CoreCivic Inc (CXW) 2004 Q2 法說會逐字稿

Welcome to the Corrections Corporation of America 2004 second quarter conference call. Before we begin, let me remind today's listeners that this conference call contains statements that are forward-looking as defined within the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Factors that could cause operating and financial results to differ are described in the Company's Form 10-K as well as in other documents filed with the Securities and Exchange Commission. These factors include, but are not limited to, the growth of the private corrections and detention industry, the Company's ability to obtain and maintain facility-management contracts, and general economic market conditions. The Company does not undertake any obligation to publicly release the results of any revisions to forward-looking statements that are made to reflect the events or circumstances after the date hereof, or to reflect the occurrence 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 its Chief Financial Officer, Irv Lingo. I would now like to turn the conference over to Mr. Andrews.

Good afternoon and welcome to our second-quarter earnings release and discussion. And as he indicated, John and Irv are here to give you a summation of the quarter and I will wrap up after the questions. So with that, Irv?

Thank you, Bill. We believe that once again the Company has registered a solid quarter. Earnings after adjusting for a tax provision for last year increased 46 percent, revenues were up 13.9 percent and operating income was up 7.3 percent while adjusted EBITDA increased 4.8 percent -- and this, despite significant startup activity at three of our facilities, as we describe in the press release. In addition, we continued to see higher portfolio occupancy and we announced a number of new contract awards during the quarter.

Turning to earnings, the Company reported net income available to common shareholders of 14.8 million -- that's 38 cents a diluted share -- compared to 12.1 million or 34 cents a share in the prior year. As you saw in the press release, there were several special items affecting last year's second quarter, and excluding the effects of these special items, net income for the second quarter of 2003 amounted to 17.8 million or 50 cents a diluted share. Now those results did not include a provision for income taxes, and we provided with the earnings release an illustration reflecting the results for the second quarter of '03 on a fully taxed basis. Based on this schedule, if you adjust to second quarter of last year, income would have amounted to 9.3 million or 26 cents per diluted share. So again, if you make the assumption of a tax provision for last year's results, earnings per share this year increased 46 percent.

Operating income for the quarter increased to 43.8 million compared to 40.8 million last year. Adjusted EBITDA increased to 56.7 million compared with 54.2 million for the second quarter last year. As indicated in our press release, the results for the second quarter of this year included approximately 3.9 million in operating losses sustained in our Northeast Ohio, Tallahatchie County and Delta Correctional facilities, primarily as a result of startup activities resulting from new contract awards. This is compared to 1.4 million in operating losses at two of those facilities during last year's second quarter. Despite these startup expenses, same-store facility EBITDA for the second quarter increased approximately 9 percent over the prior year.

Adjusted free cash flow decreased slightly from last year to 25.8 million this quarter compared to 26.2 million last year. In addition to the aforementioned startup activities, adjusted free cash flow for the current quarter was negatively impacted by an increase up to $12.7 million in cash used for investments in technology and facility improvements, and that was compared with 7.4 million over the same period last year. We expect that most other Company's adjusted free cash flow for at least the next two years will be targeted at facility expansion and development to meet current and anticipated needs of our customers.

Turning to operations, total revenue for the quarter increased 13.9 percent to 289.4 million as total compensated man-days increased to 5.8 million from 4.9 million last year. Average compensated occupancy for the quarter increased to 95.8 percent and that's compared to 91.1 percent for the second quarter of '03.

Revenue per compensated man-day decreased from $51.08 last year to $49.14 during the current quarter, and that primarily reflects lower per diems associated with the Texas contract award in January. You may recall our pointing out on the last earnings call that the Texas contracts are managed-only, and managed-only business typically contains lower per diems and lower margins, which we are quite comfortable with, given the fact that there is no capital outlay required to procure that business. So, the decline in revenue per man-day was expected -- it was essentially the result of a change in our business mix.

Operating costs decreased rather significantly to $36.94 per man-day from $38.09 per man-day last year. This decline in cost per man-day again occurred despite the $3.9 million in startup-associated costs incurred this quarter. Fixed costs declined to $27.67 per man-day versus $28.40 last year; that's a decrease of 73 cents. Salaries and benefits, which make up 86 percent of our fixed costs were down 61 cents per man-day, and the major reason underlying the decrease relates to the fact that as we -- it's pretty simple. As we drive occupancy levels higher, we were achieving greater leverage over fixed costs. Secondly, the salary levels associated with the new Texas business are lower than Company averages.

Variable costs actually declined to $9.27 a day from $9.69 cents per day last year -- that's a decrease of 42 cents. We registered decreases in costs per man-day in most areas of variable costs. But most notable was a 19-cent per day decline in inmate medical costs from last year's second quarter. The decline in inmate medical expense on a per day basis -- and you're going to hear this a lot -- it was primarily due to the fact that the Texas Department of Corrections retains responsibility for providing medical services under that large managed-only award. So, we added a significant number of man-days without the associated medical costs. We also continued to benefit from lower outsourced nursing expenses and improved pricing on pharmaceutical contracts. The end result was that operating margins per man-day actually declined 79 cents from last year's second quarter to 12.20 per man-day from $12.90 and our margin percentage declined to 24.8 percent from 25.4 percent. Again, the reduction of margins was expected. It relates to, first of all, The first quarter of last year we had our McRae facility -- we were being paid for 95 percent occupancy, when in fact, the facility on average for the quarter was only 64 percent occupied. Secondly, the Texas contract awards -- again a significant new managed-only business. Yet, at per diem, roughly half of the Company's overall average. And then third, our current quarter did include the 3.9 million in startup costs.

General and administrative expense increased to 12.1 million versus $10 million last year. In prior calls, I have discussed the higher levels of expenditures we are making in headquarters, personnel and the areas of information technology, business development and HR. And again, we believe these investments will ultimately result in improved operating margins at the facility level. That said, we do believe G&A expense was higher than normal this quarter, and upon analysis it's really for a variety of reasons -- none of them that were really, individually remarkable. I don't expect that this quarter's level of G&A expense represents a run-rate that you should go from. And for the year, we are expecting G&A expense of between 45 and $46 million.

So overall, I believe we registered a strong quarter operationally and otherwise, and in just a moment, John Ferguson will update you on the business development environment. But before turning it over to John, I want to provide our earnings outlook for the remainder of the year. And prior to discussing our guidance, which was included in the press release -- and at the risk of sounding a bit like a broken record -- I want to reiterate what we have said in the past, regarding the timing of certain events. John is going to update you on a number of specific opportunities that we are pursuing. And then John will provide a rather upbeat view of our overall business environment. As we have discussed on many occasions in the past, the issue oftentimes is not whether an event will occur, but when. The decision timeframes, with respect to several opportunities we are currently pursuing -- the original, I guess, decision timeframes -- have passed. These opportunities are still very much real. But the timing, as we have seen in the past, is very difficult to predict. Given this particular element of our business and again looking at the very positive business environment, I do believe that looking out longer term is more beneficial in many ways than worrying about whether a contract award will occur in the next quarter. Investors with patience take a longer-term view and should be rewarded.

With that said, I will move to our outlook and for the third quarter, the Company expects diluted earnings per share to be in the range of 39 to 41 cents, and expectations for the fourth quarter are identical -- 39 cents to 41 cents. That results in full-year EPS guidance in the range of $1.53 to $1.57.

During 2004 the Company expects to invest approximately 134.6 million in capital expenditures, and that consists of approximately 84.6 million in prison construction and expansions, 28.6 million in maintenance CapEx and approximately 21.4 million in information technology. Those numbers are somewhat different, but not terribly different, from our last call, with respect to the CapEx.

And with fact, I will turn the call over to John.

Okay. As I have in the past, I've begun by just highlighting some of the events of the quarter. I would like to start out with talking about a couple of things that are, of course, the unfortunate part of this business.

But on Tuesday, July 20th, an incident occurred at Crowley County Correctional Facility, in which inmates became disruptive while in the recreational yard. During the disturbance, inmates caused significant property damage and set fire to a horticultural greenhouse. The disturbance was brought under control with no correctional officer injuries, and with inmate injuries held to a minimum, and we expect to have the facility fully operational in short-order.

As much as we wish incidents such as this would never happened, unfortunately they are an unwelcome part of the corrections industry. I think if you spoke with correctional professionals across the country, the real issue is not whether an incident such as Crowley occurs, but when they occur, how well you deal with them. An after-action review into the events of that evening are ongoing, both the Colorado Department of Corrections, as well as CCA. And as stated in our press release, should initial investigations reveal that any added protocols or procedures would improve our operational performance, we absolutely would be prepared to institute any such measures. I will say that we are very proud of the way our personnel responded to this situation; they reacted as true professionals, and I commend them. I'm pleased that injuries were kept to a minimum, and am gratified to the support we have received from the Colorado Department of Corrections, both during the incident and since the disturbance.

With respect to the financial implications of this event, the Company maintains both property and casualty as well as business interruption insurance. We have not identified all costs of restoring the facility to its original condition and population levels, but do believe these costs will be mitigated by insurance to such a degree that any costs borne by the Company are not expected to be material.

As reported in the local press in Nashville, police are investigating a death in our Metro detention facility, in which they have deemed a homicide. Four officers in the facility were involved in handling a disturbance with that inmate earlier that evening. We are saddened by this death and we are cooperating fully with the investigation. We have placed the four officers on administrative leave, pending the outcome. In the meantime, we have been asked by law enforcement authorities to refrain from commenting on the incident. And we will of course comply with that request.

Several days ago there was a wire story indicating that a suit had been filed on behalf of the deceased inmate, seeking damages of $60 million. We believe the suit is premature and that the police investigation is not complete and no one has been charged. Given the few facts that are available, we believe the filing of a suit seeking such amount is outlandish. Shareholders should know that the Company maintains insurance to cover itself against lawsuits, such as this one and we have no basis for believing that the lawsuit will have an adverse effect on our business. More important, we will continue to work with law enforcement authorities to get to the bottom of this incident.

Moving to some of the operational -- I mean, the population developments in the second quarter, I point out the ones that we highlighted in our press release. First of all, on May 10th, we announced the completion of a contract to house inmates from the State of Hawaii in our owned and operated Tallahatchie County correctional facility. Of note in that transaction was a minimum guarantee of 1500 inmates, which is approximately 125 more than we currently had at that time. As we noted in our press release, we feel beneficial to the long-term benefit of the Company, in that it freed up beds in Arizona, as we can see continued demand for both U.S. marshals and immigration customs enforcement beds in that area.

On May 20th, we announced new agreements with the states of Minnesota and North Dakota, to have a portion of those state inmates in our owned and operated facility, Prairie Correctional Facility, which is located in Appleton, Minnesota. Both contracts do not indicate a specified inmate population to be managed by the Company.

And on June 1st, we announced the completion of a contract to manage a population of up to 128 Colorado maximum-security inmates at our owned and operated Tallahatchie County correctional facility, assisting that customer in Colorado. And then, on July 1st, we announced the completion of a contract agreement with the State of Washington, and the Company expects to receive an initial population of approximately 300 Washington inmates.

Also of note, during the second quarter is that as we have previously been discussing, on almost every quarterly conference call, the State of Wisconsin -- due to increased capacity within the state -- had continued to move their inmates back into their facilities, and we continue to see a reduction in the number of inmates that we've had with Wisconsin. In fact, the current population count is 432, all housed at the Prairie Correctional Facility.

Having noted each of those transactions, I would just point out what our current occupancy is in our facilities. We had a population count of 62,616 at March 31st, and we have a population at June 30th of 63,667 for a growth of a little over 1000 inmates. But during that same period of time, as I've noted about Wisconsin, we saw over 1000 inmates in -- Wisconsin inmates moved from our facilities back into their state. So we had little over 2000 bed growth net of the movement of Wisconsin, which is about a 3.5 percent growth.

As we have highlighted, previously, as we look at the inventory of available beds that we have in the owned facilities, which once again we feel is a business model that makes CCA very competitive, that we still have in the range of 6 to 7,000 beds currently available to meet growing and new customer demands. And of course, of noteworthy is the Stuart County facility of 1500 beds; our northeast Ohio, around 1900 hundred beds; and North Fork of 1440 beds; and then -- and a variety of available beds within existing facilities that are currently being operated. And we continue to complete the construction of the expansions that we have announced over the last nine months, which of course is a total of 1568 beds.

So now I'd like to move to the opportunities. It is very similar to what we talked about in the last conference call, other than there are a couple of procurements that have now become real, that we were somewhat forecasting previously. Each of the procurements that we did point out that were active in the May conference call are actually still ongoing. That being the up to 1000 beds for the State of New Hampshire and up to 2500 beds by the State of Connecticut, and then the Federal Bureau Prison of at least 1000 beds for them.

We pointed out that the State of Arizona had an active procurement for the design, build and manage of 1000 beds in their state; that is still active and ongoing. And we announced that had we had been evaluated as the vendor of choice by Dixon County in Tennessee for up to 600 beds, and those discussions are ongoing -- trying to reach an agreement on a contract.

Two new RFPs have been issued since the May conference call. Of note is up to 2800 beds by U.S. marshals service for the Laredo, Texas area. We have mentioned this potential RFP I think probably for year. And now the RFP has been issued and the responses were due by vendors on August the third. In addition to that, the State of Georgia has issued a 1000 bed RFP for beds to meet their demand by November 1st of this year.

So we have some 10,000 beds in which active procurements have been out there. And of course 5500 of those 10,000 are seeking currently available beds, and we think that we are in very good shape there. And as we have said previously, there are actually enough active procurements at this point in time in which to utilize our entire available bed availability.

A couple of other opportunities to point out -- the State of Florida, in their appropriation bill authorized the outsourcing of 1280 beds to either be an owned facility by the State of Florida or potentially be a design, build and manage by the private sector.

The State of Utah has issued a request for information which is due August 13th for a 550-beds expansion in their facility. And we currently have a customer that we are working with to expand the facility that we own and managed with them -- about 500 beds. And then everything we hear continues to encourage us that the Federal Bureau of Prisons will in fact seek more private sector beds in the future. And that number has been discussed in the range of 4500. In fact, we have heard that the Federal Bureau of Prisons' forecasts have been increased substantially between now and 2010.

So that is the activity that we have -- the opportunities. I mentioned at the last conference call, we had six states that would be new states that we are currently not doing business with. Those included Minnesota and Washington, and of course we announced that we have entered into agreements with them and are currently providing them beds. And then I indicated there were some 11 states that we currently do business with and have started to do business with, who are looking at some expansion. And that has not changed. So we feel very optimistic about our ability to meet a growing inmate population need. As we stated in the press release, that Bureau of Justice statistics indicated that the growth in inmate populations nationwide have actually growing at twice what they did the previous 12 months. And again, we have a national platform. We have an inventory that would meet those needs on a very timely basis.

So with that, we would be happy to open up for questions and answers.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Jim Macdonald, First Analysis.

Very good quarter, guys. A couple of questions -- will there be any impact in Colorado for the Washington contract? I know Colorado -- I'm trying to figure out how they have the ability to impact out-of-state inmates to come into your facilities.

Well, Colorado has asked, and of course we have taken the position, that we really want to maintain the 198 Washington inmates that we have there and not add to it in the short-term, until we can evaluate what were the circumstances that brought about this disturbance. But as you know, we have other capacity in other locations, and Washington still needs 300 beds. So we feel we will be able to meet the additional 100 beds that they need in another facility.

Okay, and just in general, I think you've stated that you might be able to find contracts to fill all your existing -- currently existing beds -- by the end of the year. Do you still think that these procurements are -- that we've talked about -- are on-track to do that?

Well, maybe I need to be careful if I did in fact say in fact to the end of the year -- I didn't think I did. I think what we were saying is, that there are active procurements that could utilize all our beds. I think as we are learning -- and I think the MacRae BOP contract would be a good lesson for all of us, that we know eventually the bed need and requirements are there. It just sometimes takes the governments a long time. And so I mean you know Connecticut has had an unusual set of political circumstances they've had to deal with. And then I think finishing this procurement with them wasn't at the top of this list. So I would say that we see that, with the current demand, with these active procurements, that it is not unrealistic to assume that eventually all of our current beds, including the expansion beds, will be absorbed.

We don't think there's a long period of time, Jim. But we're never that specific.

Any comments about price increases during the current budget rounds, and -- on average?

Well, we had some that were not done, in some of the budgets that were passed for the fiscal year beginning July 1 of 2004. And we had others that were maintained. We will -- starting almost right away -- begin to work with every executive branch, every legislative appropriation committee to make a case why the increases need to be maintained or need to be reinstated. So I would say I'm a little more enthused that we will start to see that improve, as you compare to the last couple of years.

Can you give us any metrics?

I don't think so at this moment, no.

Thanks very much.

Just one other thing I would add is, again, I will take this environment -- where the resource is constrained so much, we're not seeing a lot of bed construction. I do think that's a bigger issue than occasional per diem battles.

Susan Janssen, Lehman Brothers.

Scott Lidman (ph), calling in for Susan Janssen. Our first question is, are there any contracts that are coming up this year that you do not expect to renew?

Well, let me think about that. Most of the contracts that -- renewals would have been for the period beginning July 1. So we would probably be addressing some that -- for contract period ending June 30th, 2005. And it's hard for us to assess that at the very moment. Of course, we think we've announced, or at least we been talking about that the Southern Nevada Women's Facility that we manage in Las Vegas expires on September 30th, and we have notified them that we do not plan to continue to manage that facility -- which I think we've denoted would be a costly financial benefit to us.

And one other question. Could you comment on how some other state clients or potential clients have reacted to the recent negative headlines?

Yes. I think we -- as a company, when we have these kinds of situations, whenever we of course go talk and touch all of our customers, I would say that the State of Colorado has been very understanding and has even publicly said that this is part of the business, and that everyone wants to be judged on how they respond to it. So you know, we have had some short-term consequences of having to rearrange the inmate population, some of which is having to go back into the Colorado system until we get the facility back up and running. I've personally talked to the Directors of Corrections in both the State of Washington and the State of Wyoming, and they have been very understanding.

I have not, I guess, had any customer that has indicated that day feel that they are uncomfortable continuing to do business with CCA -- in fact, just the opposite -- they feel very comfortable continuing to do business with CCA.

Barry Stouffer, BB&T capital markets.

I had two questions -- one was just on the tax rate. It looked a little higher in the quarter. And I'm curious if that's a rate we should be using going forward?

Barry, I would use 40 percent. This is the first year that we've applied a GAAP tax rate -- I think 40 percent is a conservative rate. As we file our return -- as we go forward in the year -- we actually file the '03 return in the third quarter, we will have a better sense for a number of the items that effect that tax rate. But right now, I would go for the remainder of the year with 40 percent. We are working and looking at strategies to try to make that lower. You know, we are in a number of states that have some higher tax rates, and we do business there. So it's a long answer to your question; the short answer is, use 40 percent, but we're working on it.

And the second question, your guidance for the third quarter is the same as the fourth quarter. And those quarters are better than the second. How would those two quarters look different than the second quarter? Do you just anticipate higher occupancy or lower G&A expense --?

Barry, the best way I can answer that is that there are a lot of items that we are wrestling with. And I don't get into each individual one. As John said, for example, there is the potential for a Connecticut award. That's something you have to consider. As John said, there is the potential that Wisconsin could take more inmates away -- or they may not; that's something that you have to consider.

We have Northeast Ohio -- we have that staffed up and we've received a certain level of inmates from the U.S. marshals. What level are we going to end up with? When will Crowley be back online and when will Colorado restore inmates? So I guess what I'm saying is, we sat down and we did the very best we can, with all those caveats that I gave leading into that discussion of guidance, how we wrestle with timing here. And we try to do our best, considering all of these things. There's the potential of a Georgia contract. There's -- what's going to happen with that? I mean -- so I don't know if I'm answering your question -- there's a lot different with the second quarter and it's hard to be specific about what's different with the second quarter. There were per diem increases in the second quarter over the first quarter. There will be some per diem increases in the third quarter. So there are a lot of things. It's hard to be specific. You need to know that we look at them all, and try to come up with an answer.

And I don't think we've forecast kind of any major events yet. And if that happens that would probably (Multiple Speakers)

I don't think we've forecast any major events, but we do have assumptions regarding new inmate growth (Multiple Speakers)

Right.

So if I were to line up your third-quarter forecast versus the second quarter, we would likely see a little higher occupancy and a little higher per diem?

That's correct. Yep yep. And Barry, you're probably off by now, but there's an extra day in Q3. But yes -- I think that's probably accurate.

Scott Scheinberger (ph), Lehman Brothers.

Nice work in the quarter. Other than Wisconsin, are there any other states that you're aware of that are initiating an internalization effort, that you could share?

At first blush, I don't know of anywhere we have, where the state is positioning themselves so that they can return -- I -- that would reduce our population, no.

I can't think of any. And the saying -- clearly, they've been bringing some inmates back. Part of that was this kind of unusual situation that they had a couple of surplus prisons from years ago. I don't there's much of that at their feet.

Can you give us an update on the IT rollout? Is that progressing as planned? Just a little bit of color surrounding that.

Sure. We've now rolled it out to two facilities and we've probably -- I think we can get to four or five more before the end of the year. And it's going extremely well. You hear me knocking on wood, because they report to me. It has gone very, very well. We are very pleased with it. I think it -- these things always have a few difficulties associated with them. But I think they are minor compared to most ERP installations. I'm very proud of our IT people; they are doing a great job.

Just one follow-up on that -- looking for a higher or lower spend in that area in 2005?

I would use about the same spend. We've told people to kind of stick in that 20, $21 million area.

Zachary George, Pirate Capital.

Great quarter, guys. I'm just wondering, do you have a ballpark estimate on what your cash tax liabilities will be over the next couple of years?

This year, it's not going to be very high, because as we've told people, we had a significant amount of NOLs to burn off. What would be (inaudible) I guess I would kind of run off of 40 percent after that. Again, we are going to follow our '03 tax return before the end of Q3. And we will be able to answer that a little better. But for '04, very little in the way of cash taxes -- some, I think. And then we are probably going at the full rate next year.

And what point after current expansion efforts are completed, do you think the election of restatus (ph) makes sense, given -- to strengthen the cash flows you guys are generating?

What I would say about the right now is that if you -- everything that we say about this environment, having the opportunity to significantly -- well, let me -- I think we have less than 7 percent of the -- private prisons have a less than 7 percent share of total prison beds today. We have an environment where government is cash-strapped and not adding any beds. And I believe we have an opportunity here -- I think the word is significantly -- to expand our -- the private share of the overall prison market in this country. And during this time frame, it's important that we retain cash, plough it into the business, and try to expand our market share. Those days, I think, are going to be here for a few years, when you look out at the budgets and how long it takes to plan, site, build and staff a prison. So that could be a period of several years, and we're certainly hopeful that it is. When those days change, I think that we would look at alternatives such as dividend paying, stock buybacks, debt paydowns. There are a number of things you can do with your money, a lot of things. And so that's kind of where we are right now.

(OPERATOR INSTRUCTIONS) Patrick Swindle, Avondale partners.

Excellent quarter, gentlemen. Looking at the State of Georgia RFP, you had mentioned a November first date. Is that the date that the RFP -- their proposal is due? Or is that the date the award is expected?

That's the date they want to begin sending inmates.

And then, looking at that, knowing that the Stuart Facility will be open then and then looking at startup expenses this quarter, what should we assume? And looking into the third-quarter, in the way of startup expenses that might be the run-rate for the third and the fourth quarters -- obviously recognizing that you are going to need to staff in advance of potential wins -- if you were to win those in Connecticut and New Hampshire, preparing the facilities and staffing appropriately. What should we look for? And what's embedded in the guidance, in terms of anticipated facility ramp up costs?

It's a great question that I can't answer! (LAUGHTER) I really don't want to go into every item that goes into the guidance. If you're going to make a -- what I would say is, again -- I don't want to ramble on, like I did with Barry -- we tried to account for a myriad of things that could affect us toward the end of the year, and make our best judgments.

It is possible that Georgia could award and load a facility. And if you make the assumption in your revenue model, then you would need to probably build-in a couple months startup expenses, depending on how you did your revenue side. And again I'm not trying to be difficult, Patrick. It's just that if I get into Stewart, then I get into everything else. And it's like dominoes falling on a table, and I just can't do it. Right now, in the quarter, we did have expenses in three facilities. I would say that Delta is clearly ramping up -- it's a managed-only facility. So I don't think you're going to see a lot of continued startup costs at Delta. Tallahatchie -- John talked about Hawaii moving and Colorado coming in. So I think you can see the tide stemming a little bit on the Tallahatchie -- quote -- startup costs. Northeast Ohio? It's a different question. So that's another one of those that we have to think about. So status quo, I think you're talking about what's going to happen in Northeast Ohio. And then beyond that, it goes on whatever revenue assumptions you're going to make.

Sure. In looking at the contract opportunities in the back half of the year, to the extent that you're staffing, obviously, incurring costs in Northeast Ohio, are you assuming that you may need to fill that facility? Or are their costs that you would incur -- continued startup costs if you were to win a contract award -- for northeast Ohio, relative to the run-rate you are at today?

I'm not quite sure I understand the question. Could you give it to me maybe one more time?

If you were to win a contract award that would allow you to fill the Northeast Ohio Facility, would you be staffed appropriately today to do that? Or would you need to ramp up your hiring of guards (multiple speakers)

I'm sorry Patrick -- yes, clearly would have to -- without getting into specifics again, as to how much staff we have there and all of that -- we would have to do some staffing, absolutely. We are not staffed fully at Northeast Ohio.

And then how about North Fork? Has there been any staffing at that facility?

Minimal staffing to keep it from freezing or whatever -- just to maintain it.

Andrew May, Jefferies & Company.

Could you give us presee (ph) of the political process in Connecticut?

I don't know if we can, other than that we have a new governor. She is making some cabinet changes -- not all -- and the areas that would be involved in the procurement that's going on -- that would be, I think it's called the Department of Management Services, and also the Department of Corrections. I believe those two cabinet positions are remaining from the prior administration. So that gives some continuity that you would need in order to kind of get this back on-track.

I do not see a public policy shift of in the executive branch because of this change.

I would add one other comment. From what I understand, she is reviewing every new contract that is going out and scrutinizing it, so that there are no problems in these new contracts that occurred in some of the older contracts under the former governor.

Step back just a little bit and describe the legal position -- the mean, an RFP was issued -- I mean, just walk-through the facts on the ground about the procurement process.

That's the way it started. Well, the state began to assess its needs, because it had been utilizing out-of-state beds, in Virginia. Virginia put both Vermont and Connecticut on notice that they were going to need those beds. They gave Vermont a date in which that now was taken place, because we're housing Vermont inmates. And then they have given Connecticut -- and I think they have 500 inmates still in Virginia, until October 1.

In looking at the current bed needs, as well as the percentage of occupancy in the Connecticut facility, they saw they could need up to 2500. This would alleviate them from having to build any new facilities within the State of Connecticut. So, they submitted an RFP. You submit questions and then, based on those questions, you may modify your RFP. And then you submit the actual bid. I think that was April -- kind of a guess at the moment -- but I think April was when we submitted that to them. And we are not sure who else submitted. We would think that it would be limited, because they expressed the requirement of having beds during this period of time. And of course we feel like we have the only meaningful beds within a reasonable distance from Connecticut. But I think as Bill said, I think they are very sensitive to making sure that everything was done right. And we know of no reason why this would be affected. I do know there was another procurement for community corrections beds that did in fact reach the decision that they were going to rebid it. And we've not heard anything that would indicate that.

But their sensitivity is budding up against an October 1 deadline?

Yes, yes.

At this time, we have no further questions. I'd like to turn the conference back over to Mr. Andrews for any more concluding comments.

Let me just make one -- answer one question that was asked earlier about any other situations like Wisconsin. I think as we've noted, the State of Arizona has a procurement for design, build and manage for 1000 beds. And then they are also building a public facility for 1000 beds. Our contract with them and the other contracts are for like three years. So sometime, three years or so out from now, they may have the situation in which they can meet their own demand internally.

With John's final comments, I will just sum up. Irv indicated earnings per share were up 46 percent for the quarter, on an increase of 13.9 percent in revenues. And included in those earnings were startup expenses for three of the facilities, which we're manning up, to take in new inmates. Our EBITDA was up 9 percent. Our occupancy has increased to 95.8 percent. Along with that, our revenue per man-day has been slightly down and I think we've mentioned this several times. This is due to a change in our business mix, by having more managed beds from the Texas contract.

Our operating margins at 24.8 compared to 25.4, slightly down. And Irv pointed out, it's the manage contracts from Texas, it's the startup costs in the three facilities, and it's McRae, which was measured at 95 percent occupancy. And we were paid for that, but not full expenses for it, during the last year. Irv's given you earnings guidance for '04 at between $1.53, $1.57. You've all asked a lot of questions about that. We have lots of ups and downs in this business, and we don't know from day-to-day when we're going to get contract, when we have to fill the beds and when we may get some news that someone may move more prisoners out. So we measure all those things and come up with our best judgment. And this is our best judgment.

In 2004, we expect to spend $134.5 million for capital for maintenance and new beds and technology, which we've talked about. I think the great thing going forward is, we're looking at 10,000 beds under active procurement at present time, which would utilize all the excess capacity we have and cause us to start some new construction going forward.

So in summary, we had a good second quarter financially. We had some adverse problems -- which we always regret if we have them. But these will occur, because of the type of business we are in. However, finally we are judged by how we respond to adversity, and how we resolve these problems.

We have excellent future prospects with what is occurring in the marketplace. And as I said, we've provided you with our guidance for the balance of the year. We thank you for being at this meeting and for your continued interest in this Company. Good afternoon.

Ladies and gentlemen, this concludes the Corrections Corporation of American second quarter 2004 conference call. If you'd like to listen to the replay of today's conference, you may down 303-590-3000 or 1-800-405-2236 and you will need to enter the access code of 11-00-35-75 followed by the #. Once again, thank you for participating in today's conference. At this time, you may now disconnect.