CoreCivic Inc (CXW) 2002 Q1 法說會逐字稿

Good Afternoon,

My name is , and I will be your conference facilitator today, at this time, I would like to welcome everyone to the Corrections Corporation of American First Quarter 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After this speakers remark there will a question and answer period. If you would like to ask a question during this time, simply press star then the number one on the telephone keypad. If you would to withdraw you question press the pound key. Let me remind, today's speech of the conference call contains the statements that are forward looking as defined within the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those statements made. Factors that could cause operating and financially result to differ are described in the companies in the Form 10-K, as well as in other documents filed with Securities and Exchange Commission, and these factors include but are not limited to the growth of the private corrections and detention industry. Fluctuations in operating results because of changes in occupancy levels, competition, increases in cost of operations, fluctuations in interest rates and risks of operations, the company's ability to obtain and maintain facility management contracts and general marketing conditions. The company does not undertake any obligation to publicly release the result of any revision to forward looking statements. They may be made reflect event or circumstances after the date here or to reflect the accounts of unanticipated events.

Participating in today's call will be the company's Chairman of the Board, William Andrews, President and Chief Executive Officer, John Ferguson, and Chief Financial Officer Irving Lingo.

Now I like to turn over to Andrews go ahead Sir.

Good Afternoon and thank you all for joining us today for our quarterly conference. As indicated John Ferguson and Irving will take you through this and in addition to myself, Dave Garfinkle, who is the Vice President Finance, and we have G.A. Puryea, our Corporate Counsel and Vice President of Legal and we have Michael, our Executive Vice President and Chief Operating Officer here today. So with that I will turn it over to John and all of you to answer question after our comments.

Thank you Bill, we are going to begin with report on financials by Irving.

Thanks John,

For the three months ended March 31, 2002, the company reported a net loss available to common stock holders of $46.3m or $1.23 per share compared to a net loss of $10.1m or $0.43 per share in 1Q01 for the comparable prior year period.

Results for the first quarter includes the effect of non-cash charge of $80.3m or $2.25 per diluted share due to the cumulative effect for the change in accounting of goodwill in accordance with Statement of Financial Accounting Standards No. 142. It also included a one-time cash income tax benefit of $32.2 million, or $0.91 per diluted share, resulting from an income tax change that was signed into law in March 2002.

Excluding these non-recurring items, net income available to common stockholders would have been $1.7 million, or $0.06 per diluted share. Results for first quarter of 2002 also included non-cash gain of $3.4 million associated with the accounting for an interest rate swap agreement in accordance with Statement of Financial Accounting Standards No. 133.

Consolidated revenues for the totaled $241.2 million and consolidated EBITDA for the quarter amounted $45.1 million. Adjusted free cash flow amounted to $16.4 million, or $0.53 per diluted share, compared with $14.3 million, or $0.47 per diluted share, during the last years first quarter. This represented a 12.8% increase in adjusted free cash flow per share.

I like to speak a minute about the refinancing of debt that we will complete tomorrow, but as we announced in the press release we do expect to close on a comprehensive refinancing of our existing debt that will closed tomorrow. The financing consists of $250 million of new seven-year senior notes at 9.87%. In addition, the company also announced certain terms of a new senior secured credit facility. This is comprised with a revolving credit facility of up to $75 million with a term of four years, a $75 million term loan A with a maturity of four years, and a $565 million term loan B with a maturity of six years. All borrowings under the senior secured credit facility will initially bear interest at a base rate or essentially LIBOR plus 3.5%. The loan contains a pricing risk so that it would lower our leverage levels and our borrowing rates will decline. The proceeds from the refinancing will be used to substantially retire $100 million in our existing 12% senior notes for which we successfully tendered and will replace the existing senior secured credit facility, which is due at the end of this year, and under which the company is paying LIBOR plus 5.5%.

In last conference call, we described what we thought would be an idea of financing, one that not only extended on maturities but was also substantially prepayable our goal is to continue to use cash generated from operations and asset sales to pay down debts much improving our financial ratios and hopefully resulting in an improved credit ratings. We consistently believe in the future, we will be positioned to structure a better deal with respect to rates and debt covenant that we can't pay. So our goal is to place much of the financing as possible under the facility with the term of 4.5 years containing liberal pre-payment positions with the balance of financing consistent with longer-term borrowings and in order to spread our maturities. We believe this financing clearly achieves all these objectives and from the perspective of the interest rates, it clearly exceeded our objectives. Assuming constant debt levels and constant LIBOR rates we expect interest savings on a cash basis to exceed $7 million and interest on a GAAP basis to exceed $20 million annually.

Moving to operations, there were 4.81 million compensated man-days in Q1 of 2002 versus 4.88 million man-days in Q1 of 2001. Average portfolio occupancy declined to 87.4% from 88.3% in the previous quarter. The decrease was due to anticipated occupancy declines in our Whiteville, Tennessee facility as well as reduced demand in several of the company's Oklahoma facilities.

John will discuss portfolio of occupancy and also business development initiative later in the call, but I will say, that in March we began seeing a pick up occupancy levels, such that our total occupancy to date is approximately is 89.5% as compared to the quarter's average occupancy of 87.4%. Revenue per man-day increased to $49.08 versus $47.91 in the prior year first quarter. The increase was primarily due to the result of the number of contract rate increases, which took place over the course in the last year. Operating cost per man-day increased $1.25 to $38.31 from $37.06 in the prior quarter. To break this down fixed cost increased to $1.44 per day. This was caused by two factors, the first one was annual pay increases, which would be expected and the second one was lower occupancy level. Fixed cost consists primarily of salaries, so we would expect higher fixed cost per day during periods of temporary occupancy decline. Variable cost actually decreased to $9.89 per day from $10.08 per day in the last year. We were able hold cost in line with the most major variable expense categories. Control of expense has been an on going priority of this management team. The end result here was despite a decline in occupancy we were able to generate operating margin per man-day of $10.77, which was just $0.08 per day less then the previous year. General and administrative expense was down significantly from last year due for a variety of reasons, some of which are non-recurring. The primary reason for the decline on the first quarter was G&A salaries and benefits were lower than the previous year. We expect on a run rate basis, G&A cost should run approximately 3.25-3.5% of revenues, which would translate to between $7.8 and 8.4 million per quarter.

From an EBITDA perspective the quarter came in as pretty much expected. During our last conference call we indicated that EBITDA could be down slightly given the occupancy declines we were experiencing. Despite the occupancy decline, and control of operating cost, combined with the lower interest cost resulted in an increase of adjusted free cash flow from operations by $2.1 million representing almost 13% on a per share basis. So overall we believe that other than for the occupancy decline, which seems to be reversing the quarter reflected a continued improvement in our balance sheet and in our operations. The refinancing of our debt would extend the maturities in favorable rates with the major event for the company. The credit rating agencies have indicated that they will upgrade our debt upon successful completion of this financing. We continued to generate significant cash from operations. Our liquidity position is strong, with over $50 million in cash and a $75 million credit line as of tomorrow and we are beginning to see higher occupancies which should lead to a improve in profitability.

So with that I want to turn to our outlook and then will turn the call over to John.

As I said in the last conference call, looking forward for the second half of the 2002 and beyond optimistic about our business. In general, presence of both the federal and state level our operating capacity. Almost every state as well as the federal government is facing revenue shortfalls. Given the difficult to decisions and much be made in attempting to balance budget in this environment, we believe it will result in reduced spending on prison construction and continued rates in the prison overcrowding. Although the overcrowding might increase temporarily, we do not believe that will continue for a long haul. During the last conference call, I indicated that our forecast for the first six months of 2002 was for the EBITDA to be flat to slightly down from our Q4 2001 EBITDA $47 million. As we sit here today I see changed the forecast with respect to Q2. Thus we expect EBITDA to be in a range of $45-47m.

Keeping in the second quarter operations are negatively impacted on a seasonal basis by the ways it is going to affect company wide on April 1st. The contract increases typically are not recurrent over the second and third quarter. We therefore expect the growth in adjusted cash flow per share to be in high-single to low double digit are say 8-10%, which is somewhat below the 12.8% growth rate, we registered in the first quarter. Beyond Q2 we are still unclear as the timing of the number of our initiatives. For example we are expect announcement from the Bureau of Prisons on for some time now. We are aware of no reason why the contract is not yet being awarded and we remain optimistic that the award is eminent. Being here today, however, we are unable to predict the precise timing of the award, which would have materially impact results. There are number of initiatives that we are pursuing in addition to which John will discuss in a just a moment.

Given our assessment of needs on the part of customers, we do believe we will be successful in driving our occupancy beyond the 90% level was the year-end. With respect to the guidance regarding to the second half of the year we clearly expect EBITDA levels to exceed those achievement in the first half both through the higher occupancy and also due to the automatic contract rate increases. However, because of the uncertainties mentioned above regarding the timing of the contract awards but not able at the present to give specific guidance regarding EBITDA levels for the second half of the year. We do expect to have greater visibility as we complete the second quarter and I will provide additional guidance regarding the second of half of the year, during our second quarter conference call in August.

With that I will turn the call over to John.

Thanks Irving,

As Irving reported since December 31, we have seen our bed population some 1472 inmates, so that the available bed that the company now has is a little bit under 10,000. These beds can found in the two facilities we have in Georgia. One of which is not been completed. We continue to have our facility, in which we have discussed previously of ongoing discussions with the Bureau of Prisons as unfold all the alternatives for them as highlighted in the present budget. We have the facility that needs amount of bed that available in Tennessee and we have several other facilities that have excess of 100 beds available for opportunities for management contracts and customers. We do have a lot of activity.

If I look to the states that are experiencing overcrowding are indeed of bed space. We can say that each of these customers land up fairly well to the availability of the bed space that we have in the North East, you have Connecticut and Beaumont few states that are out of beds within the facility that are looking to sourcing outside of their state. Georgia continues to have inmate population growth. It is state that there is no general population and of course we two facilities there. Of course one right is designated in the bid to the Bureau of Prisons and hoping that the federal Bureau of prisons will utilize that facility. Tennessee has bed need over the next 15 months, in next three years it continues and of course we have available bed there.

We announced in the fourth quarter that our intend on the fourth quarter conference call that we are losing inmates returning to Wisconsin. In the last 30 days that flow in the inmates back to Wisconsin has stopped and in fact that inmate population has grown roughly 74 in late. Wisconsin is completely out of bed within the state and there is lot of discussion going on as to when they will make available beds within Winconsin. Kansas has need for bed and we recently entered into a contract with Kansas, 1000 inmates in our facilities. who we do business with and management only contract his experiencing a inmate growth and there pretty much add capacity and looking at other sources other than in state, Hawaii has announced that after July 1st, that they will have a need for 250 inmates.

Part of our growth over the last four months since January 1st has been the INS and the US Marshall service and we continue to see growth in about six facilities in excess of 100 beds each since then with the INS and the US Marshall service as we stated in February that we have numerous contracts already in place without the US Marshall service and the INS as they have new bid growth and we have available space. So we are encouraged that inventory that we currently we have available is such that it can meet the needs that I had just described that are identified as well as the INS and the US Marshall growth. We do have contracts that we have identified last quarter that we negotiating, which should improve those and those, are close to being completed. So again, we feel good about the fact that we are starting to see the needs or being able to meet the needs that are developing in the country and that are available in some period of time going forward.

So with that we will open it for question and answer.

At this time I would like to remind everyone in order to ask a question please press #1 on your telephone keypad, we will pause for just a moment to compile the Q and A roster. Your first question is from Susan of Lehman Brothers.

Hi Guys, this is Scott Lehman for Susan.

Hi

Hi John,

Great quarter.

We were just wondering if you could expand a little bit on the inmate growth over last four months, may be just give us a break down of those 1,470 new inmates?

About 1,100 of them would have been at the US Marshals and the INS and it would take me a second to say what were the other locations that we had some inmate growth.

Okay, that is definitely very helpful.

Just one follow up question, you mentioned that Wisconsin was starting to provide you guys with more inmates a reversal on previous trend. How long do you think that trend will last?

Well we are not sure. The circumstance had brought about that change of course is that little over three years ago Wisconsin passed laws, which means that people who were sentence, after the effect of that law would required to serve a minimum sentence, which took out the hands of the judges that allowed to sentence people for a lesser term. It takes several years for that to be felt. So that it may be proud of the law, we have to state 2 year or 3 year someone who would be released right now are required to serve 7 or 8% of their terms so that means they are not being released and that is what starting to generate the bed need. Wisconsin had capacity. They are now growing at several hundred inmates a month. They do have a 1,500-bed facility that they have announced that they are going to open in the fourth quarter. If they do open that facility in the fourth quarter of , then there is a chance that they would move some of the inmates out of our care into Wisconsin. Although, with the current bed growth they have, they may have found that they need out without affecting our populations. There is some discussions going on within Wisconsin about the postponement of the opening of this facility, but there is very significant cause to get it ramped up to see their first inmate. So, I would say that we would definitely, probably see some growth between now and the fourth quarter of 2002. It's hard to see beyond that.

Thank you.

Your next question comes from Jeff Kessler from Lehman Brothers.

Thank you.

Again I would like to repeat a good quarter in a tough operating situation here.

I just wanted to follow up on the question on the truth-in-sentencing laws, because this has been a fairly common occurrence, which stays around the company. I just want to know that, if indeed there have been a number of places where you're going to be seeing inmates leave the prison system. How long do you think, it will be before recidivism hits back in and you have a curve, that not to back up again us, since with the assumption that recidivism rates are going to remain pretty high amongst all these prisoners who are coming out because they had some minor crime, but were forced to serve two or three years? In other words, is there some type of rebound effect that you would expect back into the prison system in the next couple of years?

Well, we are close to target forecast, as we do know that the average time that someone has stays out before they become part of the percentage every time, just like 600 something days. So it takes a while for you to see that, but we do know that in 2000-2001, it was much higher than normal for over rate that we were expecting. May be that could impact the population going forward.

Then that is combined with demographic trends where just a percentage of 18-25 year old, when the populations is increasing. So, in addition to recidivism, you also have the fact that, just demographically, the age group that typically commits most of the crime in those countries, there's a bubble forming and it is starting to come through.

And the second question with the cancellation of three contracts out there, a lot of people think that you know, there is some bits of confusion on the policy with regard to legal . I am just wondering if you see a substitute format may be smaller detention centers came to local jails or whatever to, to have this people at these people at that time instead of large prisons that may be would be outsource as well?

Jeff I am not sure. Is the question, does the INS wanted to use the local jails or ...?

Is the INS going to be using a different format that might be outsourced as well, in another words smaller facility instead of one large facility or several large facilities?

We don't have the answer to that. I think you know that the INS is having at the level on which the decision will be made as to how to deal with this that they are somewhat very occupied with what their found structure is going to be. We, of course, are happy that our relationship with the INS continues to be good. You know it's policy, the oldest relationship that this company has and we are continuing to try to keep up with I guess, what the detention needs will be and how they will do with that and hope we can be a responsible vendor to them. And of course as you know the office of detention trusty was established about nine months ago with the express purpose of coordinating the detention needs of the US Marshall Service, the INS, and the DOP. And that is so still being developed as to how that's going to work. So it's really similar work in process, as to how the INS or even the Marshall Service will do with detainees going forward.

One final question, I know that you are not going to be giving out a lot of guidance, particularly looking out further into 2002. But you have some idea, is there some guidance you can give on where the man-day margins are heading?

The man-day margins have been, I think relatively constant for the last few quarters around that 21-22% level. I think you will see an improvement in the margins over the next couple of quarters. There are a couple of things we are doing. One, we are going to see some contract increases. I think when get out to Q3 and Q4 you will see contract increases chipping in. That's going to improve our operating margin. We are also working hard to rationalize staffing here to react a little more quickly to occupancy ups and down, that's an initiative. We have a full cost initiative, we have a medical cost initiative, so I think that overall the second quarter might be negatively impacted because what happens in the second quarter again we have these raises and the contract increases coming later. So that holds a tough quarter. Once we get beyond that I think you are going to see some improvement in operating margins.

Okay. Excellent. Thank you very much.

Your next question comes from Gary with BB&T Capital market.

Hai Gentleman,

I hear that you raised standard, and you expect only $7m in saving an annual basis in cash interest?

A $7-8million in cash.

And do you have an estimate of what's your new loan origination costs are going to be? What is the annual amortization of that will be?

I want to say it's around $3-4 million a year. Let me say that, more to come on that, we have a couple of things, Gary, we are still having people tender, and there are going to be tender costs. We are still trying to test that up, we haven't gotten all of the legal fees and off line, even I can talk about it. The accounting for this is somewhat complicated as to which of these costs is going to be capitalized and which would be reflected as an extraordinary loss in the second quarter. So I am trying to give you a broad idea now, but that number could change. And we have that something we can disclose. We don't have the large extraordinary loss in the second quarter, because most of these costs will be written off. It will be of a substantial decrease. That's why certainly we would have about $20 million pickup annually on a GAAP basis.

At the end of the second quarter what would you expect will be out of that $75 million revolver?

We are still working on that, we are sitting here today with about 75 million in cash. That's a lot higher cash balance in the number, Gary. Part of that of course would IRS refund. But again we are trying to get everything from legal bills to tender fees and all of that. I am trying to keep that down. There will be probably, about $10 million outstanding. The initiative would be probably zero outstanding then there might be a very small balance after that going forward.

On the goodwill write-down, what assets did that write-down came to?

Its just goodwill where there were no specific assets.

But the goodwill is associated with something to get on the first place?

It was just the combination of and taking over the operating companies. It was really the write down goodwill associated with subsidiaries. Over, the two subsidiaries there was no write-off, because of they were managed facilities. It was really to write-down goodwill associated with acquiring owned facilities.

Okay, Thanks.

Your next question comes from James McDonald with First Analysis Securities.

Good quarter guys,

Just, could you go through at how you get to the $0.06 earning number, I can't get there? What your tax rate is? What kind of First Call earnings--are you including a swap gain in that, which I would think, you would use a one-time item?

If swap is not in that number there would be a slight loss without that. There would be about a nickel loss.

I mean, I calculated a $0.06 loss?

I came with up with the nickel.

I think it was a $0.10 loss.

But I am using fully taxed 40% tax rate, or is there a different tax rate you are using?

There will be a different tax rate. We don't have a tax rate in here right now. I mean, James again there are issues with respect to how your model and the issues with respect to how we actually have to account for things right now, how to account the things right now, as we don't have the tax nickel.

It would be a nice thing so you get some consistent numbers out to the street and ?

I totally agree and right now there are only two numbers in First Call. We are going to try to get everybody in the First Call to a GAAP basis. And again if the analysts are going to be modeling in a tax provision, I cannot accrue a tax provision right now. I think that will probably begin to happen sometime around the fourth quarter or early next year. That is another complicated accounting issues. But we will start accruing taxes from a GAAP perspective. We have a $120 million of carry forward. We are not going to be paying taxes for sometime. But from a GAAP perspective, we will start accruing taxes, I am guessing Q4, Q1. Again we will constrain because by accounting because of heavy incurred overtime. So it's just going to be somewhat problematic, but I agree with wholeheartedly, but we have to get everybody in the First Call to at least get to a GAAP basis.

Shall I go with a zero tax rate for this year, or shall I put in things out?

You are trying to match up with what I am going to report. I would have a zero tax rate for this year, I have got some small taxes that I could go over with you off line, but there are franchise taxes and they are just odd things like that, but there are no income taxes that we are paying right now and we won't be this year. Again it is possible in the fourth quarter, but not likely. Probably early next year we will start having the tax bill.

Okay. May be I will get a zero tax rate this year. Do you have any concept of how many of the bonds have been tendered of that $100 million?

I am guessing at the end of the day we're going to be somewhere between 90-95%. But we are guessing right now.

And we write-off the swap that you have in second quarter as well?

It's possible. We don't see anything there. There is something we would be guess.

And you mentioned there was something in your 8-K filings, the Oklahoma situation, could you talk about that, what's happening with that rebid and what do you think is driving that?

The Oklahoma has about 5,500 of their inmates outsourced to four different private Correctional companies. We have about half of the inmate population in three of our facilities that we own in Colorado. The other three vendors each have facilities they own in Colorado. Oklahoma is running at 99% of their capacity. They were obligated to re-bid one contract, which was our contract because they had exhausted all of their renewal options and they elected to go ahead and re-bid all the contracts so they all have the same start date and ending date. They had a mandatory bidders conference a few weeks ago. The only bidders that showed up were of course the current contractors. Each of the vendors have a little bit of different population, there is one vendor that has all females; the rest of us are male populations. The other vendors have a very limited debt capacity so they really probably would see much change there. We do have some debt capacity in one of our facilities. I think the population vulnerability of any of the companies, but specifically ours I don't see is that great. The test that we are all going to have is what is going to be the predown of the each bid. It is not unrealistic to assume that if it's not one of these contracts that has to be renewed, then Oklahoma would really have the luxury of looking at what's bid versus renewing it and choosing which one they like the best. So, I don't think you will probably see much movement amongst the vendors and you probably won't see a whole lot of difference in the revenue.

Could you tell us the occupancy at the end of the quarter, so we got a kind of a calibration point?

The occupancy at March 31 was 54,063, that is 88.33%.

One another noticed that PPD went up $10m in the quarter. Did you built something?

We did a reclassification of for sale.

Okay Thanks very much.

Your next question comes from Charles with Standard Asset Management.

Could you give us any kind of color to the potential sale of Youngstown facility and just fresh, was there any reason given why you lost the contract in Puerto Rico?

The reported on Youngstown is really the same we have had for last two quarters and that is that we're in some discussions with bureau of prisons we have offered to them as affordable alternative. We feel that we can sell the facility to them at substantially under what you would cause them to build a facility. We were really in discussions last summer and after September 11th, there was not much focus on discussing it. The discussions, I guess picked back up in first part of this year. The bureau is assessing what cost they would have if they were to acquire and had to make some modifications to it to meet the configuration that they would like. Shortly, we would probably find out if we got a transaction that can take place based on what they feel their needs are and what they would have to do and cost on that and what we would expect out of it. The reason that the Puerto Rico contracts have not been renewed is that Puerto Rico like every other state government has had some serious financial problems. They feel that they could assume. These are facilities that Puerto Rico owns. So these are management-only contract for us. They felt that they could assume running of the facility and run it for less. We of course continued to try to show them that it maybe some of the announces that they have known are not completely correct and that we in fact could run for less but we have attempted to do that over the last several months to the point where they were willing to. So they have one transition they give us some time but it just appears right now that they are convinced that the least cost alternative for them is the assumption that these two contracts which expired on February 6th and which we were begin the transition period.

In the presentation items that you furnished in your slide show, you said with regards to Youngstown, discussions of sales to the bureau of prisons was for a range of $65-75m. That equates to $37,000 per bed on the high end. Wasn't your previous sale for something in the mid-40's, $48,000? I think fixed to my head $48,000 per bed for the sale that you did like in 2001?

It was and we have said that in valuing a prison, that's the best way to value which probably with the replacement cost, which is in the lower $40,000 to a high of $50,000 a bed for a private company to build it. Youngstown is just in a unique situation with the company. We did have contract there with the District of Columbia and those inmates were eventually transferred into the bureau of prison system. We just have no current activity on a customer at the moment. It is costing us every month to keep it open, I mean to property taxes and the crew we have there. We just felt that if we had a purchaser as we weigh against how long we probably would have to carry it to get a customer and we would be willing to go ahead and sell it that at below what replacement cost would be.

We took the de-leveling affected that too. We are actually applying those cash proceeds to the loan and actually having a gain in EBITDA would be a good solution for us.

So you don't really have any prospects for anybody occupying our facility in the foreseeable future?

We had some discussions not that I would call it meaningful that several months ago we made a decision that we wanted to see these discussions through with the bureau, and we wouldn't be going down two tracks.

The prison is absolutely viable prison and may be customer out there for it, I don't want to leave you with the notion, that we will be not be able to put prisoners in there at some point. It's just not what our objective is today.

Thank a lot.

Your next question comes from Steven James with Namieara Securities.

I am wondering if you can just comment on where margins are at your owned managed facilities as opposed to your managed only facilities, and if you could just take that to the EBITDA level as well it will great?

Margin rates for managed facilities were 18.5% for the quarter and operating margin rate for the owned facilities was 23.7%. Globally, the EBITDA margin would be about 2-3% on both sides.

Okay and the differential stay the same? Okay. Thanks a lot.

Your next comes from Tom Hanes with Georgetown Management.

Can you comment on the two facilities that you previously had classified for sale, which facility those are, how many beds they represent, what from now?

They were actually facilities that released one to another vendor and one to a local government that we were attempting to sale and we realized it does not so we just moved back out half a sale. They not facilities that we operate.

How many beds they represent?

About a thousand. They are not in our account because of lease facilities.

Currently are you trying to lease back it out again or?

Right now they both under lease. There is a chance one may come to an end. At one point we were thinking about selling those facilities.

Your next comes from Mark with USAA

I am curious as to one of you can you give update with regards to the IRS, I guess going out to offer some money in 1997-98, a timetable for resolutions and what type of reserves you have regards to any potential tax liabilities?

We have disclosed that we have accrual on the books with 1997. The 1997 issue relates to the deductions that the company took in 1997. With the IRS if it's speeding economic substance of the deductions, we simply do have economic substance and we have discussions with them for some time. Recently, the IRS will perceive some of these things in tax code, I believe they have taken a few set back. We believe in our provision, however to be conservative, we accrued roughly $47m, it's in our deferred tax liabilities. We are optimistic that, we can settle this with the IRS, where we have not been giving people in number on that settlement. We have said that we are clearly within that $47million number. We would like to have that done by the end of the year. We also told people that we both receive $32 million, as we disclosed in the press release today. So from the cash prospective, when we do achieve the settlement you always hope you get some kind of terms, but even if you can't, we are on a pretty good position here on the cash basis. We can deal with the settlement. We are becoming optimistic; they are becoming reasonable and hopefully we will settle this up before the end of year.

At this time there are no further questions.

Just to summarize what we talked about here, we invite you to take a couple of quick notes, as a result of our first quarter release, we did take this write-off and goodwill, that is now behind us, the $80 billion negative and we did pick up the $31 million cash refund which is positive and we hope that soon, all the adjustments will be behind us and we will have cleaner operating statement that will allow all of you to see how we are actually performing. The goodwill's are non-cash items. The income tax is attached as early as indicated. We did have positive earnings of $1.7 million for the quarter, but that does include interest rates swap of 3.4 which was a pickup force. The major thing about the quarter is our pre-cash flow was up 12.8% from the first quarter of 2001. So our precash flow continued to improve. But the big thing that we done is to do the new financing and as a result we will have upgrade in their rating and as the told you to increase in cash flow $7m plus and increase in our earnings before tax of $20 million plus. Although, our occupancies were down for the first quarter and I think probably we are all going to see some down turn at the end of the year, and going into the early part of the year because of the tendencies of the judges of in court to let people out for holidays, and in fact put him back in right away. But the important thing is that their occupancy is now up at 89.5% as of today.

Irving said the EBITDA would be the same as in the second quarter, as of first quarter, but the second half of this year, would be better than the first half of this year. And finally I like to say that the refinancing and the improvement in our balance sheet has really taken tremendous amount of time with our top management people both last year and the first quarter of this year and with that successful and I do believe that they are very successful refinancing behind us. Our management can focus their time and energies on filling the bids and controlling our operating cost. And let me re-emphasize that all the bids are already been financed, and so as we fill in we have favorable earnings and cash flow increase.

So thank you all for you continued interest in our company and particularly for you encouragement from March to date for our management. Thank you.

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