the accompanying consolidated financial statements as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” for all periods presented.
		During March 2005, the Company received notification from the Tulsa County Commission in Oklahoma that, as a result of a contract bidding process, the County elected to have the Tulsa County Sheriff’s Office manage the 1,440-bed David L. Moss Criminal Justice Center. The Company’s contract expired on June 30, 2005. Accordingly, the Company transferred operation of the facility to the Tulsa County Sheriff’s Office on July 1, 2005.
		The following table summarizes the results of operations for this facility for the three months ended March 31, 2006 and 2005 (amounts in thousands):

		For the Three Months Ended March 31,
		2006				2005
REVENUE:
Managed-only		$	—			$	5,043
EXPENSES:
Managed-only			—				5,832
Depreciation and amortization			—				163
			—				5,995
LOSS BEFORE INCOME TAXES			—				(952	)
Income tax benefit			—				332
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES		$	—				(620	)

The assets and liabilities of the discontinued operations presented in the accompanying condensed consolidated balance sheets are as follows (amounts in thousands):

		March 31, 2006				December 31, 2005
ASSETS
Accounts receivable		$	—			$	—
Total current assets		$	—			$	—
LIABILITIES
Accounts payable and accrued expenses		$	682			$	1,774
Total current liabilities		$	682			$	1,774

7.		DEBT
		Debt outstanding as of March 31, 2006 and December 31, 2005 consists of the following (in thousands):

		March 31,				December 31,
		2006				2005
Senior Bank Credit Facility:
Term Loan E Facility, with quarterly principal payments of varying amounts with unpaid balance originally due in March 2008; interest payable periodically at variable interest rates. The interest rate was 6.0% at December 31, 2005. This loan was paid-off in connection with issuance of the 6.75% Senior Notes in January 2006.		$	—			$	138,950
Revolving Loan, principal due at maturity in March 2006, interest payable periodically at variable interest rates. The interest rate was 5.9% at December 31, 2005. This facility was replaced with a new revolving credit facility during the first quarter of 2006, as further described hereafter.			—				10,000
New Revolving Credit Facility, principal due at maturity in February 2011; interest payable periodically at variable interest rates.			—				—
7.5% Senior Notes, principal due at maturity in May 2011; interest payable semi-annually in May and November at 7.5%.			250,000				250,000
7.5% Senior Notes, principal due at maturity in May 2011; interest payable semi-annually in May and November at 7.5%. These notes were issued with a $2.3 million premium, of which $1.5 million was unamortized at both March 31, 2006 and December 31, 2005.			201,476				201,548
6.25% Senior Notes, principal due at maturity in March 2013; interest payable semi-annually in March and September at 6.25%.			375,000				375,000
6.75% Senior Notes, principal due at maturity in January 2014; interest payable semi-annually in January and July at 6.75%.			150,000				—
Other			90				138
			976,566				975,636
Less: Current portion of long-term debt			(381	)			(11,836	)
		$	976,185			$	963,800

Senior Bank Credit Facility. As of December 31, 2005, the Company’s senior secured bank credit facility (the “Senior Bank Credit Facility”) was comprised of a $139.0

million term loan expiring March 31, 2008 (the “Term Loan E Facility”) and a revolving loan (the “Revolving Loan”) with a capacity of up to $125.0 million, including a $75.0 million subfacility for letters of credit, expiring March 31, 2006. On April 18, 2005, the Company completed an amendment to the Senior Bank Credit Facility that resulted in a reduction to the interest rates applicable to the term loan portion from 2.25% over the London Interbank Offered Rate (“LIBOR”) to 1.75% over LIBOR and a reduction to the interest rates applicable to the Revolving Loan from 3.50% over LIBOR to 1.50% over LIBOR, while the fees associated with the unused portion of the Revolving Loan were reduced from 0.50% to 0.375%. The base rate margin applicable to the term loan portion was reduced to 0.75% from 1.25% and the base rate margin applicable to the Revolving Loan was reduced to 0.50% from 2.50%.

In connection with a substantial prepayment in March 2005 with net proceeds from the issuance of the 6.25% Senior Notes (as defined hereafter), along with cash on hand, the Company amended the Senior Bank Credit Facility to permit the incurrence of additional unsecured indebtedness to be used for the purpose of purchasing, through a tender offer, the 9.875% Senior Notes (as defined hereafter), prepaying a portion of the then outstanding term loan portion of the Senior Bank Credit Facility (the “Term Loan D Facility”), and paying the related tender premium, fees, and expenses incurred in connection therewith. The tender offer for the 9.875% Senior Notes and pay-down of the Term Loan D Facility resulted in expenses associated with refinancing transactions of $35.0 million during the first quarter of 2005, consisting of a tender premium paid to the holders of the 9.875% Senior Notes who tendered their notes to the Company at a price of 111% of par, estimated fees and expenses associated with the tender offer, and the write-off of existing deferred loan costs associated with the purchase of the 9.875% Senior Notes and lump sum pay-down of the Term Loan D Facility.

During January 2006, in connection with the sale and issuance of the 6.75% Senior Notes (as defined hereafter), the Company used the net proceeds to completely pay-off the outstanding balance of the Term Loan E Facility, after repaying the outstanding $10.0 million balance on the Revolving Loan in January 2006 with cash on hand. Additionally, in February 2006, the Company reached an agreement with a group of lenders to enter into a new $150.0 million senior secured revolving credit facility with a five-year term (the “New Revolving Credit Facility”). The New Revolving Credit Facility was used to replace the existing Revolving Loan, including any outstanding letters of credit issued thereunder, which totaled $36.5 million as of March 31, 2006. The Company incurred a pre-tax charge of approximately $1.0 million during the first quarter of 2006 for the write-off of existing deferred loan costs associated with the retirement of the Revolving Loan and pay-off of the Term Loan E Facility.

The New Revolving Credit Facility has a $10.0 million sublimit for swingline loans and a $100.0 million sublimit for the issuance of standby letters of credit. The Company has an option to increase the availability under the New Revolving Credit Facility by up to $100.0 million (consisting of revolving credit, term loans, or a combination of the two) subject to, among other things, the receipt of commitments for the increased amount. Interest on the New Revolving Credit Facility is based on either a base rate plus a margin ranging from 0.00% to 0.50% or a LIBOR plus a margin ranging from 0.75% to 1.50%. The applicable margin rates are subject to adjustment based on the Company’s leverage ratio. The New Revolving Credit Facility currently

bears interest at a base rate plus a margin of 0.25% or a LIBOR plus a margin of 1.25%.

The Senior Bank Credit Facility was secured by liens on a substantial portion of the Company’s real property and other assets (inclusive of its domestic subsidiaries), and pledges of all of the capital stock of the Company’s domestic subsidiaries. The loans and other obligations under the facility were guaranteed by each of the Company’s domestic subsidiaries and were secured by a pledge of up to 65% of the capital stock of the Company’s foreign subsidiaries. The New Revolving Credit Facility is secured by a pledge of all of the capital stock of the Company’s domestic subsidiaries, 65% of the capital stock of the Company’s foreign subsidiaries, all of the Company’s accounts receivable, and all of the Company’s deposit accounts.

The credit agreement governing the Senior Bank Credit Facility required the Company to meet certain financial covenants, including, without limitation, a minimum fixed charge coverage ratio, leverage ratios, and a minimum interest coverage ratio. The New Revolving Credit Facility requires the Company to meet certain financial covenants, including, without limitation, a maximum total leverage ratio and a minimum interest coverage ratio. In addition, the Senior Bank Credit Facility contained certain covenants which, among other things, limited 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 was subject to certain cross-default provisions with terms of the Company’s other indebtedness. The New Revolving Credit Facility contains similar covenants and cross-default provisions.

$250 Million 9.875% Senior Notes. Interest on the $250.0 million aggregate principal amount of the Company’s 9.875% unsecured senior notes issued in May 2002 (the “9.875% Senior Notes”) accrued at the stated rate and was payable semi-annually on May 1 and November 1 of each year. The 9.875% Senior Notes were scheduled to mature on May 1, 2009. As previously described herein, the 9.875% Senior Notes were purchased through a tender offer by the Company during the first quarter of 2005.

$250 Million 7.5% Senior Notes. Interest on the $250.0 million aggregate principal amount of the Company’s 7.5% unsecured senior notes issued in May 2003 (the “$250 Million 7.5% Senior Notes”) accrues at the stated rate and is payable semi-annually on May 1 and November 1 of each year. The $250 Million 7.5% Senior Notes are scheduled to mature on May 1, 2011. At any time on or before May 1, 2006, the Company may redeem up to 35% of the notes with the net proceeds of certain equity offerings, as long as 65% of the aggregate principal amount of the notes remains outstanding after the redemption. The Company may redeem all or a portion of the notes on or after May 1, 2007. Redemption prices are set forth in the indenture governing the $250 Million 7.5% Senior Notes. The $250 Million 7.5% Senior Notes are guaranteed on an unsecured basis by all of the Company’s domestic subsidiaries.

$200 Million 7.5% Senior Notes. Interest on the $200.0 million aggregate principal amount of the Company’s 7.5% unsecured senior notes issued in August 2003 (the “$200 Million 7.5% Senior Notes”) accrues at the stated rate and is payable semi-annually on May 1 and November 1 of each year. However, the notes were issued at a price of 101.125% of the principal amount of the notes, resulting in a premium of $2.25 million, which is amortized as a reduction to interest expense over the term of the notes. The $200 Million 7.5% Senior Notes were issued under the existing indenture and supplemental indenture governing the $250 Million 7.5% Senior Notes.

$375 Million 6.25% Senior Notes. As previously described herein, on March 23, 2005, the Company completed the sale and issuance of $375.0 million aggregate principal amount of its 6.25% unsecured senior notes (the “6.25% Senior Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. During April 2005, the Company filed a registration statement with the SEC, which the SEC declared effective May 4, 2005, to exchange the 6.25% Senior Notes for a new issue of identical debt securities registered under the Securities Act of 1933, as amended. Proceeds from the original note offering, along with cash on hand, were used to purchase, through a cash tender offer, all of the 9.875% Senior Notes, to pay-down $110.0 million of the then outstanding Term Loan D Facility portion of the Senior Bank Credit Facility, and to pay fees and expenses in connection therewith. The Company capitalized approximately $7.5 million of costs associated with the issuance of the 6.25% Senior Notes.

Interest on the 6.25% Senior Notes accrues at the stated rate and is payable on March 15 and September 15 of each year. The 6.25% Senior Notes are scheduled to mature on March 15, 2013. At any time on or before March 15, 2008, the Company may redeem up to 35% of the notes with the net proceeds of certain equity offerings, as long as 65% of the aggregate principal amount of the notes remains outstanding after the redemption. The Company may redeem all or a portion of the notes on or after March 15, 2009. Redemption prices are set forth in the indenture governing the 6.25% Senior Notes.

$150 Million 6.75% Senior Notes. During January 2006, the Company completed the sale and issuance of $150.0 million aggregate principal amount of its 6.75% unsecured senior notes (the “6.75% Senior Notes”) pursuant to a prospectus supplement under an effective shelf registration statement that was filed by the Company with the SEC on January 17, 2006. The Company used the net proceeds from the sale of the 6.75% Senior Notes to prepay the $139.0 million balance outstanding on the term loan indebtedness under the Company’s Senior Bank Credit Facility, to pay fees and expenses, and for general corporate purposes. The Company reported a charge of $0.9 million during the first quarter of 2006 in connection with the prepayment of the term portion of the Senior Bank Credit Facility. The Company capitalized approximately $3.0 million of costs associated with the issuance of the 6.75% Senior Notes.

Interest on the 6.75% Senior Notes accrues at the stated rate and is payable on January 31 and July 31 of each year. The 6.75% Senior Notes are scheduled to mature on January 31, 2014. At any time on or before January 31, 2009, the Company may redeem up to 35% of the notes with the net proceeds of certain equity offerings, as long as 65% of the aggregate principal amount of the notes remains outstanding after the

redemption. The Company may redeem all or a portion of the notes on or after January 31, 2010. Redemption prices are set forth in the indenture governing the 6.75% Senior Notes.

		8. STOCKHOLDERS’ EQUITY
		During the first quarter of 2006, the Company issued 163,591 shares of restricted common stock to certain of the Company’s employees, with an aggregate value of $7.0 million, including 127,891 restricted shares to employees whose compensation is charged to general and administrative expense and 35,700 restricted shares to employees whose compensation is charged to operating expense. During 2005, the Company issued 197,026 shares of restricted common stock to certain of the Company’s employees, with an aggregate value of $7.7 million, including 155,556 restricted shares to employees whose compensation is charged to general and administrative expense and 41,470 shares to employees whose compensation is charged to operating expense.
		The employees whose compensation is charged to general and administrative expense have historically been issued stock options as opposed to restricted common stock. However, in 2005 the Company made changes to its historical business practices with respect to awarding stock-based employee compensation as a result of, among other reasons, the issuance of SFAS 123R, whereby the Company issued a combination of stock options and restricted common stock to such employees. The Company established performance-based vesting conditions on the restricted stock awarded to the Company’s officers and executive officers. Unless earlier vested under the terms of the restricted stock, 83,922 shares issued in 2006 and 107,950 shares issued in 2005 to officers and executive officers are subject to vesting over a three-year period based upon the satisfaction of certain performance criteria. No more than one-third of such shares may vest in the first performance period; however, the performance criteria are cumulative for the three-year period. Because the first performance criteria with respect to the restricted shares issued in 2005 were satisfied, one-third of such shares issued and still outstanding on the date the performance criteria were deemed satisfied, or 35,220 restricted shares, became vested in March 2006. Unless earlier vested under the terms of the restricted stock, the remaining 79,669 shares of restricted stock issued in 2006 and 89,076 shares of restricted stock issued in 2005 to certain other employees of the Company vest during 2009 and 2008, respectively.
		During 2004 and 2003, the Company issued 52,600 shares and 94,500 shares of restricted common stock, respectively, to certain of the Company’s wardens. Each of the aggregate grants was valued at $1.6 million on the date of the award. All of the shares granted during 2003 vested during February 2006, while all of the shares granted during 2004 vest during 2007.
		During the three months ended March 31, 2006, the Company expensed $991,000, net of forfeitures, relating to restricted common stock ($325,000 of which was recorded in operating expenses and $666,000 of which was recorded in general and administrative expenses). During the three months ended March 31, 2005, the Company expensed $477,000, net of forfeitures, relating to restricted common stock ($271,000 of which was recorded in operating expenses and $206,000 of which was recorded in general and

		administrative expenses). As of March 31, 2006, 360,345 of these shares of restricted stock remained outstanding and subject to vesting.
9.		EARNINGS PER SHARE
		In accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share,” basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For the Company, diluted earnings per share is computed by dividing net income available to common stockholders, as adjusted, by the weighted average number of common shares after considering the additional dilution related to convertible subordinated notes, restricted common stock plans, and stock options and warrants.
		A reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation is a follows (in thousands, except per share data):

		For the Three Months
		Ended March 31,
		2006				2005
NUMERATOR
Basic:
Income (loss) from continuing operations		$	21,329			$	(8,319	)
Income (loss) from discontinued operations, net of taxes			—				(620	)
Net income (loss) available to common stockholders		$	21,329			$	(8,939	)
Diluted:
Income (loss) from continuing operations		$	21,329			$	(8,319	)
Income (loss) from discontinued operations, net of taxes			—				(620	)
Diluted net income (loss) available to common stockholders		$	21,329			$	(8,939	)
DENOMINATOR
Basic:
Weighted average common shares outstanding			39,533				36,536
Diluted:
Weighted average common shares outstanding			39,533				36,536
Effect of dilutive securities:
Stock options and warrants			1,029				—
Restricted stock-based compensation			148				—
Weighted average shares and assumed conversions			40,710				36,536
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations		$	0.54			$	(0.22	)
Income (loss) from discontinued operations, net of taxes			—				(0.02	)
Net income (loss) available to common stockholders		$	0.54			$	(0.24	)
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations		$	0.52			$	(0.22	)
Income (loss) from discontinued operations, net of taxes			—				(0.02	)
Net income (loss) available to common stockholders		$	0.52			$	(0.24	)

During the three months ended March 31, 2005, the Company’s previously outstanding $30 Million Convertible Subordinated Notes were convertible into 2.2 million shares of common stock for the period such notes were outstanding during the quarter using the if-converted method; the Company’s stock options and warrants were convertible into 1.3 million shares of common stock, using the treasury stock method; and the Company’s restricted stock-based compensation was convertible into 0.1 million shares of common stock using the treasury stock method. These incremental shares were excluded from the computation of diluted earnings per share, as the effect of their inclusion was anti-dilutive.

10.		COMMITMENTS AND CONTINGENCIES
		Legal Proceedings
		General. The nature of the Company’s business results in claims and litigation alleging that it is liable for damages arising from the conduct of its employees, inmates or others. The Company maintains insurance to cover many of these claims which may mitigate the risk that any single claim would have a material effect on the Company’s consolidated financial position, results of operations, or cash flows, provided the claim is one for which coverage is available. The combination of self-insured retentions and deductible amounts means that, in the aggregate, the Company is subject to substantial self-insurance risk. In the opinion of management, there are no pending legal proceedings that would have a material effect on the Company’s consolidated financial position, results of operations, or cash flows. Adversarial proceedings and litigation are, however, subject to inherent uncertainties, and unfavorable decisions and rulings could occur which could have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows for a period in which such decisions or rulings occur, or future periods.
		Guarantees
		Hardeman County Correctional Facilities Corporation (“HCCFC”) is a nonprofit, mutual benefit corporation organized under the Tennessee Nonprofit Corporation Act to purchase, construct, improve, equip, finance, own and manage a detention facility located in Hardeman County, Tennessee. HCCFC was created as an instrumentality of Hardeman County to implement the County’s incarceration agreement with the state of Tennessee to house certain inmates.
		During 1997, HCCFC issued $72.7 million of revenue bonds, which were primarily used for the construction of a 2,016-bed medium security correctional facility. In addition, HCCFC entered into a construction and management agreement with the Company in order to assure the timely and coordinated acquisition, construction, development, marketing and operation of the correctional facility.
		HCCFC leases the correctional facility to Hardeman County in exchange for all revenue from the operation of the facility. HCCFC has, in turn, entered into a management agreement with the Company for the correctional facility.

		In connection with the issuance of the revenue bonds, the Company is obligated, under a debt service deficit agreement, to pay the trustee of the bond’s trust indenture (the “Trustee”) amounts necessary to pay any debt service deficits consisting of principal and interest requirements (outstanding principal balance of $54.4 million at March 31, 2006 plus future interest payments). In the event the state of Tennessee, which is currently utilizing the facility to house certain inmates, exercises its option to purchase the correctional facility, the Company is also obligated to pay the difference between principal and interest owed on the bonds on the date set for the redemption of the bonds and amounts paid by the state of Tennessee for the facility plus all other funds on deposit with the Trustee and available for redemption of the bonds. Ownership of the facility reverts to the state of Tennessee in 2017 at no cost. Therefore, the Company does not currently believe the state of Tennessee will exercise its option to purchase the facility. At March 31, 2006, the outstanding principal balance of the bonds exceeded the purchase price option by $13.3 million. The Company also maintains a restricted cash account of $5.4 million as collateral against a guarantee it has provided for a forward purchase agreement related to the bond issuance.
		Income Tax Contingencies
		In July 2005, the FASB issued an exposure draft of a proposed interpretation of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”) that would address the accounting for uncertain tax positions. The FASB currently expects to issue the final interpretation during 2006. The Company cannot predict what actions the FASB will take or how any such actions might ultimately affect the Company’s financial position or results of operations, but such changes could have a material impact on the Company’s evaluation and recognition of its uncertain tax positions.
11.		INCOME TAXES
		Income taxes are accounted for under the provisions of SFAS 109. SFAS 109 generally requires the Company to record deferred income taxes for the tax effect of differences between book and tax bases of its assets and liabilities.
		Deferred income taxes reflect the available net operating losses and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including the Company’s past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of its deferred tax assets, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
		The Company’s effective tax rate was 36.9% during the first quarter of 2006 compared with 34.9% during the same period in the prior year. The lower effective tax rate during the first quarter of 2005 resulted from certain tax planning strategies implemented during the fourth quarter of 2004 that were magnified by the recognition of deductible expenses associated with the Company’s debt refinancing transactions

		completed during the first quarter of 2005. The Company’s overall effective tax rate is estimated based on the Company’s current projection of taxable income and could change in the future as a result of changes in these estimates, the implementation of additional tax strategies, changes in federal or state tax rates, or changes in state apportionment factors, as well as changes in the valuation allowance applied to the Company’s deferred tax assets that are based primarily on the amount of state net operating losses and tax credits that could expire unused.
12.		SEGMENT REPORTING
		As of March 31, 2006, the Company owned and managed 39 correctional and detention facilities, and managed 24 correctional and detention facilities it did not own. Management views the Company’s operating results in two reportable segments: owned and managed correctional and detention facilities and managed-only correctional and detention facilities. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the notes to consolidated financial statements included in the Company’s 2005 Form 10-K. Owned and managed facilities include the operating results of those facilities owned and managed by the Company. Managed-only facilities include the operating results of those facilities owned by a third party and managed by the Company. The Company measures the operating performance of each facility within the above two reportable segments, without differentiation, based on facility contribution. The Company defines facility contribution as a facility’s operating income or loss from operations before interest, taxes, depreciation and amortization. Since each of the Company’s facilities within the two reportable segments exhibit similar economic characteristics, provide similar services to governmental agencies, and operate under a similar set of operating procedures and regulatory guidelines, the facilities within the identified segments have been aggregated and reported as one reportable segment.
		The revenue and facility contribution for the reportable segments and a reconciliation to the Company’s operating income is as follows for the three months ended March 31, 2006 and 2005 (dollars in thousands):

		For the Three Months Ended
		March 31,
		2006				2005
Revenue:
Owned and managed		$	225,673			$	197,206
Managed-only			85,757				78,888
Total management revenue			311,430				276,094
Operating expenses:
Owned and managed			157,714				141,034
Managed-only			73,291				68,391
Total operating expenses			231,005				209,425
Facility contribution:
Owned and managed			67,959				56,172
Managed-only			12,466				10,497
Total facility contribution			80,425				66,669
Other revenue (expense):
Rental and other revenue			4,584				4,793
Other operating expense			(5,029	)			(5,325	)
General and administrative			(14,377	)			(12,538	)
Depreciation and amortization			(15,703	)			(14,037	)
Operating income		$	49,900			$	39,562

The following table summarizes capital expenditures for the reportable segments for the three months ended March 31, 2006 and 2005 (in thousands):

		For the Three Months Ended
		March 31,
		2006				2005
Capital expenditures:
Owned and managed		$	21,915			$	16,458
Managed-only			1,814				957
Corporate and other			5,085				3,388
Total capital expenditures		$	28,814			$	20,803

The assets for the reportable segments are as follows (in thousands):

		March 31,
		2006				December 31, 2005
Assets:
Owned and managed		$	1,648,689			$	1,672,941
Managed-only			95,744				92,101
Corporate and other			365,617				321,271
Total assets		$	2,110,050			$	2,086,313

13.		SUPPLEMENTAL CASH FLOW DISCLOSURE
		During the three months ended March 31, 2005, $30.0 million of convertible subordinated notes were converted into 3.4 million shares of common stock. As a result, long term debt was reduced by, and common stock and additional paid-in capital were increased by, $30.0 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This quarterly report on Form 10-Q 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:

	•		fluctuations in operating results because of changes in occupancy levels, competition, increases in cost of operations, fluctuations in interest rates, and risks of operations;
	•		changes in the privatization of the corrections and detention industry and the public acceptance of our services;
	•		our ability to obtain and maintain correctional facility management contracts, including as the result of sufficient governmental appropriations, inmate disturbances, and the timing of the opening of new facilities and the commencement of new management contracts to utilize current available beds and new capacity as development and expansion projects are completed;
	•		increases in costs to develop or expand correctional facilities that exceed original estimates, or the inability to complete such projects on schedule as a result of various factors, many of which are beyond our control, such as weather, labor conditions, and material shortages, resulting in increased construction costs;
	•		changes in governmental policy and in legislation and regulation of the corrections and detention industry that adversely affect our business;
	•		the availability of debt and equity financing on terms that are favorable to us; and
	•		general economic and market conditions.

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, 2005, filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2006 (File No. 001-16109) (the “2005 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 2005 Form 10-K.

OVERVIEW

The Company

As of March 31, 2006, we owned 42 correctional, detention and juvenile facilities, three of which we leased to other operators. As of March 31, 2006, we operated 63 facilities, including 39 facilities that we owned, with a total design capacity of approximately 71,000 beds in 19 states and the District of Columbia. We also are constructing two additional correctional facilities in Eloy, Arizona, one that is expected to be completed during the third quarter of 2006 and the other that is expected to be completed during the second half of 2007.

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. 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 in this report 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 our 2005 Form 10-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 March 31, 2006, we had $1.7 billion in long-lived assets. We evaluate the recoverability of the carrying values of our long-lived assets, other than goodwill, when events suggest that an impairment may have occurred. Such events primarily include, but are not limited to, the termination of a management contract or a significant decrease in inmate populations within a correctional facility we own or manage. 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. As of March 31, 2006, we had $15.2 million of goodwill. We evaluate the carrying value of goodwill during the fourth quarter of each year, in connection with our annual budgeting process, and whenever circumstances indicate the carrying value of goodwill may not be recoverable. Such circumstances primarily include, but are not limited to, the termination of a management contract or a significant decrease in inmate populations within a reporting unit. We test for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined using a collaboration of various common valuation techniques, including market multiples, discounted cash flows, and replacement cost methods. Each of these techniques requires considerable judgment and estimations which could change in the future.

Income taxes. Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 generally requires us to record deferred income taxes for the tax effect of differences between book and tax bases of our assets and liabilities.

Deferred income taxes reflect the available net operating losses and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of our deferred tax assets, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.

We currently expect to utilize our remaining federal net operating losses in 2006. We also have approximately $11.5 million in net operating losses applicable to various states that we expect to carry forward in future years to offset taxable income in such states. These net operating losses have begun to expire. Accordingly, we have a valuation allowance of $3.3 million for the estimated amount of the net operating losses that will expire unused, in addition to a $6.7 million valuation allowance related to state tax credits that are also expected to expire unused. Although our estimate of future taxable income is based on current assumptions that we believe to be reasonable, our assumptions may prove inaccurate and could change in the future, which could result in the expiration of additional net operating losses or credits. We would be required to establish a valuation allowance at such time that we no longer expected to utilize these net operating losses or credits, which could result in a material impact on our results of operations in the future.

Self-funded insurance reserves. As of March 31, 2006, we had $34.2 million in accrued liabilities for employee health, workers’ compensation, and automobile insurance claims. We are significantly self-insured for employee health, workers’ compensation, and automobile liability insurance claims. As such, our insurance expense is largely dependent on claims experience and our ability to control our claims. We have consistently accrued the estimated liability for employee health insurance claims based on our history of claims experience and the time lag between the incident date and the date the cost is paid by us. We have accrued the estimated liability for workers’ compensation and automobile insurance

claims based on a third-party actuarial valuation of the outstanding liabilities. These estimates could change in the future. It is possible that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.

Legal reserves. As of March 31, 2006, we had $13.1 million in accrued liabilities related to certain legal proceedings in which we are involved. We have accrued our estimate of the probable costs for the resolution of these claims based on a range of potential outcomes. In addition, we are subject to current and potential future legal proceedings for which little or no accrual has been reflected because our current assessment of the potential exposure is nominal. These estimates have been developed in consultation with our General 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 that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.

RESULTS OF OPERATIONS

Our results of operations are impacted by 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. The following table sets forth the changes in the number of facilities operated for the periods presented.

						Owned
		Effective				and				Managed
		Date				Managed				Only				Leased				Incomplete				Total
Facilities as of December 31, 2004							38				25				3				1				67
Expiration of the management contract for the David L. Moss Criminal Justice Center		July 1, 2005					—				(1	)			—				—				(1	)
Completion of construction at the Stewart County Correctional Facility		October 10, 2005					1				—				—				(1	)			—
Facilities as of December 31, 2005							39				24				3				—				66
Facilities as of March 31, 2006							39				24				3				—				66

We also have two additional facilities located in Eloy, Arizona that are under construction. These facilities are not counted in the foregoing table because they currently have no impact on our results of operations.

Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005

Net income available to common stockholders was $21.3 million, or $0.52 per diluted share, for the three months ended March 31, 2006, compared with net loss available to common stockholders of $8.9 million, or $0.24 per diluted share, for the three months ended March 31, 2005.

Net income available to common stockholders during the first quarter of 2006 was favorably impacted by the increase in operating income of $10.3 million, from $39.6 million during the first quarter of 2005 to $49.9 million during the first quarter of 2006. Contributing to the increase in operating income during 2006 compared with the previous year was an increase in occupancy levels and the commencement of new management contracts, partially offset by an increase in general and administrative expenses and depreciation and amortization.

Net loss available to common stockholders during the first quarter of 2005 was negatively impacted by a $35.0 million charge associated with debt refinancing transactions completed during the first quarter of 2005, as further described hereafter, which consisted of a tender premium paid to the holders of the 9.875% senior notes who tendered their notes to us at a price of 111% of par pursuant to a tender offer we made for their notes in March 2005, estimated fees and expenses associated with the tender offer, and the write-off of existing deferred loan costs associated with the purchase of the 9.875% senior notes and a lump sum pay-down of our old senior bank credit facility.

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, which 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 months ended March 31, 2006 and 2005:

		For the Three Months
		Ended March 31,
		2006				2005
Revenue per compensated man-day		$	52.03			$	49.90
Operating expenses per compensated man-day:
Fixed expense			28.86				28.98
Variable expense			9.73				8.87
Total			38.59				37.85
Operating margin per compensated man-day		$	13.44			$	12.05
Operating margin			25.8	%			24.1	%
Average compensated occupancy			93.7	%			89.6	%