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: JUNE 30, 2006

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 July 31, 2006:

Shares of Common Stock, $0.01 par value per share: 40,281,608 shares outstanding.

 

 

CORRECTIONS CORPORATION OF AMERICA

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

INDEX

				PAGE
PART 1 — FINANCIAL INFORMATION
Item 1.		Financial Statements
a)		Consolidated Balance Sheets (Unaudited) as of June 30, 2006 and December 31, 2005			1
b)		Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2006 and 2005			2
c)		Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2006 and 2005			3
d)		Consolidated Statement of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2006			4
e)		Consolidated Statement of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2005			5
f)		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			47
Item 4.		Controls and Procedures			47
PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			48
Item 1A.		Risk Factors			48
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3.		Defaults Upon Senior Securities			48
Item 4.		Submission of Matters to a Vote of Security Holders			48
Item 5.		Other Information			49
Item 6.		Exhibits			50
SIGNATURES					51
EX-4.1 WARRANT NO. W-3
EX-4.2 WARRANT NO. W-4
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
CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		June 30,				December 31,
		2006				2005
ASSETS
Cash and cash equivalents		$	55,395			$	64,901
Restricted cash			11,531				11,284
Investments			60,822				19,014
Accounts receivable, net of allowance of $1,768 and $2,258, respectively			188,739				176,560
Deferred tax assets			16,386				32,488
Prepaid expenses and other current assets			22,043				15,884
Total current assets			354,916				320,131
Property and equipment, net			1,742,441				1,710,794
Investment in direct financing lease			15,908				16,322
Goodwill			15,246				15,246
Other assets			25,819				23,820
Total assets		$	2,154,330			$	2,086,313
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses		$	145,831			$	141,090
Income taxes payable			2,637				1,435
Current portion of long-term debt			331				11,836
Current liabilities of discontinued operations			604				1,774
Total current liabilities			149,403				156,135
Long-term debt, net of current portion			976,113				963,800
Deferred tax liabilities			15,409				12,087
Other liabilities			38,326				37,660
Total liabilities			1,179,251				1,169,682
Commitments and contingencies
Common stock — $0.01 par value; 80,000 shares authorized; 40,261 and 39,694 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively			403				397
Additional paid-in capital			1,512,106				1,506,184
Deferred compensation			—				(5,563	)
Retained deficit			(537,430	)			(584,387	)
Total stockholders’ equity			975,079				916,631
Total liabilities and stockholders’ equity		$	2,154,330			$	2,086,313

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

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
REVENUE:
Management and other		$	325,171			$	289,205			$	640,149			$	569,120
Rental			1,049				984				2,085				1,956
			326,220				290,189				642,234				571,076
EXPENSES:
Operating			238,814				223,597				474,848				438,347
General and administrative			15,961				13,587				30,338				26,125
Depreciation and amortization			16,326				14,780				32,029				28,817
			271,101				251,964				537,215				493,289
OPERATING INCOME			55,119				38,225				105,019				77,787
OTHER EXPENSES:
Interest expense, net			14,552				15,544				29,678				32,972
Expenses associated with debt refinancing and recapitalization transactions			—				237				982				35,269
Other (income) expenses			(102	)			173				(114	)			49
			14,450				15,954				30,546				68,290
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			40,669				22,271				74,473				9,497
Income tax expense			(15,041	)			(7,835	)			(27,516	)			(3,380	)
INCOME FROM CONTINUING OPERATIONS			25,628				14,436				46,957				6,117
Income (loss) from discontinued operations, net of taxes			—				427				—				(193	)
NET INCOME		$	25,628			$	14,863			$	46,957			$	5,924
BASIC EARNINGS PER SHARE:
Income from continuing operations		$	0.64			$	0.37			$	1.18			$	0.17
Income (loss) from discontinued operations, net of taxes			—				0.01				—				(0.01	)
Net income		$	0.64			$	0.38			$	1.18			$	0.16
DILUTED EARNINGS PER SHARE:
Income from continuing operations		$	0.63			$	0.36			$	1.15			$	0.15
Income (loss) from discontinued operations, net of taxes			—				0.01				—				—
Net income		$	0.63			$	0.37			$	1.15			$	0.15

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

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)

		For the Six Months
		Ended June 30,
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	46,957			$	5,924
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			32,029				29,003
Amortization of debt issuance costs and other non-cash interest			2,326				2,705
Expenses associated with debt refinancing and recapitalization transactions			982				35,269
Deferred income taxes			18,758				1,340
Income tax benefit of equity compensation			(7,360	)			4,067
Other expenses			(117	)			34
Non-cash equity compensation			3,212				1,322
Other non-cash items			458				547
Changes in assets and liabilities, net:
Accounts receivable, prepaid expenses and other assets			(18,747	)			(26,562	)
Accounts payable, accrued expenses and other liabilities			4,718				18,010
Income taxes payable			8,562				(20,149	)
Net cash provided by operating activities			91,778				51,510
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for acquisitions, development, and expansions			(42,454	)			(25,022	)
Expenditures for other capital improvements			(22,192	)			(18,086	)
(Increase) decrease in restricted cash			(116	)			1,931
Purchases of investments			(41,808	)			(130	)
Proceeds from sale of assets			51				887
Increase in other assets			(391	)			(23	)
Payments received on direct financing leases and notes receivable			367				318
Net cash used in investing activities			(106,543	)			(40,125	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt			150,000				375,000
Scheduled principal repayments			(97	)			(438	)
Other principal repayments			(148,950	)			(360,135	)
Payment of debt issuance and other refinancing and related costs			(3,973	)			(35,940	)
Income tax benefit of equity compensation			7,360				—
Purchase and retirement of common stock			(6,979	)			—
Proceeds from exercise of stock options			7,898				5,141
Net cash provided by (used in) financing activities			5,259				(16,372	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(9,506	)			(4,987	)
CASH AND CASH EQUIVALENTS, beginning of period			64,901				50,938
CASH AND CASH EQUIVALENTS, end of period		$	55,395			$	45,951
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized of $2,818 and $2,264 in 2006 and 2005, respectively)		$	28,059			$	30,867
Income taxes		$	3,044			$	15,465

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

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED AND AMOUNTS IN THOUSANDS)

										Additional
		Common Stock								Paid-in				Deferred
		Shares				Par Value				Capital				Compensation				Retained Deficit				Total
Balance as of December 31, 2005			39,694			$	397			$	1,506,184			$	(5,563	)		$	(584,387	)		$	916,631
Comprehensive income:			—
Net income			—				—				—				—				46,957				46,957
Total comprehensive income			—				—				—				—				46,957				46,957
Issuance of common stock			—				—				25				—				—				25
Retirement of common stock			(167	)			(2	)			(6,977	)			—				—				(6,979	)
Amortization of deferred compensation, net of forfeitures			(30	)			—				2,131				—				—				2,131
Income tax benefit of equity compensation			—				—				7,360				—				—				7,360
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			—				—				1,056				—				—				1,056
Stock options exercised			600				6				7,892				—				—				7,898
Balance as of June 30, 2006			40,261			$	403			$	1,512,106			$	—			$	(537,430	)		$	975,079

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

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED AND AMOUNTS IN THOUSANDS)

										Additional
		Common Stock								Paid-in				Deferred
		Shares				Par Value				Capital				Compensation				Retained Deficit				Total
Balance as of December 31, 2004			35,415			$	354			$	1,451,885			$	(1,736	)		$	(634,509	)		$	815,994
Comprehensive income:
Net income			—				—				—				—				5,924				5,924
Total comprehensive income			—				—				—				—				5,924				5,924
Conversion of subordinated notes			3,362				34				29,944				—				—				29,978
Issuance of common stock			—				—				34				—				—				34
Amortization of deferred compensation, net of forfeitures			(7	)			—				(106	)			1,394				—				1,288
Income tax benefit of equity compensation			—				—				4,067				—				—				4,067
Restricted stock grant			197				2				6,994				(6,996	)			—				—
Stock options exercised			402				4				5,137				—				—				5,141
Balance as of June 30, 2005			39,369			$	394			$	1,497,955			$	(7,338	)		$	(628,585	)		$	862,426

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

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006

1.		ORGANIZATION AND OPERATIONS
		As of June 30, 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 June 30, 2006, the Company operated 63 facilities, including 39 facilities that it owned, located in 19 states and the District of Columbia. The Company was also constructing two additional correctional facilities in Eloy, Arizona, one that was completed during July 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 unaudited interim condensed consolidated financial statements have been prepared by the Company 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 U.S. 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 June 30, 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 six months ended June 30, 2006 and 2005 was $15.02 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 Six Months
		Ended June 30,
		2006				2005
Expected dividend yield			0.0	%			0.0	%
Expected stock price volatility			25.2	%			26.9	%
Risk-free interest rate			4.7	%			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 June 30, 2006, are summarized below (in thousands, except per share data and years):

						Weighted- Average				Weighted-Average
						Exercise Price of				Remaining				Aggregate Intrinsic
		No. of options				options				Contractual Term				Value
Outstanding at December 31, 2005			3,329			$	25.86
Granted			271				43.82
Exercised			(600	)			13.14
Cancelled			(70	)			101.59
Outstanding at June 30, 2006			2,930			$	28.34				6.3			$	62,698
Exercisable at June 30, 2006			2,716			$	27.20				6.0			$	62,030

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s average stock price during the first six months 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 June 30, 2006. This amount changes based on the fair market value of the Company’s stock. Total intrinsic value of options exercised during the six months ended June 30, 2006 was $18.8 million.
		Nonvested stock option transactions relating to the Company’s incentive and non-qualified stock option plans as of June 30, 2006 and changes during the six months ended June 30, 2006 are summarized below (in thousands, except exercise prices):

						Weighted
		Number of				average exercise
		options				price per option
Nonvested at December 31, 2005			—			$	—
Granted			271			$	43.82
Cancelled			(17	)		$	42.81
Vested			(40	)		$	49.66
Nonvested at June 30, 2006			214			$	42.80

		The Company currently has $3.0 million of total unrecognized compensation cost related to stock options that is expected to be recognized over a remaining weighted-average period of 3.0 years. Notwithstanding the aforementioned accelerated vesting of all options on December 30, 2005 to avoid future compensation charges and a change in the Company’s 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 largely as a result of the pending adoption of SFAS 123R, as a result of adopting Statement 123R on January 1, 2006, the Company’s income from continuing operations before income taxes and net income for the six months ended June 30, 2006, are $1.1 million and $0.7 million lower, respectively, than if it had continued to account for share-based compensation under APB 25. Basic and diluted earnings per share for the six months ended June 30, 2006 are both $0.02 lower than if the Company had continued to account for share-based compensation under APB 25. 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 the consolidated statement of cash flows. In accordance with SFAS 123R, for the six months ended June 30, 2006 the presentation of the statement of cash flows has changed from prior periods to report tax benefits from equity compensation of $7.4 million 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 income and income per share for the three and six months ended June 30, 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				For the Six
		Months Ended				Months Ended
		June 30, 2005				June 30, 2005
As Reported:
Income from continuing operations		$	14,436			$	6,117
Income (loss) from discontinued operations, net of taxes			427				(193	)
Net income		$	14,863			$	5,924
Pro Forma:
Income from continuing operations		$	13,086			$	3,866
Income (loss) from discontinued operations, net of taxes			427				(193	)
Net income		$	13,513			$	3,673
As Reported:
Basic earnings per share:
Income from continuing operations		$	0.37			$	0.17
Income (loss) from discontinued operations, net of taxes			0.01				(0.01	)
Net income		$	0.38			$	0.16
As Reported:
Diluted earnings per share:
Income from continuing operations		$	0.36			$	0.15
Income (loss) from discontinued operations, net of taxes			0.01				—
Net income		$	0.37			$	0.15
Pro Forma:
Basic earnings per share:
Income from continuing operations		$	0.34			$	0.11
Income (loss) from discontinued operations, net of taxes			0.01				(0.01	)
Net income		$	0.35			$	0.10
Pro Forma:
Diluted earnings per share:
Income from continuing operations		$	0.33			$	0.09
Income (loss) from discontinued operations, net of taxes			0.01				—
Net income		$	0.34			$	0.09

		The effect of applying SFAS 123 for disclosing compensation costs under such pronouncement may not be representative of the effects on reported net income 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 June 30, 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 six months ended June 30, 2005.
		The components of the Company’s amortized intangible assets and liabilities are as follows (in thousands):

		June 30, 2006								December 31, 2005
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Contract acquisition costs		$	873			$	(856	)		$	873			$	(855	)
Customer list			765				(382	)			765				(328	)
Contract values			(35,688	)			20,834				(35,688	)			19,294
Total		$	(34,050	)		$	19,596			$	(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 June 30, 2006 and 2005 was $1.1 million and $1.1 million, respectively, while amortization income, net of amortization expense, for intangible assets and liabilities during the six months ended June 30, 2006 and 2005 was $2.3 million and $2.1 million, respectively. Interest expense associated with the amortization of contract values for the three months ended June 30, 2006 and 2005 was $0.4 million and $0.5 million, respectively, while interest expense associated with the amortization of contract values for the six months ended June 30, 2006 and 2005 was $0.8 million and $0.9 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)		$	2,276
2007			4,552
2008			4,552
2009			3,095
2010			2,534
2011			134

5.		FACILITY OPERATIONS
		During the first quarter of 2006, the Company re-opened its 1,440-bed North Fork Correctional Facility 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. In June 2006, the Company entered into a new agreement with the state of Wyoming to house up to 600 of the state’s male medium-security inmates at the North Fork Correctional Facility. The terms of the contract include an initial two-year period and may be renewed upon mutual agreement. 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 enables 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 was effective beginning May 8, 2006, provides for an indefinite term and a fixed monthly payment based on the 512-bed capacity of the facility.
		In July 2006, the Company entered into a new agreement with Stewart County, Georgia to house detainees from ICE under an inter-governmental service agreement between Stewart County and ICE. The agreement will enable ICE to accommodate detainees at the Company’s 1,524-bed Stewart Detention Center in Lumpkin, Georgia. The agreement between Stewart County and the Company is effective through December 31, 2011, and provides for an indefinite number of renewal options. The Company expects to begin receiving ICE detainees at the Stewart facility on or about October 1, 2006 and expects that ICE will substantially occupy the facility sometime during 2007.
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 and six months ended June 30, 2006 and 2005 (amounts in thousands):

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
REVENUE:
Managed-only		$	—			$	5,638			$	—			$	10,681
EXPENSES:
Managed-only			—				4,972				—				10,804
Depreciation and amortization			—				23				—				186
			—				4,995				—				10,990
OPERATING INCOME (LOSS)			—				643				—				(309	)
OTHER INCOME:
Gain on disposal of assets			—				15				—				15
INCOME (LOSS) BEFORE INCOME TAXES			—				658				—				(294	)
Income tax (expense) benefit			—				(231	)			—				101
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAXES		$	—			$	427			$	—			$	(193	)

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

		June 30, 2006				December 31, 2005
ASSETS
Accounts receivable		$	—			$	—
Total current assets		$	—			$	—
LIABILITIES
Accounts payable and accrued expenses		$	604			$	1,774
Total current liabilities		$	604			$	1,774

7.		DEBT
		Debt outstanding as of June 30, 2006 and December 31, 2005 consists of the following (in thousands):

		June 30,				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 $1.4 million and $1.5 million was unamortized at June 30, 2006 and December 31, 2005, respectively.			201,403				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			41				138
			976,444				975,636
Less: Current portion of long-term debt			(331	)			(11,836	)
		$	976,113			$	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 $36.9 million as of June 30, 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. Effective May 18, 2006, interest rates on the New Revolving Credit Facility were reduced to a base rate or a LIBOR plus a margin of 1.00% from a base rate plus a margin of 0.25% or a LIBOR plus a margin of 1.25% as a result of an improvement to the Company’s leverage ratio pursuant to the terms of the New Revolving Credit Facility.

		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 New Revolving Credit Facility requires the Company to meet certain financial covenants, including, without limitation, a maximum total leverage ratio and a minimum interest ratio coverage. In addition, the New Revolving Credit Facility contains certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, payment of dividends, transactions with affiliates, asset sales, acquisitions, capital expenditures, mergers and consolidations, prepayments and modifications of other indebtedness, liens and encumbrances, and other matters customarily restricted in such agreements. In addition, the New Revolving Credit Facility is subject to certain cross-default provisions with terms of the Company’s other indebtedness.
		$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 could have redeemed 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 remained 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 six months ended June 30, 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, as long as the employees awarded such shares do not terminate employment prior to the vesting dates.
		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. Nonvested restricted common stock transactions as of June 30, 2006 and for the six months ended June 30, 2006 are summarized below (in thousands, except per share amounts).

		Shares of				Weighted
		restricted common				average grant date
		stock				fair value
Nonvested at December 31, 2005			318			$	32.11
Granted			164			$	42.81
Cancelled			(31	)		$	39.23
Vested			(116	)		$	24.00
Nonvested at June 30, 2006			335			$	39.51

During the three months ended June 30, 2006, the Company expensed $1,140,000, net of forfeitures, relating to restricted common stock ($293,000 of which was recorded in operating expenses and $847,000 of which was recorded in general and administrative expenses), while during the three months ended June 30, 2005, the Company expensed $810,000 net of forfeitures, relating to restricted common stock ($352,000 of which was recorded in operating expenses and $458,000 of which was recorded in general and

administrative expenses). During the six months ended June 30, 2006, the Company expensed $2,131,000, net of forfeitures, relating to restricted common stock ($618,000 of which was recorded in operating expenses and $1,513,000 of which was recorded in general and administrative expenses), while during the six months ended June 30, 2005, the Company expensed $1,288,000, net of forfeitures, relating to restricted common stock ($624,000 of which was recorded in operating expenses and $664,000 of which was recorded in general and administrative expenses). As of June 30, 2006, 334,801 of these shares of restricted stock remained outstanding and subject to vesting. The unrecognized compensation related to these shares was approximately $8.9 million as of June 30, 2006 and is expected to be recognized over a weighted average period of 2.2 years.

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 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 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								For the Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
NUMERATOR
Basic:
Income from continuing operations		$	25,628			$	14,436			$	46,957			$	6,117
Income (loss) from discontinued operations, net of taxes			—				427				—				(193	)
Net income		$	25,628			$	14,863			$	46,957			$	5,924
Diluted:
Income from continuing operations		$	25,628			$	14,436			$	46,957			$	6,117
Interest expense applicable to convertible notes, net of taxes			—				—				—				128
Diluted income from continuing operations			25,628				14,436				46,957				6,245
Income (loss) from discontinued operations, net of taxes			—				427				—				(193	)
Diluted net income		$	25,628			$	14,863			$	46,957			$	6,052

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
DENOMINATOR
Basic:
Weighted average common shares outstanding			39,833				38,909				39,684				37,729
Diluted:
Weighted average common shares outstanding			39,833				38,909				39,684				37,729
Effect of dilutive securities:
Stock options and warrants			945				1,160				987				1,219
Convertible notes			—				—				—				1,096
Restricted stock-based compensation			86				107				117				91
Weighted average shares and assumed conversions			40,864				40,176				40,788				40,135
BASIC EARNINGS PER SHARE:
Income from continuing operations		$	0.64			$	0.37			$	1.18			$	0.17
Income (loss) from discontinued operations, net of taxes			—				0.01				—				(0.01	)
Net income		$	0.64			$	0.38			$	1.18			$	0.16
DILUTED EARNINGS PER SHARE:
Income from continuing operations		$	0.63			$	0.36			$	1.15			$	0.15
Income (loss) from discontinued operations, net of taxes			—				0.01				—				—
Net income		$	0.63			$	0.37			$	1.15			$	0.15

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 nature of such claims include, but is not limited to, claims arising from employee or inmate misconduct, medical malpractice, employment matters, property loss, contractual claims, and personal injury or other damages resulting from contact with the Company’s facilities, personnel or prisoners, including damages arising from a prisoner’s escape or from a disturbance or riot at a facility. 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.
		The Company records litigation reserves related to certain matters for which it is probable that a loss has been incurred and the range of such loss can be estimated. Based upon management’s review of the potential claims and outstanding litigation and based upon management’s experience and history of estimating losses, management believes a loss in excess of amounts already recognized would not be material to the Company’s financial statements. 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. Any receivable for insurance recoveries is recorded separately from the corresponding litigation reserve, and only if recovery is determined to be probable. 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 the period in which such decisions or rulings occur, or future periods. Expenses associated with legal proceedings may also fluctuate from quarter to quarter based on changes in the Company’s assumptions, new developments, or by the effectiveness of the Company’s litigation and settlement strategies.

     Insurance Contingencies

Each of the Company’s management contracts and the statutes of certain states require the maintenance of insurance. The Company maintains various insurance policies including employee health, workers’ compensation, automobile liability, and general liability insurance. These policies are fixed premium policies with various deductible amounts that are self-funded by the Company. Reserves are provided for estimated incurred claims for which it is probable that a loss has been incurred and the range of such loss can be estimated.

     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 $54.9 million at June 30, 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 June 30, 2006, the outstanding principal balance of the bonds exceeded the purchase price option by $14.5 million. The Company also maintains a restricted cash account of $5.5 million as collateral against a guarantee it has provided for a forward purchase agreement related to the bond issuance.
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 approximately 37% during both the three and six months ended June 30, 2006, compared with approximately 35% and 36% during the same periods in the prior year. The lower effective tax rates during 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 and second quarters 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, changes in tax laws, 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.
		In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance prescribed in FIN 48 establishes a recognition threshold of more likely than not that a tax position will be sustained upon examination. The measurement attribute of FIN 48 requires that a tax position be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the impact that FIN 48 will have on the Company’s financial position or results of operations and currently plans to adopt FIN 48 on January 1, 2007.

12.		SEGMENT REPORTING
		As of June 30, 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 and six months ended June 30, 2006 and 2005 (dollars in thousands):

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Revenue:
Owned and managed		$	234,216			$	203,716			$	459,889			$	400,922
Managed-only			87,393				81,345				173,150				160,233
Total management revenue			321,609				285,061				633,039				561,155
Operating expenses:
Owned and managed			159,200				147,923				316,914				288,957
Managed-only			74,145				69,567				147,436				137,958
Total operating expenses			233,345				217,490				464,350				426,915
Facility contribution:
Owned and managed			75,016				55,793				142,975				111,965
Managed-only			13,248				11,778				25,714				22,275
Total facility contribution			88,264				67,571				168,689				134,240
Other revenue (expense):
Rental and other revenue			4,611				5,128				9,195				9,921
Other operating expense			(5,469	)			(6,107	)			(10,498	)			(11,432	)
General and administrative			(15,961	)			(13,587	)			(30,338	)			(26,125	)
Depreciation and amortization			(16,326	)			(14,780	)			(32,029	)			(28,817	)
Operating income		$	55,119			$	38,225			$	105,019			$	77,787