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: SEPTEMBER 30, 2007

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

(Exact name of registrant as specified in its charter)

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 October 31, 2007:

Shares of Common Stock, $0.01 par value per share: 124,149,689 shares outstanding.

 

 

CORRECTIONS CORPORATION OF AMERICA

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

INDEX

		PAGE
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
a) Consolidated Balance Sheets (Unaudited) as of September 30, 2007 and December 31, 2006			1
b) Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2007 and 2006			2
c) Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2007 and 2006			3
d) Consolidated Statement of Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2007			4
e) Consolidated Statement of Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2006			5
f) Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			39
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3. Defaults Upon Senior Securities			40
Item 4. Submission of Matters to a Vote of Security Holders			40
Item 5. Other Information			40
Item 6. Exhibits			41
SIGNATURES			42
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)

		September 30,				December 31,
		2007				2006
ASSETS
Cash and cash equivalents		$	89,443			$	29,029
Investments			76,035				82,830
Accounts receivable, net of allowance of $3,565 and $2,261, respectively			215,981				237,382
Deferred tax assets			11,573				11,655
Prepaid expenses and other current assets			17,538				17,554
Current assets of discontinued operations			416				966
Total current assets			410,986				379,416
Property and equipment, net			1,974,629				1,805,052
Restricted cash			6,430				11,826
Investment in direct financing lease			14,755				15,467
Goodwill			15,246				15,246
Other assets			22,567				23,807
Non-current assets of discontinued operations			—				46
Total assets		$	2,444,613			$	2,250,860
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses		$	216,107			$	160,522
Income taxes payable			3,500				2,810
Current portion of long-term debt			290				290
Current liabilities of discontinued operations			237				760
Total current liabilities			220,134				164,382
Long-term debt, net of current portion			975,750				975,968
Deferred tax liabilities			29,466				23,755
Other liabilities			40,596				37,074
Total liabilities			1,265,946				1,201,179
Commitments and contingencies
Common stock — $0.01 par value; 300,000 shares authorized; 124,051 and 122,084 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively			1,241				1,221
Additional paid-in capital			1,560,378				1,527,608
Retained deficit			(382,952	)			(479,148	)
Total stockholders’ equity			1,178,667				1,049,681
Total liabilities and stockholders’ equity		$	2,444,613			$	2,250,860

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								For the Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
REVENUE:
Management and other		$	378,733			$	336,874			$	1,090,230			$	974,309
Rental			1,187				1,061				3,375				3,146
			379,920				337,935				1,093,605				977,455
EXPENSES:
Operating			274,946				247,728				783,315				719,813
General and administrative			18,362				16,379				54,497				46,717
Depreciation and amortization			20,074				17,411				57,272				49,387
			313,382				281,518				895,084				815,917
OPERATING INCOME			66,538				56,417				198,521				161,538
OTHER EXPENSES (INCOME):
Interest expense, net			13,249				14,825				40,838				44,503
Expenses associated with debt refinancing and recapitalization transactions			—				—				—				982
Other income			(200	)			(299	)			(281	)			(413	)
			13,049				14,526				40,557				45,072
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			53,489				41,891				157,964				116,466
Income tax expense			(20,234	)			(15,643	)			(59,537	)			(43,196	)
INCOME FROM CONTINUING OPERATIONS			33,255				26,248				98,427				73,270
Loss from discontinued operations, net of taxes			—				(118	)			—				(183	)
NET INCOME		$	33,255			$	26,130			$	98,427			$	73,087
BASIC EARNINGS PER SHARE:
Income from continuing operations		$	0.27			$	0.22			$	0.81			$	0.61
Loss from discontinued operations, net of taxes			—				—				—				—
Net income		$	0.27			$	0.22			$	0.81			$	0.61
DILUTED EARNINGS PER SHARE:
Income from continuing operations		$	0.26			$	0.21			$	0.79			$	0.60
Loss from discontinued operations, net of taxes			—				—				—				—
Net income		$	0.26			$	0.21			$	0.79			$	0.60

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 Nine Months
		Ended September 30,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	98,427			$	73,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			57,272				49,567
Amortization of debt issuance costs and other non-cash interest			2,972				3,396
Expenses associated with debt refinancing and recapitalization transactions			—				982
Deferred income taxes			4,697				28,441
Income tax benefit of equity compensation			(17,672	)			(10,553	)
Other income			(281	)			(416	)
Non-cash equity compensation			5,369				4,705
Other non-cash items			223				458
Changes in assets and liabilities, net:
Accounts receivable, prepaid expenses and other assets			22,648				(39,088	)
Accounts payable, accrued expenses and other liabilities			22,823				20,302
Income taxes payable			18,362				11,778
Net cash provided by operating activities			214,840				142,659
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for facility development and expansions			(161,645	)			(73,012	)
Expenditures for other capital improvements			(32,442	)			(35,236	)
(Increase) decrease in restricted cash			5,641				(184	)
Proceeds from sale of investments			10,000				—
Purchases of investments			(3,205	)			(52,714	)
Proceeds from sale of assets			48				62
(Increase) decrease in other assets			(967	)			160
Payments received on direct financing leases and notes receivable			631				559
Net cash used in investing activities			(181,939	)			(160,365	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt			—				150,000
Scheduled principal repayments			—				(133	)
Other principal repayments			—				(148,950	)
Payment of debt issuance and other refinancing and related costs			—				(3,972	)
Income tax benefit of equity compensation			17,672				10,553
Purchase and retirement of common stock			(3,579	)			(7,030	)
Proceeds from exercise of stock options and warrants			13,328				10,403
Net cash provided by financing activities			27,421				10,871
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			60,322				(6,835	)
CASH AND CASH EQUIVALENTS, beginning of period			29,121				64,901
CASH AND CASH EQUIVALENTS, end of period		$	89,443			$	58,066
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized of $4,788 and $3,434 in 2007 and 2006, respectively)		$	46,269			$	44,670
Income taxes		$	31,331			$	6,790

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

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS)

		Common Stock
										Additional
										Paid-in				Deferred				Retained
		Shares				Par Value				Capital				Compensation				Deficit				Total
Balance as of December 31, 2006			122,084			$	1,221			$	1,527,608			$	—			$	(479,148	)		$	1,049,681
Comprehensive income:
Net income			—				—				—				—				98,427				98,427
Total comprehensive income			—				—				—				—				98,427				98,427
Issuance of common stock			1				—				19				—				—				19
Retirement of common stock			(130	)			(1	)			(3,578	)			—				—				(3,579	)
Amortization of deferred compensation, net of forfeitures			(123	)			(1	)			3,717				—				—				3,716
Income tax benefit of equity compensation			—				—				17,672				—				—				17,672
Restricted stock grant			312				3				(3	)			—				—				-
Stock option compensation expense			—				—				1,634				—				—				1,634
Stock options exercised			1,832				18				12,477				—				—				12,495
Warrants exercised			75				1				832				—				—				833
Cumulative effect of accounting change			—				—				—				—				(2,231	)			(2,231	)
Balance as of September 30, 2007			124,051			$	1,241			$	1,560,378			$	—			$	(382,952	)		$	1,178,667

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

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

(UNAUDITED AND AMOUNTS IN THOUSANDS)

		Common Stock								Additional
										Paid-in				Deferred				Retained
		Shares				Par Value				Capital				Compensation				Deficit				Total
Balance as of December 31, 2005			119,082			$	1,191			$	1,505,390			$	(5,563	)		$	(584,387	)		$	916,631
Comprehensive income:
Net income			—				—				—				—				73,087				73,087
Total comprehensive income			—				—				—				—				73,087				73,087
Issuance of common stock			—				—				37				—				—				37
Retirement of common stock			(504	)			(5	)			(7,025	)			—				—				(7,030	)
Amortization of deferred compensation, net of forfeitures			(102	)			(1	)			3,360				—				—				3,359
Income tax benefit of equity compensation			—				—				10,553				—				—				10,553
Reclassification of deferred compensation on nonvested stock upon adoption of SFAS 123R			—				—				(5,563	)			5,563				—				—
Stock option compensation expense			—				—				1,309				—				—				1,309
Restricted stock grant			512				5				(5	)			—				—				—
Stock options exercised			2,352				23				10,380				—				—				10,403
Balance as of September 30, 2006			121,340			$	1,213			$	1,518,436			$	—			$	(511,300	)		$	1,008,349

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

CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007

1.		ORGANIZATION AND OPERATIONS
		As of September 30, 2007, Corrections Corporation of America, a Maryland corporation (together with its subsidiaries, the “Company”), owned 44 correctional, detention and juvenile facilities, three of which are leased to other operators. As of September 30, 2007, the Company operated 65 facilities, including 41 facilities that it owned, located in 19 states and the District of Columbia. The Company is also constructing an additional 1,668-bed facility in Adams County, Mississippi that is expected to be completed in the fourth quarter of 2008 and a 3,060-bed facility in Eloy, Arizona that is expected to be completed in the second quarter of 2009.
		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 Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on 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, 2006 (the “2006 Form 10-K”) with respect to certain significant accounting and financial reporting policies as well as other pertinent information of the Company.

		Restricted cash as of December 31, 2006 has been reclassified to long-term to conform to the 2007 presentation.
		Stock Split
		On June 7, 2007, the Company announced that its Board of Directors had declared a 2-for-1 stock split in the form of a 100% stock dividend on its common stock. The stock dividend was paid on July 6, 2007, to stockholders of record as of June 29, 2007. Each shareholder of record at the close of business on the record date received one additional share of the Company’s common stock for every one share of common stock held on that date. The number of common shares and per share amounts have been retroactively restated in the accompanying financial statements and these notes to the financial statements to reflect the increase in common shares and corresponding decrease in the per share amounts resulting from the 2-for-1 stock split.
3.		GOODWILL AND OTHER INTANGIBLE ASSETS
		Goodwill was $15.2 million as of September 30, 2007 and December 31, 2006 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.
		The components of the Company’s amortized intangible assets and liabilities are as follows (in thousands):

		September 30, 2007								December 31, 2006
		Gross Carrying				Accumulated				Gross Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
Contract acquisition costs		$	873			$	(858	)		$	873			$	(857	)
Customer list			765				(519	)			765				(437	)
Contract values			(35,688	)			25,062				(35,688	)			22,459
Total		$	(34,050	)		$	23,685			$	(34,050	)		$	21,165

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 each of the three months ended September 30, 2007 and 2006 was $1.1 million, while amortization income, net of amortization expense, for intangible assets and liabilities during each of the nine months ended September 30, 2007 and 2006 was $3.4 million. Interest expense associated with the amortization of contract values for the three months ended September 30, 2007 and 2006 was $0.3 million and $0.4 million, respectively, while interest expense associated with the amortization of contract values for the nine months ended September 30, 2007 and 2006 was $0.9 million and $1.2 million, respectively. Estimated amortization income, net of amortization expense, for the remainder of 2007 and the five succeeding fiscal years is as follows (in thousands):

2007 (remainder)		$	1,138
2008			4,552
2009			3,095
2010			2,534
2011			134
2012			134

4.		FACILITY ACTIVATIONS AND DEVELOPMENTS
		The Saguaro Correctional Facility, a new correctional facility located in Eloy, Arizona, was completed during June 2007 for an aggregate cost of approximately $101.5 million. The Saguaro facility began receiving inmates from the state of Hawaii on June 28, 2007 and as of September 30, 2007 housed 1,287 inmates from the state of Hawaii. The beds available at the Saguaro Correctional Facility are expected to be utilized to consolidate inmates from the state of Hawaii from several of the Company’s other facilities. Although the Company has contracts with customers that are expected to fill the beds vacated by Hawaii, the Company can provide no assurance that all of the beds will ultimately be utilized.
		On July 2, 2007, the Company announced the commencement of construction of a new correctional facility in Adams County, Mississippi. Construction of the Adams County Correctional Center is expected to be completed during the fourth quarter of 2008 at an estimated cost of approximately $105.0 million. The Company does not currently have a management contract to utilize these new beds, but will market the new beds to various existing and potential customers.
		On October 5, 2007, the Company announced that it has entered into a new agreement with the State of California Department of Corrections and Rehabilitation (“CDCR”) for the housing of up to 7,772 inmates from the state of California. The new contract replaces and supersedes the previous contract the Company had with the CDCR, which provided housing for up to 5,670 inmates. The new agreement, which is subject to appropriations by the California legislature, expires June 30, 2011, and provides for a minimum payment based on the greater of the actual occupancy or 90% of the capacity made available to the CDCR at each facility in which inmates are housed. The minimum payments are subject to specific terms and conditions in the new contract at each facility that houses CDCR inmates.
		Additionally, the Company announced that it expects to begin construction of a new correctional facility located in Eloy, Arizona, which it expects to be fully utilized by the CDCR. The Company expects to complete construction of the new La Palma Correctional Center during the second quarter of 2009 at an estimated total cost of $205.0 million. However, the Company expects to open a portion of the new facility to begin receiving inmates from the state of California during the third quarter of 2008, with the continued receipt of California inmates through completion of construction, as phases of the facility become available. As a condition of undertaking the substantial cost required to construct the La Palma Correctional Center, the CDCR agreed to occupy the beds allocated to it in accordance with a Phase-In Schedule, and to make a minimum payment based on the greater of the actual occupancy or 90% of the capacity available to CDCR according to the Phase-In Schedule.

5.		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” (“SFAS 144”) for all periods presented.
		During September 2006, the Company received notification from the Liberty County Commission in Liberty County, Texas that, as a result of a contract bidding process, the County elected to transfer management of the 380-bed Liberty County Jail/Juvenile Center to another operator. Accordingly, the Company transferred operation of the facility to the other operator upon expiration of the management contract in January 2007.
		The following table summarizes the results of operations for this facility for the three and nine months ended September 30, 2007 and 2006 (amounts in thousands):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
REVENUE:
Managed-only		$	—			$	1,332			$	—			$	4,046
EXPENSES:
Managed-only			—				1,393				—				4,156
Depreciation and amortization			—				127				—				180
			—				1,520				—				4,336
OPERATING LOSS			—				(188	)			—				(290	)
Income tax benefit			—				70				—				107
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAXES		$	—			$	(118	)		$	—			$	(183	)

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

		September 30, 2007				December 31, 2006
ASSETS
Cash and cash equivalents		$	—			$	92
Accounts receivable			416				874
Total current assets			416				966
Property and equipment, net			—				46
Total assets		$	416			$	1,012
LIABILITIES
Accounts payable and accrued expenses		$	237			$	760
Total current liabilities		$	237			$	760

6.		DEBT
		Debt outstanding as of September 30, 2007 and December 31, 2006 consists of the following (in thousands):

		September 30,				December 31,
		2007				2006
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 $1.0 million and $1.3 million was unamortized at September 30, 2007 and December 31, 2006, respectively.			201,040				201,258
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				150,000
			976,040				976,258
Less: Current portion of long-term debt			(290	)			(290	)
		$	975,750			$	975,968

		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 pay-off the outstanding balance of the then outstanding term loan portion of the senior secured bank credit facility (the “Senior Bank Credit Facility”). 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 “Revolving Credit Facility”). The Revolving Credit Facility was used to replace the existing revolving loan under the Senior Bank Credit Facility, including any outstanding letters of credit issued thereunder, which totaled $34.6 million as of September 30, 2007. 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 portion of the Senior Bank Credit Facility.
		The 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. In September 2007, the Company exercised its option to increase the borrowing capacity under its Revolving Credit Facility by $100.0 million, from $150.0 million to $250.0 million. The Company expects to utilize the additional borrowing capacity to fund its expansion and development projects. Interest on the 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 Revolving Credit Facility currently bears interest at a base rate or a LIBOR plus a margin of 0.75%.
		The 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 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 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 Revolving Credit Facility is subject to certain cross-default provisions with terms of the Company’s other indebtedness.
		$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. The Company may currently redeem all or a portion of the notes at redemption prices as 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. Interest on the $375.0 million aggregate principal amount of the Company’s 6.25% unsecured senior notes issued in March 2005 (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.
		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.
7.		STOCKHOLDERS’ EQUITY
		Restricted Stock
		During the nine months ended September 30, 2007, the Company issued 312,000 shares of restricted common stock to certain of the Company’s employees, with an aggregate fair value of $8.3 million, including 254,000 restricted shares to employees whose compensation is charged to general and administrative expense and 58,000 restricted shares to employees whose compensation is charged to operating expense. During 2006, the Company issued 512,000 shares of restricted common stock to certain of the Company’s employees, with an aggregate fair value of $7.4 million, including 404,000 restricted shares to employees whose compensation is charged to general and administrative expense and 108,000 shares to employees whose compensation is charged to operating expense.
		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, shares issued 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. Unless earlier vested under the terms of the restricted stock, the shares of restricted stock issued to the other employees of the Company vest after three years of continuous service.
		During each of the three months ended September 30, 2007 and 2006, the Company expensed $1.2 million, net of forfeitures, relating to restricted common stock ($0.3 million of which was recorded in operating expenses and $0.9 million of which was recorded in general and administrative expenses).
		During the nine months ended September 30, 2007, the Company expensed $3.7 million, net of forfeitures, relating to restricted common stock ($0.7 million of which was recorded in operating expenses and $3.0 million of which was recorded in general

		and administrative expenses). During the nine months ended September 30, 2006, the Company expensed $3.4 million, net of forfeitures, relating to restricted common stock ($1.0 million of which was recorded in operating expenses and $2.4 million of which was recorded in general and administrative expenses). As of September 30, 2007, 876,000 shares of restricted stock remained outstanding and subject to vesting.
		Stock Options
		During the nine months ended September 30, 2007, the Company issued to its directors, officers, and executive officers options to purchase 567,000 shares of common stock with an aggregate fair value of $4.9 million, with a weighted average exercise price of $27.28 share. During 2006, the Company issued to its directors, officers, and executive officers options to purchase 874,000 shares of common stock with an aggregate fair value of $4.4 million, with a weighted average exercise price of $14.82 per share. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. Unless earlier vested under their terms, one third of the stock options issued to the Company’s executive officers vest on the anniversary of the grant date over a three-year period while one fourth of the stock options issued to the Company’s other officers vest on the anniversary of the grant date over a four-year period. Unless earlier vested under their terms, stock options issued to the Company’s directors in 2007 vest on the one-year anniversary of the grant date, while the stock options issued to the Company’s directors in 2006 were vested on the grant date.
		During the three months ended September 30, 2007 and 2006, the Company expensed $0.7 million and $0.2 million, net of forfeitures, relating to its outstanding stock options. During the nine months ended September 30, 2007 and 2006, the Company expensed $1.6 million and $1.3 million, net of forfeitures, relating to its outstanding stock options. As of September 30, 2007, options to purchase 5.8 million shares of common stock were outstanding with a weighted average exercise price of $12.07.
		Stock Warrants
		On August 8, 2007, 75,000 warrants were exercised at a price of $11.10 per share. The holder of such warrants elected to satisfy the cost of the warrants using a net share settlement method, resulting in the issuance of 48,000 shares of stock by the Company. As of September 30, 2007, warrants to purchase approximately 150,000 shares of the Company’s common stock at a price of $11.10 per share remained outstanding and expire on December 31, 2008.

8.		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 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 as follows (in thousands, except per share data):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
NUMERATOR
Basic:
Income from continuing operations		$	33,255			$	26,248			$	98,427			$	73,270
Loss from discontinued operations, net of taxes			—				(118	)			—				(183	)
Net income		$	33,255			$	26,130			$	98,427			$	73,087
Diluted:
Income from continuing operations		$	33,255			$	26,248			$	98,427			$	73,270
Loss from discontinued operations, net of taxes			—				(118	)			—				(183	)
Diluted net income		$	33,255			$	26,130			$	98,427			$	73,087
DENOMINATOR
Basic:
Weighted average common shares outstanding			122,939				120,042				122,269				119,386
Diluted:
Weighted average common shares outstanding			122,939				120,042				122,269				119,386
Effect of dilutive securities:
Stock options and warrants			2,307				3,080				2,605				3,000
Restricted stock-based compensation			385				294				329				332
Weighted average shares and assumed conversions			125,631				123,416				125,203				122,718
BASIC EARNINGS PER SHARE:
Income from continuing operations		$	0.27			$	0.22			$	0.81			$	0.61
Loss from discontinued operations, net of taxes			—				—				—				—
Net income		$	0.27			$	0.22			$	0.81			$	0.61
DILUTED EARNINGS PER SHARE:
Income from continuing operations		$	0.26			$	0.21			$	0.79			$	0.60
Loss from discontinued operations, net of taxes			—				—				—				—
Net income		$	0.26			$	0.21			$	0.79			$	0.60

9.		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 includes, 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 inmates, including damages arising from an inmate’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.
		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 $48.8 million at September 30, 2007 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 September 30, 2007, the outstanding principal balance of the bonds exceeded the purchase price option by $11.8 million. During June 2007, the Company’s restricted cash account previously held as collateral for the forward purchase agreement was released and the Company was able to transfer the restricted cash balance to operating cash.
10.		INCOME TAXES
		Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 generally requires the Company to record deferred income taxes for the tax effect of differences between book and tax bases of its assets and liabilities.
		Deferred income taxes reflect the available net operating losses and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including the 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 37.8% and 37.7% during the three and nine months ended September 30, 2007, respectively, compared with approximately 37.3% and 37.1% during the same periods in the prior year. 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 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.

		Income Tax Contingencies
		In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of 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.
		Upon adoption of FIN 48 on January 1, 2007, the Company recognized a $2.2 million increase in the liability for uncertain tax positions net of certain benefits associated with state net operating losses, which was recorded as an adjustment to the January 1, 2007 balance of retained earnings. The Company has a $4.2 million liability recorded for uncertain tax positions as of September 30, 2007, included in other non-current liabilities in the accompanying balance sheet. The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. The total amount of unrecognized tax positions that, if recognized, would affect the effective tax rate is $3.9 million. The Company does not currently anticipate that the total amount of unrecognized tax positions will significantly increase or decrease in the next twelve months. The Company’s U.S. federal and state income tax returns for tax years 2003 and beyond remain subject to examination by the Internal Revenue Service (“IRS”).
11.		SEGMENT REPORTING
		As of September 30, 2007, the Company owned and managed 41 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: (1) owned and managed correctional and detention facilities and (2) 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 2006 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 nine months ended September 30, 2007 and 2006 (dollars in thousands):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
Revenue:
Owned and managed		$	281,206			$	245,302			$	808,947			$	705,191
Managed-only			93,167				86,976				269,373				257,412
Total management revenue			374,373				332,278				1,078,320				962,603
Operating expenses:
Owned and managed			186,985				166,585				534,630				483,499
Managed-only			80,635				75,448				230,485				220,121
Total operating expenses			267,620				242,033				765,115				703,620
Facility contribution:
Owned and managed			94,221				78,717				274,317				221,692
Managed-only			12,532				11,528				38,888				37,291
Total facility contribution			106,753				90,245				313,205				258,983
Other revenue (expense):
Rental and other revenue			5,547				5,657				15,285				14,852
Other operating expense			(7,326	)			(5,695	)			(18,200	)			(16,193	)
General and administrative			(18,362	)			(16,379	)			(54,497	)			(46,717	)
Depreciation and amortization			(20,074	)			(17,411	)			(57,272	)			(49,387	)
Operating income		$	66,538			$	56,417			$	198,521			$	161,538

The following table summarizes capital expenditures for the reportable segments for the three and nine months ended September 30, 2007 and 2006 (in thousands):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2007				2006				2007				2006
Capital expenditures:
Owned and managed		$	105,413			$	36,632			$	208,392			$	85,788
Managed-only			4,008				6,884				8,152				15,137
Discontinued operations			—				31				—				100
Corporate and other			3,559				5,212				14,302				13,597
Total capital expenditures		$	112,980			$	48,759			$	230,846			$	114,622

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

		September 30, 2007				December 31, 2006
Assets:
Owned and managed		$	2,002,709			$	1,792,348
Managed-only			117,818				118,032
Discontinued operations			416				1,012
Corporate and other			323,670				339,468
Total assets		$	2,444,613			$	2,250,860