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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-25245
PRISON REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 62-1763875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 BURTON HILLS BLVD., SUITE 100, NASHVILLE,
TENNESSEE 37215 (Address and zip code of
principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 263-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value per share New York Stock Exchange
8.0% Series A Cumulative Preferred Stock, $.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of the registrant's Common
Stock held by non-affiliates was approximately $461,439,580 as of March 15,
2000, based on the closing price of such shares on the New York Stock Exchange
on that day. The number of shares of the Registrant's Common Stock outstanding
on March 15, 2000 was 118,395,379.
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PRISON REALTY TRUST, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
1. Business
General Development of Business 1
The Company 1
CCA, PMSI and JJFMSI 2
The 1999 Merger 3
Recent Developments 5
Restructuring and Related Transactions 5
Proposed Restructuring Led by Affiliates of Fortress and Blackstone 6
Proposed Restructuring Led by Pacific Life 10
Determination of Proposed Restructuring 11
Transactions Between the Company and CCA 11
Solicitation of Consents for Waivers of, and Amendments to, Provisions of the
Company's and CCA's Outstanding Indebtedness 12
1999 Financial Statements and Going Concern Matters 16
Shareholder Litigation 17
Shelf Registration 18
Dividend Reinvestment Plan 18
Senior Notes Offering 19
Issuance of Convertible, Subordinated Notes 19
Sale of Maurice H. Sigler Detention Center 19
Financial Information About Industry Segments 20
Narrative Description of Business 20
Business Objectives and Strategies 20
Leases and Other Contractual Relationships with Primary Tenant 24
Leases 24
Other Contractual Relationships 25
Government Regulation 26
Environmental Matters 26
Americans with Disabilities Act 26
Insurance 27
Employees 27
Legal Proceedings 28
Competition 28
Risk Factors 28
The Company is Subject to Risks Inherent in the
Corrections and Detention Industry 29
The Company is Subject to Tax Related Risks 30
The Company is Subject to Risks Inherent in Investment in Real Estate Properties 31
Dependence on Tenants for Revenue 31
Dependence on Outside Financing to Support the
Company's Growth; Dilutive Effect of Such Financing 32
Lack of Control Over Day-to-Day Operations and Management of its Facilities 32
Potential Conflicts of Interest May Have an Effect on the Company 33
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Tax Status 33
Taxation as a REIT 34
Taxation as a C corporation 36
Foreign Operations 36
2. Properties 37
General 37
The Facilities 37
General 37
Facilities Under Construction or Development 40
3. Legal Proceedings 41
4. Submission of Matters to a Vote of Security Holders 42
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 42
Market Price of and Distributions on Common Stock 42
The Company 42
Old Prison Realty 43
Old CCA 43
Sale of Unregistered Securities and Use of Proceeds from Sale of Registered Securities 44
Sale of Unregistered Securities 44
Use of Proceeds from the Sale of Registered Securities 46
6. Selected Financial Data 49
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 50
Overview 51
Results of Operations 54
Prospective Restructuring and Related Equity Investment 56
Year ended December 31, 1999 57
Year ended December 31, 1998 compared with year ended December 31, 1997 60
Liquidity and Capital Resources for the year ended December 31, 1999 63
Cash Flow Related to CCA 71
Commitments and Contingencies 74
Liquidity and Capital Resources for the Year Ended
December 31, 1998 as Compared to the Year Ended
December 31, 1997 75
Year 2000 Compliance 76
Funds from Operations 77
Inflation 78
7A. Quantitative and Qualitative Disclosures about Market Risk 79
8. Financial Statements and Supplementary Data 81
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 81
PART III
10. Directors and Executive Officers of the Registrant 82
Information Regarding Members of the Current Board of Directors 82
Class I Directors 82
Class II Directors 83
Class III Directors 83
Information Regarding Executive Officers of the Company who are not Directors 84
Committees of the Company's Board 84
Audit Committee 84
Compensation Committee 85
Independent Committee 85
Special Committee 85
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Meetings of the Company's Board 85
Compensation of the Company's Directors 85
Section 16(a) Beneficial Ownership Reporting Compliance 86
11. Executive Compensation 87
Summary Compensation Table 87
Option/SAR Grants in Last Fiscal Year 91
Aggregated Option/SAR Exercises in the Last Year and Fiscal Year-End Option/SAR Values 92
Employment and Severance Agreements 92
Change of Control Provisions 93
Deferred Stock Agreements 93
Report of the Compensation Committee 93
Objectives of Executive Compensation 93
Compensation Committee Procedures 93
Base Salary 94
Annual Incentives 94
Long-Term Incentives 94
Executive Equity Loan Plan 94
Compensation of Chief Executive Officer in 1999 95
Tax Deductibility of Compensation 95
Performance Graph 95
The Company 95
Old Prison Realty 96
Old CCA 97
12. Security Ownership of Certain Beneficial Owners and Management 98
Ownership of the Company's Common Stock 98
Ownership of the Company's Series A Preferred Stock 100
13. Certain Relationships and Related Transactions 100
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 102
SIGNATURES
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NOTE CONCERNING
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the "Annual Report") filed by Prison
Realty Trust, Inc. (formerly Prison Realty Corporation), a Maryland corporation
(the "Company" or "Prison Realty"), contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Those statements include statements with respect
to the Company's financial condition, results of operations, business, future
profitability, growth strategy and its assumptions regarding other matters.
Words such as "believes," "expects," "anticipates," "intends," "estimates,"
"plans," "seeks" or similar expressions identify forward-looking statements.
You should be aware that, while the Company believes the expectations
reflected in these forward-looking statements are reasonable, they are
inherently subject to risks and uncertainties which could cause the Company's
future results and shareholder values to differ materially from the Company's
expectations. These risks and uncertainties are disclosed under "Risk Factors"
set forth herein, and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth herein. Because of these risks
and uncertainties, there can be no assurance that the forward-looking
statements included or incorporated by reference herein will prove to be
accurate. You should not regard the forward-looking statements included or
incorporated by reference herein as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved. In
addition, the Company does not intend to, and is not obligated to, update these
forward-looking statements after the date of this Annual Report, even if new
information, future events or other circumstances have made them incorrect or
misleading as of any future date.
PART I.
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
THE COMPANY
The Company is a Maryland corporation which commenced operations on
January 1, 1999, following the mergers of each of the old Corrections
Corporation of America, a Tennessee corporation ("Old CCA"), and CCA Prison
Realty Trust, a Maryland real estate investment trust ("Old Prison Realty"),
with and into the Company (such mergers referred to collectively herein as the
"1999 Merger"). The Company has operated so as to preserve its ability to
qualify as a real estate investment trust, or REIT, for federal income tax
purposes commencing with its taxable year ending December 31, 1999. See
"--Recent Developments--Restructuring and Related Transactions." Currently, the
Company is the largest self-administered and self-managed entity specializing
in acquiring, developing and owning correctional and detention facilities. As
of March 15, 2000, the Company owned, or was in the process of developing, 50
correctional and detention facilities in 17 states, the District of Columbia
and the United Kingdom, of which 43 facilities were operating, four were under
construction or expansion and three were in the planning stages. As of March
15, 2000, Corrections Corporation of America (formerly Correctional Management
Services Corporation), or CCA, the Company's primary tenant, leased 34 of the
Company's facilities, government agencies leased six of the Company's
facilities, and private operators leased three of Prison Realty's facilities.
Prison Realty has entered into lease agreements with CCA with respect
to the correctional and detention facilities owned by Prison Realty and
operated by CCA, as well as a series of additional agreements relating to the
payment of certain fees by Prison Realty to CCA. See "--Recent Developments
- --Transactions Between the Company and CCA." Prison Realty also owns 9.5% of
the capital stock, consisting of non-voting common stock, of CCA. In addition,
Prison Realty owns 100% of the non-voting common stock of Prison Management
Services, Inc., or PMSI, and Juvenile and Jail Facility Management Services,
Inc., or JJFMSI, both of which are privately-held service companies
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which manage certain government-owned prison and jail facilities under the
"Corrections Corporation of America" name. As the owner of the non-voting
common stock of the two service companies, Prison Realty is entitled to receive
95% of each company's net income as dividends on such shares.
CCA, PMSI AND JJFMSI
CCA was formed in August 1998 and commenced operations on December 31,
1998, in connection with the 1999 Merger. CCA was formed to manage and operate
certain facilities operated and managed by Old CCA and owned by Old Prison
Realty prior to the 1999 Merger. At March 15, 2000, CCA had contracts to manage
45 correctional and detention facilities with a total design capacity of 47,669
beds, of which 39 facilities with a total design capacity of 36,959 beds were
in operation. At March 15, 2000, CCA's system-wide occupancy level was
approximately 80.4%. CCA operates and manages the substantial majority of the
facilities owned by the Company and leases these facilities from the Company
under long-term "triple-net" leases as described herein. At March 15, 2000, CCA
leased 34 of the facilities owned by the Company. CCA also provides certain
business and facility development services for the Company in exchange for cash
fees. See "--Recent Developments--Transactions Between the Company and CCA."
PMSI was formed in August 1998 and commenced operations on December
31, 1998 in connection with the 1999 Merger. PMSI was formed to manage and
operate certain government owned adult prison facilities operated and managed
by Old CCA, or its subsidiaries, prior to the 1999 Merger. PMSI provides adult
prison facility management services to government agencies under the
"Corrections Corporation of America" name pursuant to management contracts with
federal, state and local government agencies and authorities in the United
States. At March 15, 2000, PMSI had contracts to manage 11 correctional and
detention facilities with a total design capacity of 13,276 beds, of which 10
facilities with a total design capacity of 12,026 beds were in operation. At
March 15, 2000, PMSI's system-wide occupancy level was 99.2%.
JJFMSI was formed in August 1998 and commenced operations on December
31, 1998 in connection with the 1999 Merger. JJFMSI was formed to manage and
operate certain government owned juvenile and jail facilities, as well as
certain international correctional and detention facilities, operated and
managed by Old CCA, or its subsidiaries, prior to the 1999 Merger. JJFMSI
provides facility management services to government agencies under the
"Corrections Corporation of America" name pursuant to management contracts with
federal, state and local government agencies and authorities in the United
States and with international authorities in Australia and the UK. At March 15,
2000, JJFMSI had contracts to manage 19 correctional and detention facilities
with a total design capacity of 9,156 beds. At March 15, 2000, JJFMSI's
system-wide occupancy level was 94.3%.
Each of CCA, PMSI and JJFMSI provides correctional and detention
facility management services to government agencies under management contracts
with federal, state and local government agencies and authorities which
generally may be canceled by such agencies and authorities on short notice and
without significant penalty. The services provided by each of the companies to
government agencies include the comprehensive operation and management of new
and existing correctional and detention facilities. In addition to providing
the fundamental residential services relating to inmates, each of the
companies' facilities offers a large variety of rehabilitation and education
programs, including basic education, life skills and employment training and
substance abuse treatment. The companies also provide health care (including
medical, dental and psychiatric services), institutional food services,
transportation requirements, and work and recreational programs.
JJFMSI also provides correction and detention facility management
services to governments in the United Kingdom (the "U.K.") and Australia
through certain of its subsidiaries formed in connection with an international
joint venture with Sodexho Alliance, S.A. ("Sodexho"). Old CCA and Sodexho
formed an international alliance in 1994 to pursue prison management business
outside the United States. In connection with the 1999 Merger, Old CCA's
international operations were transferred to JJFMSI, which succeeded to Old
CCA's obligations under the joint venture. As the result of the 1999 Merger,
Sodexho, a significant shareholder of Old CCA, became a significant shareholder
of
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Prison Realty. In addition, Jean-Pierre Cuny, Senior Vice President of the
Sodexho Group, an affiliate of Sodexho, became a member of the board of
directors of Prison Realty in connection with the 1999 Merger.
CCA provides business and facility development services for the
Company in exchange for cash fees under the terms of a services agreement and a
business development agreement. CCA also receives tenant incentives from Prison
Realty for the opening of new correctional and detention facilities pursuant to
the terms of a tenant incentive agreement. CCA also provides certain
administrative services to each of PMSI and JJFMSI for a fee. See "--Recent
Developments--Transactions Between the Company and CCA."
THE 1999 MERGER
In the 1999 Merger, each of Old CCA and Old Prison Realty was merged
with and into the Company, with the Company being the surviving corporation. In
the 1999 Merger, each issued and outstanding share of Old CCA's common stock
was converted into the right to receive 0.875 share of common stock, $0.01 par
value per share, of the Company (the "Common Stock"). Each issued and
outstanding common share of Old Prison Realty was converted into 1.0 share of
the Company's Common Stock. Each issued and outstanding 8% Series A Cumulative
Preferred Share of Old Prison Realty was converted into 1.0 share of the 8%
Series A Cumulative Preferred Stock of the Company (the "Series A Preferred
Stock"). Approximately 105,272,183 shares of Common Stock and 4,300,000 shares
of Series A Preferred Stock were issued in the 1999 Merger. Following the 1999
Merger, the Company's Common Stock began trading on the New York Stock Exchange
(the "NYSE") on January 4, 1999 under the symbol "PZN," and the Series A
Preferred Stock began trading on the NYSE under the symbol "PZN PrA" on the
same date.
On December 31, 1998, immediately prior to the 1999 Merger, and in
connection with the 1999 Merger, Old CCA sold to CCA all of the issued and
outstanding capital stock of certain wholly-owned corporate subsidiaries of Old
CCA, certain management contracts and certain other non-real estate assets
related thereto, and entered into the Trade Name Use Agreement, as described
below. In exchange, Old CCA received an installment note in the principal
amount of $137.0 million (the "CCA Note") and 100% of the non-voting common
stock of CCA. Old CCA's ownership interest in the CCA Note and the non-voting
common stock of CCA were transferred to the Company as a result of the 1999
Merger.
The non-voting common stock of CCA represents approximately a 9.5%
economic interest in CCA. During 1999, CCA paid no dividends on the shares of
its non-voting common stock. The CCA Note is payable over 10 years and bears
interest at a rate of 12% per annum. Interest only is generally payable for the
first four years of the CCA Note, and the principal will be amortized over the
following six years. Doctor R. Crants, the Chief Executive Officer of the
Company and a member of its board of directors, has guaranteed payment of 10%
of the outstanding principal amount due under the CCA Note. As a result of
CCA's current liquidity position, CCA has been required to defer the first
scheduled payment of accrued interest on the CCA Note, which was due December
31, 1999, pursuant to the terms of the Subordination Agreement, as hereinafter
defined. See "--Recent Developments--Transactions Between the Company and
CCA."
On December 31, 1998, immediately prior to the 1999 Merger and in
connection with the 1999 Merger, Old CCA sold to Prison Management Services,
LLC ("PMS, LLC") and Juvenile and Jail Facility Management Services, LLC
("JJFMS, LLC"), two privately-held Delaware limited liability companies formed
in connection with the 1999 Merger, certain management contracts and certain
other assets and liabilities relating to government-owned adult prison
facilities and government-owned jails and juvenile facilities managed by Old
CCA. In exchange, Old CCA received 100% of the non-voting membership interests
in Prison Management Services, LLC and Juvenile and Jail Facility Management
Services, LLC, which obligated Prison Management Services, LLC and Juvenile and
Jail Facility Management Services, LLC to make distributions to Old CCA equal
to 95% of each company's net income, as defined. The Company succeeded to these
interests as a result of the 1999 Merger. Immediately following the 1999
Merger, Prison Management Services, LLC merged with PMSI, and Juvenile and Jail
Facility Management Services, LLC merged with JJFMSI. During 1999, the amount
of dividends paid to the Company by PMSI and JJFMSI was
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approximately $11.0 million and $10.6 million, respectively, which does not
include dividends of approximately $579,300 and $122,400, respectively, which
were paid in the first quarter of 2000 with respect to the fourth quarter of
1999.
Under a trade name use agreement with Old CCA resulting from the 1999
Merger (the "Trade Name Use Agreement"), CCA pays a licensing fee to the
Company, Old CCA's successor, for the right to use the name "Corrections
Corporation of America" and derivatives thereof. The Trade Name Use Agreement
has a term of 10 years and the licensing fee paid pursuant to the agreement is
based upon gross revenues of CCA, subject to a limitation of 2.75% of the gross
revenues of the Company. The total amount of payments required to be paid to
the Company pursuant to the Trade Name Use Agreement during 1999 was
approximately $8.7 million, of which approximately $6.5 million has been paid
as of the date of this Annual Report.
In connection with the 1999 Merger, the Company entered into lease
agreements with CCA with respect to the correctional and detention facilities
owned by the Company and operated by CCA (the "CCA Leases"). The terms of the
CCA Leases are 12 years which may be extended at fair market rates for three
additional five-year periods upon the mutual agreement of the Company and CCA.
The total amount of lease payments required to be paid by CCA to the Company
during 1999 was approximately $263.5 million, of which approximately $251.6
million has been paid as of the date of this Annual Report. In an effort to
address CCA's liquidity needs as discussed herein, the Company and CCA intend
to amend the terms of the CCA Leases as described under the heading "--Recent
Developments--Proposed Amendment of CCA Leases and Other Agreements."
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a services agreement (the "Services Agreement") with CCA pursuant
to which CCA agreed to serve as a facilitator of the construction and
development of additional facilities on behalf of the Company for a term of five
years from the date of the Services Agreement. In such capacity, CCA agreed to
perform, at the direction of the Company, such services as are customarily
needed in the construction and development of correctional and detention
facilities, including services related to construction of the facilities,
project bidding, project design, and governmental relations. In consideration
for the performance of construction and development services by CCA pursuant to
the Services Agreement, the Company agreed to pay a fee equal to 5% of the total
capital expenditures (excluding the incentive fee discussed below and the
additional 5% fee herein referred to) incurred in connection with the
construction and development of a facility, plus an amount equal to
approximately $560 per bed for facility preparation services provided by CCA
prior to the date on which inmates are first received at such facility. The
board of directors of the Company has authorized payments of up to an additional
5% of the total capital expenditures (as determined above) to CCA if additional
services are requested by the Company. In connection with such authorization,
the Company and CCA entered into an amended and restated services agreement (the
"Amended and Restated Services Agreement") authorizing the payment of such
additional amount if additional services are requested by the Company. As a
result, a majority of the Company's current development projects are subject to
a fee totaling 10%. The total amount of fees required to be paid by the Company
to CCA pursuant to the Amended and Restated Services Agreement during 1999 was
approximately $41.2 million, all of which has been paid. The Company and CCA
also intend to amend the terms of the Amended and Restated Services Agreement to
defer the payment of fees due under the agreement to CCA from the Company until
September 30, 2000 as described under the heading "--Recent
Developments--Proposed Amendment of CCA Leases and Other Agreements."
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a tenant incentive agreement (the "Tenant Incentive Agreement")
with CCA pursuant to which the Company agreed to pay to CCA an incentive fee to
induce CCA to enter into CCA Leases with respect to those facilities developed
and facilitated by CCA. The amount of the incentive fee was set at $840 per bed
for each facility leased by CCA for which CCA served as developer and
facilitator. This $840 per bed incentive fee, however, did not include an
allowance for rental payments to be paid by CCA. The Company and CCA entered
into an amended and restated tenant incentive agreement (the "Amended and
Restated Tenant Incentive Agreement"), effective as of January 1, 1999,
providing for: (i) a tenant incentive fee of up to $4,000 per bed payable with
respect to all future facilities developed and facilitated by CCA, as
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well as certain other facilities which, although operational on January 1,
1999, had not achieved full occupancy; and (ii) an $840 per bed allowance for
all beds in operation at the beginning of January 1999, approximately 21,500
beds, that were not subject to the tenant allowance in the first quarter of
1999. The amount of the amended tenant incentive fee includes an allowance for
rental payments to be paid by CCA prior to the facility reaching stabilized
occupancy. The term of the Amended and Restated Tenant Incentive Agreement is
four years unless extended upon the written agreement of the Company and CCA.
The total amount of fees required to be paid by the Company to CCA pursuant to
the Amended and Restated Tenant Incentive Agreement during 1999 was
approximately $68.6 million, all of which has been paid. The Company and CCA
also intend to amend the terms of the Amended and Restated Tenant Incentive
Agreement to defer the payment of fees due under the agreement to CCA from the
Company until September 30, 2000 as described under the heading "--Recent
Developments--Proposed Amendment of CCA Leases and Other Agreements."
Effective January 1, 1999, the Company entered into a business
development agreement (the "Business Development Agreement") with CCA which
provides that CCA will perform, at the direction of the Company, services
designed to assist the Company in identifying and obtaining new business.
Pursuant to the agreement, the Company agreed to pay to CCA a total fee equal
to 4.5% of the total capital expenditures (excluding the amount of the tenant
incentive fee and the services fee discussed above as well as the 4.5% fee
referred to herein) incurred in connection with the construction and
development of each new facility, or the construction and development of an
addition to an existing facility, for which CCA performed business development
services. The total amount of fees required to be paid by the Company to CCA
pursuant to the Business Development Agreement during 1999 was approximately
$15.0 million, all of which has been paid. The Company and CCA also intend to
amend the terms of the Business Development Agreement to defer the payment of
fees due under the agreement to CCA from the Company until September 30, 2000
as described under the heading "--Recent Developments--Proposed Amendment of
CCA Leases and Other Agreements."
RECENT DEVELOPMENTS
RESTRUCTURING AND RELATED TRANSACTIONS
BACKGROUND OF THE EQUITY INVESTMENT AND RELATED RESTRUCTURING
TRANSACTIONS. Prison Realty, in its current form, is the result of the merger
between Old Prison Realty and Old CCA which took place on January 1, 1999. As
part of that merger, CCA, PMSI and JJFMSI assumed the business of operating
correctional facilities, with CCA being the lessee of a substantial number of
Prison Realty's facilities. The agreements and contractual obligations entered
into by these parties in connection with these transactions are described in
detail under the headings "--the 1999 Merger". The rates on the CCA Leases were
set with the intention that the public shareholders of Prison Realty would
receive as much of the benefit as possible from owning and operating the
correctional facilities, while at the same time Prison Realty would be able to
maintain its status as a REIT. This status as a REIT would enable Prison Realty
to pay no corporate income tax, but would require it to pay out large amounts
of dividends to the Prison Realty shareholders. In fact, the CCA Lease rates
were set so that CCA was projected to lose money for the first several years of
its existence. Both Prison Realty and CCA believed that CCA would have access
to adequate debt financing to fund this deficit until CCA became profitable.
After completion of the first quarter of 1999, the first quarter in which
operations were conducted in this new structure, the management of Prison
Realty and the management of CCA discovered that CCA had not performed as well
as projected for several reasons: occupancy rates at its facilities were lower
than in 1998; operating expenses were higher as a percentage of revenues than
in 1998; and certain aspects of the CCA Leases, including the obligation of CCA
to begin making full lease payments even before a facility accepted inmates,
adversely affected CCA. As a result, in May 1999, Prison Realty and CCA amended
certain of the agreements between them to provide CCA with additional cash
flow. The objective of these changes was to allow CCA to be able to continue to
make its full lease payments, to allow Prison Realty to continue to make
dividend payments to its shareholders and to provide time for CCA to improve
its operations so that it might ultimately perform as projected and be able to
make its full lease payments. However, after these changes were announced, a
chain of events occurred which adversely affected both Prison Realty and CCA.
Prison Realty's stock price fell dramatically, resulting in the commencement of
shareholder
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litigation against Prison Realty and its directors. These events made it more
difficult for Prison Realty to raise capital. A lower stock price meant that
Prison Realty had more restricted access to equity capital, and the
uncertainties caused by the falling stock price, the shareholder litigation and
the results of operations at CCA made it much more difficult for Prison Realty
to obtain debt financing. In addition, the stock prices of REITs generally
suffered in the market during this period as a result of both general market
and REIT specific factors. During this time, Prison Realty was trying to raise
approximately $300.0 million of debt financing through an offering of
high-yield notes. Because of these events and the conditions of the capital
markets generally, Prison Realty was only able to raise $100.0 million in this
financing, and the notes bore interest at a much higher rate than was expected.
In addition, during the summer of 1999, the Company was able to
increase its credit facility from $650.0 million to $1.0 billion. However, this
financing had higher interest rates and transaction costs and also put other
significant requirements on the Company. One of the financing requirements was
that the Company raise $100.0 million and CCA raise $25.0 million in new equity
in order for the Company to make the distributions that would be necessary to
enable the Company to qualify as a REIT with respect to its 1999 taxable year
in cash; provided, however, that such requirement did not prohibit Prison
Realty from making such required distributions in certain combinations of its
securities.
In order to address the capital and liquidity constraints facing the
Company and concerns regarding the corporate structure and management of the
Company, the Company intends to complete a comprehensive restructuring (the
"Restructuring") pursuant to which the Company will:
- combine with each of CCA, PMSI and JJFMSI and operate under
the name "Corrections Corporation of America" as a taxable C
corporation, rather than as a REIT, for federal income tax
purposes (the "Combination");
- raise additional equity (the "Equity Investment");
- refinance all or a portion of its existing indebtedness,
including its existing $1.0 billion credit facility; and
- restructure existing management.
As required by the Company's governing instruments, the Company
currently intends to elect to be taxed as a REIT for the year ended December
31, 1999. In the event the Company completes the Fortress/Blackstone
Restructuring (as described below) under its existing terms following required
shareholder approval in 2000, the Company will be required to be taxed as a C
corporation commencing with the taxable year ended December 31, 1999. In either
event, the Company expects that it will be taxed as a C corporation in the
taxable year ending December 31, 2000 and thereafter. There can be no assurance
that the Company will be required not to elect REIT status with respect to its
1999 taxable year under the terms of the Fortress/Blackstone Restructuring or
any other Restructuring proposal accepted by the Company. Moreover, there can
be no assurance that the Company will qualify to be taxed as a REIT for its
1999 taxable year in the event it elects such. See "--Tax Status."
PROPOSED RESTRUCTURING LED BY AFFILIATES OF FORTRESS AND BLACKSTONE
On December 26, 1999, the Company entered into a series of agreements
concerning a proposed Restructuring (the "Fortress/Blackstone Restructuring")
led by a group of institutional investors consisting of an affiliate of
Fortress Investment Group LLC and affiliates of The Blackstone Group, together
with an affiliate of Bank of America Corporation (the "Fortress/Blackstone
Investors"). Under the terms of the Fortress/Blackstone Restructuring, the
Company would:
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- complete the Combination and operate as a taxable C
corporation commencing with the Company's 1999 taxable year;
- raise up to $350.0 million by selling shares of convertible
preferred stock and warrants to purchase shares of common
stock to the Fortress/Blackstone Investors in a private
placement (the "Fortress/Blackstone Equity Investment") and
to the Company's existing common shareholders in a $75.0
million rights offering (the "Fortress/Blackstone Rights
Offering");
- obtain a new $1.2 billion credit facility;
- restructure existing management through a newly constituted
board of directors and executive management team; and
- amend the Company's existing charter and bylaws to accommodate
the Fortress/Blackstone Restructuring.
Approval of the holders of the Company's Common Stock will be required
in order to complete the Fortress/Blackstone Restructuring and related
transactions. In this regard, on February 17, 2000, the Company filed a
preliminary proxy statement with the Commission under Section 14(a) of the
Exchange Act (the "Preliminary Proxy Statement") to be used in connection with
a special meeting of the Company's shareholders expected to be held during the
second quarter of 2000. The Fortress/Blackstone Restructuring and related
transactions are described in detail in the Preliminary Proxy Statement, as
well as set forth below.
THE COMBINATION. As a part of the Fortress/Blackstone Restructuring,
the Company expects to complete the Combination pursuant to the terms of an
Agreement and Plan of Merger, dated December 26, 1999, by and among the
Company, three newly-formed wholly-owned subsidiaries of the Company, CCA, PMSI
and JJFMSI (the "Merger Agreement"). Pursuant to the current terms of the
Merger Agreement, the Company will be taxed as a C corporation, rather than as
a REIT, commencing with its 1999 taxable year. The Company is currently in
discussions with Fortress/Blackstone Investors regarding the Company's election
to be taxed as a REIT with respect to the Company's 1999 taxable year, as well
as certain other terms of the Fortress/Blackstone Restructuring. The completion
of the Combination is a condition to the Fortress/Blackstone Equity Investment,
as set forth below.
As provided for in the Merger Agreement, each of CCA, PMSI and JJFMSI
will be merged with and into the three newly-formed wholly-owned subsidiaries
of the Company. Immediately prior to the Combination, the Company will purchase
all of the shares of the common stock of CCA, PMSI and JJFMSI held by outside,
or non-management and non-employee, shareholders of CCA, PMSI and JJFMSI for
approximately $26.6 million in cash. At the time of the Combination, management
and employee shareholders of CCA, PMSI and JJFMSI will receive shares of the
Company's Common Stock valued at approximately $12.8 million as merger
consideration. The shares of the Company's Common Stock received by wardens of
correctional facilities in the Combination will be subject to vesting and
forfeiture provisions under the terms of a restricted stock plan, while shares
of the Company's Common Stock received by management shareholders of CCA will
be subject to restrictions on transfer which prohibit transfers for 180 days
after the completion of the Combination, and allow only specified percentages
to be transferred until 2004.
THE FORTRESS/BLACKSTONE EQUITY INVESTMENT AND THE FORTRESS/BLACKSTONE
RIGHTS OFFERING. The terms of the Fortress/Blackstone Equity Investment and the
Fortress/Blackstone Rights Offering are set forth in a Securities Purchase
Agreement, dated December 26, 1999, as amended on February 28, 2000, by and
among the Company, CCA, PMSI and JJFMSI, on the one hand, and an affiliate of
the Fortress/Blackstone Investors, on the other hand (the "Securities Purchase
Agreement"). Under the terms of the Securities Purchase Agreement, the
Fortress/Blackstone Investors will purchase up to $350.0 million of the
Company's convertible securities, consisting of up to 14.0 million shares of
the Company's newly-issued series B convertible preferred stock (the "Series B
Convertible Preferred Stock") and warrants ("Warrants") to purchase such number
of shares of Common Stock equal to 14% of the shares of Common Stock issued
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and outstanding, on a fully diluted basis, after giving effect to the
Combination and the issuance and sale of convertible preferred stock in the
Fortress/Blackstone Equity Investment (currently expected to equal
approximately 29.6 million shares). The Securities Purchase Agreement provides
that in connection with the Fortress/Blackstone Investors' purchase of
securities, the Company will conduct the Fortress/Blackstone Rights Offering,
in which the Company will offer its common shareholders the right to purchase
$75.0 million of the Company's convertible securities, consisting of up to
three million shares of the Company's newly-issued series C convertible
preferred stock (the "Series C Convertible Preferred Stock") and Warrants to
purchase such number of shares of Common Stock equal to 3% of the shares of
Common Stock issued and outstanding, on a fully diluted basis, after giving
effect to the Combination and the issuance and sale of convertible preferred
stock in the Fortress/Blackstone Equity Investment (currently expected to equal
approximately 6.3 million shares of common stock). The aggregate amount of
Series B Convertible Preferred Stock and Warrants purchased by the
Fortress/Blackstone Investors will be reduced dollar for dollar to the extent
the Company's common shareholders exercise the non-transferable rights issued
to them in the Fortress/Blackstone Rights Offering. In the event the
Fortress/Blackstone Investors purchase the full $350.0 million in shares of
Series B Convertible Preferred Stock and Warrants, the Fortress/Blackstone
Investors will beneficially own approximately 39.5% of the Company's Common
Stock, on a fully-diluted basis, and, through their ownership of the Series B
Convertible Preferred Stock, will hold approximately 25.5% of the voting power
of the Company. These percentages will be reduced to approximately 31% and 20%,
respectively, in the event the Fortress/Blackstone Rights Offering is fully
subscribed and the Fortress/Blackstone Investors purchase only $275.0 million
in shares of Series B Convertible Preferred Stock and Warrants.
The completion of the Fortress/Blackstone Equity Investment by the
Fortress/Blackstone Investors is subject to various conditions contained in the
Securities Purchase Agreement, including: (i) the satisfaction by the Company
of the following financial covenants including: (A) a covenant requiring the
EBITDA of the Company, CCA, PMSI and JJFMSI, on a combined consolidated basis,
for the first fiscal quarter of 2000 to be equal to or greater than $44.3
million, and (B) a covenant limiting the companies' "consolidated net debt"
immediately prior to the equity investment to $987.0 million; (ii) the absence
of any "material adverse change" in the business or operations of the Company,
CCA, PMSI or JJFMSI taken as a whole; (iii) the resolution of the Company's
outstanding securities litigation, as more fully described in "- Recent
Litigation", or the Company obtaining insurance regarding the securities
litigation in a form satisfactory to the Fortress/Blackstone Investors; or (iv)
the refinancing of the Company's existing bank credit facility through an
aggregate of $1.2 billion in senior secured credit facilities as described in
the December 26, 1999 commitment from Credit Suisse First Boston ("CSFB"), as
described below. Although the first fiscal quarter of 2000 is not complete, the
Company has conducted a preliminary review of the companies' anticipated
results and has concluded that there is a substantial likelihood that these
financial covenants will not be satisfied and has notified the
Fortress/Blackstone Investors of this conclusion. In addition, there can be no
assurance that the other conditions described above will be satisfied. If these
conditions are not satisfied, the Fortress/Blackstone Investors will be under
no obligation to complete the Fortress/Blackstone Equity Investment. The
Fortress/Blackstone Investors may, at their sole discretion, waive the
requirement that the Company comply with these conditions and elect to complete
the Fortress/Blackstone Equity Investment. There can be no assurance, however,
that the Fortress/Blackstone Investors will waive such non-compliance and
complete the Fortress/Blackstone Equity Investment.
The shares of Series B Convertible Preferred Stock to be issued and
sold to the Fortress/Blackstone Investors pursuant to the Securities Purchase
Agreement will generally pay dividends quarterly, on a cumulative basis, at a
rate of 12% per year. Each share of Series B Convertible Preferred Stock may be
converted, at the option of its holder, into a number of shares of Common Stock
equal to $25.00 divided by the conversion price of the Series B Convertible
Preferred Stock. The Series B Convertible Preferred Stock will have an initial
conversion price of $6.50, subject to adjustment under certain circumstances.
Each holder of the Series B Convertible Preferred Stock will also have the
option after approximately five years from the date of issuance, or upon a
"change in control" of the Company, to require the Company to repurchase the
shares at a cash price equal to a fixed amount per share, plus an amount equal
to a total return on investment of 18% per year, taking into account the cash
dividends paid by the Company on such stock. The Series B Convertible Preferred
Stock may also be redeemed by the Company after the later of five years from
the date of issuance or 91 days after the repayment of the Company's
outstanding 12% senior notes due 2006 (the
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"Senior Notes"). The holders of the Series B Convertible Preferred Stock will
vote together with the holders of the Company's Common Stock on an as-converted
basis on general corporate actions and will vote as a separate class on certain
specified matters, including the election of certain directors. The Warrants to
be issued and sold to the Fortress/Blackstone Investors will be exercisable for
a period of 15 years from the date of issuance and will have an initial
exercise price of $7.50 per share, which is subject to adjustment on the same
terms as applicable to the Series B Convertible Preferred Stock. The rights and
preferences of the shares of Series C Convertible Preferred Stock to be issued
and sold in the Fortress/Blackstone Rights Offering, if any, are identical to
the rights and preferences of the shares of Series B Convertible Preferred
Stock, with the exception that the holders of the Series C Convertible
Preferred Stock will not be entitled to elect a separate class of directors or
have special class approval rights. The economic terms of the Warrants to be
issued in the Fortress/Blackstone Rights Offering, if any, are identical to the
Warrants to be issued and sold to the Investors.
The proceeds from the Fortress/Blackstone Equity Investment and the
Fortress/Blackstone Rights Offering, together with the proceeds from the debt
refinancing, as discussed below, would be used to repay the Company's and CCA's
existing bank indebtedness and to pay certain transaction costs associated with
the Combination, the Fortress/Blackstone Equity Investment and the
Fortress/Blackstone Rights Offering. The balance of the proceeds would be used
for working capital and to fund the Company's business development strategy.
NEW DEBT FINANCING. In connection with the Restructuring, the Company
will refinance its existing bank indebtedness. As a condition to the
Fortress/Blackstone Restructuring, the Company will refinance its existing bank
indebtedness through an aggregate of $1.2 billion in senior secured credit
facilities, comprised of a new $950.0 million term facility and a new $250.0
million revolving facility, for which the Company has received a commitment
letter dated December 26, 1999 from CSFB. Under the terms of the commitment
letter with CSFB, CSFB will act as the administrative agent and lead arranger
for a syndicate of lenders which will provide the new credit facilities. The
$950.0 million term facility will be comprised of a $250.0 million tranche A
term loan and a $700.0 million tranche B term loan. The revolving facility and
the tranche A term loan facility will have a six year term, and the tranche B
term loan facility will have an eight year term. Under the terms of the
commitment letter, at the Company's option, the interest rates for the new
senior secured credit facilities will be based upon: (i) LIBOR plus 3% per
annum for the revolving facility and the tranche A term loan; and (ii) LIBOR
plus 3.5% per annum for the tranche B term loan, or will be based on an
alternative base rate plus applicable spreads of: (i) 2% per annum for the
revolving facility and the tranche A term loan; and (ii) 2.5% per annum for the
tranche B term loan. Under the terms of the commitment letter, the Company,
may, at its option, issue up to $375.0 million in senior subordinated notes in
lieu of $175.0 million of the senior secured credit facilities' term loans.
CSFB's commitment to provide the new credit facilities is conditioned
upon, among other things, (i) consummation of the Fortress/Blackstone Equity
Investment, (ii) that the Company, CCA, PMSI and JJFMSI, on a combined
consolidated basis, have EBITDA for the first quarter of 2000 of not less than
$43.0 million, (iii) the absence of any material adverse effect on the
business, financial condition, results of operations or prospects of the
Company, CCA, PMSI and JJFMSI, taken as a whole, since December 31, 1998, other
than issues arising out of the Company's outstanding securities litigation, as
more fully described in "-Shareholder Litigation," and (iv) the resolution of
the Company's outstanding securities litigation, as more fully described in
"-Shareholder Litigation," or the Company obtaining insurance satisfactory to
CSFB regarding such litigation. In addition, the commitment is conditioned upon
the consent of the holders of the Company's convertible, subordinated notes as
hereinafter discussed, to the Restructuring and related transactions and the
holders not accelerating amounts due under the notes in the event of default
under the terms of the notes prior to the completion of the Restructuring.
Although the first fiscal quarter of 2000 is not complete, the Company has
conducted a preliminary review of the companies' anticipated results and has
concluded that there is substantial likelihood that the financial condition to
CSFB's commitment will not be satisfied and has notified the Fortress/Blackstone
Investors of this conclusion. In addition there can be no assurance that the
other conditions of the commitment will be satisfied. If these conditions are
not satisfied, CSFB will be under no obligation to provide the new credit
facilities. Moreover, the obtaining of the new credit facilities is a condition
to the Fortress/Blackstone Investors' obligations under the Securities Purchase
Agreement. CFSB may, at its sole discretion,
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waive the requirement that the Company comply with these conditions and elect
to provide the new credit facilities. There can be no assurance, however, that
CFSB will waive such non-compliance and provide the new credit facilities.
RESTRUCTURING OF EXISTING MANAGEMENT. Pursuant to the terms of the
Fortress/Blackstone Restructuring, the Company's board of directors will be
restructured and will consist of 10 members, comprised of four members from the
Company's existing board, four members designated by the Fortress/Blackstone
Investors (the "Series B Directors"), and two members jointly designated by the
Company's existing directors and the Fortress/Blackstone Investors. Thomas W.
Beasley, Jean-Pierre Cuny and Joseph V. Russell, together with an additional
member of Prison Realty's existing board yet to be determined, will continue to
serve as members of the Company's board of directors, while the
Fortress/Blackstone Investors' designees, as well as the joint designees, have
yet to be determined. Under Maryland law, each of these directors must stand
for election at the next annual meeting of the Company's shareholders following
their appointment. Only the holders of the Series B Convertible Preferred Stock
will have the right to vote in the election of the four Series B Directors at
such meeting and at any future annual meetings. Holders of the Series B
Convertible Preferred Stock will have the right to vote together with the
Company's common shareholders in the election of the remaining directors at
such meetings. Following the Fortress/Blackstone Equity Investment, Doctor R.
Crants will resign as the Company's Chief Executive Officer and Mr. Beasley
will serve as the interim Chief Executive Officer while continuing to serve as
the Chairman of the Company's board of directors. The Company has begun a
search for a new permanent Chief Executive Officer, as well as a new Chief
Financial Officer.
AMENDMENTS TO CHARTER AND BYLAWS. Immediately prior to the closing of
the Combination, the Company will amend its charter to make the following
changes, among others:
- change the Company's name to "Corrections Corporation of
America;"
- increase the authorized capital stock of the Company;
- remove ownership limitations and other provisions relating to
REIT status;
- eliminate the classified structure of the Company's board of
directors and provide that all directors will be elected on
an annual basis for one-year terms; and
- provide that the number of directors at the time of the
amendment and restatement will be four, which number may be
increased or decreased by resolution of the Company's board
of directors.
In connection with the Fortress/Blackstone Restructuring, the
Company's board of directors will be increased to 10 members. In addition, the
Company will amend its bylaws to establish an investment committee of the board
of directors (the "Investment Committee"), which would be designed to oversee
certain significant corporate actions, and remove "super-majority" voting
requirements for certain board actions that would conflict with the authority
of the Investment Committee.
PROPOSED RESTRUCTURING LED BY PACIFIC LIFE
On February 23, 2000, the board of directors of the Company received
an unsolicited proposal from Pacific Life Insurance Company ("Pacific Life")
regarding a proposed Restructuring intending to serve as an alternative to the
Fortress/Blackstone Restructuring and related transactions (the "Pacific Life
Restructuring"). The specific terms of the proposal were set forth in detail in
a Current Report on Form 8-K filed by the Company with the Commission on March
1, 2000. In connection with the receipt of the unsolicited proposal regarding
the Pacific Life Restructuring, the Company's board of directors determined,
after reviewing the proposal with its financial and legal advisors, that it is
appropriate for the Company and its financial advisors to commence negotiations
with Pacific Life regarding a potential Restructuring led by Pacific Life. As
set forth in the Form 8-K, the Company does not intend to report on the status
of
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negotiations with Pacific Life or provide updates on the terms of Pacific
Life's proposal prior to reaching a definitive agreement with Pacific Life or
prior to determining that no definitive agreement will be reached. In the event
the Company determines to complete a transaction with Pacific Life, under the
terms of the Securities Purchase Agreement the Fortress/Blackstone Investors
will have the right to match the final terms of the Pacific Life transaction
and complete such a transaction with the Company. In the event the
Fortress/Blackstone Investors do not match the terms of the Pacific Life
proposal, the Company will likely be required to pay the Fortress/Blackstone
Investors a failed transaction fee.
DETERMINATION OF PROPOSED RESTRUCTURING
The Company is currently in discussion with each of the
Fortress/Blackstone Investors and representatives from Pacific Life with
respect to the terms of the proposed Restructuring. At the time of this Annual
Report, there is no assurance that the Fortress/Blackstone Investors or CSFB
will waive the Company's compliance with the conditions contained in the
Securities Purchase Agreement or in the commitment letter with respect to the
new credit facilities, respectively, or that the Company will be able to reach
an agreement with Pacific Life regarding the Pacific Life Restructuring. In the
event the Company is unable to reach an agreement with these parties or
complete a Restructuring with another third party, the Company and CCA will be
forced to pursue certain standalone alternatives not involving a third party
investor and such alternatives have significant drawbacks. In connection with
such standalone alternatives, the Company will be forced to restructure or
renegotiate its existing indebtedness which may not be possible or, if
possible, obtained on significantly less favorable terms, given CCA's recent
operating performance and failure to meet its projected results. No assurance,
however, can be given that any debt restructuring or renegotiation could be
accomplished. Further, a standalone combination would not address the Company's
capital needs with respect to the construction and expansion of correctional
and detention facilities as well as its financial ability to expand its
existing and perspective business opportunities. Finally, a standalone
combination would likely result in an adverse market reaction because of the
lack of credibility that the Company would likely experience absent a new
equity investment and new management team.
TRANSACTIONS BETWEEN THE COMPANY AND CCA
CCA FINANCIAL CONDITION AND FAILURE TO MAKE LEASE PAYMENTS. As
previously reported in the Company's Current Report on Form 10-Q/A for the
quarterly period ended September 30, 1999, CCA had incurred substantial losses
from operations through that period. During the fourth quarter of 1999, CCA
continued to incur losses, utilizing its available cash flow from operations,
borrowings under its line of credit and payments from the Company for services
under their various arrangements. In addition, approximately $12.0 million of
1999 rents and all of the 2000 rents due to the Company from CCA were unpaid as
of March 15, 2000. The terms of the CCA Leases provide that the 1999 rental
payments were due and payable by CCA on December 25, 1999. The CCA Leases
provide that it shall be an event of default if CCA fails to pay any installment
of rent within 15 days after notice of nonpayment from the Company. The Company,
however, has not provided a notice of nonpayment to CCA with respect to these
payments.
DEFERRAL OF INTEREST PAYMENT ON CCA NOTE. As a result of CCA's current
liquidity position, CCA has been required to defer the first scheduled payment
of accrued interest on the CCA Note. According to the terms of the CCA Note,
CCA was required to make such payment on December 31, 1999. Pursuant to the
terms of a subordination agreement, dated as of March 1, 1999, by and between
the Company and Foothill Capital Corporation, the agent of CCA's existing bank
credit facility (the "Subordination Agreement"), CCA is prohibited from making
scheduled interest payments on the CCA Note if certain financial conditions
relating to CCA's liquidity position are not met. On December 31, 1999, CCA was
not in compliance with these financial covenants. Accordingly, CCA was
prohibited from making the scheduled interest payment. Pursuant to the terms of
the Subordination Agreement, however, the Company is prohibited from
accelerating the principal amount of the CCA Note or taking any other action to
enforce its rights under the provisions of the CCA Note for so long as the CCA
bank credit facility remains outstanding.
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PROPOSED AMENDMENT OF CCA LEASES AND OTHER AGREEMENTS. In an effort to
address CCA's liquidity needs prior to the Restructuring and related
transactions, the Company and CCA intend to amend the terms of the CCA Leases.
Pursuant to this amendment, rent will be payable on each June 30 and December
31, instead of monthly. In addition, the amendment will provide that CCA is
required to make certain scheduled monthly installment payments of rent to the
Company from January 1, 2000 through June 30, 2000. In regard to rent accruing
from January 1, 2000 through June 30, 2000 the Company and CCA are currently
negotiating the scheduled monthly installments that are to occur during the
second quarter of 2000. At the time these installment payments are made, it is
anticipated that CCA will also be required to pay interest to the Company upon
such payments at a rate equal to the then current interest rate under CCA's bank
credit facility. These installment payments represent a portion of CCA's
December 1999 lease payments and a portion of the rent accruing from January 1,
2000 to June 30, 2000 under the CCA Leases. All remaining unpaid rent shall be
due and payable upon the earlier to occur of June 30, 2000 or the date on which
either the Securities Purchase Agreement or the commitment letter relating to
the new $1.2 billion credit facility is terminated.
On December 31, 1999, the Company and CCA amended the terms of the CCA
Leases to change the annual base rent escalation formula with respect to each
facility leased to CCA. Previously, the annual base rent payable with respect
to each facility was subject to increase each year in an amount equal to a
percentage of the total rental payments with respect to each facility, such
percentage being the greater of: (i) 4%; or (ii) 25% of the percentage increase
of gross management revenue derived from such facility. As a result of this
amendment, the annual base rent with respect to each facility is subject to
increase each year in an amount equal to the lesser of: (i) 4% of the
annualized yearly rental payments with respect to such facility; or (ii) 10% of
the excess of CCA's aggregate gross management revenues for the prior year over
a base amount of $325.0 million.
The Company and CCA also intend to amend the terms of each of the
following agreements between the Company and CCA: (i) the Business Development
Agreement; (ii) the Amended and Restated Services Agreement; and (iii) the
Amended and Restated Tenant Incentive Agreement to provide for the deferral of
the payment of all fees under these agreements by the Company to CCA until
September 30, 2000.
The completion of the proposed amendments described above is subject
to the consent of the Company's and CCA's senior lenders under their respective
bank credit facilities. No assurance can be given that such consent will be
obtained. A failure to obtain the consent of the requisite senior lenders to
waive the provisions of the Company's and CCA's bank credit facilities
restricting the completion of the proposed amendments would result in an event
of default under each respective bank credit facility, which would allow the
Company's or CCA's senior lenders, at their option, to accelerate all or a
portion of the outstanding indebtedness under the bank credit facilities.
SOLICITATION OF CONSENTS FOR WAIVERS OF, AND AMENDMENTS TO, PROVISIONS OF THE
COMPANY'S AND CCA'S OUTSTANDING INDEBTEDNESS
THE COMPANY'S BANK CREDIT FACILITY. On August 4, 1999, the Company
completed an amendment and restatement of its original bank credit facility
increasing amounts available to the Company under the original bank credit
facility to $1.0 billion through the addition of $350.0 million tranche C term
loans. The tranche C term loans will be payable in equal quarterly installments
in the amount of $875,000 through the calendar quarter ending September 30,
2002 with the balance paid in full on December 31, 2002. Under the amended bank
credit facility, Lehman Commercial Paper, Inc. ("LCPI") replaced NationsBank,
N.A., as Administrative Agent.
The bank credit facility as amended, similar to the original bank
credit facility, provides for interest rates, unused commitment fees and letter
of credit fees to change based on the Company's senior debt rating. As with the
original bank credit facility, the bank credit facility as amended bears
interest at variable rates of interest based on a spread over the base rate or
LIBOR (as elected by the Company), which spread is determined by reference to
the Company's credit rating. The revised spread ranges from 0.50% to 2.25% for
base rate loans and from 2.00% to 3.75% for LIBOR rate loans. These ranges
replace the original spread ranges of 0.25% to 1.25% for base rate loans and
1.375% to 2.75% for LIBOR rate loans. The term loan portions of the bank credit
facility bear interest at a variable base
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rate equal to 4.0% in excess of LIBOR. This revised rate replaces the variable
base rate equal to 3.25% in excess of LIBOR in the bank credit facility.
The bank credit facility as amended, similar to the original bank
credit facility, is secured by mortgages on the Company's real property.
Borrowings are limited based on a revised borrowing base formula which
considers, among other things, eligible real estate. The bank credit facility
contains certain revised financial covenants, primarily: (a) maintenance of a
leverage, interest coverage, debt service coverage and total indebtedness
ratios, and (b) restrictions on the incurrence of additional indebtedness.
For the fiscal quarter ended December 31, 1999, the Company was not in
compliance with the following financial covenants, each as defined in the bank
credit facility: (i) the Company's interest coverage ratio; and (ii) the
Company's leverage ratio. In addition, as a result of the existence of
explanatory paragraphs in the reports of each of the Company's and CCA's
independent auditors relating to the Company's and CCA's financial statements
as to the ability of each of the Company and CCA to continue as a going concern
as described below, the Company is also in violation of the provisions of its
bank credit facility. As more fully described below, the Company is in default
under the provisions of a note purchase agreement relating to the $40.0 million
9.5% convertible, subordinated notes issued by the Company to MDP Ventures IV
LLC and affiliated purchasers (the "MDP Notes"), which is an event of default
under the Company's bank credit facility. Additionally, as more fully described
below, CCA's bank credit facility requires that CCA have a net worth in excess
of certain specified amounts. On December 31, 1999, CCA was not, and it
currently is not, in compliance with this financial covenant, which is an event
of default under the Company's bank credit facility.
The Company, through LCPI, initiated the process of soliciting the
consent of the requisite percentage of its senior lenders under the Company's
bank credit facility for a temporary waiver of the events of default under the
bank credit facility described in the preceding paragraph (the "Initial
Waiver"). Specifically, the Company requested a temporary waiver of the
Company's failure to comply with the financial covenants contained in the bank
credit facility for the fiscal quarter ended December 31, 1999. The Company
also requested a temporary waiver of a violation of its bank credit facility
caused solely by the failure of the Company to deliver annual financial
statements of the Company and CCA unqualified as to the ability of each of the
Company and CCA to continue as a going concern. The Company also requested a
temporary waiver of events of default under the provisions of the bank credit
facility relating to: (i) certain defaults, as described below, by the Company
under the terms of the note purchase agreement relating to the MDP Notes; and
(ii) any event of default under the provisions of the Company's bank credit
facility relating to CCA's non-compliance with the financial covenant contained
in CCA's bank credit facility. In addition, the provisions of the Initial
Waiver would have provided for the waiver of any defaults arising from the
Company's declaration and payment of the regular quarterly dividend payment on
its 8.0% Series A Preferred Stock. However, as a result of the uncertainty as to
the terms of the proposed Restructuring created by the competing proposals
previously described herein, the Company withdrew its solicitation of the
Initial Waiver at this time. The Company anticipates that LCPI will initiate the
process of soliciting the consent of the required lenders under the bank credit
facility with respect to all existing defaults or events of default under the
Company's bank credit facility described herein as soon as the Company is able
to provide the definitive terms of the proposed Restructuring.
In addition to the events of default described above, the Company's
bank credit facility contains restrictions upon the ability of the Company to
amend the terms of its agreements with CCA without the consent of its senior
lenders, which would be violated upon execution of the proposed amendments to
the Company's existing agreements with CCA described in "--Transactions Between
the Company and CCA" above. The Company's bank credit facility also restricts
the ability of the Company to enter into any agreement constituting a "change
of control," as defined in the Company's bank credit facility. The appointment
of Thomas W. Beasley as the Company's Chairman of the board of directors and J.
Michael Quinlan as President of the Company constituted a "change of control" of
the Company under the terms of the Company's bank credit facility upon the
expiration of an applicable period. In addition, the execution and performance
of certain conditions contained in any definitive agreement relating to the
Fortress/Blackstone Equity Investment, including the Securities Purchase
Agreement, constitutes a "change of control" of the Company under the terms of
the bank credit facility. The Company projects that as of March 31, 2000, it
will not be in compliance with the following financial covenants, as defined in
the Company's bank credit facility: (i) the
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Company's debt service coverage ratio; (ii) the Company's interest coverage
ratio; and (iii) the Company's leverage ratio.
The Company intends to request the consent of the requisite percentage
of its senior lenders under its bank credit facility for a waiver of the bank
credit facility's restrictions relating to the proposed amendments of the
Company's agreements with CCA. The Company will also request the consent of such
lenders with respect to a waiver of the Company's failure to comply with the
bank credit facility's financial covenants described above, as well as an
amendment to the bank credit facility changing the definition of the Company's
borrowing base under the bank credit facility to alleviate the adverse effects
of the deferred rental payments on the Company's borrowing base. Additionally,
the Company will request the consent of the requisite percentage of its senior
lenders under the bank credit facility to the appointment of Thomas W. Beasley
as the Company's Chairman of the board of directors and J. Michael Quinlan as
President of the Company. The Company will also request a waiver of its bank
credit facility's restrictions upon a "change of control" arising from the
execution and performance of certain conditions under the Securities Purchase
Agreement or arising from the entering into of another definitive agreement
relating to the Equity Investment. The Company anticipates that these amendments
to, or waivers of, the provisions of the bank credit facility would remain in
effect until the earlier to occur of: (i) the completion of the Restructuring;
(ii) the termination of the securities purchase agreement or the bank commitment
letter related thereto; or (iii) an as-yet-undetermined date. The Company
anticipates that LCPI will initiate the process of soliciting the consent of the
required lenders under the bank credit facility as soon as the Company is able
to provide the definitive terms of the proposed Restructuring.
THE COMPANY'S $40.0 MILLION 9.5% CONVERTIBLE, SUBORDINATED NOTES. The
provisions of the note purchase agreement relating to the $40.0 million 9.5%
convertible, subordinated MDP Notes provide that the execution of the Securities
Purchase Agreement by the Company constitutes a "change of control" of the
Company. This "change of control" gave rise to a right of the holders of the
MDP Notes to require the Company to repurchase the MDP Notes at a price of 105%
of the aggregate principal amount of the MDP Notes. To date, the holders of the
MDP Notes have not provided notice to the Company that the Company will be
required to repurchase all or a portion of the MDP Notes. In addition, as of
February 5, 2000, the Company was no longer in compliance with a financial
covenant contained in the note purchase agreement relating to the ratio of the
Company's total indebtedness to total capitalization. As a result of the
violation of this covenant, the Company is in default under the provisions of
the note purchase agreement, and the holders of the MDP Notes may, at their
option, accelerate all or a portion of the outstanding principal amount of this
indebtedness. Moreover, during any period in which the Company is in default
under the provisions of the note purchase agreement, the holders of the MDP
Notes may require the Company to pay an applicable default rate of interest.
The Company has initiated discussions with the holders of the MDP
Notes to waive the occurrence of a "change of control" arising from the
Company's entering into of the Securities Purchase Agreement, thereby
extinguishing the Company's obligation to repurchase the notes at a premium. In
addition, the Company has requested that the provisions of the note purchase
agreement be amended to: (i) remove the financial covenant relating to the
Company's total indebtedness to total capitalization; (ii) remove a covenant
requiring the Company to use its best efforts to qualify as a REIT for federal
income tax purposes; and (iii) remove a covenant restricting the Company's
ability to conduct business other than the financing, ownership and development
of prisons and other correctional facilities.
There can be no assurance that the holders of the MDP Notes will
consent to the proposed waiver of, and amendments to, the note purchase
agreement, or will not seek to declare an event of default prior to the
execution of the proposed waiver and amendments. If the holders of the MDP Notes
do not consent to the proposed waiver of, and amendments to the note purchase
agreement, the Company will be required to repurchase or redeem the outstanding
principal amount of the MDP Notes.
THE COMPANY'S $30.0 MILLION 7.5% CONVERTIBLE, SUBORDINATED NOTES. The
provisions of the note purchase agreement relating to the $30.0 million 7.5%
convertible, subordinated notes issued to PMI Mezzanine Fund, L.P.
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("PMI") contain financial covenants relating to: (i) the Company's debt service
coverage ratio; (ii) the Company's interest coverage ratio; and (iii) the
Company's ratio of total indebtedness to total capitalization. It is possible
that as of March 31, 2000 the Company will not be in compliance with one or
more of these financial covenants. If one or more of these covenants are
violated, such a violation would result in an event of default under the
provisions of the note purchase agreement, and the holder of such notes may, at
its option, accelerate all or a portion of the outstanding principal amount of
this indebtedness.
If an event of default occurs under the provisions of the note
purchase agreement, the Company will initiate discussions with the holder of
such notes and attempt to obtain a waiver of, or amendment to, the financial
covenants contained in the note purchase agreement violated by the Company. In
addition, in order to prevent an event of default under the note purchase
agreement, prior to completion of the Restructuring and related transactions,
the Company will be required to amend the provisions of the note purchase
agreement to remove a covenant requiring the Company to elect to be taxed as a
REIT for federal income tax purposes.
There can be no assurance that the holder of these notes will consent
to any proposed waiver of, and amendments to, the note purchase agreement, or
will not seek to declare an event of default prior to the execution of the
proposed waiver and amendments. The Company anticipates that it may be required
to amend the economic terms of the notes in the event the holder of these notes
does consent to any proposed waiver of, and amendment to, the note purchase
agreement.
CCA BANK CREDIT FACILITY. The terms of CCA's bank credit facility
provide that CCA shall not amend or modify the terms of the Amended and
Restated Services Agreement, the Amended and Restated Tenant Incentive
Agreement and the Business Development Agreement in any manner which would be
on terms and conditions less favorable to CCA than are in effect immediately
prior to such amendment or modification. If the proposed amendments to these
agreements are completed, CCA will be in violation of its bank credit facility.
In addition, CCA's bank credit facility requires that CCA have a net worth in
excess of certain specified amounts. On December 31, 1999, CCA was not, and it
currently is not, in compliance with this financial covenant. The terms of the
CCA bank credit facility also provide that the execution of the Agreement and
Plan of Merger resulted in an event of default under the CCA bank credit
facility.
CCA has initiated discussions with Foothill Capital Corporation, the
agent of the bank credit facility, and will request the consent of the
requisite percentage of the senior lenders under its bank credit facility for a
waiver of the bank credit facility's restrictions relating to: (i) the
amendment of the Company's agreements with CCA; and (ii) the execution of the
Agreement and Plan of Merger. CCA has also requested the consent of such
lenders with respect to a waiver of, or amendment to, the financial covenant
concerning CCA's shareholders' equity described above.
EFFECT OF FAILURE OF THE COMPANY TO OBTAIN REQUESTED WAIVERS AND
AMENDMENTS. There can be no assurance that the requisite senior lenders under
the Company's bank credit facility will consent to the proposed waivers of, and
amendments to, the Company's bank credit facility or will not seek to declare
an event of default prior to the effectiveness of the consent or waiver.
Moreover, the effectiveness of the proposed waivers of, and amendments to, the
Company's bank credit facility is subject to the satisfaction of the conditions
described above and the attainment of the waivers of, and amendments to, the
applicable provisions of CCA's bank credit facility. The Company has also
agreed that it is currently obligated to pay interest on amounts outstanding
under the Company's bank credit facility at an applicable default rate which is
greater than the otherwise applicable rate of interest payable under the terms
of the Company's bank credit facility.
If the proposed waivers of, and amendments to, the Company's
indebtedness are not obtained, the Company will continue to negotiate with LCPI
and its other lenders in an attempt to obtain such necessary waivers or
amendments. In the event the Company is unable to obtain the necessary waivers
or amendments to the bank credit facility, or to comply with and maintain the
proposed waivers and amendments, or if the Company defaults under the terms of
any of its other indebtedness, and such indebtedness is accelerated, the senior
lenders under the Company's bank credit
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facilities are entitled, at their discretion, to exercise certain remedies,
including acceleration of the outstanding borrowings under the bank credit
facility. In addition, the Company's Senior Notes (as defined herein), the
$40.0 million 9.5% convertible, subordinated MDP Notes and the $30.0 million
7.5% convertible, subordinated notes payable to PMI contain provisions which
allow those creditors to accelerate their debt and seek remedies if the Company
has a payment default under its bank credit facility or if the obligations
under the Company's bank credit facility have been accelerated. If the senior
lenders under the Company's bank credit facility elect to exercise their rights
to accelerate the Company's obligations under the bank credit facility, and/or
if the senior lenders do not consent to the proposed waivers and amendments (or
acceptable alternative waivers and amendments), such events could result in the
acceleration of all or a portion of the outstanding principal amount of the
Company's Senior Notes (as defined herein) or its convertible, subordinated
notes, which would have a material adverse effect on the Company's liquidity
and financial position. The Company does not have sufficient working capital to
satisfy its debt obligations in the event of an acceleration of all the
Company's outstanding indebtedness.
EFFECT OF FAILURE OF CCA TO OBTAIN REQUESTED WAIVERS AND AMENDMENTS.
There can be no assurance that the requisite senior lenders under CCA's bank
credit facility will consent to the proposed waivers of, and amendment to,
CCA's bank credit facility or will not seek to declare an event of default
prior to such date. If the proposed waivers of, and amendment to, CCA's bank
credit facility are not obtained, CCA will continue to negotiate with Foothill
Capital Corporation, as agent, and its senior lenders in an attempt to obtain
necessary waivers of, or amendments to, its bank credit facility. In the event
CCA is unable to obtain the necessary waivers or amendments, or to comply with
and maintain the proposed waiver and amendment, the senior lenders are
entitled, at their discretion, to exercise certain remedies, including
acceleration of the outstanding borrowings under the bank credit facility. If
the senior lenders elect to exercise their rights to accelerate CCA's
obligations under CCA's bank credit facility, and/or if the senior lenders do
not consent to the proposed waiver and amendment, such events would have a
material adverse effect on CCA's liquidity and financial position. CCA does not
have sufficient working capital in the event of an acceleration of CCA's bank
credit facility. In addition, the terms of the CCA Leases provide that an event
of default under CCA's bank credit facility which results in the acceleration
of at least $25.0 million of CCA's indebtedness under the CCA bank credit
facility prior to its stated maturity will result in an event of default under
the CCA Leases, which would result in an event of default under the Company's
bank credit facility, also triggering defaults under the Company's other
indebtedness.
1999 FINANCIAL STATEMENTS AND GOING CONCERN MATTERS
Due to CCA's current liquidity position and its inability to make
required payments to the Company under the terms of the CCA Leases and the CCA
Note, CCA's independent auditors have included an explanatory paragraph in its
report to CCA's consolidated financial statements for the year ended December
31, 1999 that express substantial doubt as to CCA's ability to continue as a
going concern. Accordingly, as the result of the Company's financial dependence
on CCA and the Company's resulting liquidity position, as well as concerns with
respect to the Company's noncompliance with, and resulting defaults under,
certain provisions and covenants contained in its indebtedness and potential
liability arising as the result of shareholder and other litigation commenced
against the Company, the Company's independent auditors have included an
explanatory paragraph in its report to the Company's consolidated financial
statements for the year ended December 31, 1999 that express substantial doubt
as to the Company's ability to continue as a going concern. The existence of
these explanatory paragraphs may have a material adverse effect on the
Company's and CCA's relationships with its creditors and could have a material
adverse effect on the Company's business, financial condition, results of
operation and liquidity. In addition, the continued operating losses being
incurred by CCA and its inability of CCA to make contractual payments to the
Company; the declaration of default and acceleration action by the Company's
and CCA's creditors under the terms of the Company's and CCA's indebtedness;
and the Company's limited resources currently available to meet its operating,
capital expenditure and debt service requirements will have a material adverse
impact on the Company's consolidated financial position, results of operations
and cash flow.
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As a result of the existence of explanatory paragraphs in the reports
of each of the Company's and CCA's independent auditors relating to the
Company's and CCA's financial statements as to the ability of each of the
Company and CCA to continue as a going concern, the Company is also in
violation of the provisions of its bank credit facility. The Company intends to
request a waiver of a violation of the bank credit facility caused solely by
the failure of the Company to deliver annual financial statements of the
Company and CCA unqualified as to the ability of each of the Company and CCA to
continue as a going concern. See "--Solicitation of Consents for Waivers of,
and Amendments to, Provisions of the Company and CCA's Outstanding
Indebtedness."
The Company has limited resources currently available to it to meet
its operating, capital expenditure and debt service requirements. As a result,
the Company currently is, and will continue to be, dependant on its ability to
borrow funds under the terms of its bank credit facility to meet these
requirements. Due to the Company's financial condition and non-compliance with
certain covenants under the terms of its bank credit facility, the availability
of borrowing under its bank credit facility is uncertain. Accordingly, there
can be no assurance that the Company will be able to meet its operating,
capital expenditure and debt service requirements in the future.
SHAREHOLDER LITIGATION
On December 29, 1999, a purported class action lawsuit was filed on
behalf of the shareholders of the Company in the Chancery Court for Davidson
County, Tennessee. The lawsuit, captioned Bernstein v. Prison Realty Trust, et
al., names as defendants the Company and its directors, as well as the
Fortress/Blackstone Investors. The lawsuit alleges that the directors breached
their fiduciary duties to the Company's shareholders by "effectively selling
control" of the Company for inadequate consideration and without having
adequately considered or explored all other alternatives to this prospective
sale or having taken steps to maximize shareholder value. The plaintiffs seek
an injunction preventing the completion of the Fortress/Blackstone
Restructuring, declaratory relief, and costs and fees. On each of January 4,
2000 and January 12, 2000, nearly identical purported class action lawsuits
were filed in the same court on behalf of different purported class
representatives. The lawsuits, captioned Hardee v. Prison Realty Trust, et al.
and Holle v. Prison Realty Trust, et al., name as defendants the Company and
its directors, as well as the Fortress/Blackstone Investors. Each of these
three actions were consolidated in February 2000 into one action, captioned In
re: Bernstein v. Prison Realty Trust, Inc.
On December 30, 1999, a purported class action lawsuit was filed in
federal court in the United States District Court for the Middle District of
Tennessee, on behalf of the shareholders of the Company. The lawsuit, captioned
Neiger v. Doctor Crants, et al., names as defendants the Company, Doctor R.
Crants and D. Robert Crants, III. The lawsuit alleges violations of federal
securities laws based on the allegation that the defendants knew or should have
known that the Company would not make any further dividend payments on its
Common Stock, including the "special dividend" prior to the date on which it
was disclosed to the public and therefore certain statements made by them prior
to that time were false and misleading. The plaintiffs seek an unspecified
amount of monetary damages and costs and fees. On February 4, 2000, a nearly
identical purported class action lawsuit was filed in the same court on behalf
of different purported class representatives. The lawsuit, captioned Anderson
v. Doctor Crants, et al., names as defendants the Company, Doctor R. Crants and
D. Robert Crants, III. These actions were consolidated on March 13, 2000 into
one action, captioned Neiger v. Doctor Crants, et al. Additionally, on March 3,
2000, a similar lawsuit was filed on behalf of two plaintiffs in the Chancery
Court for the State of Tennessee, Twentieth Judicial District. The lawsuit,
captioned Buchanan v. Prison Realty Trust, Inc., et. al., names as defendants
the Company, Doctor R. Crants, D. Robert Crants, III and Darrell K. Massengale,
and alleges violations of state securities laws based on claims substantially
identical to those enumerated above.
The Company cannot determine the outcome of these actions, and, as a
result, the Company cannot be assured that the determination of the litigation
in a manner adverse to the Company will not have a material adverse effect upon
the Company. In addition, the Company cannot be assured that additional
lawsuits will not be filed in connection with the Fortress/Blackstone
Restructuring.
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The Company is also currently subject to two separate class actions
filed in federal court in the United States District Court for the Middle
District of Tennessee, alleging securities fraud in connection with the
agreements entered into by the Company and CCA in May, 1999 to increase
payments made by the Company to CCA under the terms of certain agreements. The
plaintiffs' class in In re Old CCA Securities Litigation consists of former
shareholders of Old CCA who acquired shares of the Company as the result of the
1999 Merger. The plaintiffs' class in In re Prison Realty Securities Litigation
consists of former shareholders of Old Prison Realty who acquired shares of the
Company as the result of the 1999 Merger and all persons who acquired shares of
the Company in the open market prior to May 17, 1999. Each of these actions
alleges violations of federal securities laws based on the allegations that the
Company and the individual defendants in the actions knew or should have known
of the increased payments to CCA prior to the date that they were disclosed to
the public, and therefore certain public filings and representations made by
the Company and certain of the defendants were false and misleading. These two
actions represent the consolidation of sixteen complaints filed in May and June
1999. In addition, a purported shareholders' derivative complaint has been
filed in the Chancery Court for Davidson County, Tennessee in Nashville,
captioned Wanstrath v. Crants, et al., against the Company, CCA and persons who
were directors at the time the Company entered into the agreements regarding
the increased payments to CCA. The derivative action alleges, among other
things, that the directors of the Company violated their fiduciary duties in
approving the increased payments to CCA. The plaintiffs in this action have
also moved for a preliminary injunction to prevent the completion of the
Restructuring. The Company is continuing to investigate the allegations in
these complaints, and although their outcome is not determinable, the Company
is defending these actions vigorously. In addition, the Company cannot be
assured that the determination of one or both of these actions in a manner
adverse to the Company will not have a material adverse effect upon the
Company.
The Company also is subject to a complaint filed in August, 1998 in
the Chancery Court for Davidson County, Tennessee, inherited from Old CCA in
the 1999 Merger. The lawsuit, captioned Dasburg, S.A. v. Corrections
Corporation of America, et al., claims that Old CCA and the individual named
defendants violated state law by making false and misleading statements in
order to keep Old CCA's stock price at an artificially high level during the
period from April, 1997 through April, 1998, so that the individual named
defendants could sell shares of Old CCA stock at inflated prices. The Company
is defending this action vigorously, and cannot be assured that the
determination of the action in a manner adverse to the Company will not have a
material adverse effect upon the Company.
SHELF REGISTRATION
On January 11, 1999, the Company filed a Registration Statement on
Form S-3 to register an aggregate of $1.5 billion in value of its Common Stock,
preferred stock, common stock rights, warrants and debt securities for sale to
the public (the "Shelf Registration Statement"). As of March 15, 2000, the
Company has issued and sold approximately 6.7 million shares of Common Stock
under the Shelf Registration Statement, resulting in net proceeds to the
Company of approximately $120.0 million, with the most recent issuance and sale
occurring during the second quarter of 1999. Proceeds from sales of Common
Stock under the Shelf Registration Statement have been used for general
corporate purposes, including the acquisition and development of correction and
detention facilities.
DIVIDEND REINVESTMENT PLAN
On May 14, 1999, the Company registered 10.0 million shares of the
Company's Common Stock for issuance under the Company's Dividend Reinvestment
and Stock Purchase Plan (the "DRSPP"). The DRSPP provides a method of investing
cash dividends in, and making optional monthly cash purchases of the Company's
Common Stock, at prices reflecting a discount between 0% and 5% from the market
price of the Common Stock on the NYSE. As of March 15, 2000, the Company has
issued 1,261,432 shares under the DRSPP with 1,252,994 of these shares issued
under the DRSPP's optional cash feature resulting in proceeds of approximately
$12.3 million. The Company has temporarily suspended the DRSPP pending the
completion of the Restructuring and related transactions.
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SENIOR NOTES OFFERING
On June 11, 1999 the Company completed its offering of $100.0 million
aggregate principal amount of 12% Senior Notes due 2006 (the "Senior Notes").
Interest on the Senior Notes is paid semi-annually in arrears and have a seven
year term due June 1, 2006. Net proceeds from the offering of the Senior Notes
were approximately $95.0 million after deducting expenses payable by the Company
in connection with the offering. The Company used the net proceeds from the sale
of the Senior Notes for general corporate purposes and to repay revolving bank
borrowings under its bank credit facility. The bank credit facility repayments
did not permanently reduce the commitments under the bank credit facility. The
Company currently is in compliance with the provisions of the indenture
governing the Senior Notes. However, under the terms of the indenture, the
Company will be required to obtain an opinion as to the fairness, from a
financial point of view, to the Company of the amendments to the terms of the
CCA Leases and the amendments to the other agreements between the Company and
CCA. In addition, the indenture governing the Senior Notes contains a provision
which allows the holders thereof to accelerate the Senior Notes and seek
remedies if the Company has a payment default under its bank credit facility or
if the obligations under the Company's bank credit facility have been
accelerated.
ISSUANCE OF CONVERTIBLE, SUBORDINATED NOTES
On March 8, 1999, the Company issued a $20.0 million convertible
subordinated note to Sodexho pursuant to a forward contract assumed by the
Company from Old CCA in the Merger. Interest on the note was payable at LIBOR
plus 1.35%, and the note was convertible into shares of the Company's common
stock at a conversion price of $7.80 per share. On March 8, 1999, Sodexho
converted: (i) $7.0 million of convertible subordinated notes assumed by the
Company from Old CCA in the 1999 Merger bearing interest at 8.5% into 1.7
million shares of Common Stock at a conversion price of $4.09 per share; (ii)
$20.0 million of convertible notes assumed by the Company from Old CCA in the
1999 Merger bearing interest at 7.5% into 700,000 shares of Common Stock at a
conversion price of $28.53; and (iii) $20.0 million of convertible subordinated
notes bearing interest at LIBOR plus 1.35% into 2.6 million shares of Common
Stock at a conversion price of $7.80 per share.
On January 29, 1999, the Company issued $20.0 million of the MDP Notes
with interest payable semi-annually at 9.5%. The MDP Notes are convertible into
shares of the Company's Common Stock at a conversion price of $28.00 per share,
which has been adjusted to $23.63. This issuance constituted the second tranche
of a commitment by the Company to issue an aggregate of $40.0 million of the
MDP Notes with the first $20.0 million tranche issued in December, 1998 under
substantially similar terms. See "--Recent Developments--Solicitation of
Consents for Waivers of, and Amendments to, Provisions of the Company's and
CCA's Outstanding Indebtedness."
The $30.0 million of 7.5% convertible, subordinated notes issued to
PMI Mezzanine Fund L.P. in connection with the 1999 Merger require that the
Company revise the conversion price as a result of the payment of a dividend or
the issuance of stock or convertible securities below market price. As of
September 30, 1999, the conversion price for the notes was $23.63, as compared
to $27.42 at issuance. This change in conversion price resulted from dividends
paid by the Company in 1999 and from the conversion of the three convertible,
subordinated notes previously issued by the Company to Sodexho and converted
into approximately five million shares of the Company's Common Stock. See
"--Recent Developments--Solicitation of Consents for Waivers of, and Amendments
to, Provisions of the Company's and CCA's Outstanding Indebtedness."
SALE OF MAURICE H. SIGLER DETENTION CENTER
On December 29, 1999, the Company sold the 1,008 bed Maurice H. Sigler
Detention Center located in Frostproof, Polk County, Florida to Polk County
pursuant to the exercise of an option to purchase the facility granted to Polk
County in connection with the award of a facility management contract to Old
CCA in 1996. Under the terms of the option, Polk County paid an aggregate
purchase price of $40.8 million for the facility, which was equal to the
depreciated book value, determined in accordance with generally accepted
accounting principles, of the facility. After
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considering the selling costs incurred by the Company, a loss of approximately
$400,000 was recorded in the fourth quarter of 1999. The Company used the
proceeds from the sale to reduce amounts outstanding under the Company's
amended bank credit facility and for general working capital purposes.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is currently engaged primarily in the business of
financing, designing, constructing and renovating new and existing jails and
prisons that it leases to both private prison managers and government agencies.
The financial statements and supplementary data required by Regulation S-X are
included in this report on Form 10-K commencing on page F-2.
NARRATIVE DESCRIPTION OF BUSINESS
BUSINESS OBJECTIVES AND STRATEGIES
GENERAL. The Company was formed to continue the success of its
predecessors in capitalizing on the opportunities for privatization in the
corrections and detention industry. The principal business strategy of the
Company has been to own, design, build and finance new correctional and
detention facilities that meet the Company's investment criteria, to acquire
existing facilities meeting such criteria from both private prison managers and
government entities, to expand the design capacity of its existing facilities
and to lease all such facilities under long-term "triple net" leases to
government entities and qualified third-party private prison operators. In this
regard, at March 15, 2000, the Company owned or was in the process of
developing 50 correctional and detention facilities, of which 43 were
operating, four were under construction or expansion and three were in the
planning stages. At March 15, 2000, CCA, the Company's primary tenant, leased
34 of the Company's facilities, government agencies leased six of the Company's
facilities and private operators leased three of the facilities. The
substantial majority of the Company's revenues comes from the rental payments
received under the terms of the Company's leases, including the CCA Leases.
However, the Company and CCA intend to amend the terms of the CCA Leases to
restructure the rental payments due thereunder. See "Recent Developments."
If the Restructuring and related transactions are completed, the
Company, through itself and its subsidiaries, will be in the business of owning
and operating correctional and detention facilities, including operating the
facilities currently being operated by CCA, PMSI and JJFMSI. As a result of the
Restructuring, the Company will no longer operate so as to qualify as a REIT,
and will instead conduct its business as a taxable C corporation. As discussed
herein under the heading "--Recent Events--Restructuring and Related
Transactions," as required by the Company's governing instruments, the Company
currently intends to elect to be taxed as a REIT for the year ended December
31, 1999. In the event the Company completes the Fortress/Blackstone
Restructuring under its existing terms following the required shareholder
approval in 2000, the Company will be required to be taxed as a C corporation
commencing with the taxable year ended December 31, 1999. In either event, the
Company expects that it will be taxed as a C corporation in the taxable year
ending December 31, 2000 and thereafter. As a C corporation, the Company will
not be required to make the distributions required by the REIT rules, including
the distribution of 95% of its taxable income, but rather will be able to
retain its after-tax earnings and invest those earnings in the business of the
Company. As such, the Company does not intend to make any distributions to the
holders of its Common Stock following the completion of the Restructuring and
related transactions.
The following discussion outlines the business objectives and
strategies related to the Company's current business--the ownership and
development of correctional and detention facilities--and the Company's
operation so as to preserve its ability to qualify as a REIT. The following
discussion also outlines the objectives and strategies expected to be adopted
by the Company upon the completion of the Restructuring and related
transactions.
BUSINESS OBJECTIVES. As an entity which has operated so as to preserve
its ability to qualify as a REIT, the Company's primary business objectives are
to generate increasing returns to its shareholders through increases in cash
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flow available for distribution and to maximize long-term total returns to its
shareholders. The Company generally seeks to achieve these objectives by:
- expanding its existing portfolio of correctional and detention
facilities by: (i) designing, building and/or developing
correctional and detention facilities for both government
entities and qualified third-party operators; and (ii)
selectively acquiring correctional and detention facilities
that demonstrate potential for significant revenue and cash
flow from both private prison managers and government
entities;
- expanding the design capacity of its existing facilities; and
- leasing its facilities pursuant to leases under which its
lessees pay base rent with certain annual escalations and pay
certain expenses in connection with the operation of the
property, such as real estate taxes, insurance, utilities and
services, maintenance and other operating expenses.
Following the Restructuring and related transactions, the Company's
primary business objectives will be to increase revenues and its position as
the largest owner, developer and manager of privatized correctional and
detention facilities worldwide. The Company expects to achieve these objectives
by:
Efficient Development and Management of Facilities. The newly combined
company will continue to provide the high quality, cost-efficient
management of correctional and detention facilities currently being
provided by CCA, PMSI and JJFMSI. The Company believes that its
quality of personnel, efficient application of financial resources and
adherence to proven policies and procedures will enable it to design,
develop and manage correctional and detention facilities at costs
lower than those of government agencies that are responsible for
performing such services. The Company believes that the reputations of
its predecessors as innovative and effective owners and managers of
facilities will enhance its ability to market its services and
capitalize on a larger scope of opportunities with a variety of
government agencies. The Company also recognizes the importance of the
facility administrator and the facility's management team in the
successful financial performance of each facility. The Company
believes that CCA's reputation will enable it to attract
highly-qualified facility administrators. Each facility management
team will operate each facility in accordance with a company-wide
policy and procedure regimen derived from industry standards and
designed to ensure the delivery of consistent, high quality services
in each of its facilities. The Company will seek to minimize operating
expenses by designing its facilities to optimize correctional officer
staffing consistent with facility security requirements. The Company
will further control operating expenses through the continued use of
electronic surveillance systems and other technologies.
Development of Domestic Business Opportunities. As a result of the
growth in the demand for privatized correctional and detention
facilities, the Company will be selective in the projects it pursues.
The Company will pursue projects based on probability of success,
geographic location, size, potential profitability, and political and
community acceptability which is intended to allow the Company to
enhance its market share and optimize resource allocation,
profitability and financial return. The Company intends to focus on
institutions with an emphasis on medium to maximum security that are
500 to 1,000 beds or larger. Management believes that the experience
and reputation of the newly-combined company in managing large secure
facilities will enable it to maintain its industry position and to
capitalize on the trend of governments to privatize larger facilities.
Expansion into International Markets. The Company believes that the
majority of its new business will come from within the United States.
While management will not detract from its domestic business to pursue
international activities, the Company will continue to participate in
selected international projects it finds attractive. The Company also
believes that in order to compete effectively in international markets
it must enter
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into alliances with strategic local partners in the international
marketplace with access to local opportunities and familiarity with
local business practices.
BUSINESS STRATEGY. The Company believes that it currently is, and
following the Restructuring and related transactions, will be, well positioned
to take advantage of the increasing trend towards privatization. The Company
currently is the only full service private corrections provider and is able to
benefit from every type of private sector/public sector partnership with
respect to correctional and detention facilities, including: (1) facilities
owned by the Company and managed by CCA; (2) facilities owned by the Company
and managed by other private operators; (3) facilities owned by the Company and
managed by government entities; and (4) facilities owned by government entities
and managed by PMSI or JJFMSI. Following the Restructuring and related
transactions, the Company will continue to benefit from these partnerships as
it will own and manage all of the correctional and detention facilities
currently owned and managed by CCA, PMSI and JJFMSI.
The Company's principal business strategy currently is to design,
build and finance new correctional and detention facilities for, as well as to
acquire and renovate existing facilities from, both governmental entities and
private prison managers and to lease these facilities under long-term "triple
net" leases to government entities and qualified third-party operators.
Substantially all of the Company's income currently comes from rent payments
from leases of correctional and detention facilities. Following the
Restructuring and related transactions, substantially all of the Company's
income will be derived from contracts with government entities for the
provision of correctional and detention facility management services.
The Industry. The Company believes the United States private
corrections industry is in a period of significant growth as governments of all
types face continuing pressure to control costs and improve the quality of
services. As the number of crimes committed each year, and the corresponding
number of arrests, increase, governments are increasingly willing to consider
privatization of correctional and detention services as a means of controlling
costs and improving the quality of services.
According to the Private Adult Correctional Facility Census (the
"Census"), prepared by Charles W. Thomas, a director of and consultant to the
Company, the design capacity of privately managed adult correctional and
detention facilities worldwide has increased dramatically since the first
privatized facility was opened by Old CCA in 1984. The majority of this growth
has occurred since 1989, as the number of privately managed adult correctional
and detention facilities in operation or under construction worldwide increased
from 26 facilities with a design capacity of 10,973 beds in 1989 to 188
facilities with a design capacity of 145,160 beds in 1999. The majority of all
private prison management contracts are in the United States. According to the
Census, at December 31, 1999, 158 of the 188 private correctional facilities
were in the United States, with the remaining 30 divided between Australia, the
United Kingdom, South Africa, the Netherlands Antilles and New Zealand.
According to the Census, the aggregate capacity of private facilities in
operation or under construction rose from 132,572 beds at December 31, 1998, to
145,160 beds at December 31, 1999, an increase of 9.5%.
The Census reports that at December 31, 1999 there were 30 state
jurisdictions, the District of Columbia and Puerto Rico, within which there
were private facilities in operation or under construction. Further, all three
federal agencies with prisoner custody responsibilities (i.e., the United
States Bureau of Prisons (the "BOP"), the U.S. Immigration and Naturalization
Service (the "INS") and the U.S. Marshals Service (the "USMS")) continued to
contract with private management firms. Management believes that the continued
trend is a result of the fact that private companies competing with each other
are incentivized to keep costs down and to improve the quality of services.
Various industry studies show that cost savings from privately operated prisons
may be in the range of 10-15%. Further, based on recidivism rates, the quality
of services is generally better in privately operated prisons than in public
prisons.
Management believes that the trend of increasing privatization of the
corrections industry will also continue, in large part, because of the general
shortage of beds available in United States correctional and detention
facilities. According to reports issued by the United States Department of
Justice, Bureau of Justice statistics ("BJS"), the number
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of inmates housed in United States federal and state prison and jail facilities
increased from 744,208 at December 31, 1985 to approximately 1,825,400 at
December 31, 1998, a compound annual growth rate of 7.3%. As of December 31,
1998, the BJS reported that one in every 149 United States residents was
incarcerated. Further, at December 31, 1998, at least 33 state prison systems,
as well as the federal prison system and the District of Columbia system are
operating at 100% or more of their highest capacity. Industry reports also
indicate that inmates convicted of violent crimes generally serve only
one-third of their sentence, with the majority of them being repeat offenders.
Accordingly, there is a perceived public demand for, among other things, longer
prison sentences, as well as prison terms for juvenile offenders, resulting in
even more overcrowding in United States correctional and detention facilities.
Finally, numerous courts and other government entities in the United States
have mandated that additional services offered to inmates be expanded and
living conditions be improved. Many governments do not have the
readily-available resources to make the changes necessary to meet such
mandates.
Growth Opportunities. The Company believes it has a competitive
advantage in the development, construction, and acquisition of new private
correctional and detention facilities due to the Company's ability to finance
and build facilities in significantly less time than government entities. The
Company intends to obtain the capital necessary to capitalize on this advantage
by completing the Restructuring and related transactions, including using the
proceeds from the Equity Investment and the Rights Offering and the borrowing
capacity under the new senior secured credit facilities to complete the
construction of existing projects and obtain additional business. In addition,
the Company's operation as a C corporation upon the completion of the
Restructuring will allow it to reinvest its after-tax revenues in the Company's
business. In the event the Company does not complete the Restructuring, or
cannot otherwise raise the capital required to develop and construct additional
facilities or expand existing facilities, the Company will not be able to
capitalize on its perceived advantages and grow its business.
In the event the Company does have access to capital, the Company
believes that its competitive advantage will enable it to capitalize on the
following opportunities:
Government Managed Facilities. Attractive opportunities exist to
develop correctional and detention facilities on behalf of various
government entities. Historically, government entities have used
various methods of construction financing to develop new correctional
and detention facilities, including but not limited to the following:
(i) one-time general revenue appropriations by the government agency
for the cost of the new facility; (ii) general obligation bonds that
are secured by either a limited or unlimited tax levied by the issuing
government entity; or (iii) lease revenue bonds secured by an annual
lease payment that is subject to annual or bi-annual legislative
appropriation of funds. Many jurisdictions are operating their
correctional and detention facilities at well above their rated
capacities, and as a result are under federal court orders to
alleviate prison overcrowding within a certain time period. These
jurisdictions are often not in a position to appropriate funds or
obtain financing to construct a correctional and detention facility
because of other fiscal demands or requirements for public approval.
Accordingly, the Company believes that, in an attempt to address
fiscal pressures of matching revenue collections with projected
expenses, many such government entities have been and will be forced
to consider private ownership with respect to the development of new
correctional and detention facilities and sale-leaseback transactions
or other financing alternatives with respect to existing correctional
and detention facilities. The Company further believes that by
privatizing the development and construction of a facility, a
government entity can avoid large capital appropriations and voter
referendum issues, freeing itself to direct its resources to other
competing infrastructure needs, and accordingly, privatization will
become even more attractive.
Expansion Opportunities. The Company's growth objectives also focus on
the selective expansion of its existing correctional and detention
facilities to increase cash flows and property values. The Company is
currently developing approximately 1,150 beds through the expansion of
three of its currently operating facilities.
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The Company's ability to acquire or develop new facilities or to
expand its existing facilities depends on its access to financing. There can be
no assurance that the Company will be able to acquire or develop correctional
facilities that meet its investment criteria. Moreover, acquisitions and
expansions entail risks that acquired or expanded facilities will fail to
perform in accordance with expectations. See "--Risk Factors--The Company is
Subject to Risks Inherent in Investment in Real Estate Properties" herein for a
further discussion of this risk.
LEASES AND OTHER CONTRACTUAL RELATIONSHIPS WITH PRIMARY TENANT
The Company currently derives a significant portion of its income from
its leases and other contractual relationships, including the CCA Note and the
Trade Name Use Agreement, with CCA, its primary tenant. As discussed herein
under the heading "--Recent Developments--Transactions Between the Company and
CCA ," the Company and CCA intend to amend the terms of the CCA leases to
restructure the lease payments due the Company under the CCA Leases, and CCA
has been required to defer payment of the initial installment of accrued
interest due December 31, 1999 under the CCA Note. As the result of the
Restructuring and related transactions, if completed, the CCA Leases, as well
as the other contractual arrangements between the Company and CCA, will be
canceled and of no further force and effect. Notwithstanding the foregoing, the
following discussion outlined the terms of the existing CCA Leases and certain
other contractual relationships between the Company and CCA.
LEASES
CCA is the Company's primary tenant, leasing 34 of the Company's 43
currently operating facilities. In connection with the 1999 Merger, the Company
and CCA entered into the CCA Leases with a primary term of 12 years (the "Fixed
Term") with respect to each facility currently leased by CCA. Each CCA Lease
conveys a leasehold interest in the land, the buildings and structures and
other improvements thereon, easements, rights and similar appurtenances to such
land and improvements, and permanently affixed equipment, machinery and other
fixtures relating to the operation of the facility and all personal property
necessary to operate the facility for its intended purpose (collectively, the
"CCA Leased Property"). Each CCA Lease permits CCA to operate the CCA Leased
Property only as a correctional or detention facility. CCA has the
responsibility in each CCA Lease to obtain and maintain all licenses,
certificates and permits in order to use and operate each facility.
The rent for the first year for each facility under the CCA Leases was
initially set at a fixed amount (the "Annual Base Rent") and is expected to
increase each year by an amount (the "Additional Rent"). Under the CCA Leases
as amended, Annual Base Rent and Additional Rent for each CCA Leased Property
will be payable in semi-annual installments (rather than in monthly
installments as set forth in the existing CCA Leases). The obligations of CCA
under each CCA Lease are cross-defaulted to each of the other CCA Leases with
respect to payment and certain other defaults. The Company has general recourse
to CCA under the CCA Leases, although CCA's payment obligations under such CCA
Leases are not secured by any assets of CCA.
The CCA Lease for each CCA Leased Property may be extended at fair
market rates for three additional five-year terms beyond the Fixed Term (the
"Extended Terms"), but only upon the mutual agreement of the Company and CCA.
Fair market rates for Extended Terms will be determined mutually by the Company
and CCA based on their respective analyses of the market for the relevant
facility. The Fixed Term and Extended Terms under each CCA Lease are subject to
earlier termination upon the occurrence of certain contingencies described in
the CCA Lease. Additionally, each CCA Lease may be terminated by the Company,
at its option, at any time after the first five years of the CCA Lease, upon 18
months' written notice to CCA.
Each CCA Lease is what is commonly known as a "triple-net" lease or
"absolute net" lease, under which CCA is to pay the Annual Base Rent and all
additional charges. Under each CCA Lease, CCA must, at its sole cost and
expense, maintain each CCA Leased Property in good order, repair and appearance
and must make structural improvements or repairs which may be necessary and
appropriate to keep such CCA Leased Property in good order, repair and
appearance, excluding ordinary wear and tear. CCA, at its sole cost and
expense, may make alterations,
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additions, changes and/or improvements to each CCA Leased Property with the
prior written consent of the Company, provided that the value and primary
intended use of such CCA Leased Property is not impaired. Each CCA Lease
provides that, at the request of CCA, the Company may make capital additions.
In certain situations, a capital addition to CCA Leased Property may be made
directly by CCA and financed by third parties, with the prior written consent
of the Company. In the case of a capital addition not undertaken or financed by
the Company, the Company will have an option to acquire and lease back to CCA
such capital addition for a period of 10 years following the date on which
inmates are first received at such capital addition, at a cost equal to the
fair market value of such capital addition and at an annual rental rate equal
to fair market rental rates.
The CCA Leases provide that CCA may not, without the prior written
consent of the Company, assign, sublease, mortgage, pledge, hypothecate,
encumber or otherwise transfer any CCA Lease or any interest therein with
respect to all or any part of the CCA Leased Property.
OTHER CONTRACTUAL RELATIONSHIPS
In connection with the 1999 Merger, the Company and CCA entered into a
right to purchase agreement (the "Right to Purchase Agreement"), whereby the
Company has an option to acquire, and lease back to CCA at fair market value,
any correctional or detention facility acquired or developed and owned by CCA
in the future, for a period of 10 years following the date on which service is
commenced with respect to such facility. For facilities acquired pursuant to
the Right to Purchase Agreement, the initial annual rental rates will be the
fair market rental rates, as determined by the Company and CCA. Additionally,
the Company has a right of first refusal in the event CCA obtains an acceptable
third party offer to acquire or provide mortgage secured financing to finance
more than 90% of the cost of any correctional or detention facility owned by
CCA or which is acquired or developed by CCA or its subsidiaries in the future.
With respect to a sale of any such facility, if the Company declines to
purchase such facility, CCA will be free to sell such facility for a specified
period of time at a price at least equal to the price offered to the Company
and on terms and conditions substantially consistent with those offered to the
Company. With respect to a first mortgage financing of 90% of the cost of any
such facility, if the Company declines to provide such financing on the terms
set forth in such third party offer, CCA will be free to obtain first mortgage
financing from a third party on terms and conditions no less favorable to CCA
than those contained in the third party offer.
The Company has also entered into: (i) an Amended and Restated Services
Agreement with CCA pursuant to which CCA is to serve as a facilitator of the
construction and development of additional facilities on behalf of the Company
for a term of five years from the date of such agreement; (ii) an Amended and
Restated Tenant Incentive Agreement with CCA pursuant to which the Company will
pay to CCA an incentive fee to induce CCA to enter into CCA Leases with respect
to those facilities developed and facilitated by CCA; and (iii) a Business
Development Agreement with CCA pursuant to which CCA will provide marketing and
other business development services on behalf of the Company. With respect to
the Services Agreement, in consideration of a fee, CCA has agreed to perform, at
the direction of the Company, services needed in the construction and
development of correctional and detention facilities, including services related
to identification of potential additional facilities, preparation of proposals,
project bidding, project design, government relations and project marketing.
With respect to the Amended and Restated Tenant Incentive Agreement, the Company
has agreed to pay an incentive fee to CCA for each facility leased by CCA for
which CCA has served as developer and facilitator. Pursuant to the Business
Development Agreement, the Company has agreed to pay CCA a fee for the marketing
and business development services provided to the Company. The Company and CCA
intend to amend the terms of these agreements to defer all fees to be paid by
the Company to CCA under these agreements until September 30, 2000. See "Recent
Developments--Transactions Between the Company and CCA."
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GOVERNMENT REGULATION
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may
be liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. As an owner of correctional and
detention facilities, the Company has been subject to these laws, ordinances
and regulations, and such laws, rules and regulations. In addition, upon the
completion of the Restructuring and related transactions, the Company will also
be subject to these laws, ordinances and regulations as the result of the
Company's, and its subsidiaries', operation and management of the correctional
and detention facilities currently managed and operated by CCA, PMSI and
JJFMSI. The cost of complying with environmental laws could materially
adversely affect the Company's financial condition and results of operations.
Phase I environmental assessments have been obtained on substantially
all of the facilities currently owned by the Company. The purpose of a Phase I
environmental assessment is to identify potential environmental contamination
that is made apparent from historical reviews of such facilities, review of
certain public records, visual investigations of the sites and surrounding
properties, toxic substances and underground storage tanks. The Phase I
environmental assessment reports do not reveal any environmental contamination
that the Company believes would have a material adverse effect on the Company's
business, assets, results of operations or liquidity, nor is the Company aware
of any such liability. Nevertheless, it is possible that these reports do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. In addition, environmental
conditions on properties owned by the Company may affect the operation or
expansion of facilities located on the properties.
Under the terms of the existing CCA Leases, CCA has made various
representations and warranties relating to environmental matters with respect
to each CCA Leased Property. Each CCA Lease requires CCA to indemnify and hold
harmless the Company and any CCA mortgagee from and against all liabilities,
costs and expenses imposed upon or asserted against the Company or the CCA
Leased Property on account of, among other things, any federal, state or local
law, ordinance, regulation, order or decree relating to the protection of human
health or the environment in respect of the CCA Leased Property. Upon
completion of the Restructuring and related transactions, the CCA Leases will
be canceled and will be of no further force and effect.
AMERICANS WITH DISABILITIES ACT
The Company's properties, and those correctional and detention
facilities operated and managed by CCA, PMSI and JJFMSI, are subject to the
Americans with Disabilities Act of 1990, as amended (the "ADA"). The ADA has
separate compliance requirements for "public accommodations" and "commercial
facilities" but generally requires that public facilities such as correctional
and detention facilities be made accessible to people with disabilities. These
requirements became effective in 1992. Compliance with the ADA requirements
could require removal of access barriers and other modifications or capital
improvements at the facilities. Noncompliance could result in imposition of
fines or an award of damages to private litigants.
Under the Company's existing leases, including the CCA Leases, the
lessee is required to make any necessary modifications or improvements to
comply with the ADA. However, the Company does not believe that such costs will
be material because it believes that relatively few modifications are necessary
to comply with the ADA. Upon completion of the Restructuring and related
transactions, however, the CCA Leases will be canceled and will be of no
further force and effect.
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INSURANCE
The Company maintains a general liability insurance policy of $2
million for all of its operations, as well as insurance in amounts it deems
adequate to cover property and casualty risks, workers' compensation and
directors and officers liability. In addition, each lease between the Company
and its lessees, including the CCA Leases, provides that the lessee will
maintain insurance on each leased property under the lessee's insurance policies
providing for the following coverages: (i) fire, vandalism and malicious
mischief, extended coverage perils, and all physical loss perils; (ii)
comprehensive general public liability (including personal injury and property
damage); and (iii) worker's compensation. Under each of these leases, the
Company has the right to periodically review its lessees' insurance coverage and
provide input with respect thereto. CCA currently maintains general liability
coverage of $55 million.
Upon completion of the Restructuring and related transactions, the CCA
Leases will be canceled and will be of no further force and effect. As such, the
Company will be required to obtain and maintain liability insurance
substantially equivalent to that currently held by CCA to cover liabilities
arising from the operation, and in some cases, the leasing of correctional and
detention facilities currently being operated by CCA, as well as sufficient
liability insurance to cover the operation of the correctional and detention
facilities currently operated by PMSI and JJFMSI.
EMPLOYEES
As of December 31, 1999, the Company had 10 full-time employees and no
part-time employees. Of such full-time employees, all were employed at the
Company's corporate offices. None of the Company's employees are subject to a
collective bargaining agreement, and the Company has experienced no
labor-related work stoppages. The Company generally considers its relations with
its personnel to be good.
As of December 31, 1999, CCA employed approximately 8,100 full-time
employees and 137 part-time employees. Of such full-time employees, 189 were
employed at CCA's corporate offices and 8,048 were employed at CCA's facilities
and in its inmate transportation business. CCA employed personnel in the
following areas: clerical and administrative, including facility
administrators/wardens, security, food service, medical, transportation and
scheduling, maintenance, teachers, counselors and other support services. At
December 31, 1999, PMSI employed approximately 3,110 full-time employees and 54
part-time employees. PMSI employed personnel in the following areas: clerical
and administrative, including facility administrators/wardens, security, food
service, medical, transportation and scheduling, maintenance, teachers,
counselors and other support services. As of December 31, 1999, JJFMSI employed
approximately 2,350 full-time employees and 49 part-time employees. JJFMSI
employed personnel in the following areas: clerical and administrative,
including facility administrators/wardens, security, food service, medical,
transportation and scheduling, maintenance, teachers, counselors and other
support services.
Each of the correctional and detention facilities currently operated
under the name "Corrections Corporation of America" by CCA, PMSI and JJFMSI is
managed as a separate operational unit by the facility administrator or warden.
All of these facilities follow a standardized code of policies and procedures.
Neither CCA, PMSI nor JJFMSI has experienced a strike or work stoppage at any of
its facilities. In January 1996, Old CCA reached an agreement with a union to
represent 38 non-security personnel at its Shelby Training Center. This
agreement was renewed in April 1998. In September 1997, Old CCA entered into an
agreement with a union to represent approximately 60 correctional officers at
the Shelby Training Center. In March 1997, Old CCA assumed management of the
D.C. Correctional Treatment Facility in Washington, D.C., and Old CCA agreed to
recognize organized labor in representing certain employees at this facility. In
December 1998, Old CCA finalized an agreement with the union to represent
approximately 120 correctional officers and other support services staff. In the
opinion of the management of each of CCA, PMSI and JJFMSI, overall employee
relations are generally considered good.
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LEGAL PROCEEDINGS
Owners and operators of privatized correctional and detention
facilities are subject to a variety of legal proceedings arising in the ordinary
course of operating such facilities, including proceedings relating to personal
injury and property damage. Such proceedings are generally brought against the
operator of a correctional facility, but may also be brought against the owner.
The Company's lessees, including CCA, PMSI and JJFMSI, as the operators of
correctional and detention facilities, are currently parties to such
proceedings, and, upon completion of the Restructuring and related transactions,
the Company and its subsidiaries also expect to become parties to such
proceedings. The Company does not believe that such litigation, if resolved
against its lessees, or the Company and its subsidiaries, would have a material
adverse effect upon its business or financial position.
The Company's existing leases with its lessees, including the CCA
Leases, generally provide that lessees are responsible for claims based on
personal injury and property damage at such facilities and that the Company's
lessees maintain insurance for such claims. Upon completion of the Restructuring
and related transactions, however, the CCA Leases will be canceled and will be
of no further force and effect. For further discussion of potential legal
proceedings affecting the Company and its lessees, see the information contained
under the heading "-- Risk Factors" herein. For a discussion of specific claims
to which the Company, CCA, PMSI and JJFMSI are a party, including certain
shareholder litigation commenced against the Company, see the information
contained under the headings "-- Recent Developments -- Shareholder Litigation"
and "Legal Proceedings" herein.
COMPETITION
The Company's existing correctional and detention facilities are, and
any additional correctional and detention facilities acquired by the Company,
will be, subject to competition for inmates from private prison managers. In
addition, the correctional and detention facilities currently managed by CCA,
PMSI and JJFMSI are, and the correctional and detention facilities to be managed
by the Company and its subsidiaries upon the completion of the Restructuring and
related transactions, will be, subject to competition for inmates from other
private prison managers. As such, the number of inmates in a particular area
could have a material adverse effect on the operating revenues of the Company's
facilities. In addition, revenues of the facilities will be affected by a number
of factors, including the demand for inmate beds and general economic
conditions. The Company will also be subject to competition for the acquisition
of correctional and detention facilities with other purchasers of correctional
and detention facilities.
RISK FACTORS
As the owner and developer of correctional and detention facilities,
the Company is currently subject to certain risks and uncertainties associated
with, among other things, the corrections and detention industry, investments in
real estate properties, and potential conflicts of interest that could cause
actual results to differ materially from those indicated in certain
forward-looking statements contained herein and elsewhere. These risks, as
identified by the Company, are set forth below. In addition, as a result of the
Company's operation so as to preserve its ability to qualify as a REIT to date,
the Company is also currently subject to certain tax related risks. In the event
the Company completes the Restructuring and related transactions, or another
similar transaction or series of transactions, the Company will also be subject
to risks and uncertainties associated with, among other things, the management
and operation of correctional and detention facilities and the demands placed on
the Company's capital and liquidity as a result of the Fortress/Blackstone or
Pacific Life equity investment, if completed, and taxation as a C corporation
that could cause actual results to differ materially from those indicated in
certain forward-looking statements contained herein and elsewhere. These risks,
to the extent they differ from the risks and uncertainties the Company is
currently subject to, are also set forth below.
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THE COMPANY IS SUBJECT TO RISKS INHERENT IN THE CORRECTIONS AND DETENTION
INDUSTRY
GENERAL. The Company currently owns, or is in the process of
developing, 50 correctional and detention facilities which it leases to both
private prison managers and government agencies. In addition, the Company owns
shares of non-voting common stock in each of CCA, PMSI and JJFMSI, companies
whose sole business is the operation and management of correctional and
detention facilities. As such, the Company's revenues and its ability to make
distributions as a REIT are dependent upon the ability of its tenants, including
CCA, to make rental payments under the terms of the leases and upon the ability
of CCA, PMSI and JJFMSI to make payments to the Company under the terms of
various agreements and as dividends on the shares of CCA, PMSI and JJFMSI
non-voting common stock held by the Company. Accordingly, the Company is subject
to the operating risks generally inherent in the corrections and detention
industry, including those set forth below.
SHORT-TERM NATURE OF GOVERNMENT CONTRACTS. Private prison managers
typically enter into facility management contracts with government entities for
terms of up to five years, with one or more renewal options that may be
exercised only by the contracting government agency. No assurance can be given
that any agency will exercise a renewal option in the future. The contracting
agency typically may also terminate a facility contract at any time without
cause by giving the private prison manager written notice. There also exists the
risk that a facility owned by the Company may not be the subject of a contract
between a private manager and a government entity while it is leased to a
private prison manager since the Company's leases with its lessees generally
extend for periods substantially longer than the contracts with government
entities. Accordingly, if a private prison manager's contract with a government
entity to operate a Company facility is terminated, or otherwise not renewed, or
if such government entity is unable to supply a facility with a sufficient
number of inmates, such event may adversely affect the ability of the
contracting private prison manager to make the required rental or other payments
to the Company.
DEPENDENCE ON GOVERNMENT APPROPRIATIONS. A private prison manager's
cash flow is subject to the receipt of sufficient funding of and timely payment
by contracting government entities. If the appropriate government agency does
not receive sufficient appropriations to cover its contractual obligations, a
contract may be terminated or the management fee may be deferred or reduced. Any
delays in payment could have an adverse effect on the private prison manager's
cash flow and therefore its ability to make payments to the Company, whether in
the form of lease payments or dividends or other payments. Further, the
Company's existing business strategy is, among other things, to acquire
facilities from government entities and to lease those facilities to the
government entity or to finance construction of the facility for the government
entity. The ability of the government entity to make payments under such leases
or in connection with such financing may be dependent upon annual
appropriations.
DEPENDENCE ON ABILITY TO DEVELOP NEW PRISONS AND CONTRACTS. The success
of a private prison manager in obtaining new awards and contracts may depend, in
part, upon its ability to locate land that can be leased or acquired under
favorable terms. Otherwise desirable locations may be in or near populated areas
and, therefore, may generate legal action or other forms of opposition from
residents in areas surrounding a proposed site. Moreover, the private
corrections industry is subject to public scrutiny. Negative publicity about an
escape, riot or other disturbance at a privately managed facility may result in
publicity adverse to the Company, CCA, PMSI or JJFMSI and the private
corrections industry in general. In addition, organized labor unions in many
states, including organized labor unions consisting of state correctional and
detention facility employees, have increasingly opposed the awarding of
contracts to private prison managers. Any of these occurrences or continued
trends may make it more difficult for a private prison manager to renew or
maintain existing contracts or to obtain new contracts or sites on which to
operate new facilities or for the Company to develop or purchase facilities and
lease them to government or private entities, any or all of which could have a
material adverse effect on the Company's business.
INCREASED REGULATION OF THE PRIVATE PRISON INDUSTRY. A substantial
majority of the Company's facilities are managed and operated by private prison
managers. These private prison managers, including CCA, have been increasingly
subject to public scrutiny regarding proposed facilities, opposition from
organized labor and federal and state regulation. For example, legislation has
been proposed or enacted in several states, and has previously been
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introduced in the United States House of Representatives, restricting the
ability of private prison managers to house certain types of inmates, including
at least one state which has attempted to restrict the ability of private prison
management companies to house certain types of out-of-state prisoners in that
state.
OPTIONS TO PURCHASE AND REVERSIONS. Eight of the facilities currently
owned or under development by the Company are or will be subject to an option to
purchase by certain government agencies. If any of these options are exercised,
there exists the risk that the Company will not recoup its full investment from
the applicable facility or that it will be otherwise unable to invest the
proceeds from the sale of the facility in one or more properties that yield as
much revenue as the property acquired by the government entity. In addition,
ownership of two of the Company's facilities currently owned will, upon the
expiration of a specified time period, revert to the respective government
agency contracting with the Company or with CCA. Also, one facility under
development will have its ownership revert back to a government agency under its
contract. See "Properties -- The Facilities" herein for a description of the
terms and conditions of these options to purchase and reversions.
LEGAL PROCEEDINGS. The Company's ownership of correctional and
detention facilities and its current ownership interest in companies which
operate and manage such facilities could expose it to potential third party
claims or litigation by prisoners or other persons relating to personal injury
or other damages resulting from contact with a facility, its managers, personnel
or other prisoners, including damages arising from a prisoner's escape from, or
a disturbance or riot at, a facility owned by the Company. In addition, as an
owner of real property, the Company may be subject to certain proceedings
relating to personal injuries of persons at such facilities. Moreover, legal
proceedings against private prison managers could have a material adverse effect
on the Company's tenants, including CCA, and PMSI and JJFMSI, which could
adversely affect their ability to make lease payments or the other required
payments to the Company, or which could adversely affect the amounts of such
payments.
By effecting the Restructuring and related transactions, and
specifically the Combination, as an owner, operator and manager of correctional
and detention facilities, the Company will become more directly exposed to the
risks inherent in the private corrections and detention industry described
above.
THE COMPANY IS SUBJECT TO TAX RELATED RISKS
The Company has operated so as to preserve its ability to qualify for
taxation as a REIT for federal income tax purposes beginning with its taxable
year ending December 31, 1999. If the Company qualifies for taxation as a REIT,
the Company (subject to certain exceptions) will not be subject to federal
income taxation at the corporate level on its taxable income that it distributes
to its shareholders. As discussed herein under the heading "--Recent
Developments--Restructuring and Related Transactions," the Company has operated
so as to preserve its ability to elect to be taxed as a REIT with respect to its
taxable year ended December 31, 1999. If, however, the Fortress/Blackstone
Restructuring, under its existing terms, is approved by the Company's
shareholders and is subsequently completed, the Company will elect to be taxed
as a C corporation, and not as a REIT, with respect to its taxable year ended
December 31, 1999 and all subsequent taxable years. See "--Recent
Developments Restructuring and Related Transactions." In any event, if the
Company determines to elect to be taxed as a REIT with respect to its 1999
taxable year or in future years, because qualification as a REIT involves the
application of highly technical and complex provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), no assurance can be made that the Company
would qualify as a REIT. If the Company does not elect to be taxed, or otherwise
qualify, as a REIT, it will be subject to federal income tax, including any
applicable alternative minimum tax, on its taxable income at corporate rates.
Failure to qualify as a REIT would therefore reduce the net earnings of the
Company available for distribution to shareholders because of the additional tax
liability to the Company for the year or years involved. To the extent that
distributions to shareholders have been made in reliance upon the Company's
qualifying as a REIT, the Company may be required to borrow funds or to
liquidate certain of its investments to pay the applicable income tax. The
failure to qualify as a REIT would also constitute a default under certain of
the Company's current debt obligations. The Company, however, intends to
refinance and/or amend the terms of its existing indebtedness and is currently
seeking a waiver of this requirement
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pending the completion of the Restructuring. See "--Recent
Developments--Solicitation of Consents for Waivers of, and Amendments to,
Provisions of the Company's and CCA's Outstanding Indebtedness."
In the event that the Company does not elect, or is otherwise unable to
qualify, to be taxed as a REIT, the REIT requirements that the Company pay
dividends equal to at least 95% of its taxable income each year and distribute
the accumulated earnings and profits from any predecessor C corporation will no
longer apply. Although the Company has already distributed the existing earnings
and profits of Old CCA with respect to its 1999 taxable year, it would have no
further obligation to distribute any increase in such earnings and profits
should the Internal Revenue Service (the "IRS") make adjustments thereto in the
future. As a C corporation, future distributions by the Company to its
shareholders will be made at the discretion of the Company's board of directors,
and it is not anticipated that the Company would make any distributions to its
common shareholders in the foreseeable future. As a C corporation, the Company
would be subject to regular corporate rates, and the Company currently estimates
that it will owe approximately $90.0 million in taxes, interest and penalties
for the year ending December 31, 1999 if it does not elect REIT status with
respect to such year. Accordingly, completing the Restructuring and related
transactions, including the Equity Investment, or any similar transactions or
series of transactions, including those transactions contemplated by the Pacific
Life Proposal, will place significant demands on the combined company's
liquidity as the result of the dividend requirements of the convertible
preferred stock and the obligation to pay corporate income taxes as a C
corporation. The company's ability to meet these liquidity requirements will
depend on its ability to borrow under its new credit facility and to generate
sufficient cash from operations. See "Business--Recent
Developments--Restructuring and Related Transactions."
THE COMPANY IS SUBJECT TO RISKS INHERENT IN INVESTMENT IN REAL ESTATE PROPERTIES
Investments in correctional and detention facilities and any
additional properties in which the Company may invest in the future are subject
to risks typically associated with investments in real estate. As an entity
which has operated so as to preserve its ability to qualify as a REIT, the
Company derives the substantial majority of its revenues from the ownership of
such real estate properties and, therefore its revenues and net income are
directly subject to such risks. Such risks include the possibility that the
correctional and detention facilities, and any additional investment properties,
will generate total rental rates lower than those anticipated or will yield
returns lower than those available through investment in comparable real estate
or other investments. Furthermore, equity investments in real estate are
relatively illiquid and, therefore, the ability of the Company to vary its
portfolio promptly in response to changed conditions will be limited.
Investments in correctional and detention facilities, in particular, subject the
Company to risks involving potential exposure to environmental liability and
uninsured loss. The operating costs of the Company may be affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances and regulations, as well as the cost of complying with future
legislation. Although, the Company's existing CCA Leases require CCA to maintain
insurance with respect to each of the Company's facilities leased to CCA, there
are certain types of losses, such as losses from earthquakes, which may be
either uninsurable or for which it may not be economically feasible to obtain
insurance coverage, in light of the substantial costs associated with such
insurance. As a result, the Company could lose both its capital invested in, and
anticipated profits from, one or more of the facilities owned by the Company.
Upon the completion of the Restructuring and related transactions,
and, in particular, the Combination, the Company will remain subject to these
risks as the result of the Company's continued ownership of correctional and
detention facilities. Moreover, as the result of the cancellation of the CCA
Leases, the Company will be required to maintain insurance with respect to each
of the Company's facilities and will be directly liable should a loss occur at
any of the facilities. As a result, the Company could lose both its capital
invested in, and anticipated profits from, one or more of the facilities owned
by the Company.
DEPENDENCE ON TENANTS FOR REVENUES
As the lessor of correctional and detention facilities, the Company
is currently dependent upon the ability of its tenants to make lease payments to
the Company. CCA is currently the lessee of a substantial majority of the
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Company's facilities. Therefore, the Company is currently dependent for a
substantial portion of its revenues on CCA's ability to make the lease payments
required under the CCA Leases for such facilities. As previously discussed
herein, CCA has incurred substantial losses from operations through the fourth
quarter of 1999. In an effort to address CCA's liquidity, the Company and CCA
intend to amend the terms of the CCA Leases as described herein under the
heading "--Recent Developments--Transactions Between the Company and CCA" to
restructure the payments due the Company under the CCA Leases. CCA's obligation
to make payments under the CCA Leases is not secured by any of the assets of
CCA, although the obligations under the CCA Leases are cross-defaulted so that
the Company could terminate all of the leases if CCA fails to make required
lease payments. Under such circumstances, the Company would be required to find
a suitable lessee for the Company's facilities in order to generate revenue and
to maintain its ability to qualify as a REIT. Due to the unique nature of
correctional and detention facilities, the Company may be unable to locate
suitable lessees or to attract such lessees.
Upon the completion of the Restructuring and related transactions, the
CCA Leases will be canceled and be of no further force and effect and the
Company, through its subsidiaries, would manage and operate the correctional and
detention facilities currently being operated by CCA. The Company would,
however, still lease nine of its facilities to government agencies and private
operators other than CCA, and would thus be dependent on such tenants for a
portion of its revenues.
DEPENDENCE ON OUTSIDE FINANCING TO SUPPORT THE COMPANY'S GROWTH; DILUTIVE EFFECT
OF SUCH FINANCING
The Company's current growth strategy includes acquiring, developing
and expanding correctional and detention facilities as well as other properties.
As an entity which has operated so as to preserve its ability to qualify as a
REIT, the Company is not generally able to fund such growth with cash from its
operating activities because the Company is required to distribute to its
shareholders at least 95% of its taxable income each year in order to qualify as
a REIT. Consequently, the Company must rely primarily upon the availability of
debt or equity capital to fund acquisitions and improvements, the availability
of which cannot be assured.
The Company's existing bank credit facility currently consists of a
$400.0 million revolving loan and $600.0 million in term loans. The bank credit
facility bears interest at a floating rate calculated from either the current
LIBOR rate or an applicable base rate, as may be elected by the Company. The
incurrence of additional indebtedness, and the potential issuance of additional
debt securities, may result in increased interest expense for the Company and
increase the Company's exposure to the risks associated with debt financing and
there can be no assurance that the Company will have access to debt markets to
fund future growth at an acceptable cost. The bank credit facility contains
restrictions upon the Company's ability to incur additional debt and requires
the Company to maintain certain specified financial ratios and a minimum net
worth. These provisions may also restrict the Company's ability to obtain
additional debt capital or limit its ability to engage in certain transactions.
In addition, the board of directors of the Company has adopted a policy of
limiting indebtedness to not more than 50% of the Company's total
capitalization, which could also limit the Company's ability to incur additional
indebtedness to fund its continued growth. As of December 31, 2000, the Company
was not in compliance with certain financial and other covenants under its bank
credit facility and under the terms of certain other indebtedness. The Company
intends to request the consent of its lenders with respect to a waiver of these
provisions. See "--Recent Developments--Solicitation of Consents for Waivers of,
and Amendments to, Provisions of the Company's and CCA's Outstanding
Indebtedness." There can be no assurance, however, that the Company will obtain
such waivers. The failure to obtain such waivers or any additional breaches of
these covenants could result in the acceleration of the Company's outstanding
indebtedness under the bank credit facility. The Company may not be able to
refinance or repay this indebtedness in full under such circumstances. There
also can also be no assurance that the Company will have access to the capital
markets to fund future growth at an acceptable cost.
LACK OF CONTROL OVER DAY-TO-DAY OPERATIONS AND MANAGEMENT OF ITS FACILITIES
To qualify as a REIT for federal income tax purposes, the Company
cannot operate, or participate in decisions affecting the operations of, its
facilities or those government-owned facilities managed by CCA, PMSI or JJFMSI.
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Accordingly, the Company's lessees control the operations of its facilities
pursuant to long-term "triple-net" leases, most of which have initial terms of
12 years and three renewal terms of five years each, exercisable upon the mutual
agreement of the lessee and the Company. During the terms of the leases, the
Company does not have the authority to require lessees to operate the facilities
in a particular manner or to govern any particular aspect of their operation,
except as set forth in the leases. Thus, even if the Company believes a lessee
is operating a facility inefficiently or in a manner adverse to the Company's
interests, the Company may not require a lessee to change its method of
operation. The Company is limited to seeking redress only if the lessee violates
the terms of a lease, in which case the Company's primary remedy is to terminate
the lease or, in certain circumstances, all of the leases with that particular
lessee, and seek to recover damages from the lessee. If a lease is terminated,
the Company is required to find another suitable lessee or risk losing its
ability to elect or maintain REIT status, as applicable. Moreover, PMSI and
JJFMSI control the operations of the government-owned facilities managed and
operated by them, and CCA controls the operations of the facilities managed and
operated by it. The Company will not have the authority to require any of them
to operate the facilities in a particular manner or to govern any particular
aspect of their operation. Accordingly, the Company has no control over the
operations of CCA, PMSI or JJFMSI which provide the basis for any dividends or
other payments to be made to the Company from CCA, PMSI or JJFMSI.
If the Company completes the Restructuring and related transactions,
and, in particular, the Combination, the business operations currently conducted
by each of CCA, PMSI and JJFMSI will be conducted by the Company and its
subsidiaries, and the existing CCA Leases and other agreements between the
Company, CCA, PMSI and JJFMSI will be canceled. As such, the Company will have
control, either directly or indirectly through its subsidiaries, over the daily
operations and management of each facility which is currently managed by CCA,
PMSI or JJFMSI.
POTENTIAL CONFLICTS OF INTEREST MAY HAVE AN EFFECT ON THE COMPANY
Some directors, officers and shareholders of the Company currently
have relationships with the Company, CCA, PMSI and JJFMSI which may create the
potential for a conflict of interest with respect to the business decisions
affecting the Company. Some directors, officers and shareholders of the Company
also have an ownership interest in CCA which may create the potential for a
conflict of interest with respect to the business decisions affecting the
Company. In addition, the significant contractual and other ongoing
relationships between the Company, CCA, PMSI and JJFMSI may present the
potential for conflicts of interest. Such conflicts would impose a risk that
these persons will favor their own interests over the interests of the Company
in connection with the operations of the Company and CCA and their ongoing
relationship. The Company has adopted policies to address these conflicts of
interest. A more detailed discussion of these potential conflicts of interest is
set forth herein under the heading "Certain Relationships and Transactions."
Upon the completion of the Restructuring and related transactions, the business
operations currently conducted by each of CCA, PMSI and JJFMSI will be conducted
by the Company and its subsidiaries and the existing agreements between the
Company, CCA, PMSI and JJFMSI, including the CCA Leases, will be canceled and
will be of no further force and effect. As such, the current potential for
conflicts of interest caused by the status of the Company as a landlord and a
creditor of CCA, and as a shareholder of PMSI and JJFMSI, will be eliminated.
TAX STATUS
The Company has operated so as to preserve its ability to qualify for
taxation as a REIT for federal income tax purposes beginning with its taxable
year ending December 31, 1999. As discussed herein under the heading "--Recent
Developments--Restructuring and Related Transactions," the Company currently
intends to elect to be taxed as a REIT with respect to its taxable year ended
December 31, 1999 and to operate as a C corporation thereafter unless the
Fortress/Blackstone Restructuring, under its existing terms, is approved by the
Company's shareholders and is subsequently completed. In the event, however, the
Company completes the Fortress/Blackstone Restructuring under its existing
terms, subject to shareholder approval, the Company will be required to operate
as a C corporation commencing with its taxable year ended December 31, 1999.
Therefore, there can be no assurance that the Company will be required to not
elect REIT status with respect to its 1999 taxable year under the terms of the
Fortress/Blackstone Restructuring or any other Restructuring proposal accepted
by the Company. Moreover, there can be no assurance
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that the Company will qualify to be taxed as a REIT for its 1999 taxable year in
the event it elects such. Notwithstanding the foregoing, pending the vote of the
Company's shareholders, the Company intends to take such actions as may be
necessary to retain its ability to elect REIT status for its 1999 taxable year
and beyond. In connection therewith, the Company has obtained an extension of
time to file its 1999 federal tax return until September 15, 2000, which enables
the Company to declare sufficient dividends (in cash or securities) with respect
to its 1999 taxable year (equal to approximately $220.0 million) to elect to be
taxed as a REIT for 1999 (and subsequent years) if shareholder approval is not
obtained. If the Restructuring and related transactions, or another similar
transaction or series of transactions, are completed, it is highly unlikely that
the Company will elect, or be eligible, to qualify as a REIT for the taxable
year in which the Restructuring is completed or in any taxable year subsequent
to such Restructuring.
TAXATION AS A REIT
In any year which the Company elects and qualifies for taxation as a
REIT, the Company (subject to certain exceptions) would not be subject to
federal income taxation at the corporate level on its taxable income that is
distributed to its shareholders during the applicable year. Qualification as a
REIT depends on the Company's ability to meet certain distribution and stock
ownership requirements, as well as various qualification tests prescribed in the
Code, as more fully described below.
STOCK OWNERSHIP RESTRICTIONS. As an entity which has operated so as to
preserve its ability to qualify as a REIT, the Company is subject to rules
regarding ownership of its capital stock (the "Stock Ownership Restrictions").
First, the Company, during a substantial portion of its taxable year, must be
beneficially owned by 100 or more persons. Second, during the last half of the
Company's taxable year, not more than 50% of the Company's capital stock may be
owned, directly or indirectly, by five or fewer "individuals," as that term is
defined in the Code. The Company's charter contains certain restrictive
provisions with respect to the direct or constructive ownership of the Company's
capital stock which are designed to assist the Company in satisfying the Stock
Ownership Restrictions. However, the constructive ownership rules in the Code
are complex and may cause shares of the Company's capital stock owned, directly
or indirectly, by a group of related individuals and/or entities to be deemed to
be constructively owned by an individual or entity in violation of the Stock
Ownership Restrictions.
INCOME TESTS. For the Company to be able to qualify as a REIT, it must
satisfy two gross income requirements (the "Income Tests") on an annual basis.
First, at least 75% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property (including, among other
items, Rents from Real Property, as hereinafter defined) or from "qualified
temporary investment income," as defined in the Code (the "75% Income Test").
"Rents from Real Property" generally means the gross amount received for the use
of, or the right to use, a REIT's real property. Rents received by a REIT will
qualify as Rents from Real Property only if the following conditions, among
others, are met: (i) the leases under which such rents are paid must be
respected as "true leases" for federal income tax purposes; and (ii) the REIT
receiving rental payments from a corporate tenant, or a 10% shareholder of such
REIT, must not own, directly or constructively, 10% or more of the voting power
or total number of outstanding shares of such corporate tenant (a "Related Party
Tenant"). Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
investments related to real property or from certain other types of passive
income (the "95% Income Test").
Due to certain aspects of the Company's relationship with CCA, the IRS
may not consider part or all of the payments that the Company receives from CCA
under the CCA Leases to be Rents from Real Property. First, the IRS could
recharacterize the CCA Leases as service contracts or partnership agreements,
rather than as "true leases." Second, the IRS could recharacterize the CCA Note
as equity for federal income tax purposes, which could result in the Company
being deemed to own in excess of 10% of the total outstanding capital stock of
CCA. If either of those events occur, part or all of the payments under the CCA
Leases would not be considered Rents from Real Property. In either event, based
upon the expected amount of rent payments under the CCA Leases, the Company
likely would not satisfy either the 75% Income Test or the 95% Income Test and,
as a result, would not be able to elect REIT status.
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As described herein under the heading "Business--General Development of
Business--Recent Developments --Transactions Between the Company and CCA," the
Company and CCA intend to amend the terms of the CCA Leases to restructure the
payments due the Company under the CCA Leases.
The Company also realizes on a regular basis: (i) interest income
under the CCA Note; (ii) license fees under the Trade Name Use Agreement
relating to the use of the CCA name; and (iii) dividend income on its non-voting
common stock in PMSI and JJFMSI, some or all of which will not be qualifying
income under the 75% Income Test and the 95% Income Test. Taking into account
these other sources of income, the Company believes it has satisfied the 75%
Income Test and the 95% Income Test with respect to its 1999 tax year. The IRS,
however, may assert that the payments under the CCA Leases are excessive and
treat the excess as attributable to the Trade Name Use Agreement, the management
contracts acquired in connection with the issuance of the CCA Note or some other
source. CCA has been required to defer the first scheduled payment of accrued
interest under the CCA Note. See "Business--General Development of
Business--Recent Developments --Transactions between the Company and CCA."
ASSET TESTS. For the Company to be able to qualify as a REIT, at the
close of each quarter of its taxable year it must also satisfy three tests
relating to the nature of its assets (the "Asset Tests"). First, at least 75% of
the value of the Company's total assets (determined in accordance with GAAP)
must be represented by real estate assets, cash, cash items and government
securities. Second, the value of any one issuer's securities owned by the
Company (other than those qualifying for the 75% test) may not exceed 5% of the
value of the Company's total assets. Third, the Company may not own more than
10% of any one issuer's outstanding voting securities. These Asset Tests are
applied as of the close of each fiscal quarter. After initially meeting the
Asset Tests, the Company will not lose its ability to qualify as a REIT for
failure to satisfy the Asset Tests at the end of a later quarter solely by
reason of a change in asset values. Pursuant to valuations determined in good
faith by the Board of Directors of the Company, the Company satisfied the Asset
Tests as of the end of each quarter during 1999. However, the Company's
determination is not binding on the IRS.
DISTRIBUTION REQUIREMENTS. For the Company to be able to qualify as a
REIT, it will be required to make annual distributions to its shareholders in an
amount at least equal to (1) the sum of (a) 95% of the Company's "REIT taxable
income" (as defined in the Code to exclude net capital gains), and (b) 95% of
the net income, if any, from foreclosure property in excess of the special tax
on income from foreclosure property, minus (2) the sum of certain items of
non-cash income. To the extent that the Company does not distribute all of its
net capital gain or distribute at least 95% (but less than 100%) of its REIT
taxable income, as adjusted, it will be subject to tax on the undistributed
portion, at regular corporate tax rates. Furthermore, if the Company fails to
distribute for each calendar year at least the sum of (a) 85% of its ordinary
income for such year, (b) 95% of its net capital gain for such year, and (c) any
undistributed ordinary income and capital gain net income from prior periods,
the Company will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
Prior to the 1999 Merger, Old CCA operated as a taxable corporation
for federal income tax purposes since its inception, and, therefore, generated
accumulated earnings and profits to the extent its taxable income, subject to
certain adjustments, was not distributed to its shareholders. To preserve its
ability to qualify as a REIT, the Company was required to distribute all of Old
CCA's earnings and profits before the end of 1999. If in the future the IRS
makes adjustments increasing Old CCA's earnings and profits, the Company may be
required to make additional distributions equal to the amount of the increase.
The Company distributed approximately $217.7 million in dividends in
1999. Under certain ordering rules contained in the Code, these dividends were
applied first to Old CCA's earnings and profits, with the excess being applied
to the 95% distribution requirement. If the Company elects to be taxed as a REIT
for 1999, it will be required to pay in 2000 dividends (in cash or securities)
and excise taxes of up to approximately $220.0 million, a substantial portion of
which would be required to be paid in the year 2000, with the remainder, if any,
to be paid in later years and may be required to pay additional dividends in the
future should the IRS make adjustments increasing Old CCA's earnings and
profits.
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TAX LEGISLATION. The REIT industry is subject to regulation by
Congress. Legislation affecting REITs could be introduced in Congress at any
time. Moreover, legislation, as well as administrative interpretations or court
decisions, could also change the tax laws with respect to REIT qualification and
the federal income tax consequences of such qualification. The adoption of any
such legislation, regulation, administrative interpretation or court decision
could have a material adverse effect on the results of operations, financial
condition and prospects of the Company for so long as the Company elects to
qualify as a REIT.
TAXATION AS A C CORPORATION
In the event that the Company does not elect, or is otherwise unable
to qualify, to be taxed as a REIT, the REIT requirements that the Company pay
dividends equal to at least 95% of its taxable income each year and distribute
the accumulated earnings and profits from any predecessor C corporation will no
longer apply. Although the Company has already distributed the existing earnings
and profits of Old CCA with respect to its 1999 taxable year, it would have no
further obligation to distribute any increase in such earnings and profits
should the IRS make adjustments thereto in the future. Additionally, any
distributions which the Company paid to the shareholders of the Company would
not be deductible for purposes of computing the Company's taxable income and the
Company would be subject to income tax, including any applicable alternative
minimum tax, on its taxable income at regular corporate rates. As such, the
Company will be required to reflect the appropriate provision for income taxes
in its financial statements in accordance with SFAS No. 109. As a C corporation,
the Company would be subject to regular corporate rates, and the Company
currently estimates that it will owe approximately $90.0 million in taxes,
interest and penalties for the year ending December 31, 1999 if it does not
elect REIT status with respect to such year.
DISTRIBUTIONS ON, AND INVESTMENT IN COMMON STOCK. As a C corporation,
future distributions by the Company to its shareholders would be made at the
discretion of the Company's board of directors, and it is not anticipated that
the Company would make any distributions to its common shareholders in the
foreseeable future. However, any distributions that may be paid by the Company
to a corporate shareholder may be eligible for the dividends received deduction,
subject to certain limitations set forth in the Code, whereas distributions paid
by REITs are not eligible for the dividends received deduction. As a C
corporation, investments in the Common Stock will be taxed under the general
rules applicable to investments in stock of regular C corporations, and a holder
of Common Stock will no longer be subject to the special rules governing REITs.
SPECIAL CONSEQUENCES TO NON -U.S. SHAREHOLDERS. Should the Company
fail to elect REIT status commencing with its taxable year ending December 31,
1999, their shares of Common Stock will not be eligible for an exemption from
the Foreign Investment in Real Property Tax Act ("FIRPTA") as stock of a
domestically-controlled REIT and the Company will constitute a "United States
real property holding corporation" within the meaning of FIRPTA.
FOREIGN OPERATIONS
The Company does not currently engage in any foreign operations or
derive revenues from foreign sources. However, the Company, through a wholly
owned subsidiary, has constructed the HMP Forrest Bank Prison, an 800 bed medium
security facility located in Salford, England. The facility, which became
operational in January 2000, is subject to a 25 year lease with Agecroft Prison
Management, Inc. ("APM"). APM is a special purpose entity acting as the
contracting entity for a 25 year prison management contract with an agency of
the U.K. government. APM is a joint venture of a wholly owned subsidiary of
JJFMSI and Sodexho. APM subcontracts the operation of the facility to U.K.
Detention Services Limited, a company incorporated in the U.K. and 50% owned by
a wholly owned subsidiary of JJFMSI and Sodexho. Additionally, in connection
with the 1999 Merger, Old CCA transferred all of the issued and outstanding
capital stock of certain of its subsidiaries, constituting all of its
international operations, to JJFMSI. The Company may, in the future, pursue
other opportunities which may result in the Company or its subsidiaries engaging
in foreign operations or deriving revenues from foreign sources.
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ITEM 2. PROPERTIES.
GENERAL
At March 15, 2000, the Company owned or was in the process of
developing 50 correctional and detention facilities in 17 states, the District
of Columbia and the United Kingdom, of which 43 facilities were operating, four
were under construction or expansion, and three were in the planning stages with
a total aggregate cost of $2.3 billion. At March 15, 2000, Prison Realty leased
34 facilities to CCA, its primary tenant, six facilities to government agencies
and three facilities to private operators. Upon the completion of the
Restructuring and related transactions, and, in particular, the Combination, the
Company will continue to own these correctional and detention facilities and
will operate each of the facilities currently leased to CCA, as well as the
other detention facilities owned by various governments and currently being
operated by CCA, PMSI and JJFMSI.
THE FACILITIES
GENERAL
The facilities owned or under development by the Company can generally
be classified according to the level(s) of security at such facility. Minimum
security facilities are facilities having open housing within an appropriately
designed and patrolled institutional perimeter. Medium security facilities are
facilities having either cells, rooms or dormitories, a secure perimeter, and
some form of external patrol. Maximum security facilities are facilities having
single occupancy cells, a secure perimeter and external patrol or detention
services. Multi-security facilities are facilities with various areas
encompassing either minimum, medium or maximum security. The Company's
facilities can also be classified according to the type(s) of inmates or other
detainees held at such facility, or with respect to its juvenile educational
facilities, the level of security provided for the students attending
educational programs at such facilities. The facilities can, generally be
grouped in this manner into the following five facility types:
- Correctional Facilities. Correctional facilities are used to
house inmates on a permanent basis for the duration of their
sentences.
- Detention Facilities. Detention facilities are multi-security
level facilities used to house inmates of all levels,
including pre-trial and pre-sentence prisoners for the USMS,
inmates sentenced but not yet housed in correctional
facilities, inmates awaiting trial, sentencing or hearing and
persons detained by the INS.
- Juvenile Educational Facilities. Juvenile educational
facilities leased to Community Education Partners, Inc.
("CEP") are used to provide services to at-risk juveniles
attending educational programs in a secure setting. These
facilities may be generally classified as juvenile/minimum
security facilities.
- Processing Centers. Processing centers are used to house
undocumented aliens for the INS and are classified as minimum
to medium security facilities.
- Pre-Parole Transfer Facilities. Pre-parole transfer facilities
are used to hold inmates who have been arrested for technical
violations of their parole agreements with a State Department
of Criminal Justice, Board of Pardons and Paroles. Pre-parole
transfer facilities are classified as minimum security
facilities.
Each of the Company's facilities has been pledged to secure borrowings
under the Company's existing bank credit facility. Information regarding each
facility owned by the Company as of March 15, 2000 is set forth below, grouped
by state:
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DESIGN SECURITY LEASE
FACILITIES LOCATION CAPACITY (1) LEVEL TENANT TERM
---------- -------- --------- ----- ------ ----
DOMESTIC
Eloy Detention Center ELOY, ARIZONA 1,500 MEDIUM CCA 12
CENTRAL ARIZONA DETENTION CENTER FLORENCE, ARIZONA 2,304 MULTI CCA 12
FLORENCE CORRECTIONAL FACILITY FLORENCE, ARIZONA 1,600 MEDIUM CCA 12
CALIFORNIA CORRECTIONAL FACILITY CALIFORNIA CITY, 2,304 MEDIUM CCA 12
CALIFORNIA
LEO CHESNEY CORRECTIONAL CENTER LIVE OAK, CALIFORNIA 240 MINIMUM CORNELL CORRECTIONS 5
KIT CARSON CORRECTIONAL CENTER BURLINGTON, COLORADO 768 MEDIUM CCA 12
BENT COUNTY CORRECTIONAL FACILITY LAS ANIMAS, COLORADO 700 MEDIUM CCA 12
HUERFANO COUNTY CORRECTIONAL CENTER WALSENBURG, COLORADO 752 MEDIUM CCA 12
(2)
D.C. CORRECTIONAL WASHINGTON, D. C. 866 MEDIUM DISTRICT OF COLUMBIA 20
TREATMENT FACILITY (3)
COFFEE CORRECTIONAL FACILITY (4) NICHOLLS, GEORGIA 1,524 MEDIUM CCA 12
WHEELER CORRECTIONAL FACILITY (4) ALAMO, GEORGIA 1,524 MEDIUM CCA 12
LEAVENWORTH DETENTION CENTER LEAVENWORTH, KANSAS 327 (5) MAXIMUM CCA 12
LEE ADJUSTMENT CENTER BEATTYVILLE, KENTUCKY 756 MEDIUM CCA 12
RIVER CITY CORRECTIONAL CENTER LOUISVILLE, KENTUCKY 363 MEDIUM CCA 12
MARION ADJUSTMENT CENTER ST. MARY, KENTUCKY 856 MINIMUM CCA 12
OTTER CREEK CORRECTIONAL CENTER WHEELWRIGHT, 656 MEDIUM CCA 12
KENTUCKY
CROSSROADS CORRECTIONAL CENTER (6) SHELBY, MONTANA 512 MEDIUM CCA 12
PRAIRIE CORRECTIONAL FACILITY APPLETON, MINNESOTA 1,338 MEDIUM CCA 12
SOUTHERN NEVADA WOMEN'S LAS VEGAS, NEVADA 500 MEDIUM STATE OF NEVADA(7) 18
CORRECTIONAL FACILITY
NEW MEXICO WOMEN'S GRANTS, NEW MEXICO 322 (5) MEDIUM CCA 12
CORRECTIONAL FACILITY (8)
CIBOLA COUNTY CORRECTIONS CENTER MILAN, NEW MEXICO 1,012 MEDIUM CCA 12
TORRANCE COUNTY DETENTION FACILITY ESTANCIA, NEW MEXICO 910 MULTI CCA 12
PAMLICO CORRECTIONAL FACILITY (9) BAYBORO, NORTH 528 MEDIUM STATE OF 12
CAROLINA NORTH CAROLINA(10)
MOUNTAIN VIEW CORRECTIONAL FACILITY(9) SPRUCE PINE, 528 MEDIUM STATE OF 12
NORTH CAROLINA NORTH CAROLINA(10)
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DESIGN SECURITY LEASE
FACILITIES LOCATION CAPACITY (1) LEVEL TENANT TERM
---------- -------- --------- ----- ------ ----
QUEENSGATE CORRECTIONAL FACILITY CINCINNATI, OHIO 850 MEDIUM HAMILTON COUNTY, OHIO 5
NORTHEAST OHIO CORRECTIONAL CENTER YOUNGSTOWN, OHIO 2,016 MEDIUM CCA 12
NORTH FORK CORRECTIONAL FACILITY SAYRE, OKLAHOMA 1,440 MEDIUM CCA 12
DIAMONDBACK CORRECTIONAL FACILITY WATONGA, OKLAHOMA 1,440 (5) MEDIUM CCA 12
CIMARRON CORRECTIONAL FACILITY (11) CUSHING, OKLAHOMA 960 MEDIUM CCA 12
DAVIS CORRECTIONAL FACILITY(11) HOLDENVILLE, 960 MEDIUM CCA 12
OKLAHOMA
SHELBY TRAINING CENTER (12) MEMPHIS, TENNESSEE 200 MEDIUM CCA 12
WEST TENNESSEE DETENTION FACILITY MASON, TENNESSEE 600 MULTI CCA 12
WHITEVILLE CORRECTIONAL FACILITY WHITEVILLE, TENNESSEE 1,536 MEDIUM CCA 12
BRIDGEPORT PPT FACILITY BRIDGEPORT, TEXAS 200 MINIMUM CCA 12
EDEN DETENTION CENTER EDEN, TEXAS 1,225 MEDIUM CCA 12
COMMUNITY EDUCATION PARTNERS - DALLAS DALLAS, TEXAS (13) JUVENILE/ CEP 12
COUNTY SCHOOL FOR ACCELERATED MINIMUM
LEARNING
COMMUNITY EDUCATION PARTNERS - HOUSTON, TEXAS (13) JUVENILE/ CEP 12
SOUTHEAST HOUSTON SCHOOL FOR MINIMUM
ACCELERATED LEARNING
HOUSTON PROCESSING CENTER HOUSTON, TEXAS 411 MEDIUM CCA 12
LAREDO PROCESSING CENTER LAREDO, TEXAS 258 MEDIUM CCA 12
WEBB COUNTY DETENTION FACILITY LAREDO, TEXAS 480 MAXIMUM CCA 12
MINERAL WELLS PPT FACILITY MINERAL WELLS, TEXAS 2,103 MINIMUM CCA 12
T. DON HUTTO CORRECTIONAL CENTER TAYLOR, TEXAS 480 MEDIUM CCA 12
INTERNATIONAL
HMP Forrest Bank SALFORD, ENGLAND 800 MEDIUM U.K. DETENTION SERVICES 25
LIMITED
- -----------------------
(1) DESIGN CAPACITY MEASURES THE NUMBER OF BEDS, AND ACCORDINGLY, THE NUMBER OF
INMATES EACH FACILITY IS DESIGNED TO ACCOMMODATE. MANAGEMENT BELIEVES DESIGN
CAPACITY IS AN APPROPRIATE MEASURE FOR EVALUATING PRISON OPERATIONS, BECAUSE THE
REVENUES GENERATED BY EACH FACILITY ARE BASED ON A PER DIEM OR MONTHLY RATE PER
INMATE HOUSED AT THE FACILITY PAID BY THE CORRESPONDING CONTRACTING GOVERNMENT
ENTITY. THE ABILITY OF CCA OR ANOTHER PRIVATE OPERATOR TO SATISFY ITS FINANCIAL
OBLIGATIONS UNDER ITS LEASES WITH THE COMPANY IS BASED IN PART ON THE REVENUES
GENERATED BY THE FACILITIES, WHICH IN TURN DEPENDS ON THE DESIGN CAPACITY OF
EACH FACILITY.
(2) THE FACILITY IS SUBJECT TO A PURCHASE OPTION HELD BY HUERFANO COUNTY WHICH
GRANTS HUERFANO COUNTY THE RIGHT TO PURCHASE THE FACILITY UPON AN EARLY
TERMINATION OF THE LEASE AT A PRICE DETERMINED BY A FORMULA SET FORTH IN
THE LEASE AGREEMENT.
(3) OWNERSHIP OF THE FACILITY AUTOMATICALLY REVERTS TO THE DISTRICT OF COLUMBIA
UPON EXPIRATION OF THE LEASE TERM.
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(4) THE FACILITY IS SUBJECT TO A PURCHASE OPTION HELD BY THE GEORGIA DEPARTMENT
OF CORRECTIONS (THE "GDOC") WHICH GRANTS THE GDOC THE RIGHT TO PURCHASE THE
FACILITY FOR THE LESSER OF THE FACILITY'S DEPRECIATED BOOK VALUE OR FAIR MARKET
VALUE AT ANY TIME DURING THE TERM OF THE MANAGEMENT CONTRACT BETWEEN CCA AND THE
GDOC.
(5) THE FACILITY IS CURRENTLY BEING EXPANDED BY THE COMPANY.
(6) THE STATE OF MONTANA HAS AN OPTION TO PURCHASE THE FACILITY AT FAIR MARKET
VALUE GENERALLY AT ANY TIME DURING THE TERM OF THE MANAGEMENT CONTRACT WITH CCA.
(7) THE STATE OF NEVADA HAS CONTRACTED WITH CCA TO MANAGE AND OPERATE THE
FACILITY.
(8) THE 1995 FACILITY EXPANSION IS SUBJECT TO A PURCHASE OPTION HELD BY THE
NEW MEXICO CORRECTIONAL DEPARTMENT (THE "NMCD") WHICH GRANTS THE NMCD THE RIGHT
TO PURCHASE THE 1995 FACILITY EXPANSION AT ITS FAIR MARKET VALUE AT ANY TIME
DURING THE TERM OF THE MANAGEMENT CONTRACT WITH CCA.
(9) THE STATE OF NORTH CAROLINA HAS AN OPTION TO PURCHASE THE FACILITY AT THE
END OF THE SIXTH YEAR OF THE LEASE AND AT THE END OF EACH YEAR OF THE LEASE
THEREAFTER AT A PURCHASE PRICE EQUAL TO DEPRECIATED BOOK VALUE.
(10) THE STATE OF NORTH CAROLINA HAS CONTRACTED WITH CCA TO MANAGE AND OPERATE
THE FACILITY. (11) THE FACILITY IS SUBJECT TO A PURCHASE OPTION HELD BY THE
OKLAHOMA DEPARTMENT OF CORRECTIONS (THE "ODC") WHICH GRANTS THE ODC THE RIGHT TO
PURCHASE THE FACILITY AT ITS FAIR MARKET VALUE AT ANY TIME.
(12) UPON THE CONCLUSION OF THE THIRTY YEAR LEASE BETWEEN THE COMPANY AND SHELBY
COUNTY, TENNESSEE, THE FACILITY WILL BECOME THE PROPERTY OF SHELBY COUNTY. PRIOR
TO SUCH TIME, (A) IF THE COUNTY TERMINATES THE LEASE WITHOUT CAUSE, THE COMPANY
MAY PURCHASE THE PROPERTY FOR $150,000; (B) IF THE STATE FAILS TO FUND THE
CONTRACT, THEN THE COMPANY MAY PURCHASE THE PROPERTY FOR $150,000; (C) IF THE
COMPANY TERMINATES THE LEASE WITHOUT CAUSE, THEN THE COMPANY SHALL PURCHASE THE
PROPERTY FOR ITS FAIR MARKET VALUE AS AGREED TO BY THE COUNTY AND THE COMPANY;
(D) IF THE COMPANY BREACHES THE LEASE CONTRACT, THEN THE COMPANY MAY PURCHASE
THE PROPERTY FOR ITS FAIR MARKET VALUE AS AGREED TO BY THE COUNTY AND THE
COMPANY; AND (E) IF THE COUNTY BREACHES THE LEASE CONTRACT, THEN THE COMPANY MAY
PURCHASE THE PROPERTY FOR $150,000.
(13) THIS ALTERNATIVE EDUCATIONAL FACILITY IS CURRENTLY CONFIGURED TO
ACCOMMODATE 900 AT-RISK JUVENILES AND MAY BE EXPANDED TO ACCOMMODATE A TOTAL OF
1,400 AT-RISK JUVENILES. THE COMPANY BELIEVES THAT DESIGN CAPACITY DOES NOT
GENERALLY APPLY TO EDUCATIONAL FACILITIES, AND, THEREFORE, THE AGGREGATE DESIGN
CAPACITY OF THE COMPANY'S FACILITIES REFERRED TO IN THIS ANNUAL REPORT DOES NOT
INCLUDE THE TOTAL NUMBER OF AT-RISK JUVENILES WHICH CAN BE ACCOMMODATED AT THIS
FACILITY.
FACILITIES UNDER CONSTRUCTION OR DEVELOPMENT
In addition to owning the facilities listed in the preceding tables,
the Company is currently in the process of developing or constructing seven
facilities, which are scheduled to open on various dates commencing in May 2000.
Set forth below is a brief description of each of the facilities currently under
development or construction by the Company, grouped by state. Unless indicated
otherwise, upon completion of each of the facilities, pending and subject to the
completion of the Restructuring, each of the facilities will be leased to, and
managed by, CCA.
Mendota Correctional Facility. The Mendota Correctional Facility will be located
on 265 acres in Mendota, California. The 261,000 square foot, medium security
facility will have a design capacity of 1,024 beds and is scheduled to open
after 2001.
San Diego Correctional Facility. The San Diego Correctional Facility will be
located on 13 acres in San Diego, California. The 201,000 square foot, medium
security facility will have a design capacity of 1,000 beds and is scheduled to
open in May 2000. This facility will revert to San Diego County, California
approximately 16 years and six months after the date the facility begins
operations.
McRae Correctional Facility. The McRae Correctional Facility will be located on
70 acres in McRae, Georgia. The 297,550 square foot medium security facility
will have a design capacity of 1,524 beds and is scheduled to open in the second
half of 2000.
Millen Correctional Facility. The Millen Correctional Facility will be located
on 102 acres in Millen, Georgia. The 307,600 square foot medium security
facility will have a design capacity of 1,524 beds and is scheduled to open
after 2001.
Stewart County Detention Center. The Stewart County Detention Center will be
located in Stewart County, Georgia. The 297,550 square foot medium security
facility will have a design capacity of 1,524 beds and is scheduled to open in
2001.
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45
Northeast Indiana Youth Village. The Northeast Indiana Youth Village will be
located in Warsaw, Indiana. The juvenile/minimum security facility will have a
design capacity of 144 beds upon completion. No timetable for completion has
been determined.
Tallahatchie County Correctional Center. The Tallahatchie County Correctional
Center is currently under construction and will be located in Tutwiler,
Mississippi. Construction on the 1,104 bed facility began in February 1999 and
the facility is scheduled to open in May 2000.
ITEM 3. LEGAL PROCEEDINGS.
As a result of the 1999 Merger, the Company became subject to a variety
of legal proceedings outstanding as of December 31, 1998 against Old CCA arising
in the ordinary course of Old CCA's business, including certain claims brought
by and on behalf of inmates and employees of facilities managed and operated by
Old CCA prior to the 1999 Merger. The Company does not believe that such
litigation, if resolved against the Company, would have a material adverse
effect upon its business or financial position. Also, as a result of the 1999
Merger, the Company became subject to certain legal proceedings outstanding as
of January 1, 1999 against the Company arising in the ordinary course of the
Company's business, including certain claims arising in connection with the
construction and development of its facilities. The Company does not believe
that such litigation, if resolved against the Company, would have a material
adverse effect upon its business or financial position.
At December 31, 1998, Old CCA was a party to two inmate lawsuits at the
Northeast Ohio Correctional Center for wrongful deaths. These lawsuits were
assumed by the Company in the 1999 Merger. While the outcome of these lawsuits
is not determinable, the Company does not believe that such litigation, if
resolved against the Company, would have a material adverse effect upon its
business or financial position.
The Company was the subject of a purported class action complaint filed
in the Circuit Court for Davidson County, Tennessee, on January 28, 2000. The
lawsuit, captioned White v. Prison Realty Trust, Inc., et al., alleged that the
defendants engaged in unfair and deceptive practice of permitting telephone
service providers exclusive service rights in return for illegal payments and
kickbacks, which exclusive agreements allow and require the providers to charge
unconscionable fees for phone services. This complaint was subsequently
dismissed by the Circuit Court on February 23, 2000. A similar complaint,
captioned Hunt v. Prison Realty Trust, Inc., was filed on February 23, 2000 in
the Circuit Court for Davidson County, Tennessee, naming as defendants the
Company, CCA, JJFMSI, PMSI and Does 1 - 100. Plaintiffs are asking for
unspecified treble damages pursuant to the Tennessee Consumer Protection Act
plus restitution of the amounts collected by the defendants under such
arrangements, as well as a permanent injunction restraining the defendants from
engaging in such conduct, in addition to unspecified damages.
In addition to the foregoing, the Company is also subject to certain
shareholder litigation as described in this Annual Report under the heading "-
Recent Developments - Recent Litigation." The Company is currently investigating
the allegation contained in each of these complaints and/or is defending against
these actions vigorously, as the case may be. However, no assurance can be given
that the determination of one or more of these claims in a manner adverse to the
Company will not have a material adverse effect upon the Company. As a result of
potential liability from these claims and other financial circumstances, the
Company's independent auditors have included an explanatory paragraph in its
audit of the Company's financial statements for the year ended December 31, 1999
expressing substantial doubt as to the Company's ability to continue as a going
concern. See "- Recent Developments - 1999 Financial Statements and Going
Concern Matters."
With the exception of the foregoing matters, the Company is not
presently subject to any material litigation nor, to the Company's knowledge, is
any litigation threatened against the Company, other than routine litigation
arising in the ordinary course of business, some of which is expected to be
covered by liability insurance, and all of which collectively is not expected to
have a material adverse effect on the consolidated financial statements of the
Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 1999. However, in connection with the proposed
Fortress/Blackstone Restructuring, the Company filed the Preliminary Proxy
Statement and intends to hold a special meeting of its shareholders in the
second quarter of 2000 for the approval of the Restructuring and related
transactions. At the date of this Annual Report, the Company has not fixed the
record date for shareholders entitled to notice and eligible to vote at the
special meeting nor the date of the special meeting.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET PRICE OF AND DISTRIBUTIONS ON COMMON STOCK
The Common Stock is traded on the NYSE under the symbol "PZN" and the
Series A Preferred Stock is traded on the NYSE under the symbol "PZN PrA." On
March 15, 2000, the last reported sale price per share of Common Stock was $4.06
and there were 1,558 registered holders and approximately 28,000 beneficial
holders, respectively, of Common Stock.
The Common Stock and Series A Preferred Stock began trading on the NYSE
on January 4, 1999, the first trading day following completion of the 1999
Merger. As such, certain of the information provided under this section relates
to the securities of Old CCA and Old Prison Realty, which, as a result of the
1999 Merger, are no longer traded on the NYSE or on any other securities
exchange or market. The following table sets forth, for the fiscal quarters
indicated, (i) the range of high and low sales prices of the Common Stock, Old
Prison Realty's common shares, and Old CCA's Common Stock on the NYSE, and (ii)
the amount of cash distributions or dividends paid per share:
THE COMPANY
COMPANY PER SHARE
SALES PRICE CASH
DISTRIBUTION
HIGH LOW PAID OR EXPECTED
---- --- TO BE PAID
----------
FISCAL YEAR 1999
First Quarter.............................................. $24.38 $16.63 $0.60
Second Quarter............................................. 22.38 9.25 0.60
Third Quarter.............................................. 14.18 9.00 0.60
Fourth Quarter............................................. 11.69 4.50 0.00
FISCAL YEAR 2000
First Quarter (through March 15, 2000)..................... 6.25 3.63 0.00 (expected)
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OLD PRISON REALTY
OLD PRISON REALTY
SALES PRICE PER SHARE
CASH DISTRIBUTION
HIGH LOW PAID
----- ---- ----
FISCAL YEAR 1998
First Quarter................................................... 44.50 38.50 0.425
Second Quarter.................................................. 41.94 26.38 0.425
Third Quarter................................................... 30.69 17.50 0.480
Fourth Quarter ................................................. 26.75 15.50 0.480
OLD CCA
OLD CCA
SALES PRICE(1)
PER SHARE CASH
HIGH LOW DIVIDEND PAID
----- ------ --------------
FISCAL YEAR 1998
First Quarter................................................... 41.50 32.00 0
Second Quarter.................................................. 35.50 20.25 0
Third Quarter................................................... 24.88 13.13 0
Fourth Quarter ................................................. 22.38 10.50 0
(1) In October 1995, CCA authorized a 2-for-1 stock split on its common stock
effective October 31, 1995. The stock split was paid in the form of a one share
dividend for every share of CCA common stock held by shareholders of record on
October 16, 1995. In June 1996, CCA authorized a 2-for-1 stock split on its
common stock effective July 2, 1996. The stock split was paid in the form of a
one share dividend for every share of CCA common stock held by shareholders of
record on June 19, 1996. All references herein are on a post-split basis and are
not adjusted to reflect the completion of the 1999 Merger.
During 1999, the Company made distributions to its shareholders in
order to preserve its ability to qualify as a REIT for the 1999 taxable year.
Pursuant to the terms of the Securities Purchase Agreement governing the
proposed Fortress/Blackstone Equity Investment, the Company has not paid any
additional dividends on shares of Common Stock pending completion of the
Restructuring, including distributions required to qualify as a REIT subsequent
to 1999. While the Company currently intends to elect to be taxed as a REIT with
respect to its 1999 taxable year and as a C corporation thereafter, if the
Fortress/Blackstone Restructuring is completed under its current terms, the
Company will not elect to qualify as a REIT for tax purposes commencing with its
1999 taxable year. As a C corporation, the Company will not be subject to the
Code's requirements relating to distributions. Following completion of the
Restructuring, the Company
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does not anticipate paying cash dividends on shares of its Common Stock. In
connection with the foregoing, pending the vote of the Company's shareholders at
its special meeting, the Company intends to take such actions as may be
necessary to retain its ability to elect to be taxed as a REIT for its 1999
taxable year and beyond. These actions have included, without limitation,
obtaining an extension of time to file its 1999 federal income tax return until
September 15, 2000, which will enable the Company to declare sufficient
dividends with respect to its 1999 tax year and to make an election to be taxed
as a REIT for 1999 (and subsequent years) if shareholder approval is not
obtained.
SALE OF UNREGISTERED SECURITIES AND USE OF PROCEEDS FROM SALE OF REGISTERED
SECURITIES
SALE OF UNREGISTERED SECURITIES
The following description sets forth sales or other issuances of
unregistered securities by each of Old CCA and Old Prison Realty during the
two-year period prior to the 1999 Merger, as well as sales of unregistered
securities by the Company since its formation in September 1998. Unless
indicated otherwise, all securities were issued and sold in private placements
pursuant to the exemption from the Securities Act registration requirements
contained in Section 4(2) of the Securities Act. No underwriters were engaged in
connection with the issuances of securities described below. All references in
this description to Old CCA common stock and Old Prison Realty common shares are
reflected on a converted basis assuming the completion of the 1999 Merger. In
the 1999 Merger, all outstanding shares of CCA common stock, including
unregistered shares, were exchanged for shares of Common Stock at an exchange
ratio of 0.875 to 1, and all outstanding Old Prison Realty common shares were
exchanged for shares of Common Stock at an exchange ratio of 1 to 1, all
pursuant to an effective Registration Statement on Form S-4 (Reg. no.
333-65017), filed with the Commission on September 30, 1998 and declared
effective by the Commission on October 16, 1998 (the "Registration Statement on
Form S-4").
OLD CCA. In February and August 1997, CCA issued an aggregate of
878,098 shares of CCA common stock to Pacific Mutual Life Insurance Company and
PM Group Life Insurance Company pursuant to the conversion of a portion of
certain of its 8.5% Convertible Extendable, Subordinated Notes originally issued
in 1992.
In December 1994, 664,793 shares of Old CCA common stock were acquired
by American Corrections Transport, Inc., a Tennessee corporation ("ACT"),
pursuant to the Share Exchange Agreement by and among Old CCA, TransCor America,
Inc. ("TransCor, Inc."), and the shareholders of TransCor, Inc. in connection
with Old CCA's acquisition of TransCor, Inc. ACT was a shareholder of TransCor,
Inc. at the time of the 1994 exchange. Subsequently, in October 1997, Old CCA
agreed to exchange those shares of CCA common stock held by ACT for 379,882
shares of Old CCA's newly authorized series B convertible preferred stock (the
"Old CCA Series B Preferred Stock"). ACT agreed to liquidate and distribute its
assets, including the Old CCA Series B Preferred Stock, to its shareholders
immediately following the exchange. Accordingly, on October 2, 1997, Old CCA,
ACT, the majority shareholders of ACT, and one additional individual entered
into an Exchange Agreement to effectuate the foregoing transaction (the "1997
ACT Exchange Agreement"). As a condition to the exchange, ACT agreed to place
189,949 shares of the Old CCA Series B Preferred Stock into escrow, with such
shares being held to satisfy any claim, loss, liability, costs and expenses
directly or indirectly relating to or resulting from or arising out of the 1997
ACT Exchange Agreement and the consummation of the transactions.
The exchange was structured as a tax-free reorganization under the
meaning of Section 368(a)(1)(C) of the Code, and ACT and its shareholders
obtained certain tax benefits as a result of the 1997 exchange transaction. Old
CCA assumed no liabilities of ACT as a result of the exchange. The rights and
preferences of the Old CCA Series B Preferred Stock, generally, were as follows:
The shares were convertible into shares of Old CCA common stock on a 1.94 to 1
basis, subject to adjustment, and were automatically convertible into shares of
Old CCA common stock upon notification of Old CCA. The holders of the Old CCA
Series B Preferred Stock could convert the shares into shares of Old CCA's
common stock in varying increments through September 1, 2000, at which time up
to 75% could be converted. The holders of the Old CCA Series B Preferred Stock
could not transfer or assign such shares before September 1, 2000, except upon
death. The holders of the Old CCA Series B Preferred Stock were to share in
distribution upon an event of
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sale or liquidation along with holders of Old CCA common stock based on their
respective ownership. The Old CCA Series B Preferred Stock had the same voting
rights as Old CCA common stock, and no dividends were to be declared and paid on
the Old CCA common stock unless dividends were declared and paid on the Old CCA
Series B Preferred Stock at the same time at a rate equal to twice that of the
Old CCA common stock.
On October 15, 1998, Old CCA issued 43,750 shares of Old CCA common
stock to a director, in consideration of a purchase price of $756,250 paid to
Old CCA. These shares were purchased pursuant to an agreement between Old CCA
and the director, and such sale was approved in advance by the board of
directors of Old CCA.
On September 18, 1998, pursuant to the 1997 ACT Exchange Agreement, Old
CCA exercised its right to convert the Old CCA Series B Preferred Stock into
shares of Old CCA common stock by providing notice to each holder of shares of
Old CCA Series B Preferred Stock. On October 2, 1998, Old CCA converted each
outstanding share of Old CCA Series B Preferred Stock into 1.94 shares of Old
CCA common stock. As a result of this conversion, Old CCA issued an aggregate of
639,030 shares of Old CCA common stock, including 322,432 shares of Old CCA
common stock to be held in escrow pursuant to the terms of the 1997 ACT Exchange
Agreement, without registration under the Securities Act in reliance upon
Section 3(a)(9) of the Securities Act. The Company received no cash proceeds
from the exchange of the Old CCA Series B Preferred Stock.
OLD PRISON REALTY. Old Prison Realty was formed as a Maryland real
estate investment trust in April 1997, with one shareholder being issued 1,000
Old Prison Realty common shares in consideration of $1,000.
On July 18, 1997, upon completion of Old Prison Realty's initial public
offering of 21,275,000 Old Prison Realty common shares, D. Robert Crants, III
and Michael W. Devlin each received 150,000 Old Prison Realty common shares as a
development fee and for services rendered and as reimbursement of actual costs
incurred in connection with the formation of Old Prison Realty, the completion
of Old Prison Realty's initial public offering and the closing of Old Prison
Realty's purchase of nine facilities from Old CCA. The reimbursed costs include
certain costs related to property due diligence, employee compensation, travel
and overhead. Old Prison Realty received no cash proceeds from the issuance of
these 300,000 common shares.
THE COMPANY. The Company was formed as a Maryland corporation in
September 1998, with one shareholder being issued 100 shares of common stock in
consideration of $1,000. Upon completion of the 1999 Merger, these shares of
Company Common Stock were repurchased by the Company.
The Company sold $40.0 million aggregate principal amount of the MDP
Notes, pursuant to the terms of a Note Purchase Agreement, dated December 31,
1998, by and between the Company and MDP. The first $20.0 million tranche closed
on December 31, 1998, and the second $20.0 million tranche closed on January 29,
1999, resulting in aggregate proceeds to the Company of $40.0 million. The notes
bear interest at 9.5% per annum and are due December 31, 2008. The notes are
convertible into shares of common stock at a conversion price of approximately
$23.63 per share, as adjusted under the terms of the Note Purchase Agreement.
The Company also entered into a Registration Rights Agreement with MDP regarding
the registration of the shares of the Company's Common Stock to be issued to MDP
upon the conversion of the notes.
In connection with the 1999 Merger, the Company issued $30.0 million
aggregate principal amount 7.5% convertible, subordinated notes, due February
28, 2005, to PMI Mezzanine Fund, L.P. The notes, which replace the convertible,
subordinated notes previously issued by Old CCA on February 29, 1996, are
currently convertible into the Company's Common Stock at a conversion price of
$23.63 per share, as adjusted pursuant to the terms of the notes. The Company
received no cash proceeds from the issuance of the notes.
Also in connection with the 1999 Merger, the Company assumed: (i) the
1996 Sodexho Convertible Notes, which, upon assumption, were convertible into
701,135 shares of Common Stock at a conversion price of $28.53 per share; and
(ii) the $7.0 million 8.5% Convertible Subordinated Notes due November 7, 1999,
originally issued to
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Sodexho by CCA on June 23, 1994 (the "1994 Sodexho Convertible Notes"), which,
upon assumption, were convertible into 1,709,699 shares of the Company's Common
Stock at a conversion price of $4.09 per share. The Company also assumed Old
CCA's obligations under a forward contract between Old CCA and Sodexho (the
"Sodexho Forward Contract"), in which Old CCA had agreed to sell to Sodexho up
to $20.0 million of convertible, subordinated notes, bearing interest at LIBOR
plus 1.35%, at any time prior to December 1999, which, upon assumption, were
convertible into 2,564,103 shares of Common Stock at a conversion price of $7.80
per share. The Company received no cash proceeds from the assumption of these
notes and the assumption of Old CCA's obligations under the Sodexho Forward
Contract.
On January 6, 1999, the Company issued a total of 1,410 shares of
Common Stock to eight non-employee directors of the Company. These shares were
issued to these directors in satisfaction of Old Prison Realty's obligations
under the Old Prison Realty Non-Employee Trustees' Compensation Plan, under
which these individuals, previously trustees of Old Prison Realty, opted to
receive Old Prison Realty common shares in lieu of certain trustees' fees. On
January 29, 1999, the Company issued 75,717 shares of Common Stock to a former
director of Old CCA in satisfaction of its obligations under the Old CCA
Non-Employee Directors' Stock Option Plan, which was assumed by the Company in
the Merger. These shares of Common Stock were valued based on market prices of
the Common Stock on the NYSE. The Company received no cash proceeds from the
issuance of these shares of Common Stock.
On March 8, 1999, the Company, in satisfaction of its obligations under
the Sodexho Forward Contract, issued the $20.0 million Sodexho Floating Rate
Convertible Note, due March 8, 2004, in consideration of cash proceeds of $20.0
million. Immediately after issuance of the Sodexho Floating Rate Convertible
Note, the Company, pursuant to Sodexho's exercise of its conversion option,
converted the 1996 Sodexho Convertible Notes, the 1994 Sodexho Convertible Notes
and the Sodexho Floating Rate Convertible Note into 4,974,937 shares of the
Company's Common Stock. The Company received no proceeds from the issuance of
these shares of the Company's Common Stock to Sodexho.
USE OF PROCEEDS FROM THE SALE OF REGISTERED SECURITIES
The following description sets forth certain sales or other issuances
of registered securities by each of Old CCA, Old Prison Realty and the Company,
as well as the application of the proceeds from such sales. Unless otherwise
indicated, no underwriters were engaged in connection with the issuances of
securities described below. In connection with the 1999 Merger, all outstanding
shares of Old CCA common stock, all outstanding Old Prison Realty common shares
and all outstanding Old Prison Realty preferred shares were exchanged for shares
of the Company pursuant to the Registration Statement on Form S-4.
OLD CCA OFFERING OF COMMON STOCK ON A CONTINUOUS AND DELAYED BASIS. On
November 4, 1998, Old CCA filed a Registration Statement on Form S-3 (Reg. no.
333-66783), to register up to 2,981,978 shares of Old CCA common stock for sale
on a continuous and delayed basis using a "shelf" registration process. During
December 1998, Old CCA, in a series of private placements, sold 2,882,296 shares
of Old CCA common stock to institutional investors pursuant to this registration
statement, which was declared effective by the Commission on November 16, 1998.
The cash proceeds to Old CCA from these sales were approximately $65.5 million,
and these proceeds were utilized by Old CCA for general corporate purposes,
including the repayment of indebtedness, financing capital expenditures and
working capital.
OLD PRISON REALTY OFFERING OF OLD PRISON REALTY 8.0% SERIES A
PREFERRED STOCK AND OFFERING OF COMMON SHARES ON A CONTINUOUS AND DELAYED BASIS.
On January 30, 1998, pursuant to Old Prison Realty's Registration Statement on
Form S-11 (Reg. no. 333-43935), declared effective by the Commission on January
26, 1998, Old Prison Realty completed an offering of 4,300,000 shares Old Prison
Realty 8.0% series A preferred stock (including 300,000 Old Prison Realty series
A preferred stock issued as a result of the exercise of an over-allotment option
by the underwriters), at a price of $25.00 per share. The Old Prison Realty
series A preferred stock was redeemable at any time on or after January 30,
2003, at $25.00 per share, plus dividends accrued and unpaid to the redemption
date. The Old
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Prison Realty series A preferred stock had no stated maturity, sinking fund
provision or mandatory redemption and was not convertible into any other
securities of Old Prison Realty. Dividends on the Old Prison Realty series A
preferred stock were cumulative from the date of original issue of such shares
and were payable quarterly in arrears on the 15th day of January, April, July
and October of each year, to shareholders of record on the last day of March,
June, September and December of each year, respectively, at a fixed annual rate
of 8.0%. The shares were listed on the Exchange under the symbol "PZN PrA." The
offering of the Old Prison Realty series A preferred stock was underwritten by a
syndicate of underwriters lead managed by J.C. Bradford & Co., NationsBanc
Montgomery Securities LLC, PaineWebber Incorporated, Stephens Inc. and Wheat
First Butcher Singer. The gross proceeds from the sale of the Old Prison Realty
series A preferred stock were approximately $107.5 million, generating net
proceeds to Old Prison Realty of approximately $103.5 million after deduction of
the underwriting discount and estimated offering expenses. Old Prison Realty
used approximately $72.7 million of the net proceeds to repay outstanding
indebtedness under its existing bank credit facility. The balance was used to
make future acquisitions of correctional and detention facilities and for
general corporate purposes. Pursuant to the requirements of the SEC, Old CCA was
required to act as a co-registrant on this registration statement (Reg. no.
333-43935-01) with respect to this offering. Old CCA, however, received no
proceeds from this offering.
On September 16, 1998, Old Prison Realty filed a Registration Statement
on Form S-3 (Reg. no. 333-63475) with the Commission to register an aggregate of
$500.0 million in value of Old Prison Realty common shares, preferred shares and
common share rights or warrants. Pursuant to this registration statement, which
became effective as of October 14, 1998, Old Prison Realty issued 324,000 of Old
Prison Realty common shares to certain trustees and officers of Old Prison
Realty in a series of private placements, resulting in aggregate cash proceeds
to Old Prison Realty of approximately $6.9 million. Old Prison Realty used these
proceeds to reimburse the cost of a like number of Old Prison Realty common
shares purchased by Old Prison Realty on the open market. Prison Realty also
issued a total of 3,732,542 Old Prison Realty common shares to institutional
investors in a series of private placements pursuant to this registration
statement, resulting in aggregate cash proceeds to Old Prison Realty of $85.0
million. These proceeds were used by Old Prison Realty for general corporate
purposes, including, among others, repaying its obligations as they became due,
redeeming its outstanding indebtedness, capital expenditures and working
capital. Pursuant to the requirements of the SEC, Old CCA was required to act as
a co-registrant on Old Prison Realty's registration statement (Reg. no.
33-63475- 01) with respect to this offering. Old CCA, however, received no
proceeds from this offering.
THE COMPANY'S ISSUANCE OF CAPITAL STOCK IN 1999. In the 1999 Merger,
the Company issued 105,272,183 shares of Common Stock in exchange for all
outstanding shares of Old CCA common stock and all outstanding Old Prison Realty
common shares pursuant to the Registration Statement on Form S-4. In the 1999
Merger, each outstanding share of Old CCA common stock was converted into the
right to receive .875 share of the Company's Common Stock, and each outstanding
Prison Realty common share was converted into 1.0 share of the Company's Common
Stock. The Company also issued 4,300,00 shares of Series A Preferred Stock in
exchange for all outstanding Old Prison Realty Preferred Shares in the 1999
Merger. In the Merger, each outstanding share of Old Prison Realty Series A
Preferred Stock was converted into 1.0 share of the Company's Series A Preferred
Stock with identical liquidation preferences and dividend and redemption rights.
The Company received no proceeds from this exchange. In connection with the 1999
Merger, Stephens Inc. provided an opinion to the board of directors of Old CCA
that the 1999 Merger was fair, from a financial point of view, to Old CCA and
its shareholders, and J.C. Bradford & Co., LLC, provided an opinion to the board
of trustees of Old Prison Realty that the 1999 Merger was fair, from a financial
point of view, to Old Prison Realty and its shareholders.
On January 11, 1999, the Company filed the Shelf Registration
Statement, which became effective on January 19, 1999 with the Commission to
register an aggregate of $1.5 billion in value of the Company's Common Stock,
preferred stock, Common Stock purchase rights, debt securities and warrants for
sale on a continuous or delayed basis. As of March 15, 2000, the Company has
sold approximately 6.7 million shares of the Company's Common Stock under the
Shelf Registration Statement, resulting in net proceeds of approximately $120.4
million. These net proceeds have been used by the Company for general corporate
purposes, including, among others, repaying its obligations as they
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become due, redeeming its outstanding indebtedness, financing, all or in part,
future purchases of real estate properties meeting its business objectives and
strategies, capital expenditures and working capital.
On June 11, 1999, the Company completed its offering of $100.0 million
aggregate principal amount of the Senior Notes. The offering of the Senior Notes
was underwritten by Lehman Brothers, Inc. Net proceeds from the offering were
approximately $95.0 million after deducting expenses payable by the Company in
connection with the offering. The Company used the net proceeds from the sale of
the Senior Notes for general corporate purposes and to repay revolving bank
borrowings under its existing bank credit facility.
On May 14, 1999, the Company registered 10.0 million shares of the
Company's Common Stock for issuance under the Company's DRSPP. As of March 15,
2000, the Company has issued 1,261,432 shares under the DRSPP with 1,252,994 of
these shares issued under the DRSPP's optional cash feature resulting in
proceeds of approximately $12.3 million. The Company has temporarily suspended
the DRSPP pending the completion of the Restructuring and related transactions.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the year ended December 31, 1999
were derived from the audited consolidated financial statements of the Company
and the related notes thereto included elsewhere in this Annual Report. The
following selected financial data for the four years ended December 31, 1998,
December 31, 1997, December 31, 1996 and December 31, 1995, presents Old CCA's
historical selected results of operations prior to and through the date of the
1999 Merger.
PRISON REALTY TRUST, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997 1996 1995
--------- --------- ---------- -------- -------
STATEMENT OF OPERATIONS:
Revenues $ 285,718 $ 662,059 $ 462,249 $292,513 $207,241
--------- --------- --------- -------- --------
Expenses:
Operating -- 496,522 330,470 211,208 153,692
Lease -- 58,018 18,684 2,786 5,904
General and administrative 24,125 28,628 16,025 12,607 13,506
New CCA compensation charge -- 22,850 -- -- --
Write-off of amounts under
Lease arrangements 65,677 -- -- -- --
Impairment Loss 76,433 -- -- -- --
Depreciation and amortization 44,062 14,363 13,378 11,339 6,524
--------- --------- --------- -------- --------
210,297 620,381 378,557 237,940 179,626
--------- --------- --------- -------- --------
Operating income 75,421 41,678 83,692 54,573 27,615
--------- --------- --------- -------- --------
Loan costs write-off 14,567 2,043 -- -- --
Interest expense (income), net 51,921 (2,770) (3,404) 4,224 3,952
Equity in earnings of unconsolidated
entities and amortization of
deferred gain (22,886) -- -- -- --
Loss on deposits of assets 1,995 -- -- -- --
--------- --------- --------- -------- --------
Income before income taxes 29,824 42,405 87,096 50,349 23,663
Provision for income taxes 83,200 15,424 33,141 19,469 9,330
--------- --------- --------- -------- --------
Income (loss) before cumulative
effect of accounting change (53,376) 26,981 53,955 30,880 14,333
Cumulative effect of accounting
change, net of taxes -- 16,145 -- -- --
--------- --------- --------- -------- --------
Net Income (loss) (53,376) 10,836 53,955 30,880 14,333
Preferred stock dividends (8,600) -- -- -- --
--------- --------- --------- -------- --------
Net income (loss) allocable to
common stockholders (61,976) $ 10,836 $ 53,955 $ 30,880 $ 14,333
========= ========= ========= ======== ========
Basic net income (loss) allocable
to common stockholders per
common share:
Before cumulative effect of
accounting change $ (0.54) $ 0.38 $ 0.80 $ 0.49 0.26
Cumulative effect of accounting
change -- (.23) -- -- --
--------- -------- -------- -------- --------
$ (0.54) $ 0.15 $ 0.80 $ 0.49 $ 0.26
========= ======== ======== ======== ========
Diluted net income (loss) allocable
to common stockholders per
common share:
Before cumulative effect of
accounting change $ (0.54) $ 0.34 $ 0.69 $ 0.42 $ 0.21
Cumulative effect of accounting
change -- (.20) -- -- --
--------- -------- -------- -------- --------
$ (0.54) $ .14 $ 0.69 $ 0.42 $ 0.21
========= ======== ======== ======== ========
Weighted average shares outstanding
Basic 115,097 71,380 67,568 62,793 54,475
Diluted 115,097 78,939 78,939 76,160 71,396
BALANCE SHEET:
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Total assets $2,735,922 $1,090,437 $697,940 $ 468,888 $ 213,478
Long-term debt, less current
portion 1,092,907 290,257 127,075 117,535 74,865
Total liabilities excluding
deferred gains 1,209,528 395,999 214,112 187,136 116,774
Stockholders' equity 1,420,349 451,986 348,076 281,752 96,704
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
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OVERVIEW
THE COMPANY
The Company, a Maryland corporation, commenced operations on January 1, 1999
following the 1999 Merger of Old CCA and Old Prison Realty with and into the
Company.
The 1999 Merger has been accounted for as a reverse acquisition of the Company
by Old CCA and as an acquisition of Old Prison Realty by the Company. As such,
Old CCA's assets and liabilities have been carried forward at historical cost,
and the provisions of reverse acquisition accounting prescribe that Old CCA's
historical financial statements be presented as the Company's historical
financial statements prior to January 1, 1999. The historical equity section of
the financial statements and earnings per share have been retroactively restated
to reflect the Company's equity structure, including the exchange ratio and the
effects of the differences in par values of the respective companies' common
stock. Old Prison Realty's assets and liabilities have been recorded at fair
market value, as required by Accounting Principles Board Opinion No. 16,
"Business Combinations" ("APB 16").
OPERATIONS
Prior to the 1999 Merger, Old CCA operated and managed prisons and other
correctional and detention facilities and provided prisoner transportation
services for governmental agencies. Old CCA also provided a full range of
related services to governmental agencies, including managing, financing,
developing, designing and constructing new correctional and detention facilities
and redesigning and renovating older facilities. Since the 1999 Merger, the
Company has specialized in acquiring, developing and owning correctional and
detention facilities as a lessor. The Company has operated so as to preserve its
ability to qualify as a real estate investment trust ("REIT") for federal income
tax purposes for its taxable year ending December 31, 1999. See "Business --
Recent Developments -- Restructuring and Related Transactions."
The Company's results of operations for all periods prior to January 1, 1999
reflect the operating results of Old CCA, and the results of operations
subsequent to January 1, 1999 reflect the operating results of the Company as a
REIT. Management believes the comparison between 1999 and prior years is not
meaningful because the prior years' financial condition, results of operations,
and cash flows reflect the operations of Old CCA and the 1999
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financial condition, results of operations and cash flows reflect the operations
of the Company as a REIT.
As required by the Company's governing instruments, the Company currently
intends to elect to be taxed as a REIT for the year ended December 31, 1999. In
the event the Company completes the Fortress/Blackstone Restructuring under its
existing terms following required shareholder approval in 2000, the Company will
be required to be taxed as a C corporation commencing with the taxable year
ended December 31, 1999. In either event, the Company expects that it will be
taxed as a C corporation in the taxable year ending December 31, 2000 and
thereafter. There can be no assurance that the Company will be required not to
elect REIT status with respect to its 1999 taxable year under the terms of the
Fortress/Blackstone Restructuring or any other Restructuring proposal accepted
by the Company. Moreover, there can be no assurance that the Company will
qualify as a REIT for its 1999 taxable year in the event it elects such.
The following unaudited pro forma operating information presents a summary of
comparable consolidated results of combined operations as a REIT of Old CCA and
Old Prison Realty for the year ended December 31, 1998 (excluding (i) Old CCA's
historical operations, (ii) the CCA compensation charge, (iii) the cumulative
effect of accounting change, (iv) any write off of loan costs, (v) any
non-recurring expenses related to the 1999 Merger, (vi) any write-offs of
amounts due under lease arrangements, (vii) any impairment loss, (viii) any loss
or disposals of assets, and (ix) any provision for income taxes or charge in tax
status), as if the 1999 Merger had occurred as of January 1, 1998. The unaudited
pro forma operating information is presented for comparison purposes only and
does not purport to represent what the Company's results of operations actually
would have been had the 1999 Merger, in fact, occurred on January 1, 1998.
PRO FORMA
TWELVE MONTHS ENDED
DECEMBER 31, 1998
-------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues $ 218,587
Operating income 181,238
Net income available to common shareholders 174,888
Net income per common share:
Basic 1.88
Diluted 1.73
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to CCA
all of the issued and outstanding capital stock of certain wholly-owned
corporate subsidiaries of Old CCA, certain management contracts and certain
other assets and liabilities, and entered into a trade name use agreement as
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described previously. In exchange, Old CCA received the CCA Note and 100% of the
non-voting common stock of CCA. The non-voting common stock represents a 9.5%
economic interest in CCA and was valued at the implied fair market value of $4.8
million. The Company succeeded to these interests as a result of the 1999
Merger. The sale to CCA generated a deferred gain of $63.3 million.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to PMS,
LLC, certain management contracts and certain other assets and liabilities
relating to government-owned adult prison facilities. On January 1, 1999, PMS,
LLC merged with PMSI. In exchange, Old CCA received 100% of the non-voting
membership interest in PMSI valued at the implied fair market value of $67.1
million. The Company succeeded to this interest as a result of the 1999 Merger.
The sale to PMSI generated a deferred gain of $35.4 million.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to
JJFMS, LLC, certain management contracts and certain other assets and
liabilities relating to government-owned jails and juvenile facilities. On
January 1, 1999, JJFMS, LLC merged with JJFMSI. In exchange, Old CCA received
100% of the non-voting membership interest in JJFMSI valued at the implied fair
market value of $55.9 million. The Company succeeded to this interest as a
result of the 1999 Merger. The sale to JJFMSI generated a deferred gain of $18.0
million.
On January 1, 1999, Old Prison Realty merged with and into the Company (the
"Prison Realty Merger"). In the Prison Realty Merger, Old Prison Realty
shareholders received 1.0 share of common stock or 8.0% Series A Cumulative
Preferred Stock of the Company in exchange for each Old Prison Realty common
share or Series A Cumulative Preferred Share. The Prison Realty Merger was
accounted for as a purchase acquisition of Old Prison Realty. Subsequent to the
Prison Realty Merger, the Company believes it has operated so as to qualify as a
REIT and acquires, develops and leases properties rather than operating and
managing prison facilities.
CCA is a private prison management company that operates and manages the
substantial majority of facilities owned by the Company. As a result of the 1999
Merger and certain contractual relationships existing between the Company and
CCA, the Company is dependent on its significant sources of income from CCA. In
addition, the Company pays CCA for services rendered to the Company in
development of its correctional and detention facilities. As of December 31,
1999, CCA leased 34 of the 43 operating facilities owned by the Company. For a
complete description of the contractual arrangements between the Company and
CCA, see "Business -- General Development of Business -- and Recent
Developments."
As the lessor of correctional and detention facilities, the Company is currently
dependent upon the ability of its tenants to make lease payments to the Company.
CCA is currently the lessee of a substantial majority of the Company's
facilities. Therefore, the Company is currently dependent for a substantial
portion of its revenues on CCA's ability to make the lease payments
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required under the CCA Leases for such facilities. As previously discussed
herein, CCA has incurred substantial losses from operations through the fourth
quarter of 1999. In an effort to address CCA's liquidity, the Company and CCA
intend to amend the terms of the CCA Leases as described herein under the
heading "-- Recent Developments -- Transactions Between the Company and CCA" to
restructure the payments due the Company under the CCA Leases. CCA's obligation
to make payments under the CCA Leases is not secured by any of the assets of
CCA, although the obligations under the CCA Leases are cross-defaulted so that
the Company could terminate all of the leases if CCA fails to make required
lease payments. Under such circumstances, the Company would be required to find
a suitable lessee for the Company's facilities in order to generate revenue and
to maintain its ability to qualify as a REIT. Due to the unique nature of
correctional and detention facilities, the Company may be unable to locate
suitable lessees or to attract such lessees.
RESULTS OF OPERATIONS
The Company incurred a net loss for the year ended December 31, 1999 of $53.4
million and has been in default under its bank credit facility (outstanding
balance of $928.2 million at December 31, 1999) and is in default the MDP Notes
(outstanding balance of $40.0 million at December 31, 1999). In addition, the
Company expects to be in default under the bank credit facility, the MDP Notes
and its $30.0 million 7.5% convertible, subordinated notes during 2000. The
defaults relate to failure to comply with certain financial covenants and a
"change in control" provision, as defined in the agreements. The noncompliance
with the requirements under these outstanding obligations could result in the
creditors demanding immediate repayment of these obligations. The events of
default have not been formally declared and no acceleration actions have been
taken by the creditors. However, the Company has acknowledged to the senior
lenders under its bank credit facility that an event of default exists under the
bank credit facility and, as such, the Company has been paying interest at the
default rate thereunder since January 14, 2000. The Company has not obtained
waivers of all noncompliance issues. In addition, as discussed herein under
"Liquidity and Capital Resources" and in "Business -- Recent Developments --
Shareholder Litigation," the Company has significant outstanding shareholder and
other litigation matters. For a fuller description of the Company's
non-compliance with the terms and covenants of its indebtedness and events of
default thereunder, as well as the Company's actions with respect to obtaining
waivers of these matters, see "Business -- Recent Developments -- Solicitation
of Consents for Waivers of, and Amendments to, Provisions of the Company's and
CCA's Outstanding Indebtedness."
Further, CCA, the Company's primary lessee, which the Company is dependent on
for its major sources of income, incurred a net loss of $202.9 million for the
year ended December 31, 1999, has a net working capital deficiency and a net
capital deficiency at December 31, 1999, and is in default under its revolving
credit facility. CCA's default under its revolving credit facility relates to
failure to comply with certain financial covenants. In addition, CCA is in
default under the CCA Note and has not made certain scheduled lease payments to
the Company pursuant to the terms of the CCA Leases. The Company has not
provided CCA with a notice of nonpayment of lease payments due under the
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CCA Leases and thus CCA is not currently in default under the terms of the CCA
Leases.
As of December 31, 1999, the first scheduled payment of interest, totaling
approximately $16.4 million, on the CCA Note was unpaid. Pursuant to the terms
of the CCA Note, CCA was required to make the payment on December 31, 1999;
however, pursuant to the terms of a subordination agreement, dated as of March
1, 1999, by and between the Company and the agent of CCA's revolving credit
facility, CCA is prohibited from making the scheduled interest payments on the
CCA Note when CCA is not in compliance with certain financial covenants. CCA is
not in compliance with these financial covenants and, consequently, is
prohibited from making the scheduled interest payments to the Company. Pursuant
to the terms of the subordination agreement between the Company and the agent of
CCA's revolving credit facility, the Company is prohibited from accelerating
payment of the principal amount of the CCA Note or taking any other action to
enforce its rights under the provisions of the CCA Note for so long as CCA's
revolving credit facility remains outstanding. As of December 31, 1999,
approximately $24.9 million of rents due from CCA to the Company were unpaid.
The terms of the CCA Leases provide that rental payments were due and payable on
December 25, 1999. During 2000, CCA has paid $12.9 million of lease payments
related to 1999 and no lease payments relating to 2000. Also, the independent
public accountants of CCA have indicated in their opinion on the respective 1999
consolidated financial statements that there is substantial doubt about CCA's
ability to continue as a going concern.
Continued operating losses by CCA, declarations of events of default and
acceleration actions by the Company's and CCA's creditors, the continued
inability of CCA to make contractual payments to the Company, and the Company's
limited resources currently available to meet its operating, capital expenditure
and debt service requirements will have a material adverse impact on the
Company's consolidated financial position, results of operations and cash flows.
In addition, these matters concerning the Company and CCA raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments relating to the
recoverability of asset carrying amounts or the amounts of liabilities that
might result should the Company be unable to continue as a going concern.
The Company has limited resources currently available to meet its operating,
capital and debt service requirements. As a result, the Company currently is,
and will continue to be, dependent on its ability to borrow funds under the
terms of its credit facility to meet these requirements. Due to the Company's
financial condition and non-compliance with certain covenants under the terms of
its credit facility, the availability of borrowings under its credit facility is
uncertain. Accordingly, there can be no assurance that the Company will be able
to meet its operating, capital expenditure and debt service requirements in the
future.
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PROSPECTIVE RESTRUCTURING AND RELATED EQUITY INVESTMENT
RESTRUCTURING AND RELATED TRANSACTIONS
In order to address the capital and liquidity constraints facing the
Company and CCA, as well as concerns regarding the corporate structure and
management of the Company, the Company intends to complete a comprehensive
restructuring (the "Restructuring"). For a description of the terms of the
Restructuring, including the terms of the two proposals currently being
considered by the Company with respect to such Restructuring, see "Business --
Recent Developments -- Restructuring and Related Transactions."
PROPOSED AMENDMENTS TO CCA LEASES AND OTHER AGREEMENTS
As of December 31, 1999, approximately $24.9 million of December 1999 rents due
from CCA to the Company were unpaid. In an effort to address the liquidity needs
of the Company and CCA prior to the completion of the Restructuring, the Company
and CCA intend to amend the terms of the CCA Leases. Pursuant to this proposed
amendment, rent will be payable on each June 30 and December 31, instead of
monthly. In addition, the proposed amendment provides that CCA is required to
make certain scheduled monthly installment payments to the Company from January
1, 2000 through June 30, 2000. Approximately $12.9 million of the balance
outstanding at December 31, 1999 was paid February 14, 2000, and the Company
expects that the remaining $12.0 million of 1999 rents will be received during
the second quarter of 2000. In regard to rent accruing from January 1, 2000
through June 30, 2000, the Company and CCA are currently negotiating the
scheduled monthly installment payments of 2000 rent that are to occur during the
second quarter of 2000. At the time these installment payments are made, CCA
will also be required to pay interest to the Company upon such payments at a
rate equal to the then current interest rate under the bank credit facility.
The Company and CCA also intend to amend the terms of the Business Development
Agreement, the Amended and Restated Services Agreement, and the Amended and
Restated Tenant Incentive Agreement to provide for the deferral of the payment
of all fees under these agreements by the Company to CCA until September 30,
2000. For a description of the proposed amendments to the CCA Leases and to the
Business Development Agreement, the Amended and Restated Services Agreement and
the Amended and Restated Tenant Incentive Agreement, see "Business -- Recent
Developments -- Transactions Between the Company and CCA."
LENDER CONSENTS
The proposed amendments to the contractual agreements between the Company and
CCA as previously described are subject to the consent of the Company's lenders.
The consummation of the Restructuring, absent a refinancing of the Company's
debt, also is subject to the consent of the Company's lenders. The actions of
the Company with respect to the solicitation of the consent of the Company's
lenders with respect to these matters is
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described under the heading "Business -- Recent Developments -- Transactions
Between the Company and CCA."
YEAR ENDED DECEMBER 31, 1999
The Company commenced operations on January 1, 1999 as a result of the 1999
Merger. The 1999 Merger was accounted for as a reverse acquisition of the
Company by Old CCA and the purchase of Old Prison Realty by the Company. As
such, Old CCA was treated as the acquiring company, and Old Prison Realty was
treated as the acquired company, for financial reporting purposes. The
provisions of the purchase method of accounting prescribe that Old CCA's
historical financial statements be presented as the Company's historical
financial statements. Management believes that comparison of financial results
between 1999 and 1998 is not meaningful because the 1998 results reflect the
operations of Old CCA, and the 1999 results of operations reflect the operating
results of the Company as a REIT.
RENTAL REVENUES
For the year ended December 31, 1999, rental revenues were $270.1 million and
were generated from the leasing of correctional and detention facilities. During
the year, the Company began leasing five new facilities, one in February 1999,
one in April 1999, one in September 1999 and two in December 1999 respectively,
in addition to the 37 facilities which were previously leased as of the
beginning of the year.
INTEREST INCOME
For the year ended December 31, 1999, interest income was $6.9 million. This
amount was a result of interest earned on cash used to collateralize letters of
credit for certain construction projects, direct financing leases and
investments of cash prior to the funding of construction projects.
In connection with the 1999 Merger, Old CCA received the $137.0 million CCA
Note. The Company succeeded to the CCA Note as a result of the 1999 Merger.
Interest on the CCA Note is payable annually at the rate of 12%. Principal is
due in six equal annual installments beginning December 31, 2003. As previously
described, as of December 31, 1999, the first scheduled payment of interest,
totaling approximately $16.4 million, on the CCA Note was unpaid. The Company
has fully reserved the $16.4 million of interest accrued under the terms of the
CCA Note during 1999.
LICENSING FEES
For the year ended December 31, 1999, licensing fees were $8.7 million. The
licensing fees were earned as a result of the Trade Name Use Agreement which
granted CCA the right to use the name "Corrections Corporation of America" and
derivatives thereof subject to specified terms and conditions therein. The fee
is based upon gross revenues of CCA, subject to a limitation of 2.75% of the
gross revenues of the Company.
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DEPRECIATION AND AMORTIZATION
For the year ended December 31, 1999, depreciation expense was $ 44.1 million.
Depreciation expense as a percentage of rental revenues for 1999 was 16.3%. The
Company uses the straight-line depreciation method over 50 and five year lives
of buildings and machinery and equipment, respectively.
GENERAL AND ADMINISTRATIVE EXPENSE
For the year ended December 31, 1999, general and administrative expenses were
$24.1 million or 8.9% of 1999 rental revenues. General and administrative
expenses consist primarily of management salaries and benefits, legal and other
administrative costs. Salaries and related benefits represented 12% of general
and administrative expenses for the year ended December 31, 1999.
During 1999, the Company was involved in various litigation including
shareholder litigation and other legal matters which are being defended and
handled in the ordinary course of business. While the ultimate results of these
individual matters cannot be exactly determined, the Company incurred legal
expenses of $6.3 million during 1999. See "Liquidity and Capital Resources"
herein for further discussion of litigation issues as well as the information
contained under the headings "Business -- Recent Developments -- Shareholder
Litigation" and "Legal Proceedings."
In connection with the proposed Restructuring and related equity investment, the
Company has incurred $3.9 million of costs representing consulting and legal
advisory services prior to the consummation of the proposed transaction.
As a result of the Company's failure to declare the dividends discussed herein
under "Distributions to Shareholders" prior to December 31, 1999, and failure to
distribute, prior to January 31, 2000, dividends sufficient to distribute 95% of
its taxable income for 1999, the Company is subject to excise taxes, which are
currently estimated to be $7.1 million and which have been accrued as of
December 31, 1999.
EQUITY IN EARNINGS OF UNCONSOLIDATED ENTITIES AND AMORTIZATION OF DEFERRED GAINS
For 1999, equity in earnings of unconsolidated entities and amortization of
deferred gains were $22.9 million. For the year ended December 31, 1999, the
Company recognized equity in earnings of PMSI and JJFMSI of $4.7 million and
$7.5 million, respectively, and received distributions from PMSI and JJFMSI of
$11.0 million and $10.6 million, respectively. For 1999, the amortization of the
deferred gain on the sales of contracts to the PMSI and JJFMSI was $7.1 million
and $3.6 million, respectively.
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INTEREST EXPENSE
For the year ended December 31, 1999, interest expense was $51.9 million,
respectively. Interest expense is based on outstanding convertible notes payable
balances and borrowings under the Company's bank credit facility and the
Company's Senior Notes, including amortization of loan costs and unused fees.
Interest expense is reported net of capitalized interest on construction in
progress of $37.7 million for 1999.
WRITE OFF OF LOAN COSTS
As a result of the amendment to the original bank credit facility, the Company
incurred a write off of loan costs of $9.0 million for 1999. See "Liquidity and
Capital Resources" for a discussion of this write-off.
LOSS ON DISPOSAL OF ASSETS
In June 1999, the Company incurred a loss of $1.6 million as a result of a
settlement with the State of South Carolina for property previously owned by Old
CCA. Under the settlement, the Company, as the successor to Old CCA, will
receive $6.5 million in three installments by June 30, 2001 for the transferred
assets. The net proceeds were approximately $1.6 million less than the
surrendered assets' depreciated book value. The Company received $3.5 million of
the proceeds during 1999. As of December 31, 1999, the Company has a receivable
of $3.0 million related to this settlement.
In December 1999, the Company incurred a loss of $0.4 million resulting from a
sale of a new facility in Florida. Construction on the facility was completed by
the Company in May 1999. In accordance with the terms of the management contract
between Old CCA and Polk County, Florida, Polk County exercised an option to
purchase the facility. Net proceeds of $40.5 million were received by the
Company.
WRITE OFF OF AMOUNTS UNDER LEASE ARRANGEMENTS
For the year ended December 1999, the Company had paid tenant incentive fees of
$68.6 million, with $2.9 million of those fees amortized against rental
revenues. During the fourth quarter of 1999, the Company undertook a plan that
contemplates merging with CCA and thereby eliminating the CCA Leases or amending
the CCA Leases to significantly reduce the lease payments to be paid by CCA to
the Company. Consequently, the Company determined that the remaining deferred
tenant incentive fees at December 31, 1999 were not realizable and wrote off
fees totaling $65.7 million.
IMPAIRMENT LOSS
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of," requires impairment losses to be recognized for
long-lived assets used in operations when indications of impairment are present
and the estimate of undiscounted future cash flows is not sufficient to recover
asset
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carrying amounts. In December 1999, the poor financial position, results of
operations and cash flows of CCA indicated to management that certain of its
correctional and detention facilities might be impaired. In accordance with SFAS
121, the Company estimated the undiscounted net cash flows for each of its
properties and compared the sum of those undiscounted net cash flows to the
Company's investment in that property. Through its analysis, the Company
determined that three of its correctional and detention facilities in the state
of Kentucky had been impaired. For these three properties, the Company reduced
the carrying values of the underlying assets to their estimated fair values, as
determined based on anticipated future cash flows discounted at rates
commensurate with the risks involved. The resulting impairment loss totaled
$76.4 million.
PROVISION FOR CHANGE IN TAX STATUS
The Company, formerly a taxable corporation, intends to elect to change its tax
status from a taxable corporation to a REIT effective with the filing of its
1999 federal income tax return. As of December 31, 1998, the Company's balance
sheet reflected $83.2 million in gross deferred tax assets. In accordance with
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), the Company provided a provision for
these deferred tax assets, excluding any estimated tax liabilities required for
prior tax periods, upon completion of the 1999 Merger and the election to be
taxed as a REIT. As such, the Company's results of operations reflect a
provision for change in tax status of $83.2 million for the year ended December
31, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
MANAGEMENT AND OTHER REVENUES
Total revenues increased 43.2% in 1998 as compared to 1997, with increases in
both management and transportation services. Management revenues increased 44%
in 1998, or $197.9 million. This increase was primarily due to the opening of
new facilities and the expansion of existing facilities by Old CCA in 1997 and
1998. In 1998, Old CCA opened 10 new facilities with an aggregate design
capacity of 9,256 beds, assumed management of eight facilities with an aggregate
design capacity of 3,757 beds and expanded seven existing facilities to increase
their design capacity by an aggregate of 2,473 beds. Due to the growth in beds,
compensated mandays increased 44% in 1998 from 10,524,537 to 15,107,533. Average
occupancy improved to 94.4% in 1998 as compared to 93.2% in 1997.
Transportation revenues increased $1.9 million or 15% in 1998 as compared to
1997. This growth was primarily the result of an expanded customer base and
increased compensated mileage realized through the increased utilization of
three transportation hubs opened in 1997 and more "mass transports," which are
generally moves of 40 or more inmates per trip.
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OPERATING EXPENSES
Facility operating expenses increased 50.2% to $496.5 million in 1998. There
were significant increases in operating expenses realized due to the increased
compensated mandays and compensated mileage that Old CCA realized in 1998 as
previously mentioned. Also Old CCA adopted the provisions of the AICPA's
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities". The effect of this accounting change for 1998 was a $14.9 million
charge to operating expenses. Prior to the adoption of SOP 98-5, project
development and facility start-up costs were deferred and amortized on a
straight-line basis over the lesser of the initial term of the contract plus
renewals or five years. In conjunction with Old CCA terminating five contractual
relationships, Old CCA realized approximately $2.0 million of operating expenses
related to transition costs and deferred contract costs. Old CCA also incurred
$1.0 million of non-recurring operating expenses related to the 1999 Merger.
In 1998, Old CCA was subject to a class action lawsuit at one of its facilities
regarding the alleged violation of inmate rights which was settled subsequent to
the end of the year. Old CCA was also subject to two wrongful death lawsuits at
one of its facilities. These lawsuits were assumed by the Company in the 1999
Merger. CCA recognized $2.1 million of expenses in 1998 related to these
lawsuits. See "Legal Proceedings."
LEASE EXPENSE
Lease expense increased 210.5% in 1998 compared to 1997. Old CCA had entered
into leases with Old Prison Realty in July 1997 for the initial nine facilities
that Old CCA had sold to Old Prison Realty. Throughout 1997 and 1998, Old CCA
sold an additional four facilities and one expansion to Old Prison Realty and
immediately after these sales, leased the facilities back pursuant to long-term,
triple net leases. As a result of the U.S. Corrections Corporation acquisition,
Old CCA entered into long-term leases for four additional facilities with Old
Prison Realty.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 78.6% in 1998 over 1997. Included
in general and administrative expenses was $1.3 million incurred in the fourth
quarter of 1998 for an advertising and employee relations initiative aimed at
raising the public awareness of Old CCA and the industry. Also, in connection
with the 1999 Merger, CCA became subject to a purported class action lawsuit
attempting to enjoin the 1999 Merger and seeking unspecified monetary damages.
The lawsuit was settled in principle in November 1998 with the formal settlement
being completed in March 1999. Accordingly, Old CCA recognized $3.2 million of
expense in 1998 to cover legal fees and the settlement obligation. See
"Liquidity and Capital Resources" for further discussion.
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NEW CCA COMPENSATION CHARGE
Old CCA recorded a $22.9 million charge to expense in 1998 for the implied fair
value of 5,000 shares of CCA voting common stock issued by CCA to certain
employees of Old CCA and Old Prison Realty. The shares were granted to certain
founding shareholders of CCA in September 1998. Neither Old CCA nor CCA received
any proceeds from the issuance of these shares. The fair value of these common
shares was determined at the date of the 1999 Merger based upon the implied
value of CCA, derived from $16.0 million in cash investments made by outside
investors as of December 31, 1998, as consideration for a 32% ownership interest
in CCA.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased 7.4% in 1998 over 1997. The
increase was due to the increase in the number of owned facilities operated by
Old CCA in 1998 as compared to 1997. Of the 10 new facilities opened by Old CCA
in 1998, Old CCA owned six.
INTEREST EXPENSE
Interest expense for 1998 was $8.6 million as compared to $7.4 million in 1997.
INTEREST INCOME
Interest income for 1998 was actually $11.4 million as compared to $10.8 million
of interest income in 1997. In 1998, Old CCA was still benefiting from interest
earnings on the cash proceeds that Old CCA realized in 1997 when it sold 12
facilities to Old Prison Realty.
WRITE OFF OF LOAN COSTS
In June 1998, Old CCA expanded its credit facility from $170.0 million to $350.0
million and incurred debt issuance costs that were being amortized over the life
of the loan. The credit facility matured at the earlier of the date of the
completion of the 1999 Merger or September 1999. Accordingly, upon consummation
of the 1999 Merger the credit facility was terminated and the related
unamortized issuance costs were expensed. See "Liquidity and Capital Resources"
for more detail.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES
As previously discussed, Old CCA adopted the provisions of SOP 98-5 in 1998. As
a result, Old CCA recorded a $16.1 million charge as a cumulative effect of
accounting change, net of taxes of $10.3 million, on periods through December
31, 1997.
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LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 1999
Substantially all of the Company's revenues are derived from: (i) rents received
under triple net leases of correctional and detention facilities, including the
CCA Leases; (ii) dividends from investments in the non-voting stock of certain
subsidiaries; (iii) interest income on the CCA Note; and (iv) license fees
earned under the Trade Name Use Agreement. CCA currently leases 34 of the
Company's 43 operating facilities pursuant to the CCA Leases. The Company,
therefore, is dependent for its rental revenues upon CCA's ability to make the
lease payments required under the CCA Leases for such facilities. CCA's
obligation to make payments under the CCA Leases is not secured by any of the
assets of CCA, although the obligations under the CCA Leases are cross-defaulted
so that the Company could terminate all the leases if CCA fails to make required
lease payments. If this were to happen, however, the Company would be required
to renegotiate existing leases or incentive fee arrangements, to find other
suitable lessees or to risk losing its ability to elect or maintain REIT status,
as applicable.
CCA incurred a net loss of $202.9 million for the year ended December 31, 1999,
has a net working capital deficiency and a net capital deficiency at December
31, 1999, and is in default under its revolving credit facility. CCA's default
under its revolving credit facility relates to failure to comply with certain
financial covenants. In addition, CCA is in default under the CCA Note as a
result of CCA's failure to pay the first scheduled interest payment under the
terms of the CCA Note. See "Results of Operations" herein. CCA has also not made
certain scheduled lease payments to the Company pursuant to the terms of the CCA
Leases. The Company has not provided CCA with a notice of nonpayment of lease
payments due under the CCA Leases, and thus CCA is not currently in default
under the terms of the CCA Leases.
In response to the significant losses experienced by the Company and by CCA
during 1999 and in response to the defaults under the Company's debt agreements,
the Company's board of directors is considering various capital infusion
proposals by one or more strategic investors, as well as various restructurings.
For a complete description of the Restructuring proposals currently being
considered by the Company, see "Business -- Recent Developments -- Restructuring
and Related Transactions."
In 1999, the Company's growth strategy included acquiring, developing and
expanding correctional and detention facilities as well as other properties.
Because the Company was required to distribute to its stockholders at least 95%
of its taxable income to qualify as a REIT for 1999, the Company relied
primarily upon the availability of debt or equity capital to fund the
construction and acquisitions of and improvements to correctional and detention
facilities.
CASH FLOW FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company's cash flow provided by operating activities was $79.5 million for
1999 and represents net income plus depreciation and amortization and
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changes in the various components of working capital. The Company's cash flow
used in investing activities was $447.6 million for 1999 and represents
acquisitions of real estate properties and payments made under lease
arrangements. The Company's cash flow provided by financing activities was
$421.4 million for 1999 and represents proceeds from the issuance of common
stock, issuance of long-term debt, borrowings under the bank credit facility and
the Senior Notes, payments of debt issuance costs and payments of dividends on
shares of the Company's preferred and common stock.
DEBT STRUCTURE
On January 1, 1999, in connection with the completion of the 1999 Merger, the
Company obtained a $650.0 million secured bank credit facility from NationsBank,
N.A., as Administrative Agent, and several U.S. and non-U.S. banks. The original
bank credit facility included up to a maximum of $250.0 million in tranche B
term loans and $400.0 million in revolving loans, including a $150.0 million
subfacility for letters of credit. The tranche B term loans require quarterly
principal payments of $625,000 throughout the term of the loans, with the
remaining balance maturing on December 31, 2002. The revolving loans mature on
January 1, 2002. Interest rates, unused commitment fees and letter of credit
fees on the original bank credit facility were subject to change based on the
Company's senior debt rating. The original bank credit facility was secured by
mortgages on the Company's real property.
On August 4, 1999, the Company completed an amendment and restatement of the
original bank credit facility increasing amounts available to the Company under
the original bank credit facility to an aggregate of $1.0 billion through the
addition of a $350.0 million tranche C term loan. The tranche C term loan is
payable in equal quarterly installments in the amount of $875,000 through the
calendar quarter ending September 30, 2002, with the balance to be paid in full
on December 31, 2002. Under the bank credit facility, LPCI replaced NationsBank,
N.A. as Administrative Agent.
The bank credit facility as amended, similar to the original bank credit
facility, provides for interest rates, unused commitment fees and letter of
credit fees which vary based on the Company's senior debt rating. Similar to the
original bank credit facility, the bank credit facility bears interest at
variable rates of interest based on a spread over the base rate or LIBOR (as
elected by the Company), which spread is determined by reference to the
Company's credit rating. The spread ranges from 0.50% to 2.25% for base rate
loans and from 2.00% to 3.75% for LIBOR rate loans. These ranges replaced the
original spread ranges of 0.25% to 1.25% for base rate loans and 1.375% to 2.75%
for LIBOR rate loans. The term loan portions of the bank credit facility bear
interest at a variable rate equal to 3.75% to 4.00% in excess of LIBOR or 2.25%
to 2.50% in excess of a base rate. This rate replaced the variable rate equal to
3.25% in excess of LIBOR or 1.75% in excess of a base rate in the bank credit
facility.
Upon the lenders' determination that the Company is in default under the terms
of the bank credit facility, the Company is required to pay a default rate
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of interest equal to the rate of interest as determined based on the terms
described above, plus 2.00%. As discussed below, the Company is currently in
default under the bank credit facility and, consequently, has become subject to
the default rate of interest on January 25, 2000.
The Company incurred costs of $59.2 million in consummating the original bank
credit facility and the bank credit facility transactions, including $41.2
million related to the amendment and restatement. The Company wrote off $9.0
million of expenses related to the bank credit facility upon completion of the
amendment and restatement.
In accordance with the terms of the bank credit facility, the Company entered
into certain swap arrangements guaranteeing that it will not pay an index rate
greater than 6.51% on outstanding balances of at least (a) $325.0 million
through December 31, 2001 and (b) $200.0 million through December 31, 2002. The
effect of these arrangements is recognized in interest expense.
The bank credit facility, similar to the original bank credit facility, is
secured by mortgages on the Company's real property. Borrowings are limited
based on a borrowing base formula that considers, among other things, eligible
real estate. The bank credit facility contains certain financial covenants,
primarily: (a) maintenance of leverage, interest coverage, debt service coverage
and total indebtedness ratios and (b) restrictions on the incurrence of
additional indebtedness.
The bank credit facility also restricted the Company's ability to make the 1999
cash payment of a special dividend unless (a) the Company had liquidity of at
least $75.0 million at the dividend declaration date after giving effect to the
payment of the special dividend, (b) the Company received at least $100.0
million in cash proceeds for the issuance of equity or similar securities from a
new investor receiving representation on the Company's Board of Directors and
(c) CCA received at least $25.0 million in cash proceeds from the issuance of
any combination of equity securities and subordinated debt. The bank credit
facility also restricts the cash payment of a special dividend in 2000.
The current financial condition of the Company, the inability of CCA to make
certain of its payment obligations to the Company, the ongoing process
surrounding the prospective equity investment and related restructuring, and the
actions taken by the Company and CCA in attempts to resolve current liquidity
issues of the Company and CCA have resulted in a series of default or potential
default issues under the bank credit facility. These defaults and potential
defaults consist of the following:
- - Restrictions upon the ability of the Company to amend the terms of its
agreements with CCA without the consent of its senior lenders create a
potential default due to the Company's anticipation of required amendments
to alter the timing and amount of payments under the terms of the CCA
Leases, as well as interest payments on the CCA Note.
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- - Restrictions upon the ability of the Company to enter into any agreement
constituting a "change of control" provision, as defined in the bank credit
facility, create the need for a consent based upon the execution of a
securities purchase agreement with a prospective equity investor and the
appointment of a new Chairman of the Board of Directors of the Company and
a new President of the Company.
- - For the fiscal quarter ending December 31, 1999, the Company was not in
compliance with the following financial covenants, as defined in the bank
credit facility: (i) the Company's interest coverage ratio and (ii) the
Company's leverage ratio.
- - The existence of explanatory paragraphs in the reports of each of the
Company's and CCA's reports of independent public accountants relating to
the Company's and CCA's financial statements as to the ability of each of
the Company and CCA to continue as a going concern render the Company in
violation of the provisions of the bank credit facility requiring
unqualified opinions for the Company and CCA.
- - The declaration of the quarterly dividend on the 8.0% Series A Cumulative
Preferred Stock for the quarter ended March 31, 2000, payable April 17,
2000, constituted an event of default, based on the Company's unwaived
defaults at the time the dividend was declared.
- - CCA's revolving credit facility requires that CCA have a net worth in
excess of certain specified amounts. On December 31, 1999, CCA was not, and
it currently is not, in compliance with this financial covenant, which is
an event of default under the Company's bank credit facility.
- - As of March 31, 2000, the Company projects that it will not be in
compliance with the following financial covenants, as defined in the bank
credit facility: (i) the Company's debt service coverage ratio; (ii) the
Company's interest coverage ratio; (iii) the Company's leverage ratio; and
(iv) the Company's ratio of total indebtedness to total capitalization.
- - In addition, as described below, the Company is in default under the
provisions of the MDP Notes. Due to cross-default provisions existing
between the bank credit facility and the MDP Notes, the Company has been
considered in default of this provision of the bank credit facility since
January 25, 2000.
The Company anticipates that LCPI will solicit the consent to the Company's
lenders under the bank credit facility for a waiver of the events of default
described above. For a complete discussion of the terms and timing of the
waiver, see "Business -- Recent Developments -- Solicitation of Consents for
Waivers of, and Amendments to, Provisions of the Company's and CCA's Outstanding
Indebtedness."
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SENIOR NOTES
On June 11, 1999, the Company completed its offering of $100.0 million aggregate
principal amount of its Senior Notes. Interest on the Senior Notes is paid
semi-annually in arrears at a rate of 12% per annum, and the Senior Notes have a
seven year term due June 1, 2006. Net proceeds from the offering were
approximately $95.0 million after deducting expenses payable by the Company in
connection with the offering. The Company used the net proceeds from the sale of
the Senior Notes for general corporate purposes and to repay revolving bank
borrowings under its original bank credit facility.
As of December 31, 1999, the Company is not in default under the terms of the
Senior Notes; however, amendment of the Company's agreements with CCA without
prior delivery of fairness opinions, as described above, to the trustee of the
Senior Notes would constitute an event of default. In addition, the indenture
governing the Senior Notes contains a provision which allows the holders thereof
to accelerate the Senior Notes and seek remedies if the Company has a payment
default under its bank credit facility or if the obligations under the Company's
bank credit facility have been accelerated.
9.5% CONVERTIBLE, SUBORDINATED NOTES
On January 29, 1999, the Company issued $20.0 million of the MDP Notes due in
December 2008, with interest payable semi-annually at 9.5%. This issuance
constituted the second tranche of a commitment by the Company to issue an
aggregate of $40.0 million of the MDP Notes, with the first $20.0 million
tranche issued in December 1998 under substantially similar terms. The MDP Notes
require that the Company revise the conversion price as a result of the payment
of a dividend or the issuance of stock or convertible securities below market
price. As of December 31, 1999, the conversion price for the MDP Notes was
$23.63 per share as compared to $28.00 per share at issuance. This change in
conversion price resulted from dividends paid by the Company in 1999 and from
the March 8, 1999 conversion of a $7.0 million convertible subordinated note
issued to Sodexho into 1.7 million shares of common stock at a conversion price
of $4.09 per share and the conversion of a $20.0 million convertible
subordinated note issued to Sodexho into 2.6 million shares of common stock at a
conversion price of $7.80 per share, as provided in the original terms of the
MDP Notes.
The provisions of the MDP Notes provide that the execution of the Securities
Purchase Agreement as discussed previously by the Company constitutes a "change
of control" of the Company. This "change of control" gave rise to a right of the
holders of the MDP Notes to require the Company to repurchase the MDP Notes at a
price of 105% of the aggregate principal amount of such notes. To date, the
holders of the MDP Notes have not provided notice to the Company that the
Company will be required to repurchase all or a portion of the MDP Notes. In
addition, as of February 5, 2000, the Company was no longer in compliance with a
financial covenant contained in the note agreement relating to the ratio of the
Company's total indebtedness to total capitalization. As a result of the
violation of these covenants, the Company is in default under the
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provisions of the note agreement, and the holders of such notes may, at their
option, accelerate all or a portion of the outstanding principal amount of this
indebtedness. Moreover, during any period in which the Company is in default
under the provisions of the note agreement, the holders of the notes may require
the Company to pay an applicable default rate of interest of 20%.
In addition to the default rate of interest, as a result of the default, the
Company is obligated, under the terms of the MDP Notes, to pay the holders of
the notes contingent interest sufficient to permit those note holders to receive
a 15% rate of return on the $40.0 million principal amount, unless the holders
of the notes elect to convert the notes into the Company's common stock under
the terms of the note agreement. Such contingent interest is retroactive to the
date of issuance of the MDP Notes. Because the conversion into common stock is
at the election of the note holders, the Company has accrued the contingent
interest from the date of issuance through December 31, 1999 of approximately
$2.1 million.
The Company has initiated discussions with the holders of the MDP Notes to waive
the occurrence of a "change of control" arising from the Company's execution of
the Securities Purchase Agreement, thereby extinguishing the Company's
obligation to repurchase the notes at a premium. In addition, the Company has
requested that the provisions of the note purchase agreement be amended to: (i)
remove the financial covenant relating to the Company's total indebtedness to
total capitalization; (ii) remove a covenant requiring the Company to use its
best efforts to qualify as a REIT for federal income tax purposes; and (iii)
remove a covenant restricting the Company's ability to conduct business other
than the financing, ownership and development of prisons and other correctional
facilities.
There can be no assurance that the holders of the MDP Notes will consent to the
proposed waiver of, and amendments to, the note purchase agreement, or will not
seek to declare an event of default prior to the execution of any proposed
waiver and amendments. If the holders of the MDP Notes do not consent to the
proposed waiver of, and amendments to the note purchase agreement, the Company
will be required to repurchase or redeem the outstanding principal amount of the
MDP Notes.
7.5% CONVERTIBLE SUBORDINATED NOTES
The $30.0 million 7.5% convertible, subordinate notes require that the Company
revise the conversion price as a result of the payment of a dividend or the
issuance of stock or convertible securities below market price. As of December
31, 1999, the conversion price for the note was $23.63 per share as compared to
$27.42 per share at issuance. This change in conversion price resulted from
dividends paid by the Company in 1999 and from the March 8, 1999 conversion of a
$7.0 million convertible subordinated note issued to Sodexho into 1.7 million
shares of common stock at a conversion price of $4.09
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per share and the conversion of a $20.0 million convertible subordinated note
issued to Sodexho into 2.6 million shares of common stock at a conversion price
of $7.80 per share, as provided in the original terms of the 7.5% convertible,
subordinate notes.
The provisions of the note purchase agreement relating to the $30.0 million 7.5%
convertible, subordinated notes contain financial covenants relating to: (i) the
Company's debt service coverage ratio; (ii) the Company's interest coverage
ratio; and (iii) the Company's ratio of total indebtedness to total
capitalization. It is possible that as of March 31, 2000 the Company will not be
in compliance with one or more of these financial covenants. If one or more of
these covenants are violated, such a violation would result in an event of
default under the provisions of the note purchase agreement, and the holder of
such notes may, at its option, accelerate all or a portion of the outstanding
principal amount of this indebtedness.
If an event of default occurs under the provisions of the note purchase
agreement, the Company will initiate discussions with the holder of such notes
and attempt to obtain a waiver of, or amendment to, the financial covenants
contained in the note purchase agreement violated by the Company. In addition,
in order to prevent an event of default under the note purchase agreement, prior
to completion of the Restructuring and related transactions, the Company will be
required to amend the provisions of the note purchase agreement to remove a
covenant requiring the Company to elect to be taxed as a REIT for federal income
tax purposes, if necessary.
There can be no assurance that the holder of these notes will consent to any
proposed waiver of, and amendments to, the note purchase agreement, or will not
seek to declare an event of default prior to the execution of the proposed
waiver and amendments. The Company anticipates that it may be required to amend
the economic terms of the notes in the event the holder of these notes does
consent to any proposed waiver of, and amendment to, the note purchase
agreement.
OTHER DEBT TRANSACTIONS
On March 8, 1999, the Company issued a $20.0 million convertible subordinated
note to Sodexho pursuant to a forward contract assumed by the Company from Old
CCA in the 1999 Merger. The note bore interest at LIBOR plus 1.35% and was
convertible into shares of the Company's common stock at a conversion price of
$7.80 per share. On March 8, 1999, Sodexho converted (i) a $7.0 million
convertible subordinated note bearing interest at 8.5% into 1.7 million shares
of the Company's common stock at a conversion price of $4.09 per share, (ii) a
$20.0 million convertible subordinated note bearing interest at 7.5% into
700,000 shares of the Company's common stock at a conversion price of $28.53 per
share and (iii) a $20.0 million convertible subordinated note bearing interest
at LIBOR plus 1.35% into 2.6 million shares of the Company's common stock at a
conversion price of $7.80 per share.
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In 1998, convertible subordinated notes with a face value of $5.8 million were
converted into 2.9 shares of common stock.
At December 31, 1999 and 1998, the Company had $16.3 million and $1.6 million in
letters of credit, respectively. The letters of credit were issued to secure the
Company's construction of one facility and Old CCA's worker's compensation
insurance policy, performance bonds and utility deposits. The Company is
required to maintain cash collateral for the letters of credit.
Maturities of long-term debt (excluding acceleration or demand provisions) for
the next five years and thereafter are:
(IN THOUSANDS)
2000 $ 6,084
2001 6,093
2002 916,337
2003 114
2004 126
Thereafter 170,237
----------
$1,098,991
==========
EQUITY CAPITAL
On January 11, 1999, the Company filed a Shelf Registration Statement on Form
S-3 to register an aggregate of $1.5 billion in value of its common stock,
preferred stock, common stock rights, warrants and debt securities for sale to
the public. Proceeds from sales under the Shelf Registration Statement have been
and will be used for general corporate purposes, including the acquisition and
development of correctional and detention facilities. During 1999, the Company
issued and sold approximately 6.7 million shares of its common stock under the
Shelf Registration Statement, resulting in net proceeds to the Company of
approximately $120.0 million.
On May 7, 1999, the Company registered 10.0 million shares of the Company's
common stock for issuance under the Company's DRSPP. The DRSPP provides a method
of investing cash dividends in, and making optional monthly cash purchases of,
the Company's common stock, at prices reflecting a discount between 0% and 5%
from the market price of the common stock on NYSE. As of December 31, 1999, the
Company has issued 1,261,431 shares under the DRSPP, with 1,253,232 of these
shares issued under the DRSPP's optional cash feature resulting in proceeds of
$12.3 million. The Company has temporarily suspended the DRSPP pending the
completion of the Restructuring and related transactions.
DISTRIBUTION TO SHAREHOLDERS
If the Company elects to qualify, as a REIT, it cannot complete any taxable year
with accumulated earnings and profits from a taxable corporation. Accordingly,
in order to preserve its ability to elect REIT status for 1999, the Company was
required to distribute Old CCA's earnings and profits to which it succeeded in
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the 1999 Merger (the "Accumulated Earnings and Profits"). During the year ended
December 31, 1999, the Company made $217.7 million of distributions related to
its common stock and 8.0% Series A Cumulative Preferred Stock. For purposes of
meeting the distribution requirements discussed above, $152.5 million of the
total distributions in 1999 have been designated as distributions of the
Accumulated Earnings and Profits.
In addition to distributing the Accumulated Earnings and Profits, the Company,
if it elects to qualify as a REIT for its 1999 taxable year, also will be
required to distribute 95% of its taxable income for 1999. Although dividends
sufficient to distribute 95% of the Company's taxable income for 1999 have not
been declared as of December 31, 1999, the Company intends to take such actions
as may be necessary to retain its ability to elect REIT status for its 1999
taxable year and beyond. In connection therewith, the Company has obtained an
extension of time to file its 1999 federal income tax return until September 15,
2000, which enables the Company to declare sufficient dividends with respect to
its 1999 taxable year (equal to approximately $220.0 million) to elect to be
taxed as a REIT for 1999, should it so decide. Certain provisions of the bank
credit facility restrict the Company's ability to pay these distributions in
cash. As of December 31, 1999, $2.2 million of distributions relating to the
8.0% Series A Cumulative Preferred Shares have been declared and accrued in the
accompanying consolidated balance sheets. The remaining $220.0 million of
distributions that would have to be paid to shareholders in 2000 in order for
the Company to elect REIT status have not been declared by the Board of
Directors and, accordingly, have not been accrued in the accompanying
consolidated balance sheets.
CASH FLOW RELATED TO CCA
As of December 31, 1999, CCA leased 34 of the 42 operating facilities owned by
the Company.
CCA NOTE
In connection with the 1999 Merger, Old CCA received the $137.0 million CCA Note
due. The Company succeeded to the CCA Note as a result of the 1999 Merger.
Interest on the CCA Note is payable annually at the rate of 12%. Principal is
due in six equal annual installments beginning December 31, 2003. The Company
has fully reserved the $16.4 million of interest accrued under the terms of the
CCA Note during 1999.
CCA LEASES
For the year ended December 31, 1999, the Company recognized gross rental
revenue from CCA of $263.5 million.
Based on the CCA Leases in effect at December 31, 1999, the future minimum lease
payments scheduled to be received by the Company under the CCA Leases as of
January 1, 2000 are as follows:
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(IN THOUSANDS)
Years Ending December 31:
2000 $ 310,651
2001 310,651
2002 310,651
2003 310,651
2004 310,651
Thereafter 1,890,193
----------
$3,443,448
==========
As of December 31, 1999, approximately $24.9 million of rents due from CCA to
the Company were unpaid. The terms of the CCA Leases provide that rental
payments were due and payable on December 25, 1999. During 2000, CCA has paid
$12.9 million of lease payments related to 1999 and no lease payments relating
to 2000. Under the terms of the CCA Leases, an event of default occurs if CCA
fails to pay all required lease payments owed to the Company under the CCA
Leases within 15 days of receiving a notice of nonpayment from the Company. As
of the date hereof, the Company has not provided CCA with such notice
In addition, the Company expects that the CCA Leases will be materially impacted
by either the prospective equity investment and related restructuring discussed
previously or by renegotiation of the CCA Leases with CCA.
AMENDED TENANT INCENTIVE AGREEMENT
For the year ended December 1999, the Company had paid tenant incentive fees of
$68.6 million, with $2.9 million of those fees amortized against rental
revenues. During the fourth quarter of 1999, the Company undertook a plan that
contemplates either merging with CCA and thereby eliminating the CCA Leases or
amending the CCA Leases to reduce the lease payments to be paid by CCA to the
Company during 2000. Consequently, the Company determined that the remaining
deferred tenant incentive fees under the existing lease arrangements at December
31, 1999 were not realizable and wrote off fees totaling $65.7 million.
TRADE NAME USE AGREEMENT
For the year ended December 31, 1999, the Company recognized income of $8.7
million from CCA under the terms of the Trade Name Use Agreement. As of December
31, 1999, the Company had recorded a receivable of $2.2 million from CCA for
licensing fees due under the Trade Name Use Agreement.
CCA SERVICES AGREEMENT
Costs incurred by the Company under the CCA Services Agreement are capitalized
as part of the facilities' development cost. Costs incurred under the CCA
Services Agreement and capitalized as part of the facilities' development cost
totaled $41.6 million for the year ended December 31, 1999.
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BUSINESS DEVELOPMENT AGREEMENT
Costs incurred by the Company under the Business Development Agreement are
capitalized as part of the facilities' development cost. Costs incurred under
the Business Development Agreement and capitalized as part of the facilities'
development cost totaled $15.0 million for the year ended December 31, 1999.
CCA FINANCIAL INFORMATION
The following summarized operating information presents CCA's results of
operations for the year ended December 31, 1999:
(IN THOUSANDS)
Revenues $ 499,292
Net loss (202,918)
The following summarized balance sheet information presents CCA's financial
position as of December 31, 1999:
(IN THOUSANDS)
Current assets $ 88,647
Total assets 184,701
Current liabilities 258,421
Deferred credits 107,070
Total liabilities 365,491
Stockholders' deficit (180,790)
The following summary presents CCA's cash flows for the year ended December 31,
1999:
(IN THOUSANDS)
Cash flows used in operating activities $(16,332)
Cash flows used in investing activities (2,091)
Cash flows provided by financing activities 10,089
--------
Net decrease in cash for 1999 $ (8,334)
========
CCA has utilized cash from borrowings under its revolving credit facility,
equity issuances and payments from the Company for tenant incentive arrangements
and other services to offset the cash requirements of its operating losses. CCA
expects to continue to use these sources of cash to offset its anticipated
losses from operations; however, amounts presently anticipated to be available
to CCA will not be sufficient to offset all of CCA's expected future operating
losses.
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COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is subject to a variety of legal proceedings, some of which if
resolved against the Company, could have a material adverse effect upon the
business and financial position of the Company. A complete description of the
litigation currently commenced against the Company, including certain
shareholder litigation, is set forth herein under the headings "Business --
Recent Developments -- Shareholder Litigation" and "Legal Proceedings."
INCOME TAX CONTINGENCIES
As required by its governing instruments, the Company currently intends to elect
to be taxed as a REIT for the year ended December 31, 1999. In the event the
Company completes the Fortress/Blackstone Restructuring under its existing terms
following shareholder approval in 2000, the Company will be required to be taxed
as a C corporation commencing with the taxable year ended December 31, 1999. In
order to qualify as a REIT, the Company is required to distribute 95% of its
taxable income for 1999. Although dividends sufficient to distribute 95% of the
Company's taxable income for 1999 have not been declared as of December 31,
1999, the Company intends to pay sufficient dividends either in cash or in
securities to satisfy all distribution requirements for qualification as a REIT
for 1999 and estimates that $143.7 million will be distributed in 2000 to meet
this requirement. The Company is currently considering the exact timing and
method of the payment of these required distributions. As of December 31, 1999,
$2.2 million of distributions relating to the 8% Series A Cumulative Preferred
Shares have been declared and accrued on the Company's consolidated balance
sheets. The remaining $141.5 million of distributions that must be paid to
shareholders in 2000 in order for the Company to qualify as a REIT have not been
declared by the board of directors and, accordingly, have not been accrued in
the Company's consolidated balance sheets. It is likely that the Company's debt
holders would be required to consent to the Company's payment of these
distributions. The Company's failure to distribute 95% of its taxable income for
1999 or the failure of the Company to comply with other requirements for REIT
qualification under the Code would have a material adverse impact on the
Company's consolidated financial position, results of operations and cash flows.
If the Company elects REIT status for its taxable year ended December 31, 1999,
such election will be subject to review by the IRS for a period of three years
from the date of filing of its 1999 tax return. Should the IRS review the
Company's election to be taxed as a REIT for the 1999 taxable year and reach a
conclusion requiring the Company to be treated as a taxable corporation for the
1999 taxable year, the Company would be subject to income taxes and interest on
its 1999 taxable income and possibly subject to fines and/or penalties. Income
taxes for the year ended December 31, 1999 could exceed $83.5 million, which
would have an adverse impact on the Company's consolidated financial position,
results of operations and cash flows.
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In connection with the 1999 Merger, the Company assumed the tax obligations of
Old CCA resulting from disputes with federal and state taxing authorities
related to tax returns filed by Old CCA in 1998 and prior taxable years. The IRS
is currently conducting an audit of Old CCA's federal tax return for the taxable
year ending December 31, 1997. The Company currently is unable to predict the
ultimate outcome of the IRS's audit of Old CCA's 1997 federal tax return or the
ultimate outcome of audits of other tax returns of the Company or Old CCA by the
IRS or by other taxing authorities; however, it is possible that such audits
will result in claims against the Company in excess of the $5.5 million of
income taxes payable and the $32.0 million of deferred tax liability currently
recorded by the Company. In addition, to the extent that IRS audit adjustments
increase the Accumulated Earnings and Profits of Old CCA, the Company would be
required to make timely distribution of the Accumulated Earnings and Profits of
Old CCA to shareholders. Such results would have a material adverse impact on
the Company's financial position, results of operations and cash flows.
GUARANTEES
The Company has guaranteed the bond indebtedness (outstanding balance of $69.1
million at December 31, 1999) and forward purchase agreement (estimated
obligation of $6.9 million at December 31, 1999) of a governmental entity for
which PMSI currently provides management services at a 302-bed correctional
facility. Under the terms of its guarantee agreements, the Company is required
to maintain a restricted cash account (balance of $6.9 million at December 31,
1999) to collateralize the guarantee of the forward purchase agreement.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED
TO THE YEAR ENDED DECEMBER 31, 1997
Old CCA's current ratio decreased to .33 in 1998 as compared to 2.41 in 1997.
The decrease was due in part to the sale of $95.0 million of net current assets
to Old CCA, JJFMSI and PMSI. In addition, during 1998, Old CCA utilized
approximately $100.0 million of excess cash on hand at December 31, 1997 from
the sale of 12 facilities to Old Prison Realty in 1997.
Old CCA's cash flow from operations for 1998 was $54.5 million as compared to
$92.0 million for 1997. The decrease in cash flow in 1998 was primarily a result
of increased lease payments to Old Prison Realty of $39.3 million over 1997.
However, cash flow from operations, calculated on a EBITDAR basis, was $112.0
million for 1998 as compared to $115.8 million for 1997. Included in these 1998
cash flow results are two significant non-cash charges, $22.9 million for the
Old CCA compensation and $26.5 million for the cumulative effect of accounting
change due to the adoption of SOP-98-5. At December 31, 1998, Old CCA had
strengthened its cash flow through its expanded business, additional focus on
larger, more profitable facilities, the expansion of existing facilities where
economies of scale can be realized, and the continuing effort of cost
containment.
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On November 4, 1998 Old CCA filed a Registration Statement on Form S-3 that
allowed it, over the following two years, to sell Old CCA Common Stock in one or
more offerings up to a total dollar amount of $100.0 million. As of December 31,
1998, Old CCA had sold 2,882,296 shares of Old CCA Common Stock under this
registration statement, generating net proceeds to Old CCA of approximately
$65.5 million. Old CCA used the net proceeds from the sale of Old CCA Common
Stock for general corporate purposes including without limitation, repayment of
indebtedness, financing capital expenditures and working capital.
In June 1998, Old CCA increased its revolving credit facility with a group of
banks to $350.0 million. The facility matured on the earlier of the date of the
completion of the 1999 Merger or September 6, 1999 and was used for general
corporate purposes and the issuance of letters of credit. The credit facility
bore interest, at the election of Old CCA, at either the bank's prime rate or a
rate which was 1.25% above the applicable 30, 60, or 90 day LIBOR rate. Interest
was payable quarterly with respect to prime rate loans and at the expiration of
the applicable LIBOR period with respect to LIBOR based loans. There were no
prepayment penalties associated with the credit facility. The credit facility
required Old CCA, among other things, to maintain certain net worth, leverage
and debt service coverage ratios. The facility also limited certain payments and
distributions. Borrowings on the facility at December 31, 1998 were $222.0
million and letters of credit totaling $98.7 million had been issued as of such
date. In connection with the 1999 Merger, JJFMSI and PMSI each assumed $5.0
million of debt related to this facility, resulting in an unused commitment of
$19.3 million. In January 1999, PMSI and JJFMSI paid off their portions of the
outstanding debt and the credit facility was replaced with a new credit facility
as discussed below.
Old CCA also had a $2.5 million credit facility with a bank that provided for
the issuance of letters of credit and which matured on the earlier of the date
of the completion of the 1999 Merger or September 6, 1999. At December 31, 1998,
letters of credit totaling $1.6 million had been issued leaving an unused
commitment of $947,000. On January 1, 1999, in connection with the 1999 Merger,
this facility was replaced with the Company's credit facility as discussed in "
- -- Debt Structure" above. In July 1997, Old CCA sold 10 of its facilities to Old
Prison Realty for approximately $378.3 million. The proceeds were used to pay
off $131.0 million of Old CCA's credit facility debt, $42.2 million of first
mortgage debt and $9.4 million of senior secured notes. The remaining proceeds
were used to fund existing construction projects and for general working capital
purposes. In October 1997, Old CCA sold an additional facility to Old Prison
Realty for approximately $38.5 million. In November and December 1997, Old CCA
paid $74.4 million for two correctional facilities. Subsequently, Old CCA sold
these facilities to Old Prison Realty for $74.4 million in December 1997 and
January 1998, respectively.
YEAR 2000 COMPLIANCE
In 1999, the Company completed an assessment of its key information technology
systems, including its client server and minicomputer hardware and
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operating systems and critical financial and non-financial applications, in
order to ensure that these date sensitive critical information systems would
properly recognize the Year 2000 as a result of the century change on January 1,
2000. Based on this assessment, the Company determined that these key
information systems were Year 2000 compliant. The Company also evaluated its
non-critical information technology systems for Year 2000 compliance and
determined that such non-critical systems were complaint. The Company's systems
did not subsequently experience any significant disruptions as a result of the
century change on January 1, 2000. In 1999, the Company also completed
communications with third parties with whom it has important financial or
operational relationships, including CCA, the lessee of the substantial majority
of the Company's facilities, to determine the extent to which they were
vulnerable to the Year 2000 issue. Based on responses from these third-parties,
including CCA, the Company determined that there were no third party related
Year 2000 noncompliance issues that would have a material adverse impact on the
Company's operations. These third parties, including CCA, did not subsequently
experience any significant disruptions as a result of the century change on
January 1, 2000 that had a material adverse impact on the Company's operations.
The Company's information systems were Year 2000 compliant when acquired in the
1999 Merger, and as such, the Company incurred no significant expenses through
December 31, 1999, and the Company does not expect to incur any significant
costs in connection with the Year 2000 subsequent to December 31, 1999.
CCA incurred expenses allocable to internal staff, as well as costs for outside
consultants, computer systems remediation and replacement and non-information
technology systems remediation and replacement (including validation). Through
December 31, 1999, CCA spent approximately $6.4 million which included $3.4
million related to the replacement leased equipment, $2.4 million for travel and
services and $0.6 million for software. These costs were expensed as incurred.
CCA does not expect to incur any significant costs in connection with the Year
2000 subsequent to December 31, 1999.
FUNDS FROM OPERATIONS
Management believes Funds from Operations is helpful to investors as a measure
of the performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it provides
investors with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. The Company computes Funds from
Operations in accordance with standards established by the White Paper on Funds
from Operations (the "White Paper") approved by the Board of Governors of NAREIT
in 1995, which may differ from the methodology for calculating Funds from
Operations utilized by other equity REITs, and accordingly, may not be
comparable to such other REITs. The White Paper defines Funds from Operations as
net income (loss), computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate-related
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depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Further, Funds from Operations does not
represent amounts available for management's discretionary use because of needed
capital replacement or expansion, debt service obligations, or other commitments
and uncertainties. Funds from Operations should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indication
of the Company's financial performance or to cash flows from operating
activities (determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's cash
needs, including its ability to make distributions. The Company believes that in
order to facilitate a clear understanding of the consolidated operating results
of the Company, Funds from Operations should be examined in conjunction with net
income as presented in the consolidated financial statements.
The following table presents the Company's Funds from Operations for the year
ended December 31, 1999:
1999
(IN THOUSANDS)
Net income available to common
Shareholders $ (61,976)
Plus: real estate depreciation 44,062
Add back non-recurring items:
Change in tax status 83,200
Write off of loan costs 14,567
Loss on disposal of assets 1,995
Write off of amounts under lease
Arrangements 65,677
Impairment loss 76,433
---------
Funds from operations $ 223,958
=========
INFLATION
The Company does not believe that inflation has had or will have a direct
adverse effect on its operations. The CCA Leases generally contain provisions
which will mitigate the adverse impact of inflation on net income. These
provisions include clauses enabling the Company to pass through to CCA certain
operating costs, including real estate taxes, utilities and insurance, thereby
reducing the Company's exposure to increases in costs and operating expenses
resulting from inflation. Additionally, the CCA Leases contain provisions which
provide the Company with the opportunity to achieve increases in rental income
in the future.
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ITEM 7A. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is to changes in U.S. interest rates.
The Company is exposed to market risk related to its bank credit facility and
certain other indebtedness as discussed in " -- Liquidity and Capital
Resources." The interest on the bank credit facility and such other indebtedness
is subject to fluctuations in the market. If the interest rate for the Company's
outstanding indebtedness under the bank credit facility was 100 basis points
higher or lower in 1999, the Company's interest expense, net of amounts
capitalized, would have been increased or decreased by approximately $5.1
million.
As of December 31, 1999, the Company had outstanding $100.0 million of its
Senior Notes with a fixed interest rate of 12.0%, $40.0 million of convertible,
subordinated notes with a fixed interest rate of 9.5%, $30.0 million of
convertible, subordinated notes with a fixed interest rate of 7.5% and $107.5
million of preferred stock with a fixed dividend rate of 8%. Similarly, as of
1999, the Company had a note receivable in the amount of $137.0 million with a
fixed interest rate of 12%. Because the interest and dividend rates with respect
to these instruments are fixed, a hypothetical 10% increase or decrease in
market interest rates would not have a material impact on the Company.
The bank credit facility required the Company to hedge $325.0 million of its
floating rate debt on or before August 16, 1999. The Company has entered into
certain swap arrangements guaranteeing that it will not pay an index rate
greater than 6.51% on outstanding balances of at least (a) $325.0 million
through December 31, 2001 and (b) $200.0 million through December 31, 2002.
There is no balance sheet effect related to this arrangements, and the monthly
income effect of these arrangements is recognized in interest expense. Despite
the change in market interest rates, the Company will pay the fixed rate as set
on the required balance.
Additionally, the Company may, from time to time, invest its cash in a variety
of short-term financial instruments. These instruments generally consist of
highly liquid investments with original maturities at the date of purchase
between three and 12 months. While these investments are subject to interest
rate risk and will decline in value if market interest rates increase, a
hypothetical 10% increase or decrease in market interest rates would not
materially affect the value of these investments.
The Company also uses, or intends to use, long-term and medium-term debt as a
source of capital. These debt instruments, if issued, will typically bear fixed
interest rates. When these debt instruments mature, the Company may refinance
such debt at then-existing market interest rates which may be more or less than
the interest rates on the maturing debt. In addition, the Company may attempt to
reduce interest rate risk associated with a forecasted issuance of new debt. In
order to reduce interest rate risk associated with these transactions, the
Company may occasionally enter into interest rate protection agreements similar
to the interest rate swap arrangement described above.
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The Company does not believe it has any other material exposure to market risks
associated with interest rates.
The Company does not have a material exposure to risks associated with foreign
currency fluctuations related to its operations. The Company does not use
derivative financial instruments in its operations or investment portfolio.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation
S-X are included in this Annual Report on Form 10-K commencing on page F-2 as
indicated below. The consolidated financial statements of CCA have been inserted
in this Annual Report on Form 10-K due to its status as a significant lessee of
the Company.
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS OF
PRISON REALTY TRUST, INC.
Report of Independent Public Accountants. F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998. F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997. F-6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997. F-8
Consolidated Statements of Cash Flows for the years
December 31, 1999, 1998 and 1997. F-10
Notes to the Consolidated Financial Statements. F-14
CONSOLIDATED FINANCIAL STATEMENTS OF
CORRECTIONAL CORPORATION OF AMERICA
Report of Independent Public Accountants. F-59
Consolidated Balance Sheet as of December 31, 1999 and 1998. F-60
Consolidated Statement of Operations for the year ended
December 31, 1999 F-61
Consolidated Statement of Stockholders' Equity for the year ended
December 31, 1999 and for the period from September 11, 1998
through December 31, 1998. F-62
Consolidated Statement of Cash Flows for the year
ended December 31, 1999 and for the period from
September 11, 1998 through December 31, 1998. F-63
Notes to the Consolidated Financial Statements. F-65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with the Company's accountants on any
matter of accounting principles and practices or financial statement
disclosures. Arthur Andersen LLP was selected by the Company's board of
directors to serve as its independent public accountant for the year ended
December 31, 1999. Arthur Andersen LLP also served as independent public
accountants for Old Prison Realty and Old CCA prior to the 1999 Merger and
currently serves in the same capacity for CCA, PMSI and JJFMSI.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is information regarding each of the nine current
directors of the Company. If the Restructuring and related transactions are not
completed, the Company's board of directors will retain its current structure,
and these directors will continue to serve until the expiration of their term of
office. If, however, the Restructuring and related transactions are completed,
all of the individuals then serving as directors of the Company will resign, and
the Company's board of directors will be restructured. See "Business -- Recent
Developments --Restructuring and Related Transactions." Also set forth below is
information concerning current and former executive officers of the Company.
INFORMATION REGARDING MEMBERS OF THE CURRENT BOARD OF DIRECTORS
The Company's board of directors is currently composed of nine
directors, divided into three equal classes (Class I, Class II and Class III).
Subsequent to the Company's 1999 annual meeting of shareholders, J. Michael
Quinlan resigned from the Company's board of directors in order to join CCA as
its President and Chief Operating Officer and as a member of CCA's board of
directors. During the fourth quarter of 1999, John W. Eakin, Jr. and Ned Ray
McWherter resigned as directors of the Company, and on December 31, 1999, D.
Robert Crants, III and Michael W. Devlin also resigned as officers and directors
of the Company. On December 27, 1999, Thomas W. Beasley was appointed by the
Company's board to serve as a director and as the Company's Chairman of the
board of directors.
Set forth below is information regarding the current members of the
Prison Realty board of directors and the classes in which they serve. The
directors listed below as "Independent Directors" are not directors, officers or
employees of the Company, CCA, PMSI or JJFMSI, and are not otherwise affiliated
with any tenants of the Company, including CCA, or with PMSI or JJFMSI.
CLASS I DIRECTORS - (TERMS TO EXPIRE IN 2002)
THOMAS W. BEASLEY, 57, was appointed by the Company's board of
directors in December 1999 to serve as a director and as the Chairman of the
Company's board of directors, and Mr. Beasley will assume the role of interim
Chief Executive Officer of the Company upon completion of the Restructuring and
related transactions. Mr. Beasley also currently serves as the Chairman of the
PMSI board of directors. Mr. Beasley is a co-founder of Old CCA and served as
its Chairman Emeritus from June 1994 to December 31, 1998. From 1974 through
1978, Mr. Beasley served as Chairman of the Tennessee Republican Party, and he
continues to be active in Tennessee politics. Mr. Beasley graduated from the
United States Military Academy at West Point in 1966 and received a Doctor of
Jurisprudence degree from Vanderbilt University School of Law in 1973.
TED FELDMAN, 46, is an Independent Director and is the Chairman of the
Audit Committee of the Company's board of directors. Mr. Feldman served as a
trustee of Old Prison Realty from April 1997 to December 1998. Mr. Feldman
served as the Chief Operating Officer of StaffMark, Inc. ("StaffMark"), a
publicly traded provider of diversified staffing services to business, medical,
professional and service organizations and governmental agencies from October
1996 through October 1999. Prior to joining StaffMark, Mr. Feldman founded HRA,
Inc., a Nashville provider of staffing services, in 1991 and served as its
President and Chief Executive Officer from that time until it merged with
StaffMark in October 1996.
JACKSON W. MOORE, 51, is an Independent Director and is the Chairman of
the Compensation Committee of the Company's board of directors. Mr. Moore served
as a trustee of Old Prison Realty from April 1997 to December 1998. Mr. Moore is
presently a director of and is the President and Chief Operating Officer of
Union Planters Corporation, a multi-state bank and savings and loan holding
company headquartered in Memphis, Tennessee that is publicly traded on the NYSE,
positions he has held since 1986, 1989, and 1994, respectively, and is President
and Chief Executive Officer of its principal subsidiary, Union Planters Bank,
N.A. He is also Chairman of PSB Bancshares, Inc. and a Vice
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President and director of its subsidiary, the People Savings Bank in Clanton,
Alabama. Prior to joining Union Planters, Mr. Moore practiced law for 16 years.
Mr. Moore is a graduate of the University of Alabama and Vanderbilt University
School of Law.
CLASS II DIRECTORS - (TERMS TO EXPIRE IN 2000)
RICHARD W. CARDIN, 64, is an Independent Director and served as a
trustee of Old Prison Realty from April 1997 to December 1998. Mr. Cardin is a
certified public accountant and is currently a consultant and retired partner at
Arthur Andersen LLP. Prior to his retirement in 1995, Mr. Cardin was affiliated
with, and a partner in, Arthur Andersen for 37 years. From 1980 through 1994,
Mr. Cardin served as the managing partner of Arthur Andersen's Nashville office.
Mr. Cardin is a member of the boards of directors of Atmos Energy Corporation
and United States Lime & Minerals, Inc.
DOCTOR R. CRANTS, 55, is a member of the Company's board of directors
and served as its Chairman from its inception to December 1999. Mr. Crants
currently serves as the Chief Executive Officer of the Company. Mr. Crants also
serves as Chief Executive Officer and a director of CCA, and as a director of
PMSI and JJFMSI. Prior to the 1999 Merger, Mr. Crants served as Chairman, Chief
Executive Officer and President of Old CCA, which he co-founded in 1983, as well
as Chairman of the board of trustees of Old Prison Realty. Mr. Crants also
currently serves on the board of directors of Sodexho Marriott Services, Inc.,
the largest food service and facility management company in North America. Mr.
Crants graduated from the United States Military Academy at West Point in 1966
and received a joint Masters in Business Administration and Juris Doctor degree
from the Harvard Business School and Harvard Law School, respectively, in 1974.
JOSEPH V. RUSSELL, 59, is an Independent Director and is the Chairman
of the Independent Committee of the Company's board of directors. Mr. Russell
also serves as the Chairman of the Special Committee and served as a trustee of
Old Prison Realty from April 1997 to December 1998. Mr. Russell is the President
and Chief Financial Officer of Elan-Polo, Inc., a Nashville-based,
privately-held, worldwide producer and distributor of footwear. Mr. Russell is
also the Vice President of and a principal in RCR Building Corporation, a
Nashville-based, privately-held builder and developer of commercial and
industrial properties. He also serves on the boards of directors of Community
Care Corp., the Footwear Distributors of America Association and US Auto
Insurance Company. Mr. Russell graduated from the University of Tennessee in
1963 with a B.S. in Finance.
CLASS III DIRECTORS - (TERMS TO EXPIRE IN 2001)
C. RAY BELL, 58, is a director of the Company and served as a trustee
of Old Prison Realty from April 1997 to December 1998. Mr. Bell is the President
and owner of Ray Bell Construction, Inc., which specializes in the construction
of a wide range of commercial buildings, and has constructed approximately 40
correctional and detention facilities, consisting of over 15,000 beds in seven
states, on behalf of various government entities and private companies,
including the Company and Old CCA. Mr. Bell is a founding member of the Middle
Tennessee Chapter of Associated Builders and Contractors. Mr. Bell is a graduate
of the University of the South.
JEAN-PIERRE CUNY, 45, is a director of the Company and served as a
director of Old CCA from July 1994 to December 1998. Mr. Cuny serves as the
Senior Vice President of The Sodexho Group, a French-based, leading supplier of
catering and various other services to institutions and an affiliate of Sodexho.
From February 1982 to June 1987, he served as Vice President in charge of
Development for the Aluminum Semi-Fabricated Productions Division of Pechiney, a
diversified integrated producer of aluminum and other materials. Mr. Cuny
graduated from Ecole Polytechnique in Paris in 1977 and from Stanford University
Engineering School in 1978. Pursuant to the terms of a contractual arrangement
between Sodexho and Prison Realty, Sodexho designated Mr. Cuny to stand for
election as a director.
CHARLES W. THOMAS, PH.D, 57, is a director of the Company and served as
a trustee of Old Prison Realty from April 1997 to December 1998. Dr. Thomas is a
private consultant who has taught and written on the criminal justice and
private corrections fields for more than 30 years. Until 1999, he was a
Professor of Criminology and the Director of the
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Private Corrections Project of the Center for Studies in Criminology and Law at
the University of Florida, Gainesville, positions he held from 1980 and 1989,
respectively. While serving as Director of the Center, Dr. Thomas authored the
Center's annual Private Adult Correctional Facility Census. In connection with
the 1999 Merger, Dr. Thomas performed certain consulting services for each of
Old Prison Realty and Old CCA. Dr. Thomas continues to perform consulting
services for CCA relating to its business objectives. Dr. Thomas graduated from
McMurry University in 1966 with a B.S. in Secondary Education and from the
University of Kentucky with a M.A. in Sociology in 1969 and a Ph.D. in Sociology
in 1971.
INFORMATION REGARDING EXECUTIVE OFFICERS OF THE COMPANY WHO ARE NOT DIRECTORS
J. MICHAEL QUINLAN, 58, has served as President of the Company since
December 1999. Mr. Quinlan also serves as the President and Chief Operating
Officer of CCA and as a member of CCA's board of directors, positions he has
held since June 1999. From January 1999 until May 1999, Mr. Quinlan served as a
member of the board of directors of the Company and as Vice-Chairman of the
Company's board of directors. From April 1997 until January 1999, Mr. Quinlan
served as a member of the board of trustees and as Chief Executive Officer of
Old Prison Realty. From July 1987 to December 1992, Mr. Quinlan served as the
Director of the Federal Bureau of Prisons. In such capacity, Mr. Quinlan was
responsible for the total operations and administration of a federal agency with
an annual budget of more than $2 billion, more than 26,000 employees and 75
facilities. In 1988, Mr. Quinlan received the Presidential Distinguished Rank
Award, which is the highest award given by the United States government to civil
servants for service to the United States. In 1992, he received the National
Public Service Award of the National Academy of Public Administration and the
American Society of Public Administration, awarded annually to the top three
public administrators in the United States. Mr. Quinlan is a 1963 graduate of
Fairfield University with a B.S.S. in History, and he received a J.D. from
Fordham University Law School in 1966. He also received an L.L.M. from the
George Washington University School of Law in 1970.
VIDA H. CARROLL, 39, currently serves as the Company's Chief Financial
Officer, Secretary and Treasurer. Ms. Carroll has resigned from each of these
positions effective June 30, 2000. Ms. Carroll served as the Chief Financial
Officer, Secretary and Treasurer of Old Prison Realty from its inception until
December 1998. From 1991 to 1996, Ms. Carroll, as a sole proprietor, worked as a
financial consultant, specializing in accounting conversions and systems design.
Prior to this time, she worked in public accounting, including working as an
audit manager with KPMG Peat Marwick. Ms. Carroll holds a Bachelor of Science
Degree from Tennessee Technological University and is a certified public
accountant.
COMMITTEES OF THE COMPANY'S BOARD
Pursuant to the authority granted under Company's bylaws, the Company's
board of directors has designated an Audit Committee, Compensation Committee and
an Independent Committee. In addition, the Company's board, together with the
boards of directors of CCA, PMSI and JJFMSI, formed a Special Committee to
consider the Restructuring and related transactions. Information regarding the
members of each committee and the authority granted to each committee by the
Company's board of directors is set forth below.
AUDIT COMMITTEE
The Company's Audit Committee currently consists of Messrs. Cardin and
Feldman, with Mr. Feldman serving as Chairman. Prior to his resignation from the
Company's board, Mr. Eakin also served as a member of the Audit Committee. The
Audit Committee makes recommendations concerning the engagement of independent
public accountants by the Company, reviews with the independent public
accountants the plans and results of the audit engagement, approves professional
services provided by the independent public accountants, reviews the
independence of the independent public accountants, considers the range of audit
and non-audit fees and reviews the adequacy of the Company's internal accounting
controls. The Company's Audit Committee has held one meeting to date in 2000 and
held four meetings in 1999.
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COMPENSATION COMMITTEE
The Company's Compensation Committee consists of Messrs. Bell, Moore
and Russell, with Mr. Moore serving as Chairman. The Compensation Committee
determines compensation, including awards under the Company's current equity
plans, for the Company's executive officers and also administers each of the
Non-Employee Directors' Share Option Plan, as amended, and the Non-Employee
Directors' Compensation Plan. The Company's Compensation Committee has held no
formal meetings to date in 2000 and held two meetings in 1999.
INDEPENDENT COMMITTEE
The Company's Independent Committee currently consists of Messrs.
Cardin, Feldman, and Russell, with Mr. Russell serving as Chairman. Prior to
their resignations from the Company's board of directors, Messrs. Eakin,
McWherter and Moore also served as members of the Independent Committee at
certain times. Pursuant to the Company's bylaws, as currently in effect, the
Independent Committee must approve the following actions of the Company's board:
(i) the election of the operators for the Company's properties; (ii) the
entering into of any agreement with any tenant of the Company's properties,
including CCA, PMSI and JJFMSI; and (iii) the consummation of any transaction
between the Company and any of its tenants, including those parties mentioned
above, which transactions include, but are not limited to, the negotiation,
enforcement and renegotiation of the terms of any lease of any of the Company's
properties. The Independent Committee has held three meetings to date in 2000
and held seven formal meetings and numerous informal meetings in 1999.
SPECIAL COMMITTEE
In August 1999, the Company's board of directors, together with the
boards of CCA, PMSI and JJFMSI, formed the Special Committee to monitor the
financial situation of both the Company and CCA and to coordinate with the
Company's advisors regarding the consideration of various strategic
alternatives. The then existing members of the Independent Committee, together
with Mr. Cuny, were appointed to serve as members of the Special Committee, with
Joseph V. Russell appointed to serve as the Chairman of the Special Committee.
Thomas W. Beasley, Chairman of the PMSI board, Lucius E. Burch, III, Chairman of
the CCA board, and Samuel W. Bartholomew, Jr., Chairman of the JJFMSI board,
were also appointed to the Special Committee. The Special Committee has held
three meetings to date in 2000 and held 17 formal meetings and numerous informal
meetings in 1999.
MEETINGS OF THE COMPANY'S BOARD
The Company's full board has held two meetings in 2000, with all
directors attending either in person or by teleconference. The Company's full
board held eight meetings in 1999 and no director, with the exception of Ned Ray
McWherter, attended fewer than 75% of the aggregate of all meetings of the board
and the committees, if any, upon which such director served and which were held
during the period of time that such person served on the Company's board or such
committee(s).
COMPENSATION OF THE COMPANY'S DIRECTORS
Currently, the Company pays its directors who are not employees of the
Company or one of its lessees or any of their affiliates or subsidiaries an
annual retainer of $12,000 for their services. In addition, non-employee
directors receive a fee of $1,000 for each meeting of the Company's board which
they attend and an additional fee of $500 for each meeting they attend of
committees on which they serve. Messrs. Cardin, Feldman, and Russell,
non-employee members of the Independent Committee and the Special Committee, did
not, however, receive the $500 fee for their attendance at meetings of these
committees relating to the Restructuring and related transactions. Instead,
Messrs. Cardin and Feldman each received a retainer fee of $50,000 for their
services, and Mr. Russell received a retainer fee of $75,000 for his services.
In addition, Messrs. Beasley and Bartholomew each received a retainer fee of
$50,000 for their services on the Special Committee. Non-employee directors may
elect, on an annual basis, to receive up to 100% of their regular
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compensation in shares of Common Stock. Non-employee directors are reimbursed
for reasonable expenses incurred to attend the Company's board and committee
meetings. Non-employee directors also participate in the Non-Employee Directors'
Share Option Plan, whereby they receive options to purchase 5,000 shares of
Common Stock for each year of service with the Company's board.
Directors who are employees of either the Company or one of its lessees
or their affiliates are not compensated for serving as directors. Such directors
of the Company are, however, eligible to participate in the Company's employee
equity benefit plans.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities ("10% Holders"), to file reports of ownership
and changes in ownership with the Commission and the NYSE. Executive officers,
directors and 10% Holders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms that they file. To the Company's
knowledge, based solely on review of the copies of such reports and amendments
thereto furnished to the Company and on written representations made to the
Company that no other reports were required during or with respect to the fiscal
year ended December 31, 1999, all Section 16(a) filing requirements relating to
the Company were timely made with the exception of the following reports: (1)
Doctor R. Crants inadvertently failed to file a Form 4 with the Commission on a
timely basis to report an exercise of certain options to purchase the Company's
Common Stock; (2) Ned Ray McWherter inadvertently failed to file on a Form 4
with the Commission on a timely basis to report one sale of the Company's Common
Stock; and (3) Jackson W. Moore inadvertently failed to file a Form 4 with the
Commission on a timely basis with respect to two purchases of the Company's
Common Stock.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain summary information concerning
the compensation paid to Doctor R. Crants and the compensation paid to each of
Mr. Quinlan, Ms. Carroll, D. Robert Crants, III and Michael W. Devlin, the four
most highly compensated executive officers of Prison Realty other than Doctor
R. Crants whose annualized compensation exceeded $100,000 (collectively, the
"Named Executive Officers"), for the fiscal years ended December 31, 1997, 1998
and 1999. As discussed more fully in "--Employment and Severance Agreements,"
each of Mr. Crants, III and Mr. Devlin resigned from their positions with the
Company, effective as of December 31, 1999.
Annual Compensation Long-Term Compensation
----------------------------------------------------- ---------------------------------
Awards
---------------------------------
Name and Other Annual Securities
--------- ---------------- Restricted Stock Underlying
Principal Position Year Salary ($) Bonus ($) Compensation ($) Award ($) Options (#)
------------------ ---- ---------- --------- ---------------- --------- -----------
Doctor R. Crants................. 1999 $ 175,000(1) $ 34,488(2) -- $103,465(3) 113,750(4)
Chief Executive Officer 1998 385,933(5) -- -- -- 17,500(6)
1997 359,423(8) -- -- -- 113,125(9)
J. Michael Quinlan............... 1999 79,583(11) -- -- -- 10,000(12)
President 1998 155,625 -- -- -- --
1997 150,000(14) -- -- -- 375,000(15)
Vida H. Carroll.................. 1999 141,667 81,387(16) -- 19,160(17) 26,250(18)
Chief Financial Officer 1998 88,813 -- -- -- --
Secretary and Treasurer 1997 75,000(14) -- -- -- --
65,000(20)
D. Robert Crants, III............ 1999 155,000 113,320(21) -- 114,961(22) 52,500(23)
President 1998 103,750 -- -- -- --
1997 100,000(14) (25) -- --
225,000(26)
Michael W. Devlin................ 1999 155,000 113,320(21) -- 114,961(22) 52,500(23)
Chief Operating Officer 1998 103,750 -- -- -- --
1997 100,000(14) (25) -- -- --
225,000(26)
Long-Term Compensation
------------------------------------
Payouts
------------------------------------
Name and
--------- LTIP All Other
Principal Position Payouts ($) Compensation ($)
------------------ ----------- ----------------
Doctor R. Crants................. -- --
Chief Executive Officer -- $ 7,450(7)
-- 7,450(10)
J. Michael Quinlan............... -- --
President -- 5,000(13)
-- --
Vida H. Carroll.................. -- 42,500(19)
Chief Financial Officer -- 3,000(13)
Secretary and Treasurer --
D. Robert Crants, III............ -- 238,750(24)
President -- 5,000(13)
-- --
Michael W. Devlin................ -- 238,750(24)
Chief Operating Officer -- 5,000(13)
--
- -------------------
(1) Represents Mr. Crants' base salary as Chief Executive Officer and
Chairman of the board of directors of the Company during 1999. Mr.
Crants has resigned from his position as Chairman of the board of
directors of the Company but continues to serve as Chief Executive
Officer of the Company.
(2) Mr. Crants was awarded 1,687 restricted shares of the Company's Common
Stock on March 4, 1999 pursuant to the Company's 1997 Employee Share
Incentive Plan, which was assumed by the Company in the 1999 Merger.
Pursuant to the terms of a Restricted Stock Agreement between the
Company and Mr. Crants, these shares of the Company's Common Stock
were vested immediately upon the award of such shares to Mr. Crants.
The value of these shares on the date of award was $34,488, based on
the average of the high and low sales prices of the Company's Common
Stock on the NYSE on March 3, 1999, $20.44. As of December 31, 1999,
the closing market price of the Company's Common Stock on the NYSE was
$5.06 per share, reducing the aggregate value of the shares awarded to
Mr. Crants to $8,536.
(3) Mr. Crants was awarded 5,063 restricted shares of the Company's Common
Stock on March 4, 1999 pursuant to the Company's 1997 Employee Share
Incentive Plan. Pursuant to the terms of a Restricted Stock Agreement
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between the Company and Mr. Crants, such restricted shares vest
ratably on each of the first three anniversaries of the date of such
award. The value of these shares on the date of award was $103,465,
based on the average of the high and low sales prices of the Company's
Common Stock on the NYSE on March 3, 1999, $20.44. As of December 31,
1999, the closing market price of the Company's Common Stock on the
NYSE was $5.06 per share, reducing the aggregate value of the shares
awarded to Mr. Crants to $25,619.
(4) Pursuant to the Company's 1997 Employee Share Incentive Plan, these
options to purchase shares of the Company's Common Stock vest in 25%
increments over a three-year period, with the first such increment
having vested on March 4, 1999, and are exercisable at a price of
$19.94 per share, the closing market price on the NYSE of the
Company's Common Stock on March 4, 1999, the date of grant of these
options.
(5) Represents the compensation paid by Old CCA, the Company's
predecessor, to such individual for the fiscal year ended December 31,
1999.
(6) These options were granted by Old CCA under Old CCA's 1995 Stock
Incentive Plan. In connection with the 1999 Merger, the Company
assumed all of the options outstanding under the 1995 Stock Incentive
Plan, with all of such options being converted into options
exercisable for shares of the Company's Common Stock, based on the
exchange ratio in the 1999 Merger.
(7) Amount represents the contribution by Old CCA, the Company's
predecessor, to Old CCA's Amended and Restated Employee Stock Option
Plan (the "Old CCA ESOP") during the fiscal year ended December 31,
1998.
(8) Represents the compensation paid by Old CCA, the Company's
predecessor, to such individual for the fiscal year ended December 31,
1997.
(9) 13,125 of the options were granted by Old CCA under Old CCA's 1995
Stock Incentive Plan. The balance of the options, which vest in 25%
increments over a three-year period, with the first such increment
having vested on July 15, 1997, were granted by Old Prison Realty
under Old Prison Realty's 1997 Employee Share Incentive Plan. In
connection with the 1999 Merger, the Company assumed all of the
options outstanding under Old CCA's 1995 Stock Incentive Plan and Old
Prison Realty's 1997 Employee Share Incentive Plan, with all of such
options being converted into options exercisable for shares of the
Company's Common Stock, based on the exchange ratio in the 1999
Merger.
(10) Amount represents the contribution by Old CCA, the Company's
predecessor, to the Old CCA ESOP during the fiscal year ended December
31, 1997.
(11) From January 1, 1999 until May 11, 1999, Mr. Quinlan served as
Vice-Chairman of the Company's board of directors. From May 11, 1999
until June 28, 1999, Mr. Quinlan served as the Company's
Vice-President, Special Projects. On June 28, 1999, Mr. Quinlan
resigned from all positions with the Company to become President and
Chief Operating Officer of CCA. Mr. Quinlan became President of the
Company, effective upon the resignation of D. Robert Crants, III.
(12) Pursuant to the Company's 1997 Employee Share Incentive Plan, these
options to purchase shares of the Company's Common Stock initially
were to vest in 25% increments over a three-year period, with the
first such increment having vested on March 4, 1999. Upon Mr.
Quinlan's resignation from all positions with the Company on June 28,
1999, all outstanding unvested options held by Mr. Quinlan became
fully vested upon action by the Company's board of directors. These
options are exercisable at a price of $19.94 per share, the closing
market price on the NYSE of the Company's Common Stock on March 4,
1999, the date of grant of these options.
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(13) Amount represents the contribution by Old Prison Realty, the Company's
predecessor, to Old Prison Realty's Amended and Restated Employee
Share Ownership Plan for the fiscal year ended December 31, 1998.
(14) Amounts are annualized salaries for the fiscal year ended December 31,
1997.
(15) All but 25,000 of these options to purchase the Company's Common Stock
initially vested in 25% increments over a three-year period with the
first such increment having vested on July 15, 1997. The balance of
these options initially vested in 25% increments over a three-year
period, with the first such increment having vested on December 2,
1997. All of these options were granted under Old Prison Realty's 1997
Employee Share Incentive Plan. In connection with the 1999 Merger, the
Company assumed all of the options outstanding under Old Prison
Realty's 1997 Employee Share Incentive Plan, with all of such options
being converted into options exercisable for shares of the Company's
Common Stock, based on the exchange ratio in the 1999 Merger. Upon Mr.
Quinlan's resignation from all positions with the Company on June 28,
1999, all outstanding unvested options held by Mr. Quinlan became
fully vested upon action by the Company's board of directors.
(16) Ms. Carroll was awarded 312 restricted shares of the Company's Common
Stock on March 4, 1999 pursuant to the Company's 1997 Employee Share
Incentive Plan. Pursuant to the terms of a Restricted Stock Agreement
between the Company and Ms. Carroll, these shares were vested
immediately upon the award of such shares. The value of these shares
on the date of award was $6,387, based on the average of the high and
low sales prices of the Company's Common Stock on the NYSE on March 3,
1999, $20.44. As of December 31, 1999, the closing market price of the
Company's Common Stock on the NYSE was $5.06 per share, reducing the
aggregate value of the shares awarded to $1,579. Ms. Carroll also
received a cash bonus of $75,000 in March 1999.
(17) Ms. Carroll was awarded 938 restricted shares of the Company's Common
Stock on March 4, 1999 pursuant to the Company's 1997 Employee Share
Incentive Plan. Pursuant to the terms of a Restricted Stock Agreement
between the Company and Ms. Carroll, such restricted shares vest
ratably on each of the first three anniversaries of the date of such
award. The value of these shares on the date of award was $19,160,
based on the average of the high and low sales prices of the Company's
Common Stock on the NYSE on March 3, 1999, $20.44. As of December 31,
1999, the closing market price of the Company's Common Stock on the
NYSE was $5.06 per share, reducing the aggregate value of the shares
awarded to $4,746.
(18) Pursuant to the Company's 1997 Employee Share Incentive Plan, these
options to purchase shares of the Company's Common Stock vest in 25%
increments over a three-year period, with the first such increment
having vested on March 4, 1999, and are exerciseable at a price of
$19.94 per share, the closing market price on the NYSE of the
Company's Common Stock on March 4, 1999, the date of grant of these
options.
(19) Represents three-months' severance of $37,500 paid in advance to Ms.
Carroll and a contribution of $5,000 by the Company to the Prison
Realty Trust, Inc. 401(k) Savings and Retirement Plan on Ms. Carroll's
behalf during the fiscal year ended December 31, 1999.
(20) All but 15,000 of these options to purchase the Company's Common Stock
vest in 25% increments over a three- year period with the first such
increment having vested on July 15, 1997. The balance of the options
vest in 25% increments over a three-year period with the first such
increment having vested on December 2, 1997. All of these options were
granted under Old Prison Realty's 1997 Employee Share Incentive Plan.
In connection with the 1999 Merger, the Company assumed all of the
options outstanding under Old Prison Realty's 1997 Employee Share
Incentive Plan, with all of such options being converted into options
exerciseable for shares of the Company's Common Stock, based on the
exchange ratio in the 1999 Merger.
(21) This individual was awarded 1,875 restricted shares of the Company's
Common Stock on March 4, 1999 pursuant to the Company's 1997 Employee
Share Incentive Plan. Pursuant to the terms of a Restricted Stock
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Agreement between the Company and such individual, these shares were
vested immediately upon the award of such shares. The value of those
shares on the date of award was $38,320, based on the average of the
high and low sales prices of the Company's Common Stock on the NYSE on
March 3, 1999, $20.44. As of December 31, 1999, the closing market
price of the Company's Common Stock on the NYSE was $5.06 per share,
reducing the aggregate value of the shares awarded to $9,488. This
individual also received a cash bonus of $75,000 in March 1999.
(22) This individual was awarded 5,625 restricted shares of the Company's
Common Stock on March 4, 1999 pursuant to the Company's 1997 Employee
Share Incentive Plan. Pursuant to the terms of a Restricted Stock
Agreement between the Company and the individual, such restricted
shares were to vest ratably on each of the first three anniversaries
of the date of such award. The value of these shares on the date of
award was $114,961, based on the average of the high and low sales
prices of the Company's Common Stock on the NYSE on March 3, 1999,
$20.44. As of December 31, 1999, the closing market price of the
Company's Common Stock on the NYSE was $5.06 per share, reducing the
aggregate value of the shares awarded to such individual to $28,463.
In connection with the individual's resignation from all positions
with the Company on December 31, 1999, these shares were forfeited by
such individual.
(23) Pursuant to the Company's 1997 Employee Share Incentive Plan, these
options to purchase shares of the Company's Common Stock vested in 25%
increments over a three-year period, with the first such increment
having vested on March 4, 1999, and were exercisable at a price of
$19.94 per share, the closing marked price on the NYSE of the
Company's Common Stock on March 4, 1999, the date of grant of these
options. In connection with the individual's resignation from all
positions with the Company on December 31, 1999, these options were
forfeited by such individual.
(24) In connection with the individual's resignation from all positions
with the Company on December 31, 1999, the Company made a cash payment
of $233,750 to the individual, which represented the outstanding
amount of the Company's obligations under such individual's employment
agreement with the Company. See "-- Employment and Severance
Agreements." The Company also contributed $5,000 to the Prison Realty
Trust, Inc. 401(k) Savings and Retirement Plan on the individual's
behalf during the fiscal year ended December 31, 1999.
(25) This individual was awarded 150,000 common shares of Old Prison Realty
issued as a development fee and as reimbursement for actual costs
incurred with the promotion and formation of Old Prison Realty, the
consummation of Old Prison Realty's initial public offering of common
shares and Old Prison Realty's purchase of nine correctional and
detention facilities from Old CCA.
(26) All but 25,000 of the options initially vested in 25% increments over
a three-year period with the first increment having vested on July 15,
1997. The balance of the options initially vested in 25% increments
over a three-year period with the first increment having vested on
December 2, 1997. All of these options were granted under Old Prison
Realty's 1997 Employee Share Incentive Plan. In connection with the
1999 Merger, the Company assumed all of the options outstanding under
Old Prison Realty's 1997 Employee Share Incentive Plan, with all of
such options being converted into options exercisable for shares of
the Company's Common Stock, based on the exchange ratio in the 1999
Merger. All of these options were forfeited upon the individual's
resignation from all positions with the Company on December 31, 1999.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth the options granted with respect to the
fiscal year ended December 31, 1999 to the Chief Executive Officer and each of
the Company's Named Executive Officers.
Potential Realizable Value
at Assumed Rates of Stock
Price Appreciation
Individual Grants for Option Term(1)
---------------------------------------------------------------- ---------------------------
Number of
Securities Percentage of Total
Underlying Options Granted to
Options Employees in Fiscal Exercise Expiration
Name Granted(#) Year(2) Price(3) Date 5%($) 10%($)
- ---- ---------- ---- ----- ---- ----- ------
Doctor R. Crants............. 113,750(4) 35.8% $ 19.94 03/04/09 $1,428,950 $3,606,398
J. Michael Quinlan........... 10,000(5) 3.1% $ 19.94 03/04/09 125,622 317,046
Vida H. Carroll.............. 26,250(4) 8.3% $ 19.94 03/04/09 329,758 832,245
D. Robert Crants, III........ 52,500(6) 16.5% $ 19.94 03/04/09 0(7) 0(7)
Michael W. Devlin............ 52,500(6) 16.5% $ 19.94 03/04/09 0(7) 0(7)
- -------------------
(1) The dollar amounts under these columns are the result of calculations
at the 5% and 10% rates set by the Commission and therefore are not
intended to forecast future appreciation, if any, of the price of the
Company's Common Stock.
(2) The percentage of total stock options granted to the Chief Executive
Officer and each Named Executive Officer is based on the total number
of options to purchase the Company's Common Stock granted during 1999,
which amounted to options to purchase 317,500 shares.
(3) All options to purchase the Company's Common Stock granted to Named
Executive Officers in 1999 have exercise prices equal to the fair
market value (closing price per share of the Company's Common Stock on
the NYSE) on the date of grant, March 4, 1999.
(4) 25% of the options vested on March 4, 1999, the date of grant, and the
remainder of the options will vest in equal 25% installments on each
of the first three anniversaries of the date of grant.
(5) In connection with Mr. Quinlan's resignation from all positions with
the Company on June 28, 1999, all of these options became fully vested
upon action by the Company's board of directors.
(6) These options, which were terminated in connection with the
resignation of each of D. Robert Crants, III and Michael W. Devlin
from all positions with the Company on December 31, 1999, initially
were subject to the following vesting schedule: 25% of the options
vested on March 4, 1999, the date of grant, and the remainder of the
options were to vest in equal 25% installments on each of the first
three anniversaries of the date of grant.
(7) All options held by each of D. Robert Crants, III and Michael W.
Devlin terminated upon the resignation of Messrs. Crants, III and
Devlin from all positions with the Company on December 31, 1999. For a
more complete description of their severance agreements, see
"--Employment and Severance Agreements"
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AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information with respect to the value
of unexercised options to purchase the Company's Common Stock held by the Named
Executive Officers on December 31, 1999.
NUMBER OF SECURITIES
NAME VALUE UNDERLYING UNEXERCISED
---- SHARES ACQUIRED ----- OPTIONS HELD AT VALUE OF UNEXERCISED IN-THE-MONEY
ON EXERCISE (#) REALIZED(1) DECEMBER 31, 1999 OPTIONS AT DECEMBER 31, 1999(2)
--------------- ----------- ----------------- -------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Doctor R. Crants 52,500 $435,908 296,563 135,313 0 0
J. Michael Quinlan(3) -- -- 393,750 0 0 0
Vida H. Carroll -- -- 55,312 35,938 0 0
D. Robert Crants, III(4) -- -- 0 0 0 0
Michael W. Devlin(5) -- -- 0 0 0 0
- -------------------
(1) Represents the market value of the underlying shares of the Company's
Common Stock on the date of exercise, less the applicable exercise
price.
(2) As of December 31, 1999 (the last trading date in 1999) the market
price of the Company's Common Stock (the closing price per share of
Common Stock on the NYSE) was $5.06 per share. As a result, none of
the unexercised options to purchase the Company's Common Stock were
in-the-money at December 31, 1999.
(3) In connection with Mr. Quinlan's resignation from all positions with
the Company on June 28, 1999, the Compensation Committee of the board
of directors of the Company accelerated the date of exercise of all of
Mr. Quinlan's outstanding options to purchase shares of the Company's
Common Stock. Mr. Quinlan was later appointed President of the
Company, effective upon the resignation of D. Robert Crants, III.
(4) As a result of the resignation of D. Robert Crants, III, all of his
outstanding options to purchase the Company's Common Stock were
terminated. For a more complete description of the severance agreement
entered into in connection with this resignation, see "--Employment
and Severance Agreements."
(5) As a result of the resignation of Michael W. Devlin, all of his
outstanding options to purchase the Company's Common Stock were
terminated. For a more complete description of the severance agreement
entered into in connection with this resignation, see "--Employment
and Severance Agreements."
EMPLOYMENT AND SEVERANCE AGREEMENTS
On January 1, 1999, the Company entered into an employment agreement
with Doctor R. Crants which provided for a term of three years with an
additional three year renewal option. The agreement provided for annual
compensation and incentive compensation as determined by the Company's
Compensation Committee and also provided for certain non-cash benefits such as
life and health insurance. Doctor R. Crants has since resigned from his
position as Chairman of the Company board and, following the successful
completion of the Restructuring, Mr. Crants will resign as the Chief Executive
Officer of the Company. In connection with such resignation, Doctor R. Crants
will receive a severance payment and/or benefits in an amount as yet to be
determined by the Company's board. Mr. Crants will continue to serve as the
Vice-Chairman of the Company. The provisions of Doctor R. Crants' employment
agreement prohibit him from competing with the Company for a period of one year
after termination of his employment.
Vida H. Carroll has resigned from her positions as Chief Financial
Officer, Secretary and Treasurer of the Company, effective as of June 30, 2000.
In connection with Ms. Carroll's resignation, Ms. Carroll received an advance
severance payment of $37,500. Upon Ms. Carroll's resignation, Ms. Carroll will
forfeit all of her outstanding options to purchase the Company's Common Stock
and all unvested restricted shares of the Company's Common Stock previously
awarded to Ms. Carroll.
In connection with the resignation of D. Robert Crants, III from his
position as President of the Company and as a member of the Company's board,
and the resignation of Michael W. Devlin from his position as Chief Operating
Officer of the
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Company and as a member of the Company's board, the employment agreements
previously entered into between the Company and each executive have been
terminated. The Company and CCA have entered into a severance agreement with
each executive pursuant to which payments shall be made to each executive
totaling approximately $633,750. Among the payments to be made to each
executive pursuant to the terms of the severance agreements are (i) a payment
of $233,750, which represents amounts that were payable to each executive
pursuant to the terms of his employment agreement, and (ii) payments made to
each executive in exchange for shares of CCA common stock owned by such
executive. See "Certain Relationship and Related Transactions." All payments
will be applied to reduce the outstanding principal amount of a loan granted to
each executive in the principal amount of $1.0 million under the Prison Realty
Trust, Inc. Executive Equity Loan Plan. See "-- Report of the Compensation
Committee." Additionally, any stock options or similar rights which have not
been exercised by each executive, and any other awards of stock or equity
interests in which each executive has not become vested, have been terminated
or forfeited to the Company.
CHANGE OF CONTROL PROVISIONS
DEFERRED STOCK AGREEMENTS
Certain executive officers of the Company and CCA, including Doctor R.
Crants, the Chief Executive Officer of the Company and CCA, were granted an
aggregate of 294,897 deferred shares of the Company's Common Stock under the
Corrections Corporation of America 1989 Stock Bonus Plan in order to offer
long-term incentives to the Company's officers. Under the terms of the 1989
Stock Bonus Plan and the deferred stock agreements, the deferred shares awarded
do not vest until the earliest of the following events: (i) 10 years after the
date the deferred shares were awarded; (ii) the death or disability of the
recipient; or (iii) a change of control of Prison Realty (as defined in the
deferred stock agreements). It is likely that the Restructuring and related
transactions and the resulting changes in the structure of the Company will
constitute a change in control of the Company which will result in the deferred
shares of each holder, including Doctor R. Crants, becoming immediately vested.
REPORT OF THE COMPENSATION COMMITTEE
The Company's Compensation Committee is comprised of Jackson W. Moore,
C. Ray Bell and Joseph V. Russell, with Mr. Moore serving as its Chairman. Each
of the members of the Compensation Committee, with the exception of Mr. Bell,
are Independent Directors. The following report relates to the policies adopted
and actions taken by the Company's Compensation Committee in 1999.
OBJECTIVES OF EXECUTIVE COMPENSATION
The Company's executive compensation program is intended to attract,
motivate and retain key executives who are capable of leading the Company
effectively and continuing its long-term growth. The compensation program for
its executives is comprised of base salary, annual incentives and long-term
incentive awards. Base salary is targeted to be within a reasonable range of
compensation for comparable companies and for comparable levels of expertise by
executives. Annual incentives are based upon the achievement of one or more
performance goals. The Company uses stock options and other equity based
compensation in its long-term incentive programs.
COMPENSATION COMMITTEE PROCEDURES
The Compensation Committee establishes the Company's general
compensation policies and is responsible for the implementation and monitoring
of its compensation and incentive plans and policies. Final compensation
determinations for each fiscal year are generally made after preliminary
financial statements for the fiscal year become available and upon a review of
the salaries of the executive officers of comparable REITs as disclosed in
available SNL Executive Compensation Reviews and publicly filed documents. At
that time, annual incentives, if any, are determined for the past year's
performance, base salaries for the following fiscal year are set and long-term
incentives, if any, are granted.
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98
In determining the executive officers' base salaries and the
performance-based incentives granted to the executive officers for the end of
the fiscal year ended December 31, 1999, the Compensation Committee took into
consideration the above-referenced factors and examined comparable executive
compensation paid by a peer group of REITs of similar size, makeup and
performance as reported in the SNL Executive Compensation Review 1999 -- REITS.
While the companies included in the SNL Review may not be identical to the
companies used to calculate the NAREIT Index to which the Company's share
performance is compared in the performance graph on page [65] herein, the
Compensation Committee believes that the compensation information in the SNL
Review was comparable because it contained data pertaining to REITs of similar
size, makeup and performance to that of the Company. Members of the
Compensation Committee consult periodically by telephone prior to their
meetings at which compensation decisions are made. The Compensation Committee
exercises its independent discretion in determining the compensation of the
Company's executive officers.
Each element of the Company's executive compensation, as well as the
compensation of the Chief Executive Officer, is discussed below.
BASE SALARY
Base salaries are a fixed component of total compensation and do not
relate to the performance of the Company. Base salaries are determined by the
Compensation Committee after reviewing salaries paid by companies of similar
size and performance. For the year ended December 31, 1999, the Company's
executive officers, other than its Chief Executive Officer, who is discussed
separately below, received the following base salaries, which were fixed by the
Compensation Committee on March 4, 1999: D. Robert Crants, III (President) -
$165,000; Michael W. Devlin (Chief Operating Officer) - $165,000; Vida H.
Carroll (Chief Financial Officer) - $150,000; and J. Michael Quinlan
(Vice-Chairman of the board of directors) - $160,000.
ANNUAL INCENTIVES
Annual incentives are provided in the form of cash bonuses. Annual
incentives are designed to reward executives and management for the annual
growth and achievement of the Company and are therefore tied to its
performance. The Compensation Committee awards cash bonuses to those executives
who meet established goals. The amount of the award is based upon each
executive's base salary and the level to which such executive's performance met
and exceeded the established goal. D. Robert Crants, III, Michael W. Devlin and
Vida H. Carroll were each paid annual cash incentives of $75,000 in 1999 for
services provided to the Company in connection with the 1999 Merger.
LONG-TERM INCENTIVES
Long-term incentives are provided through the grant of stock options
and restricted stock awards under the Company's 1997 Share Incentive Plan.
These grants are designed to align executives' interests with the long-term
goals of the Company and the interests of the Company's shareholders and
encourage high levels of stock ownership among executives. The Compensation
Committee granted 141,250 options to executive officers other than Doctor R.
Crants in 1999. In addition, the Compensation Committee awarded 16,250
restricted shares of the Company's Common Stock to executive officers other
than Doctor R. Crants in 1999.
EXECUTIVE EQUITY LOAN PLAN
On May 10, 1999, the Compensation Committee approved, and the Company
adopted, the Prison Realty Trust, Inc. Executive Equity Loan Plan (the "Loan
Plan"), pursuant to which the Company may grant loans to its officers and other
key employees for the purpose of purchasing shares of the Company's Common
Stock. The Company adopted the Loan Plan so as to align the interests of the
Company's management and shareholders. Under the Loan Plan, the Company granted
an aggregate of $2.0 million in loans in 1999 to certain of its executive
officers other than Doctor R. Crants in 1999, which were to be used for the
purposes of purchasing shares of the Company's Common Stock.
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COMPENSATION OF CHIEF EXECUTIVE OFFICER IN 1999
In March 1999, the Compensation Committee set the 1999 base salary for
the Company's Chief Executive Officer, Doctor R. Crants, in accordance with the
policies and considerations stated above. For the year ended December 31, 1999,
Mr. Crants received a base salary of $175,000. During the fiscal year ended
December 31, 1999, the Compensation Committee awarded options to purchase
113,750 shares of the Company's Common Stock to Mr. Crants. The Company also
awarded a total of 6,750 restricted shares of the Company's Common Stock to Mr.
Crants pursuant to the 1997 Employee Share Incentive Plan, which vest in 25%
increments over a three-year period, with the first such increment vesting
immediately upon the date of the award. In addition, under the terms of the
Company's Loan Plan, Mr. Crants obtained a loan in the principal amount of $1.0
million for the purpose of purchasing shares of the Company's Common Stock.
TAX DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Code limits the deductibility on the Company's
tax return of compensation over $1.0 million to either the Chief Executive
Officer or any of the Named Executive Officers of the Company unless, in
general, the compensation is paid pursuant to a plan which is
performance-related, non-discretionary and has been approved by the Company's
shareholders. The Compensation Committee's policy with respect to Section
162(m) is to make every reasonable effort to ensure that compensation is
deductible to the extent permitted while simultaneously providing the Company
executives with appropriate rewards for their performance.
Submitted by the Compensation Committee of the Company's board of directors:
Jackson W. Moore, Chairman
C. Ray Bell
Joseph V. Russell
PERFORMANCE GRAPH
The Common Stock is traded on the NYSE under the symbol "PZN." On
March 15, 2000, the last reported sales price of the Common Stock was $4.06 per
share. The Common Stock, however, did not begin trading on the NYSE until
January 4, 1999, after the completion of the 1999 Merger. As such, the
information provided below relating to shareholder returns for the periods
indicated relates to the Company since the Common Stock began trading on
January 4, 1999, as well as each of Old Prison Realty and Old CCA prior to
January 1, 1999. In the 1999 Merger, each Old Prison Realty common share was
converted into one share of Common Stock and each share of Old CCA common stock
was converted into the right to receive 0.875 share of Common Stock.
THE COMPANY
The following graph provides a comparison of the cumulative total
shareholder return on Prison Realty's Common Stock compared to the cumulative
total return of the Standard & Poor's 500 Index (the "S&P 500 Index") and the
National Association of Real Estate Investment Trusts ("NAREIT") Total Return
Equity Index (the "NAREIT Index") for the year ended December 31, 1999. The
graph assumes an investment of $100 on January 4, 1999, a reinvestment of
distributions and/or dividends and actual increase of the market value of
Prison Realty's Common Stock relative to the initial investment of $100. The
comparisons in this table are required by the Commission and are not intended
to forecast or be indicative of possible future performance of the Company's
Common Stock.
[GRAPH]
95
100
1/4/99* 12/31/99
------- --------
Prison Realty Trust, Inc. $100(1) $ 25.22
NAREIT Index $100 $ 92.18
S&P 500 Index $100 $121.15
- -------------------
(1) Shares of Company's Common Stock did not begin trading on the NYSE
until January 1, 1999. Accordingly, the table and graph reflect the
Company's performance from that date only.
OLD PRISON REALTY
The following graph provides a comparison of the cumulative total
shareholder return on Old Prison Realty's common shares compared to the
cumulative total return of the S&P 500 Index and the NAREIT Index for the six
months ended December 31, 1997 and the year ended December 31, 1998. The graph
assumes an investment of $100 on June 30, 1997, a reinvestment of distributions
and/or dividends and actual increase of the market value of Old Prison Realty's
common shares relative to the initial investment of $100.
[GRAPH]
6/30/97* 12/31/97 12/31/98
-------- -------- --------
CCA Prison Realty Trust $100(1) $216.82 $106.70
NAREIT Index $100 $112.17 $ 91.06
S&P 500 Index $100 $110.58 $142.18
- ------------------
* Old Prison Realty's common shares did not begin trading on the NYSE
until July 18, 1997. Accordingly, the table and graph reflect Old
Prison Realty's performance from that date only.
(1) Reflects a purchase price of $21.00 per share, the initial public
offering price of Old Prison Realty's common shares on the NYSE on
July 18, 1997. The Company believes that the use of the initial
offering price better reflects shareholder return rather than the use
of the opening purchase price of Old Prison Realty's common shares on
such date. If a purchase price of $28.00 were used as the initial
investment price (as was done in determining Old Prison Realty's
cumulative shareholder return in the performance graph appearing in
Old Prison Realty's proxy statement prepared in connection with its
1998 Annual Meeting of Shareholders), the cumulative total shareholder
return would be $157.69 and $77.60 for the periods ending December 31,
1997 and December 31, 1998, respectively.
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OLD CCA
The following graph provides a comparison, for the period of
five years commencing December 31,1993 and ending December 31, 1998, of the
yearly percentage change in the cumulative total shareholder return on Old
CCA's common stock with the cumulative total return of the S&P 500 Index and an
index consisting of companies that were either direct competitors of Old CCA or
other regional service organizations with similar market capitalization to Old
CCA prior to the 1999 Merger (the "Peer Group Index"). Old CCA believed that
the companies included within the Peer Group Index generally possessed assets,
liabilities and operations more similar to those of Old CCA than the companies
comprising other publicly-available indices. The graph assumes an investment of
$100 on December 31, 1993, a reinvestment of dividends and actual increase of
the market value of Old CCA's common stock relative to the initial investment
of $100.
[GRAPH]
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
Corrections Corp. $100(1) $179.17 $825.00 $ 1355.56 $1647.22 $783.33
Peer Group* $100 $108.76 $179.65 $ 201.31 $ 233.38 $179.57
S&P 500 Composite $100 $101.36 $139.48 $ 171.48 $ 228.69 $294.05
- -------------------
* The Peer Group includes AMRESCO, Chattem, Inc., Command Security
Corporation, Correctional Services Corp.**, Hospital Staffing
Services, Inc., Insituform Technology, Inc., Medalliance, Inc.,
Nichols Research Corporation, Phycor, Inc., Pinkerton, Inc.,
REN-Corporation-USA, Republic Automotive Parts, Inc., Saks, Inc.***
and Wackenhut Corrections. (Medalliance stopped trading stock on
November 19, 1995 and Ren Corp stopped trading stock on November 1,
1995; therefore, they have been deleted from the Peer Group after
December 31, 1994. Hospital Staffing Services, Inc. stopped trading
stock on March 27, 1998 and Republic Automotive Parts, Inc., stopped
trading stock on June 26, 1998; therefore, they have been deleted from
the Peer Group after December 31, 1997.)
** Correctional Services Corp was formerly known as Esmor Corporation.
*** Proffitts, Inc. merged with Saks, Inc. on September 17, 1998.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF THE COMPANY'S COMMON STOCK
The following table sets forth certain information with respect to the
beneficial ownership of shares of the Company's Common Stock as of March 15,
2000, by: (i) each shareholder of the Company that the Company believes
currently holds more than a 5% beneficial interest in the Company's Common
Stock; (ii) each existing director of the Company; (iii) each of the Company's
Named Executive Officers (including D. Robert Crants, III and Michael W.
Devlin); and (iv) all directors and executive officers as a group. Except as
otherwise indicated, the Company believes that the beneficial owners of the
shares of the Company's Common Stock listed below, based on information
furnished by such owners and/or from information contained reports filed by the
beneficial owner with the Commission pursuant to Section 13 of the Exchange
Act, have sole voting and investment power with respect to such shares.
NUMBER OF SHARES OF COMMON PERCENTAGE OF SHARES OF COMMON
STOCK BENEFICIALLY OWNED (1) STOCK BENEFICIALLY OWNED (2)
---------------------------- ----------------------------
NAME OF BENEFICIAL OWNER
Dreman Value Management, L.L.C.................. 13,324,690(3) 11.3
10 Exchange Place, Suite 2150
Jersey City, New Jersey 07302-3913
Sodexho Alliance, S.A........................... 10,459,131(4) 8.8
Port de la Bourdonnais 75007
Paris, France
Scudder Kemper Investments, Inc................. 8,923,325(5) 7.5
345 Park Avenue
New York, New York 10154
Gotham Partners, L.P............................ 6,802,000(6) 5.7
Gotham Partners III, L.P.
Gotham International Advisors, L.L.C.
110 East 42nd Street, 18th Floor
New York, New York 10017
Thomas W. Beasley............................... 2,490,626(7) 2.1
Doctor R. Crants................................ 1,473,858(8) 1.2
J. Michael Quinlan.............................. 427,745(9) *
C. Ray Bell..................................... 160,161(10) *
Richard W. Cardin............................... 20,750(11) *
Jean-Pierre Cuny................................ 26,250(12) *
Ted Feldman..................................... 27,054(11) *
Jackson W. Moore................................ 42,259(11) *
Joseph V. Russell............................... 146,657(13) *
Charles W. Thomas............................... 71,896(11) *
Vida H. Carroll................................. 64,006(14) *
D. Robert Crants, III........................... 641,892(15) *
Michael W. Devlin............................... 641,892(15) *
All Named Executive Officers and directors as a
group (13 persons).............................. 5,644,910(16) 4.7
- --------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
the Company's Common Stock.
(1) Includes shares as to which such person directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or shares
voting power and/or investment power as these terms are defined in Rule
13d-3(a) of the Exchange Act. Shares of the Company's Common Stock underlying
options to purchase shares of the Company's Common Stock, which are
exercisable, or become exercisable within 60 days after March 15, 2000, are
deemed to be outstanding for the purpose of computing the outstanding shares of
the Company's Common Stock owned by the articular person and by the group, but
are not deemed outstanding for any other purpose.
(2) Based on 118,395,379 shares of the Company's Common Stock issued and
outstanding on March 15, 2000.
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(3) This beneficial ownership information was received by the Company from a
Schedule 13D filed with the Commission on January 6, 2000. Dreman Value
Management, L.L.C. beneficially owns, and has the sole power to dispose or
direct the disposition of, 13,324,690 shares of the Company's Common Stock. Of
this amount, Dreman Value Management, L.L.C. has the sole power to vote or
direct the vote of 12,581,140 shares of the Company's Common Stock.
(4) Includes 10,383,505 shares of the Company's Common Stock held by Sodexho
and 75,626 shares of the Company's Common Stock issuable upon the exercise of
certain options issued to Jean-Pierre Cuny and transferred by Mr. Cuny to
Sodexho. Does not include 26,250 shares of the Company's Common Stock issuable
upon the exercise of certain options issued to Jean-Pierre Cuny, which were not
transferred by Mr. Cuny to Sodexho.
(5) This beneficial ownership information was received by the Company from a
Schedule 13G filed with the Commission on January 28, 2000. Scudder Kemper
Investments, Inc. beneficially owns, and has the sole power to dispose or to
direct the disposition of, 8,923,325 shares of the Company's Common Stock. Of
this amount, Scudder Kemper Investments, Inc. has the sole power to vote or
direct the vote of 8,922,100 shares of the Company's Common Stock.
(6) This beneficial ownership information was received by the Company from a
Schedule 13D filed with the Commission on February 9, 2000. Gotham Partners,
L.P. has sole voting and investment power with respect to 4,507,452 shares of
the Company's Common Stock. Gotham Partners III, L.P. has sole voting and
investment power with respect to 222,962 shares of the Company's Common Stock.
Gotham International Advisors, L.L.C. has sole voting and investment power with
respect to 2,071,586 shares of the Company's Common Stock. Section H Partners,
L.P. is the sole general partner of Gotham Partners, L.P. and Gotham Partners
III, L.P. Karenina Corp., which is wholly owned by William A. Ackman, and DPB
Corp., which is wholly owned by David P. Berkowitz, are the sole general
partners of Section H Partners, L.P. Messrs. Ackman and Berkowitz are the
senior managing members of Gotham International Advisors, L.L.C., which,
pursuant to an investment management agreement, has the power to vote and
dispose of 2,071,586 shares of the Company's Common Stock owned by Gotham
Partners International, Ltd.
(7) Includes 5,000 shares of the Company's Common Stock issuable upon the
exercise of vested options, 26,211 shares of the Company's Common Stock held in
a 401(k) plan, 19,750 shares of the Company's Common Stock owned by Thomas W.
Beasley's spouse, and an aggregate of 14,567 shares of the Company's Common
Stock owned by Mr. Beasley's three children.
(8) Includes 325,000 shares of the Company's Common Stock issuable upon the
exercise of vested options and 43,163 shares of the Company's Common Stock held
in a 401(k) plan.
(9) Includes 393,750 shares of the Company's Common Stock issuable upon the
exercise of vested options, 900 shares of the Company's Common Stock owned by
Mr. Quinlan's daughters, 21,000 shares of the Company's Common Stock owned by
Mr. Quinlan's spouse and 2,645 shares of the Company's Common Stock held in an
Individual Retirement Account.
(10) Includes 15,000 shares of the Company's Common Stock issuable upon the
exercise of vested options and 1,000 shares of the Company's Common Stock owned
jointly by Mr. Bell and his spouse.
(11) Includes 15,000 shares of the Company's Common Stock issuable upon the
exercise of vested options.
(12) Mr. Cuny serves as the Senior Vice-President of The Sodexho Group, an
affiliate of Sodexho. Mr. Cuny beneficially owns 26,250 shares of the Company's
Common Stock issuable upon the exercise of vested options. This number does not
include 10,459,131 shares of the Company's Common Stock beneficially owned by
Sodexho (including 75,626 shares of the Company's Common Stock issuable upon
the exercise of options issued to Mr. Curry and transferred by Mr. Curry to
Sodexho), of which Mr. Cuny disclaims beneficial ownership.
(13) Includes 15,000 shares of the Company's Common Stock issuable upon the
exercise of vested options and 437 shares of the Company's Common Stock owned
jointly by Mr. Russell and his daughter.
(14) Includes 61,875 shares of the Company's Common Stock issuable upon the
exercise of vested options.
(15) Includes 592,267 shares of the Company's Common Stock held by a private
investment partnership. Each of Michael W. Devlin and D. Robert Crants, III
serve as a manager of the general partner of the private investment
partnership. Therefore, each are deemed to beneficially own the 592,267 shares
of the Company's Common Stock held by the private investment partnership.
(16) Includes an aggregate of 904,006 shares of the Company's Common Stock
issuable upon the exercise of vested options.
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OWNERSHIP OF THE COMPANY'S SERIES A PREFERRED STOCK
The following table sets forth, as of March 15, 2000, certain
information with respect to the beneficial ownership of shares of the Company's
Series A Preferred Stock by each existing director of the Company and all
directors as a group. No Named Executive Officers of the Company, nor the
Company's Chief Executive Officer, owned any shares of the Series A Preferred
Stock as of March 15, 2000. In addition, the Company is aware of no beneficial
holder of more than 5% of the Series A Preferred Stock.
PERCENTAGE OF
NUMBER OF SHARES OF SERIES A PREFERRED SHARES OF SERIES A PREFERRED STOCK
STOCK BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (2)
--------------------------------------- ----------------------------------
NAME OF BENEFICIAL OWNER
C. Ray Bell .................................. 5,000 *
All directors as a group (9 persons) ......... 5,000 *
- ----------------------
* Represents beneficial ownership of less than 1% of the outstanding
shares of the Series A Preferred Stock.
(1) Includes shares as to which such person directly or indirectly,
through any contract, arrangement, understanding, relationship, or
otherwise has or shares voting power and/or investment power as these
terms are defined in Rule 13d-3(a) of the Exchange Act.
(2) Based on 4,300,000 shares of the Series A Preferred Stock issued and
outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company commenced operations on January 1, 1999 following the 1999
Merger. CCA commenced operations on December 31, 1998 as the result of the
contribution and assignment of certain facility management contracts and
related assets by Old CCA to CCA in connection with the 1999 Merger. The
Company currently leases the substantial majority of the correctional and
detention facilities owned by it to CCA pursuant to the CCA Leases. The total
amount of lease payments required to be paid by CCA to the Company during 1999
was approximately $263.5 million, of which approximately $251.6 million has
been paid as of March 17, 2000. If the Restructuring and related transactions
are completed, the CCA Leases will be canceled and will be of no further force
and effect.
The Company and CCA also entered into a series of additional
contractual arrangements in connection with the completion of the 1999 Merger,
as described in this Annual Report under Part I, Item 1 "Business -- General
Development of Business." The total amount of fees required to be paid by the
Company to CCA pursuant to the Business Development Agreement and the Amended
and Restated Services Agreement during 1999 were approximately $15.0 million
and $41.2 million, respectively, of which approximately $15.0 million and $39.1
million have been paid, respectively. The total amount of fees paid by the
Company to CCA pursuant to the Amended and Restated Tenant Incentive Agreement
during 1999 was approximately $68.6 million. The total amount of payments
required to be paid by CCA pursuant to the Service Mark and Trade Name Use
Agreement during 1999 was approximately $8.7 million, of which approximately
$6.5 million has been paid. If the Restructuring and related transactions are
completed, each of these agreements will be canceled and will be of no further
force and effect.
Also in connection with the 1999 Merger, CCA executed the CCA Note in
the aggregate principal amount of $137.0 million, which bears interest at a
rate of 12% per annum. Ten percent of the outstanding principal amount of the
CCA Note is personally guaranteed by the Company's Chief Executive Officer,
Doctor R. Crants, who also serves as the Chief Executive Officer and a member
of the board of directors of CCA. As of March 15, 2000, the entire original
principal amount of the note remained outstanding. Pursuant to the terms of the
CCA Note, payments of accrued interest are due and payable annually on December
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31 of each year, with the first such payment due and payable on December 31,
1999. The terms of the CCA Note provide that, beginning December 31, 2003 and
continuing on each anniversary date thereafter until December 31, 2008, equal
annual payments of principal and interest shall be due and payable by CCA. As a
result of CCA's current liquidity position, CCA has been required to defer the
first scheduled payment of accrued interest on the CCA Note. Pursuant to the
terms of the subordination agreement by and between the Company and Foothill
Capital Corporation, the agent of CCA's existing bank credit facility, CCA is
prohibited from making scheduled interest payments on the CCA Note if certain
financial conditions relating to CCA's liquidity position are not met. On
December 31, 1999, CCA was not in compliance with these financial covenants.
Accordingly, CCA was prohibited from making the scheduled interest payment.
Pursuant to the terms of the subordination agreement, however, the Company is
prohibited from accelerating the principal amount of the CCA Note or taking any
other action to enforce its rights under the provisions of the CCA Note for so
long as the CCA bank credit facility remains outstanding. If the Restructuring
and related transactions are completed, the CCA Note will be canceled and will
be of no further force and effect.
The Company owns 100% of CCA's non-voting common stock, which
represents approximately 9.5% of CCA's issued and outstanding capital stock.
The terms of CCA's non-voting common stock provide for the payment of dividends
as and if declared by the CCA board of directors on a parity with shares of
CCA's voting common stock. During 1999, no dividends were declared or paid by
CCA. The Company also owns 100% of the outstanding non-voting common stock of
each of PMSI and JJFMSI. The terms of the non-voting common stock of PMSI and
JJFMSI provide for the payment, on a pro-rata basis, of cumulative cash
dividends, as and if declared by the PMSI board and the JJFMSI board,
respectively, equal to 95% of each entity's net income, as determined in
accordance with generally accepted accounting principles. During 1999, the
amount of dividends paid to the Company by PMSI and JJFMSI were approximately
$11.0 million and $10.6 million, respectively, which does not include dividends
of approximately $579,000 and $129,000, respectively, paid in 2000 with respect
to the fourth quarter of 1999. If the Restructuring and related transactions
are completed, the Company's entire ownership interest in each of CCA, PMSI and
JJFMSI will be canceled.
Jean-Pierre Cuny, a member of the Company's board of directors, is the
Senior Vice-President of The Sodexho Group, an affiliate of Sodexho. Sodexho,
which beneficially owns approximately 8.8% of the Company's outstanding Common
Stock, has a contractual right to require the Company to nominate Mr. Cuny for
election as a director.
In connection with the Restructuring and related transactions, the
Company will purchase from each of Sodexho and the Baron Asset Fund all of
Sodexho's and Baron's interest in the voting common stock of CCA, representing
approximately 33.8% of CCA's outstanding voting common stock, in exchange for a
cash payment of $8.0 million to each of Sodexho and Baron. The Company also
will acquire approximately 85% of the outstanding voting common stock of each
of PMSI and JJFMSI from Privatized Management Services Investors, LLC and
Correctional Services Investors, LLC, respectively, in connection with the
Restructuring and related transactions. The aggregate purchase price of
Privatized Management Services Investors' ownership interest in PMSI will be
approximately $5.8 million, and the aggregate purchase price of Correctional
Services Investors' ownership interest in JJFMSI will be approximately $4.8
million. The completion of each of these purchases, however, is conditioned
upon, among other things, the approval of the Restructuring.
Doctor R. Crants currently serves as the Chief Executive Officer of
the Company. Mr. Crants also serves as Chairman of the board of directors and
Chief Executive Officer of CCA and serves as a member of each of the PMSI board
and the JJFMSI board. J. Michael Quinlan, President of the Company, is also
President of CCA and a member of its board of directors. Thomas W. Beasley,
Chairman of the board of directors of the Company, is also chairman of the
board of directors of PMSI. C. Ray Bell, a member of the Company's board of
directors, is the principal of a construction company which, as a part of its
business, builds correctional and detention facilities, including facilities
for the Company. In 1999, Mr. Bell's construction company received fees in the
amount of $26.5 million for construction services provided to the Company.
During 1998, Old CCA and Old Prison Realty paid $40.8 million and $8.7 million,
respectively to Mr. Bell's construction company for construction services.
During 1999, DC Investment Partners, LLC, a private investment manager of which
D. Robert Crants, III and Michael W. Devlin are principals, leased certain
office space from the Company. The total amount of rental payments with respect
to such lease arrangement in 1999 was $9,600. In connection with the 1999
Merger, Charles W. Thomas, a director of the Company, received a total of $3.0
million from the Company and Old CCA for the provision of certain consulting
services to each of the Company
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and Old CCA. Jackson W. Moore, a director of the Company, is a director of and
the President and Chief Operating Officer of Union Planters Corporation, a
multi-state bank and savings and loan holding company, and is President and
Chief Executive Officer of its principal subsidiary, Union Planters Bank, N.A.
Union Planters Bank, N.A. is a lender under the Company's bank credit facility.
Stokes & Bartholomew, P.A. is tax and securities counsel to the
Company, and Stokes & Bartholomew, P.A. also provide certain legal services to
each of CCA, PMSI and JJFMSI. Samuel W. Bartholomew, Jr., a shareholder of
Stokes & Bartholomew, P.A., is chairman of the board of directors of JJFMSI.
Prior to the 1999 Merger, Mr. Bartholomew was a member of the board of
directors of Old CCA. Legal fees paid to Stokes & Bartholomew, P.A. related to
Old CCA's mergers and acquisitions amounted to $3.0 million and $1.1 million in
1998 and 1997, respectively. During 1999, the Company paid $5.8 million to
Stokes & Bartholomew, P.A.
Joseph F. Johnson, Jr. is a member of the board of directors of JJFMSI
and, prior to the 1999 Merger, served as a member of the board of directors of
Old CCA. Old CCA paid fees of approximately $1.6 million and $1.3 million in
1998 and 1997, respectively to Mr. Johnson, or an entity controlled by Mr.
Johnson, for consulting services related to various contractual relationships
and services rendered at one of Old CCA's facilities. No fees were paid to Mr.
Johnson by the Company in 1999.
Pursuant to the Company's Loan Plan, the Company granted a loan in the
aggregate principal amount of $1.0 million to each of Doctor R. Crants, D.
Robert Crants, III and Michael W. Devlin in May and June 1999. The loans were
to be used for the purpose of purchasing shares of the Company's Common Stock.
Each loan, which bears interest at a rate of 250 basis points over the
thirty-day LIBOR, adjusted quarterly, initially had a term of five years from
the date of the grant, with interest payable annually. Pursuant to the terms of
a severance agreement by and between the Company and each of D. Robert Crants,
III and Michael W. Devlin, the terms of the loans granted to each of them have
been modified. As a result of this modification, the outstanding principal
amount of the loans to each of D. Robert Crants, III and Michael W. Devlin as
of March 15, 2000 is $547,823 and $546,375, respectively, with interest only
payable on such principal amount for a period of three years and with the
principal amount, plus interest, payable in equal installments over the
following three years. This balance will be reduced to $447,823 for Mr. Crants,
III and $446,375 for Mr. Devlin upon application of the proceeds received from
each of Messrs. Crants, III and Devlin from the purchase of the CCA common
stock held by each of them. Under the original terms of these Severance
Agreements, CCA was to purchase a portion of the shares of CCA Common Stock
held by each of Messrs. Crants, III and Devlin. However, as a result of
restrictions on CCA's ability to purchase these shares, this right and
obligation was assigned to and assumed by Doctor R. Crants. In connection with
this assignment, Mr. Crants will receive a loan in the aggregate principal
amount of $600,000 from PMSI, the proceeds of which were used to purchase the
300,000 shares of CCA Common Stock owned by Messrs. Crants, III and Devlin. If
the Restructuring is completed, the proceeds received by Mr. Crants from the
repurchase of these shares of CCA Common Stock will be applied to reduce the
outstanding principal amount of Mr. Crants' loan from PMSI. For a discussion of
the terms of the modifications of the loans to Messrs. Crants, III and Devlin,
see " -- Employment and Severance Agreements." The outstanding principal amount
of the loan to Doctor R. Crants as of March 15, 2000 is $1.0 million.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
The Financial Statements as set forth under Item 8 of
this Annual Report on Form 10-K have been filed
herewith, beginning on Page F-2 of this report.
(2) Financial Statement Schedules.
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107
Schedules for which provision is made in Regulation S-X
are either not required to be included herein under the
related instructions or are inapplicable or the related
information is included in the footnotes to the
applicable financial statements and, therefore, have
been omitted.
(3) The Exhibits are listed in the Index of Exhibits
Required by Item 601 of Regulation S-K included
herewith.
(b) The Company filed a Current Report on Form 8-K on December
28, 1999, relating to the proposed Restructuring.
Additionally, on March 1, 2000, the Company filed a Current
Report on Form 8-K relating to the Company's receipt of the
Pacific Life Proposal and the amendment of the Securities
Purchase Agreement.
(c) Certain Exhibits. See Item 14(a)(3) above.
(d) Certain Financial Statements. See Item 14(a) (1) and (2)
above.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PRISON REALTY TRUST, INC.
Date: March 30, 2000 By: /s/ Doctor R. Crants
---------------------------------------
Its: Chief Executive Officer
--------------------------------------
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Doctor R. Crants and Vida H. Carroll, and each of
them, as their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for them and in their name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report of
Prison Realty Trust, Inc. for the fiscal year ended December 31, 1999, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and the New York Stock
Exchange, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Doctor R. Crants
------------------------- Chief Executive Officer March 30, 2000
Doctor R. Crants (Principal Executive Officer),
and Director
/s/ J. Michael Quinlan
------------------------- President March 30, 2000
J. Michael Quinlan
/s/ Vida H. Carroll
------------------------- Chief Financial Officer March 30, 2000
Vida H. Carroll (Principal Financial and
Accounting Officer),
Secretary and Treasurer
/s/ Thomas W. Beasley
------------------------- Chairman of the Board and Director March 30, 2000
Thomas W. Beasley
/s/ C. Ray Bell
------------------------- Director March 30, 2000
C. Ray Bell
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SIGNATURE TITLE DATE
--------- ----- ----
--------------------------- Director March ____, 2000
Richard W. Cardin
Director March ____, 2000
---------------------------
Jean-Pierre Cuny
/s/ Ted Feldman
--------------------------- Director March 30, 2000
Ted Feldman
--------------------------- Director March ____, 2000
Jackson W. Moore
/s/ Joseph V. Russell
-------------------------- Director March 30, 2000
Joseph V. Russell
/s/ Charles W. Thomas, Ph.D.
--------------------------- Director March 30, 2000
Charles W. Thomas, Ph.D.
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INDEX OF EXHIBITS
Exhibits marked with an * are filed herewith. Other exhibits have previously
been filed with the Securities and Exchange Commission (the "Commission") and
are incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- --------------------------
2.1 Agreement and Plan of Merger, dated as of April 17, 1998, by and among Old Prison
Realty and USCC Corporation, a wholly-owned Kentucky subsidiary of Old Prison Realty,
and U.S. Corrections Corporation, a Kentucky corporation (previously filed as Exhibit
2.2 to Old Prison Realty's Current Report on Form 8-K (Commission File no. 1-13049),
filed with the Commission on April 22, 1998 and incorporated herein by reference).
2.2 Amended and Restated Agreement and Plan of Merger, dated as of September 29, 1998, by
and among Old CCA, Old Prison Realty and the Company (previously filed as Appendix A
to the Prospectus filed pursuant to Rule 424(b)(4) included in the Company's
Registration Statement on Form S-4 (Commission File no. 333-65017), filed with the
Commission on September 30, 1998, as declared effective on October 16, 1998, and
incorporated herein by reference) (as directed by Item 601(b)(2) of Regulation S-K,
certain schedules and exhibits to this document were omitted from that filing, and the
Company has agreed to furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request).
2.3 Agreement and Plan of Merger, dated as of December 26, 1999, by and among the Company,
CCA Acquisition Sub, Inc., PMSI Acquisition Sub, Inc. and JJFMSI Acquisition Sub, Inc.
and CCA, PMSI and JJFMSI (previously filed as Exhibit 2.1 to the Company's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the Commission on
December 28, 1999 and incorporated herein by reference) (as directed by Item 601(b)(2)
of Regulation S-K, certain schedules and exhibits to this document were omitted from
that filing, and the Company has agreed to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request).
3.1 Charter of the Company (previously filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-4 (Commission File no. 333-65017), filed with the Commission on
September 30, 1998 and incorporated herein by reference).
3.2 Articles of Amendment of the Charter of the Company (previously filed as Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1999 (Commission File no. 0- 25245), filed with the Commission on May 14, 1999 and
incorporated herein by reference).
3.3* Second Amended and Restated Bylaws of the Company.
4.1 Provisions defining the rights of shareholders are found in Sections SIXTH through
SEVENTH and Article II in the Charter and Second Amended and Restated Bylaws,
respectively, of the Company (included as Exhibits 3.1 and 3.2 hereto).
4.2 Specimen of certificate representing the Company's Common Stock (previously filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-4 (Commission File no.
333-65017), filed with the Commission on September 30, 1998 and incorporated herein by
reference).
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4.3 Specimen of certificate representing the Company's 8.0% Series A Preferred Stock
(previously filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4
(Commission File no. 333-65017), filed with the Commission on September 30, 1998 and
incorporated herein by reference).
4.4 Form of 7.5% Convertible, Subordinated Note due February 28, 2002 made payable to
Sodexho in the aggregate principal amount of $20.0 million (previously filed as
Exhibit 4(v) to Old CCA's Annual Report on Form 10-K (Commission File no. 1-13560),
filed with the Commission on March 31, 1997 and incorporated herein by reference).
4.5 8.5% Convertible, Subordinated Note due November 7, 1999 made payable to Sodexho S.A.,
predecessor in interest to Sodexho, in the aggregate principal amount of $7.0 million
(previously filed as Exhibit 2 to Old CCA's Current Report on Form 8-K (Commission
File no. (0-15719), filed with the Commission on June 30, 1994 and incorporated herein
by reference).
4.6 7.5% Convertible, Subordinated Note Modification Agreement, dated as of December 30,
1998, by and between Sodexho and Old CCA (previously filed as Exhibit 4.16 to the
Company's Annual Report on Form 10-K (Commission File no. 0-25245), filed with the
Commission on March 30, 1999 and incorporated herein by reference).
4.7 8.5% Convertible, Subordinated Note Modification Agreement, dated as of December 30,
1998, by and between Sodexho and Old CCA (previously filed as Exhibit 4.17 to the
Company's Annual Report on Form 10-K (Commission File no. 0-25245), filed with the
Commission on March 30, 1999 and incorporated herein by reference).
4.8 7.5% Convertible, Subordinated Note due February 28, 2005, made payable to PMI
Mezzanine Fund, L.P. in the aggregate principal amount of $30.0 million (previously
filed as Exhibit 4.6 to the Company's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated herein by
reference).
4.9 Note from the Company made payable to MDP Ventures IV LLC, dated as of December 31,
1998, in the principal amount of $20.0 million (previously filed as Exhibit 4.7 to the
Company's Current Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by reference).
4.10 Floating Rate Convertible Note, due March 8, 2004, made payable to Sodexho in the
aggregate principal amount of $20.0 million (previously filed as Exhibit 4.20 to the
Company's Annual Report on Form 10-K (Commission File no. 0-25245), filed with the
Commission on March 30, 1999 and incorporated herein by reference).
4.11 Notes from the Company made payable to MDP Ventures IV LLC, and certain other
purchasers, dated as of January 29, 1999, in the aggregate principal amount of $20.0
million (previously filed as Exhibit 4.21 to the Company's Annual Report on Form 10-K
(Commission File no. 0-25245), filed with the Commission on March 30, 1999 and
incorporated herein by reference).
4.12 Prison Realty Trust, Inc. Dividend Reinvestment and Stock Purchase Plan (previously
filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ending March 31, 1999 (Commission File No. 0-25245), filed with the Commission
on May 14, 1999 and incorporated herein by reference).
4.13 Indenture, dated as of June 10, 1999, by and between the Company and State Street Bank
and Trust Company, as trustee, relating to the issuance of debt securities (previously
filed as Exhibit 4.1 to the Company's Quarterly
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Report on Form 10-Q for the quarterly period ending June 30, 1999 (Commission File No.
0-25245), filed with the Commission on August 17, 1999 and incorporated herein by
reference).
4.14 First Supplemental Indenture, by and between the Company and State Street Bank and
Trust Company, as trustee, dated as of June 11, 1999, relating to the $100.0 million
aggregate principal amount of the Company's 12% Senior Notes due 2006 (previously
filed as Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarterly
period ending June 30, 1999 (Commission File No. 0-25245), filed with the Commission
on August 17, 1999 and incorporated herein by reference).
10.1 Stock Repurchase Agreement, dated March 2, 1998, between Old CCA and Doctor R. Crants
(previously filed as Exhibit 10.193 to Old CCA's Annual Report on Form 10-K
(Commission File no. 1-13560), filed with the Commission on March 30, 1998 and
incorporated herein by reference).
10.2 Amended and Restated Credit Agreement, dated as of June 24, 1998, by and among Old CCA
as Borrower, certain subsidiaries of Old CCA, certain Lenders, First Union National
Bank, as the Administrative Agent for the Lenders, Canadian Imperial Bank of Commerce,
as Documentation Agent, and NationsBank, N.A., as Syndication Agent (previously filed
as Exhibit 10.1 to Old CCA's Quarterly Report on Form 10-Q (Commission File no.
1-13560), filed with the Commission on August 14, 1998 and incorporated herein by
reference).
10.3 Master Agreement to Lease, dated as of January 1, 1999, by and between the Company,
USCC, Inc. and CCA (previously filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K (Commission File no. 0-25245), filed with the Commission on January 6,
1999 and incorporated herein by reference).
10.4 Form of Lease Agreement by and between the Company and CCA (previously filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated herein by
reference).
10.5 Right to Purchase Agreement, dated as of January 1, 1999, by and between the Company
and CCA (previously filed as Exhibit 10.3 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.6 Service Mark and Trade Name Use Agreement, dated as of December 31, 1998, by and
between Old CCA and CCA (previously filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the Commission on January
6, 1999 and incorporated herein by reference).
10.7 Service Mark and Trade Name Use Agreement, dated as of December 31, 1998, by and
between CCA and Prison Management Services, LLC (previously filed as Exhibit 10.5 to
the Company's Current Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by reference).
10.8 Service Mark and Trade Name Use Agreement, dated as of December 31, 1998, by and
between CCA and Juvenile and Jail Facility Management Services, LLC (previously filed
as Exhibit 10.6 to the Company's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated herein by
reference).
10.9 Promissory Note, dated as of December 31, 1998, executed by CCA made payable to Old
CCA in the principal amount of $137.0 million (previously filed as Exhibit 10.7 to the
Company's Current Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by reference).
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10.10 Guaranty Agreement, dated as of December 31, 1998, executed and delivered by Doctor R.
Crants to Old CCA (previously filed as Exhibit 10.8 to the Company's Current Report on
Form 8-K (Commission File no. 0-25245), filed with the Commission on January 6, 1999
and incorporated herein by reference).
10.11 Assignment Agreement, dated as of December 31, 1998, by and between Old CCA and
Corrections Partners, Inc. and related Bill of Sale (previously filed as Exhibit 10.9
to the Company's Current Report on Form 8-K (Commission File no. 0-25245), filed with
the Commission on January 6, 1999 and incorporated herein by reference).
10.12 Assignment Agreement, dated as of December 31, 1998, by and among Corrections
Partners, Inc., Concept Incorporated, TransCor America, Inc., certain other
subsidiaries of Old CCA, and CCA and related Bill of Sale (previously filed as Exhibit
10.10 to the Company's Current Report on Form 8-K (Commission File no. 0-25245), filed
with the Commission on January 6, 1999 and incorporated herein by reference).
10.13 Contribution Agreement, dated as of December 31, 1998, by and between Old CCA and CCA
(previously filed as Exhibit 10.11 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.14 Contribution Agreement, dated as of December 31, 1998, by and between Old CCA and
Prison Management Services, LLC (previously filed as Exhibit 10.12 to the Company's
Current Report on Form 8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.15 Contribution Agreement, dated as of December 31, 1998, by and between Old CCA and
Juvenile and Jail Facility Management Services, LLC (previously filed as Exhibit 10.13
to the Company's Current Report on Form 8-K (Commission File no. 0-25245), filed with
the Commission on January 6, 1999 and incorporated herein by reference).
10.16 Assignment and Assumption Agreement, dated as of December 31, 1998, by and among Old
CCA, Corrections Partners, Inc., Gadsden Correctional Institution, Inc., and Prison
Management Services, LLC (previously filed as Exhibit 10.14 to the Company's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the Commission on January
6, 1999 and incorporated herein by reference).
10.17 Assignment and Assumption Agreement, dated as of December 31, 1998, by and among Old
CCA, Concept Incorporated, Corrections Partners, Inc. and Juvenile and Jail Facility
Management Services, LLC (previously filed as Exhibit 10.15 to the Company's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the Commission on January
6, 1999 and incorporated herein by reference).
10.18 Services Agreement, dated as of January 1, 1999, by and between the Company and CCA
(previously filed as Exhibit 10.16 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.19 Tenant Incentive Agreement, dated as of January 1, 1999, by and between the Company
and CCA (previously filed as Exhibit 10.17 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.20 Note Purchase Agreement, dated as of January 1, 1999, by and between CCA and PMI
Mezzanine Fund, L.P., including, as Exhibit R-1 thereto, Registration Rights
Agreement, dated as of January 1, 1999, by and between CCA and PMI Mezzanine Fund,
L.P. (previously filed as Exhibit 10.22 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
114
10.21 Agreement in Principle by and among Sodexho, Old CCA and Old Prison Realty (previously
filed as Exhibit 10.13 to the Company's Registration Statement on Form S-4 (Commission
File no. 333-65017), filed with the Commission on September 30, 1998 and incorporated
herein by reference).
10.22 1998 Amendment to 1994 Securities Purchase Agreement by and between Old CCA and
Sodexho S.A., dated as of December 30, 1998 (previously filed as Exhibit 10.86 to the
Company's Annual Report on Form 10-K (Commission File no. 0-25245), filed with the
Commission on March 30, 1999 and incorporated herein by reference).
10.23 Agreement in Principle, dated as of October 15, 1998, by and between Baron Asset Fund,
and all series thereof, on behalf of itself and one or more mutual funds managed by
it, or its affiliates, Old CCA, Old Prison Realty and CCA (previously filed as Exhibit
10.14 to the Company's Registration Statement on Form S-4 (Commission File no.
333-65017) Amendment no. 4, filed with the Commission on September 30, 1998 and
incorporated herein by reference).
10.24 Administrative Services Agreement, dated as of January 1, 1999, by and between CCA and
PMSI (previously filed as Exhibit 10.26 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.25 Administrative Services Agreement, dated as of January 1, 1999, by and between CCA and
JJFMSI (previously filed as Exhibit 10.27 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.26 Employment Agreement, dated as of January 1, 1999, by and between Doctor R. Crants and
the Company (previously filed as Exhibit 10.28 to the Company's Current Report on Form
8-K (Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.27 Employment Agreement, dated as of January 1, 1999, by and between Doctor R. Crants and
CCA (previously filed as Exhibit 10.29 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.28 Employment Agreement by and between D. Robert Crants, III and Old Prison Realty
(previously filed as Exhibit 10.23 to Old Prison Realty's Quarterly Report on Form
10-Q (Commission File no. 1-13049), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.29 Employment Agreement by and between Michael W. Devlin and Old Prison Realty
(previously filed as Exhibit 10.24 to Old Prison Realty's Quarterly Report on Form
10-Q (Commission File no. 1-13049), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.30 Form of Officer and Director Indemnification Agreement by and between the Company and
its officers and directors (previously filed as Exhibit 10.48 to the Company's
Registration Statement on Form S-4 (Commission File no. 333-65017), filed with the
Commission on September 30, 1998 and incorporated herein by reference).
10.31 Form of Lockup Agreement by and between the Company and officers and directors of the
Company, CCA, PMSI and JJFMSI (previously filed as Exhibit 10.49 to the Company's
Registration Statement on Form S-4 (Commission File no. 333-65017), filed with the
Commission on September 30, 1998 and incorporated herein by reference).
10.32 Amended and Restated Charter of CCA (previously filed as Exhibit 10.50 to the
Company's Registration Statement on Form S-4 (Commission File no. 333-65017), filed
with the Commission on September 30, 1998 and incorporated herein by reference).
115
10.33 Bylaws of CCA (previously filed as Exhibit 10.51 to the Company's Registration
Statement on Form S-4 (Commission File no. 333-65017), filed with the Commission on
September 30, 1998 and incorporated herein by reference).
10.34 Amended and Restated Charter of PMSI (previously filed as Exhibit 10.31 to the
Company's Current Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by reference).
10.35 Bylaws of PMSI (previously filed as Exhibit 10.53 to the Company's Registration
Statement on Form S-4 (Commission File no. 333-65017), filed with the Commission on
September 30, 1998 and incorporated herein by reference).
10.36 Amended and Restated Charter of JJFMSI (previously filed as Exhibit 10.32 to the
Company's Current Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by reference).
10.37 Bylaws of JJFMSI (previously filed as Exhibit 10.55 to the Company's Registration
Statement on Form S-4 (Commission File no. 333-65017), filed with the Commission on
September 30, 1998 and incorporated herein by reference).
10.38 Credit Agreement, dated as of January 1, 1999, by and among the Company and certain of
its subsidiaries and NationsBank, N.A., as Administrative Agent, Lehman Commercial
Paper, Inc., as Documentation Agent, and the Bank of Nova Scotia, as Syndication Agent
(previously filed as Exhibit 10.33 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.39 Note Purchase Agreement, dated as of December 31, 1998, by and between the Company and
MDP Ventures IV LLC (previously filed as Exhibit 10.36 to the Company's Current Report
on Form 8-K (Commission File no. 0-25245), filed with the Commission on January 6,
1999 and incorporated herein by reference).
10.40 Registration Rights Agreement, dated as of December 31, 1998, by and between the
Company and MDP Ventures IV LLC (previously filed as Exhibit 10.37 to the Company's
Current Report on Form 8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.41 Preemptive Rights Agreement, dated as of January 1, 1999, by and between the Company
and CCA (previously filed as Exhibit 10.38 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.42 REIT Management Agreement, dated as of July 21, 1997, by and between Old Prison Realty
and Prison Realty Management, Inc. (previously filed as Exhibit 10(hh) to Old Prison
Realty's Annual Report on Form 10-K (Commission File no. 1-13049), filed with the
Commission on March 18, 1998 and incorporated herein by reference).
10.43 Old Prison Realty's 1997 Employee Share Incentive Plan (previously filed as Exhibit
10.25 to Old Prison Realty's Quarterly Report on Form 10-Q (Commission File no.
1-13049), filed with the Commission on August 25, 1997 and incorporated herein by
reference).
10.44 Old Prison Realty's Non-Employee Trustees' Share Option Plan, as amended (previously
filed as Exhibit 10.26 to Old Prison Realty's Quarterly Report on Form 10-Q
(Commission File no. 1-13049), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
116
10.45 Old Prison Realty's Non-Employee Trustees' Compensation Plan (previously filed as
Exhibit 4.3 to Old Prison Realty's Registration Statement on Form S-8 (Commission File
no. 333-58339), filed with the Commission on July 1, 1998 and incorporated herein by
reference).
10.46 Old CCA's Option Plan, dated as of January 23, 1985, as amended by First Amendment to
Old CCA's Stock Option Plan, together with forms of Incentive Stock Option Agreement
and Non-Qualified Stock Option Agreement (previously filed as Exhibit 10(c) to Old
CCA's Registration Statement on Form S-1 (Commission File no. 33-8052), filed with the
Commission on August 15, 1986 and incorporated herein by reference).
10.47 Non-Qualified Stock Option Plan of Old CCA, dated as of January 16, 1986, and related
form of Non-Qualified Stock Option Agreement (previously filed as Exhibit 10(d) to Old
CCA's Registration Statement on Form S-1 (Commission File no. 33-8052), filed with the
Commission on August 15, 1986 and incorporated herein by reference).
10.48 Old CCA's 1988 Flexible Stock Option Plan (previously filed as Exhibit A to Old CCA's
definitive Proxy Statement relating to Old CCA's 1988 Annual Meeting of Shareholders
(Commission File no. 0-15719), filed with the Commission on April 29, 1988 and
incorporated herein by reference).
10.49 Second Amendment to Old CCA's Stock Option Plan, dated as of March 27, 1987, together
with form of Incentive Stock Option Agreement (previously filed as Exhibit 10(aa) to
Old CCA's Annual Report on Form 10-K (Commission File no. 0-15719), filed with the
Commission on March 31, 1987 and incorporated herein by reference).
10.50 Third Amendment to Old CCA's Stock Option Plan, dated as of March 18, 1988 (previously
filed as Exhibit B to Old CCA's definitive Proxy Statement relating to Old CCA's 1988
Annual Meeting of Shareholders (Commission File no. 0-15719), filed with the
Commission on April 29, 1988 and incorporated herein by reference).
10.51 Old CCA's 1989 Stock Bonus Plan (previously filed as Exhibit 10(zz) to Old CCA's
Annual Report on Form 10-K (Commission File no. 0-15719), filed with the Commission on
March 30, 1990 and incorporated herein by reference).
10.52 First Amendment to Old CCA's 1988 Flexible Stock Option Plan, dated as of June 8, 1989
(previously filed as Exhibit 10(mmm) to Old CCA's Annual Report on Form 10-K
(Commission File no. 0-15719), filed with the Commission on March 30, 1990 and
incorporated herein by reference).
10.53 First Amendment to Old CCA's Non-Qualified Stock Option Plan, dated as of June 8, 1989
(previously filed as Exhibit 10(nnn) to Old CCA's Annual Report on Form 10-K
(Commission File no. 0-15719), filed with the Commission on March 30, 1990 and
incorporated herein by reference).
10.54 Amended and Restated Employee Stock Ownership Plan (previously filed as Exhibit
10(iiii) to Old CCA's Annual Report on Form 10-K (Commission File no. 0-15719), filed
with the Commission on March 30, 1992 and incorporated herein by reference).
10.55 Old CCA's Non-Employee Director Stock Option Plan (previously filed as Exhibit
10(yyyy) to Old CCA's Annual Report on Form 10-K (Commission File no. 0-15719), filed
with the Commission on March 31, 1994 and incorporated herein by reference).
10.56 First Amendment to Old CCA's 1991 Flexible Stock Option Plan, dated as of March 11,
1994 (previously filed as Exhibit 10.102 to Old CCA's Annual Report on Form 10-K
(Commission File no. 1-13049), filed with the Commission on March 31, 1995 and
incorporated herein by reference).
117
10.57 Amendments to the Amended and Restated Old CCA Employee Stock Ownership Plan, dated as
of June 3, 1994 (previously filed as Exhibit 10.109 to Old CCA's Annual Report on Form
10-K (Commission File no. 1-13049), filed with the Commission on March 31, 1995 and
incorporated herein by reference).
10.58 Amended and Restated Old CCA 1989 Stock Bonus Plan, dated as of February 20, 1995
(previously filed as Exhibit 10.138 to Old CCA's Annual Report on Form 10-K
(Commission File no. 1-13560), filed with the Commission on March 31, 1995 and
incorporated herein by reference).
10.59 Old CCA's 1995 Employee Stock Incentive Plan, effective as of March 20, 1995
(previously filed as Exhibit 4.3 to Old CCA's Registration Statement on Form S-8
(Commission File no. 33-61173), filed with the Commission on July 20, 1995 and
incorporated herein by reference).
10.60 First Amendment to Amended and Restated Old CCA 1989 Stock Bonus Plan, dated as of
November 3, 1995 (previously filed as Exhibit 10.153 to Old CCA's Annual Report on
Form 10-K (Commission File no. 1-13560), filed with the Commission on March 29, 1996
and incorporated herein by reference).
10.61 Option Agreement, dated March 31, 1997, by and between Old CCA and Joseph F. Johnson,
Jr. relating to the grant of an option to purchase 80,000 shares of Old CCA Common
Stock (previously filed as Appendix B to Old CCA's definitive Proxy Statement relating
to Old CCA's 1998 Annual Meeting of Shareholders (Commission File no. 0-15719), filed
with the Commission on March 31, 1998 and incorporated herein by reference).
10.62 Old CCA's Non-Employee Directors' Compensation Plan (previously filed as Appendix A to
Old CCA's definitive Proxy Statement relating to Old CCA's 1998 Annual Meeting of
Shareholders (Commission File no. 0-15719), filed with the Commission on March 31,
1998 and incorporated herein by reference).
10.63 Amended and Restated Tenant Incentive Agreement by and between the Company and CCA
(previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly ended March 31, 1999 (Commission File no. 0-25245), filed with the
Commission on May 14, 1999 and incorporated herein by reference).
10.64 Business Development Agreement by and between the Company and CCA (previously filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly ended
March 31, 1999 (Commission File no. 0-25245), filed with the Commission on May 14,
1999 and incorporated herein by reference).
10.65 Amended and Restated Credit Agreement, dated as of August 4, 1999, by and among the
Company, as Borrower, certain subsidiaries of the Company, as Guarantor, the several
lenders from time to time party thereto, Lehman Commercial Paper Inc., as
Administrative Agent, Societe Generale, as Documentation Agent, The Bank of Nova
Scotia, as Syndication Agent, SouthTrust Bank, N.A., as Co-Agent, and Lehman Brothers
Inc., as Advisor, as Lead Arranger, and as Book Manager (previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly ended June 30,
1999 (Commission File no. 0-25245), filed with the Commission on August 17, 1999 and
incorporated herein by reference).
10.66 Securities Purchase Agreement, dated as of December 26, 1999, by and between the
Company, CCA, PMSI, and JJFMSI, on the one hand, and Prison Acquisition Company,
L.L.C., on the other hand, including: (i) as Exhibit A thereto, the Agreement and Plan
of Merger; (ii) as Exhibit B thereto, the Form of Articles of Amendment and
Restatement of the Company; (iii) as Exhibit C thereto, the Amended and Restated
Bylaws of the Company; (iv) as Exhibit D thereto, the Form of Articles Supplementary
for Series B Cumulative Convertible Preferred Stock; (v) as Exhibit E thereto, the
Form of Warrant; (vi) as Exhibit F thereto, the Form of Articles Supplementary for
Series C Cumulative Convertible Preferred Stock; (vii) as Exhibit G thereto, the Form
of Registration Rights Agreement; and (viii) as Exhibit H thereto, the Financing
Commitment Letter
118
(previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K
(Commission File no. 0- 25245), filed with the Commission on December 28, 1999 and
incorporated herein by reference) (as directed by Item 601(b)(2) of Regulation S-K,
certain schedules and exhibits to this document were omitted from that filing, and the
Company agreed to furnish supplementally a copy of any omitted schedule or exhibit to
the Commission upon request).
10.67* First Amendment to Master Agreement to Lease, dated as of December 31, 1999, by and
between the Company and CCA.
10.68* Master Amendment to Lease Agreements, dated as of December 31, 1999, by and between
the Company and CCA.
10.69* Severance Agreement, dated as of December 31, 1999, by and among
D. Robert Crants, III, the Company and CCA.
10.70* Severance Agreement, dated as of December 31, 1999, by and among
Michael W. Devlin, the Company and CCA.
21* Subsidiaries of the Company.
23.1* Consent of Arthur Andersen LLP with respect to the Company.
23.2* Consent of Arthur Andersen LLP with respect to CCA.
24 Powers of Attorney (included on signature pages).
27.1* Financial Data Schedule (for Commission use only).
119
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
OF PRISON REALTY TRUST, INC.
Report of Independent Public Accountants. F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998. F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997. F-6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997. F-8
Consolidated Statements of Cash Flows for the years
December 31, 1999, 1998 and 1997. F-10
Notes to the Consolidated Financial Statements. F-14
CONSOLIDATED FINANCIAL STATEMENTS OF
CORRECTIONS CORPORATION OF AMERICA
Report of Independent Public Accountants. F-59
Consolidated Balance Sheet as of December 31, 1999 and 1998. F-60
Consolidated Statement of Operations for the year ended
December 31, 1999. F-61
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1999 and for the period from September 11, 1998
through December 31, 1998. F-62
Consolidated Statements of Cash Flows for the year
ended December 31, 1999 and for the period from
September 11, 1998 through December 31, 1998. F-63
Notes to the Consolidated Financial Statements. F-65
F-1
120
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 1999 and 1998
Together with Report of Independent Public Accountants
F-2
121
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Prison Realty Trust, Inc:
We have audited the accompanying consolidated balance sheets of PRISON REALTY
TRUST, INC. (a Maryland corporation and formerly Prison Realty Corporation - See
Note 1) and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of Prison Realty Trust, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prison Realty Trust,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared assuming
that Prison Realty Trust, Inc. will continue as a going concern. As discussed in
Notes 2, 12 and 22 to the consolidated financial statements, Prison Realty
Trust, Inc. is in default under its secured bank credit facility, is in default
under certain of its convertible subordinated notes payable obligations and has
significant outstanding shareholder and other litigation matters. Also, Prison
Realty Trust, Inc. has limited resources currently available to meet its
operating, capital expenditure and debt service requirements during 2000. In
addition, as discussed in Notes 2 and 5 to the consolidated financial
statements, Prison Realty Trust, Inc.'s primary lessee, Corrections Corporation
of America, incurred a net loss of $202.9 million for the year ended December
31, 1999, has a net working capital deficiency and a net capital deficiency at
December 31, 1999, is in default under its revolving credit facility and is in
default under its promissory note payable to Prison Realty Trust, Inc. Also, the
independent public accountants of Corrections Corporation of America have
indicated in their opinion on the respective 1999 consolidated financial
statements that there is substantial doubt about Corrections Corporation of
America's ability to continue as a going concern. These matters concerning
Prison Realty Trust, Inc. and Corrections Corporation of America raise
substantial doubt about Prison Realty Trust, Inc.'s ability to continue as a
going concern. Management's plans in regard to these matters are described in
Notes 2 and 23. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability of asset carrying amounts
or the amounts of liabilities that might result should Prison Realty Trust, Inc.
be unable to continue as a going concern.
Nashville, Tennessee ARTHUR ANDERSEN LLP
March 27, 2000
F-3
122
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
ASSETS 1999 1998
- ----------------------------------------- ----------- -----------
Real estate properties:
Correctional and detention facilities $ 2,258,281 $ 637,640
Less accumulated depreciation (49,785) (10,251)
----------- -----------
Net real estate properties 2,208,496 627,389
Cash and cash equivalents 84,493 31,141
Restricted cash 24,409 --
Note receivable from New CCA 137,000 137,000
Investments in affiliates 118,232 127,691
Investments in direct financing leases 74,059 77,809
Deferred tax assets -- 51,200
Receivable from New CCA 28,608 --
Other assets 60,625 38,207
----------- -----------
Total assets $ 2,735,922 $ 1,090,437
=========== ===========
(Continued)
F-4
123
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------------- ----------- -----------
LIABILITIES:
Distributions payable $ 2,150 $ --
Bank credit facility 928,234 222,000
Senior notes payable 100,000 --
Convertible subordinated notes and other debt 70,757 77,833
Accounts payable and accrued expenses 70,911 81,200
Income taxes payable 5,476 14,966
Deferred gains on real estate transactions -- 125,751
Deferred gains on sales of contracts 106,045 116,701
Other liabilities 32,000 --
----------- -----------
Total liabilities 1,315,573 638,451
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - Series A - $.01 (one cent) par value; 20,000 shares
authorized; 4,300 shares issued and outstanding at December 31, 1999;
stated at liquidation preference of $25 (twenty five dollars) per share 107,500 --
Common stock - $.01 (one cent) par value; 300,000 shares authorized; 118,406
and 79,956 shares issued and 118,394 and 79,956 shares outstanding at
December 31, 1999 and 1998, respectively 1,184 800
Treasury stock, 12 shares, at cost (242) --
Additional paid-in capital 1,347,227 398,493
Retained earnings -- 52,693
Cumulative net income 29,824 --
Accumulated distributions (65,144) --
----------- -----------
Total stockholders' equity 1,420,349 451,986
----------- -----------
Total liabilities and stockholders' equity $ 2,735,922 $ 1,090,437
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-5
124
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
--------- --------- ---------
REVENUES:
Rental revenues $ 270,134 $ -- $ --
Interest income 6,885 -- --
Licensing fees 8,699 -- --
Management and other revenues -- 662,059 462,249
--------- --------- ---------
285,718 662,059 462,249
--------- --------- ---------
EXPENSES:
Depreciation and amortization 44,062 14,363 13,378
General and administrative 24,125 28,628 16,025
Operating -- 496,522 330,470
Lease -- 58,018 18,684
Write-off of amounts under lease arrangements 65,677 -- --
Impairment loss 76,433 -- --
New CCA compensation charge -- 22,850 --
--------- --------- ---------
210,297 620,381 378,557
--------- --------- ---------
OPERATING INCOME 75,421 41,678 83,692
--------- --------- ---------
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated entities and
amortization of deferred gain 22,886 -- --
Interest expense (51,921) (8,619) (7,368)
Interest income -- 11,389 10,772
Write-offs of loan costs (14,567) (2,043) --
Loss on disposals of assets (1,995) -- --
--------- --------- ---------
(45,597) 727 3,404
--------- --------- ---------
INCOME BEFORE INCOME TAXES 29,824 42,405 87,096
PROVISION FOR CHANGE IN TAX STATUS 83,200 -- --
PROVISION FOR INCOME TAXES -- 15,424 33,141
--------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (53,376) 26,981 53,955
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES
-- 16,145 --
--------- --------- ---------
NET INCOME (LOSS) (53,376) 10,836 53,955
DIVIDENDS TO PREFERRED SHAREHOLDERS (8,600) -- --
--------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (61,976) $ 10,836 $ 53,955
========= ========= =========
(Continued)
F-6
125
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Continued)
1999 1998 1997
----------- ----------- -----------
BASIC NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE:
Before cumulative effect of accounting change $ (.54) $ .38 $ .80
Cumulative effect of accounting change -- (.23) --
----------- ----------- -----------
$ (.54) $ .15 $ .80
----------- ----------- -----------
DILUTED NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE:
Before cumulative effect of accounting change $ (.54) $ .34 $ .69
Cumulative effect of accounting change -- (.20) --
----------- ----------- -----------
$ (.54) $ .14 $ .69
----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC 115,097 71,380 67,568
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, DILUTED 115,097 78,939 78,959
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-7
126
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK
-------------------------------------- ------------------------------------------------
SERIES A SERIES B ISSUED TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1996 - $ -- -- $ -- 65,650 $ 656 (20) $ (726)
Exchange of preferred
stock for
acquisition of
American Corrections - -- 380 380 -- -- (665) (32,812)
Transport
Stock options and
warrants exercised - -- -- -- 3,672 37 (36) (1,975)
Stock repurchased - -- -- -- -- -- (108) (5,329)
Income tax benefits of
incentive stock
option exercises - -- -- -- -- -- -- --
Conversion of
long-term debt - -- -- -- 879 9 -- --
Compensation expense
related to deferred
stock awards and
stock options - -- -- -- -- -- -- --
Net income (loss) - -- -- -- -- -- -- --
--- ------- ------ ---------- -------- --------- ------- ---------
BALANCE, DECEMBER 31, 1997 - -- 380 380 70,201 702 (829) (40,842)
--- ------- ------ ---------- -------- --------- ------- ---------
Conversion of
preferred stock - -- (380) (380) 610 6 -- --
Stock options and
warrants exercised - -- -- -- 5,161 52 (818) (20,148)
Stock repurchased - -- -- -- -- -- (175) (7,600)
Income tax benefits of
incentive stock
option exercises - -- -- -- -- -- -- --
Conversion of
long-term debt - -- -- -- 1,805 18 1,075 51,029
Retirement of treasury
stock - -- -- -- (747) (7) 747 17,561
CMSC stock issued to
Old CCA employees - -- -- -- -- -- -- --
Issuance of common
stock - -- -- -- 2,926 29 -- --
Compensation expense
related to deferred
stock awards and
stock options - -- -- -- -- -- -- --
Net income - -- -- -- -- -- -- --
--- ------- ------ ---------- -------- --------- ------- ---------
BALANCE, DECEMBER 31, 1998 - $ -- -- $ -- 79,956 $ 800 -- $ --
--- ------- ------ ---------- -------- --------- ------- ---------
ADDITIONAL TOTAL
PAID-IN RETAINED CUMULATIVE ACCUMULATED STOCKHOLDERS'
CAPITAL EARNINGS NET INCOME DISTRIBUTIONS EQUITY
------- -------- ---------- ------------- ------
BALANCE, DECEMBER 31, 1996 $ 239,690 $ 42,132 $ -- $ -- $ 281,752
Exchange of preferred
stock for
acquisition of
American Corrections 32,432 -- -- -- --
Transport
Stock options and
warrants exercised 14,786 (3,612) -- -- 9,236
Stock repurchased -- -- -- -- (5,329)
Income tax benefits of
incentive stock
option exercises 6,328 -- -- -- 6,328
Conversion of
long-term debt 1,668 -- -- -- 1,677
Compensation expense
related to deferred
stock awards and
stock options 457 -- -- -- 457
Net income (loss) -- 53,955 -- -- 53,955
--------- --------- --------- ----------- ---------
BALANCE, DECEMBER 31, 1997 295,361 92,475 -- -- 348,076
--------- --------- --------- ----------- ---------
Conversion of
preferred stock 374 -- -- -- --
Stock options and
warrants exercised 22,478 (1,733) -- -- 649
Stock repurchased -- -- -- -- (7,600)
Income tax benefits of
incentive stock
option exercises 4,475 -- -- -- 4,475
Conversion of
long-term debt 3,633 (48,885) -- -- 5,795
Retirement of treasury
stock (17,554) -- -- -- --
CMSC stock issued to
Old CCA employees 22,850 -- -- -- 22,850
Issuance of common
stock 66,119 -- -- -- 66,148
Compensation expense
related to deferred
stock awards and
stock options 757 -- -- -- 757
Net income -- 10,836 -- -- 10,836
--------- --------- --------- ----------- ---------
BALANCE, DECEMBER 31, 1998 $ 398,493 $ 52,693 $ -- $ -- $ 451,986
--------- --------- --------- ----------- ---------
(Continued)
F-8
127
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
(Continued)
PREFERRED STOCK COMMON STOCK
SERIES A SERIES B ISSUED TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
BALANCE, DECEMBER 31, 1998 -- $ -- $-- -- 79,956 $ 800 -- $ --
Acquisition of Old
Prison Realty 4,300 107,500 -- -- 25,316 253 -- --
Effect of election of
status as a real
estate investment -- -- -- -- -- -- -- --
trust
Issuance of common
stock -- -- -- -- 7,981 79 -- --
Stock options exercised -- -- -- -- 146 2 (12) (242)
Conversion of
long-term debt -- -- -- -- 4,975 50 -- --
Shares issued to -- -- -- -- 9 -- -- --
trustees
Compensation expense
related to deferred
stock awards and
stock options -- -- -- -- 23 -- -- --
Net income -- -- -- -- -- -- -- --
Distributions to
shareholders -- -- -- -- -- -- -- --
----- ----------- ---- --- ------- ----------- --- -----------
BALANCE, DECEMBER 31, 1999 4,300 $ 107,500 $ -- -- 118,406 $ 1,184 (12) $ (242)
===== =========== ==== === ======= =========== === ===========
ADDITIONAL TOTAL
PAID-IN RETAINED CUMULATIVE ACCUMULATED STOCKHOLDERS'
CAPITAL EARNINGS NET INCOME DISTRIBUTIONS EQUITY
BALANCE, DECEMBER 31, 1998 $ 398,493 $ 52,693 $ -- $ -- $ 451,986
Acquisition of Old
Prison Realty 952,927 -- -- -- 1,060,680
Effect of election of
status as a real
estate investment 52,693 (52,693) -- -- --
trust
Issuance of common
stock 131,898 -- -- -- 131,977
Stock options exercised 406 -- -- -- 166
Conversion of
long-term debt 45,789 -- -- -- 45,839
Shares issued to 125 -- -- -- 125
trustees
Compensation expense
related to deferred
stock awards and
stock options 606 -- -- -- 606
Net income (83,200) -- 29,824 -- (53,376)
Distributions to
shareholders (152,510) -- -- (65,144) (217,654)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ 1,347,227 $ -- $ 29,824 $ (65,144) $ 1,420,349
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-9
128
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (53,376) $ 10,836 $ 53,955
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization expense 44,062 14,363 13,378
Amortization of debt issuance costs 7,901 1,610 715
Provision for change in tax status 83,200 -- --
Deferred and other noncash income taxes -- (40,719) (6,329)
Other noncash items 3,679 757 457
(Gain) loss on disposals of assets 1,995 1,083 (881)
Equity in earnings of unconsolidated entities and
amortization of deferred gains (22,886) (535) (916)
Recognized gain on real estate transactions -- (13,984) (5,906)
Write-off of amounts under lease arrangements 65,677 -- --
Impairment loss 76,433 -- --
Write-offs of loan costs 14,567 2,043 --
New CCA compensation charge -- 22,850 --
Cumulative effect of accounting change -- 26,468 --
Changes in assets and liabilities, net of acquisitions and divestitures:
Payments under lease arrangements (68,623) -- --
Receivable from New CCA (28,608) -- --
Other assets (2,732) (39,678) 13,157
Accounts payable and accrued expenses (32,302) 68,565 11,106
Income taxes payable (9,490) 838 13,242
--------- --------- ---------
Net cash provided by operating activities 79,497 54,497 91,978
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (528,935) (417,215) (297,293)
(Increase) decrease in restricted cash and investments (7,221) -- 4,037
Cash acquired in purchase of Old Prison Realty 21,894 -- --
Increase in other assets 3,536 -- (17,868)
Merger costs -- (26,270) --
Distributions from investments in PMSI and JJFMSI 21,668 -- --
Distributions from investments in affiliates, net -- 603 1,707
Proceeds from disposals of assets 43,959 61,299 457,802
Investment in notes receivable (6,117) (1,549) (38,156)
Increase in direct financing leases -- -- (84,295)
Payments received on direct financing leases and notes receivable 3,643 4,713 3,462
Acquisition of USCC contracts, net of cash acquired -- (9,341) --
Cash acquired by New CCA, PMSI and JJFMSI in sales of contracts -- (4,754) --
--------- --------- ---------
Net cash provided by (used in) investing activities $(447,573) $(392,514) $ 29,396
--------- --------- ---------
(Continued)
F-10
129
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
(Continued)
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $ 40,000 $ 20,000 $ --
Payments on long-term debt (76) (151) (57,194)
Proceeds from line of credit, net 426,634 162,000 66,000
Proceeds from issuance of senior notes 100,000 -- --
Payment of debt issuance costs (59,619) (9,485) (2,772)
Proceeds from issuance of common stock 131,977 66,148 --
Distributions paid on common stock (209,054) -- --
Distributions paid on preferred stock (8,600) -- --
Proceeds from exercise of stock options and warrants 166 2,099 9,236
Purchase of treasury stock -- (7,600) (5,329)
--------- --------- ---------
Net cash provided by financing activities 421,428 233,011 9,941
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
53,352 (105,006) 131,315
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 31,141 136,147 4,832
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 84,493 $ 31,141 $ 136,147
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized of $37,700, $11,800 and
$6,300 in 1999, 1998 and 1997, respectively) $ 28,022 $ 4,424 $ 6,579
========= ========= =========
Income taxes $ 9,490 $ 44,341 $ 24,351
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Long-term debt was converted into common stock:
Other assets $ 1,161 $ 5 $ 23
Long-term debt (47,000) (5,800) (1,700)
Common stock 50 18 9
Additional paid-in capital 45,789 3,633 1,668
Treasury stock -- 51,029 --
Retained earnings -- (48,885) --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
Preferred stock was converted into common stock:
Preferred stock $ -- $ (380) $ --
Common stock -- 6 --
Additional paid-in capital -- 374 --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
(Continued)
F-11
130
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
(Continued)
1999 1998 1997
----------- ----------- -----------
Property and equipment were acquired through the forgiveness of the direct
financing lease receivable and the issuance of a credit toward future
management fees:
Accounts receivable $ -- $ 3,500 $ --
Property and equipment -- (16,207) --
Investment in direct financing lease -- 12,707 --
----------- ----------- -----------
$ -- $ -- $ --
----------- ----------- -----------
Property and equipment were acquired through the forgiveness of a note
receivable:
Note receivable $ -- $ 57,624 $ --
Property and equipment -- (58,487) --
Long-term debt -- 863 --
----------- ----------- -----------
$ -- $ -- $ --
----------- ----------- -----------
Stock warrants were exercised for shares of Old CCA's common stock:
Other assets $ -- $ 1,450 $ --
Common stock -- 38 --
Additional paid-in capital -- 15,892 --
Treasury stock -- (17,380) --
----------- ----------- -----------
$ -- $ -- $ --
----------- ----------- -----------
The Company acquired treasury stock and issued common stock in connection
with the exercise of stock options:
Additional paid-in capital $ 242 $ -- $ --
Treasury stock, at cost (242) -- --
----------- ----------- -----------
$ -- $ -- $ --
----------- ----------- -----------
The Company acquired Old Prison Realty's assets and liabilities for stock:
Restricted cash $ (17,188) $ -- $ --
Property and equipment (1,223,370) -- --
Other assets 22,422 -- --
Accounts payable and accrued expenses 23,351 -- --
Deferred gains on real estate transactions (125,751) -- --
Line of credit 279,600 -- --
Distributions payable 2,150 -- --
Common stock 253 -- --
Preferred stock 107,500 -- --
Additional paid-in capital 952,927 -- --
----------- ----------- -----------
$ 21,894 $ -- $ --
----------- ----------- -----------
(Continued)
F-12
131
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
(Continued)
1999 1998 1997
----------- --------- -----------
Sales of contracts to Old CCA, PMSI and JJFMSI:
Accounts receivable $ -- $ 105,695 $ --
Prepaid expenses -- 5,935 --
Deferred tax assets -- 2,960 --
Other current assets -- 14,865 --
Property and equipment, net -- 63,083 --
Notes receivable -- (135,854) --
Investments in affiliates -- (120,916) --
Other long-term assets -- 10,124 --
Accounts payable -- (25,559) --
Accrued salaries and wages -- (7,401) --
Accrued expenses -- (24,387) --
Current portion of deferred gains on sales of contracts -- 16,671 --
Long-term debt -- (10,000) --
Deferred gains on sales of contracts -- 104,784 --
----------- --------- -----------
$ -- $ -- $ --
=========== ========= ===========
The accompanying notes are an integral part of these consolidated statements.
F-13
132
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)
1. ORGANIZATION AND OPERATIONS
BACKGROUND AND FORMATION TRANSACTIONS
Prison Realty Trust, Inc., formerly Prison Realty Corporation, a Maryland
corporation (the "Company"), was formed in September 1998. Corrections
Corporation of America, a Tennessee corporation ("Old CCA"), and CCA
Prison Realty Trust, a Maryland real estate investment trust ("Old Prison
Realty"), merged with and into the Company on December 31, 1998 and
January 1, 1999, respectively (collectively, the "1999 Merger"), pursuant
to an Amended and Restated Agreement and Plan of Merger by and among Old
CCA, Old Prison Realty and the Company, dated as of September 29, 1998.
The 1999 Merger has been accounted for as a reverse acquisition of the
Company by Old CCA and as an acquisition of Old Prison Realty by the
Company. As such, Old CCA's assets and liabilities have been carried
forward at historical cost, and the provisions of reverse acquisition
accounting prescribe that Old CCA's historical financial statements be
presented as the Company's historical financial statements prior to
January 1, 1999. The historical equity section of the financial
statements and earnings per share have been retroactively restated to
reflect the Company's equity structure, including the exchange ratio and
the effects of the differences in par values of the respective companies'
common stock. Old Prison Realty's assets and liabilities have been
recorded at fair market value, as required by Accounting Principles Board
Opinion No. 16, "Business Combinations" ("APB 16").
OPERATIONS
Prior to the 1999 Merger, Old CCA operated and managed prisons and other
correctional and detention facilities and provided prisoner
transportation services for governmental agencies. Old CCA also provided
a full range of related services to governmental agencies, including
managing, financing, developing, designing and constructing new
correctional and detention facilities and redesigning and renovating
older facilities. Since the 1999 Merger, the Company has specialized in
acquiring, developing and owning correctional and detention facilities as
a lessor. As required by its governing instruments, the Company currently
intends to elect to be taxed as a real estate investment trust ("REIT")
for the year ended December 31, 1999. In the event that the Company
completes the Fortress/Blackstone Restructuring, as defined in Note 23,
under its existing terms following required shareholder approval in 2000,
the Company will be required to be taxed as a C corporation commencing
with the taxable year ended December 31, 1999. See Note 22 for
information on the Company's contingent tax liabilities. In either event,
the Company expects that it will be taxed as a C corporation in the
taxable year ending December 31, 2000 and thereafter.
F-14
133
The Company's results of operations for all periods prior to January 1,
1999 reflect the operating results of Old CCA, and the results of
operations subsequent to January 1, 1999 reflect the operating results of
the Company as a REIT. Management believes the comparison between 1999
and prior years is not meaningful because the prior years' financial
condition, results of operations, and cash flows reflect the operations
of Old CCA and the 1999 financial condition, results of operations and
cash flows reflect the operations of the Company as a REIT.
The following unaudited pro forma operating information presents a
summary of comparable consolidated results of combined operations as a
REIT of Old CCA and Old Prison Realty for the year ended December 31,
1998 (excluding (i) Old CCA's historical operations, (ii) the New CCA
compensation charge, (iii) the cumulative effect of accounting change,
(iv) any write off of loan costs, (v) any non-recurring expenses related
to the 1999 Merger, (vi) any write-off of amounts under lease
arrangements, (vii) any impairment loss, (viii) any loss on disposals of
assets, and (ix) any provision for income taxes or change in tax status),
as if the 1999 Merger had occurred as of January 1, 1998. The unaudited
pro forma operating information is presented for comparison purposes only
and does not purport to represent what the Company's results of
operations actually would have been had the 1999 Merger, in fact,
occurred on January 1, 1998.
PRO FORMA
TWELVE MONTHS
ENDED
(UNAUDITED) DECEMBER 31, 1998
-----------------
Revenues $218,587
Operating income 181,238
Net income available to common shareholders 174,888
Net income per common share:
Basic 1.88
Diluted 1.73
2. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
is in default under its secured bank credit facility (the "Amended Credit
Facility", outstanding balance of $928.2 million at December 31, 1999)
and is in default under its 9.5% convertible subordinated notes (the
"9.5% Convertible Notes", outstanding balance of $40.0 million at
December 31, 1999). The defaults relate to failure to comply with certain
financial covenants, the issuance of a going concern opinion
qualification, and a "change in control" provision, as defined in the
agreements. The noncompliance with the requirements under these
outstanding obligations could result in the creditors demanding immediate
repayment of these obligations. The events of default have not been
formally or informally declared and no acceleration actions have been
taken by the creditors. The Company has not obtained waivers of the
noncompliance issues. Also, Prison Realty Trust, Inc. has limited
resources currently available to meet its operating, capital expenditure
and debt service requirements during 2000. In addition, as discussed in
Note 22, the Company has significant outstanding shareholder and other
litigation matters.
F-15
134
The Company's primary lessee, Corrections Corporation of America ("New
CCA"), which the Company is dependent on for its major sources of income,
incurred a net loss of $202.9 million for the year ended December 31,
1999, has a net working capital deficiency and a net capital deficiency
at December 31, 1999, and is in default under its revolving credit
facility. New CCA's default under its revolving credit facility relates
to failure to comply with certain financial covenants. In addition, New
CCA is in default under the $137.0 million promissory note payable by New
CCA to the Company (the "CCA Note"). As of December 31, 1999,
approximately $24.9 million of rents due from New CCA to the Company
under the master lease agreement and leases with respect to each leased
property between New CCA and the Company (the "CCA Leases") were unpaid.
The terms of the CCA Leases provide that rental payments were due and
payable on December 25, 1999. During 2000, New CCA has paid $12.9 million
of lease payments related to 1999.
New CCA's defaults under the CCA Note relate to failure to make timely
contractual payments. As of December 31, 1999, the first scheduled
payment of interest, totaling approximately $16.4 million, on the CCA
Note was unpaid. Pursuant to the terms of the CCA Note, New CCA was
required to make the payment on December 31, 1999; however, pursuant to
the terms of a subordination agreement, dated as of March 1, 1999, by and
between the Company and the agent of New CCA's revolving credit facility,
New CCA is prohibited from making the scheduled interest payments on the
CCA Note when New CCA is not in compliance with certain financial
covenants. New CCA is not in compliance with these financial covenants
and, consequently, is prohibited from making the scheduled interest
payments to the Company. Pursuant to the terms of the subordination
agreement between the Company and the agent of New CCA's revolving credit
facility, the Company is prohibited from accelerating payment of the
principal amount of the CCA Note or taking any other action to enforce
its rights under the provisions of the CCA Note for so long as New CCA's
revolving credit facility remains outstanding. Also, the independent
public accountants of New CCA have indicated in their opinion on the
respective 1999 consolidated financial statements that there is
substantial doubt about New CCA's ability to continue as a going concern.
Continued operating losses by New CCA, declarations of events of default
and acceleration actions by the Company's and New CCA's creditors, the
continued inability of New CCA to make contractual payments to the
Company, and the Company's limited resources currently available to meet
its operating, capital expenditure and debt service requirements will
have a material adverse impact on the Company's consolidated financial
position, results of operations and cash flows. In addition, these
matters concerning the Company and New CCA raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the
recoverability of asset carrying amounts or the amounts of liabilities
that might result should the Company be unable to continue as a going
concern.
In response to the significant losses experienced by the Company and by
New CCA during 1999 and in response to the defaults under the Company's
debt agreements, the Company's Board of Directors is considering various
capital infusion proposals through one or more strategic investors, as
well as various restructurings. A complete discussion of the Company's
plan and recent developments affecting the Company's plan is included in
Note 23.
F-16
135
3. 1999 MERGER TRANSACTIONS
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold
to New CCA all of the issued and outstanding capital stock of certain
wholly-owned corporate subsidiaries of Old CCA, certain management
contracts and certain other assets and liabilities, and entered into a
trade name use agreement as described in Note 5. In exchange, Old CCA
received the CCA Note and 100% of the non-voting common stock of New CCA.
The non-voting common stock represents a 9.5% economic interest in New
CCA and was valued at the implied fair market value of $4.8 million. The
Company succeeded to these interests as a result of the 1999 Merger. The
sale to New CCA generated a deferred gain of $63.3 million. See Note 5
for discussion of the accounting for the CCA Note, the investment in New
CCA and the deferred gain and for discussion of ongoing relationships
with New CCA.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold
to a newly-created company, Prison Management Services, LLC ("PMS LLC"),
certain management contracts and certain other assets and liabilities
relating to government-owned adult prison facilities. On January 1, 1999,
PMS LLC merged with Prison Management Services, Inc., a privately-held
Tennessee corporation ("PMSI"). In exchange, Old CCA received 100% of the
non-voting membership interest in PMSI valued at the implied fair market
value of $67.1 million. The Company succeeded to this interest as a
result of the 1999 Merger. The sale to PMSI generated a deferred gain of
$35.4 million.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold
to a newly-created company, Juvenile and Jail Facility Management
Services, LLC ("JJFMS LLC"), certain management contracts and certain
other assets and liabilities relating to government-owned jails and
juvenile facilities. On January 1, 1999, JJFMS LLC merged with Juvenile
and Jail Facility Management Services, Inc., a privately-held Tennessee
corporation ("JJFMSI"). In exchange, Old CCA received 100% of the
non-voting membership interest in JJFMSI valued at the implied fair
market value of $55.9 million. The Company succeeded to this interest as
a result of the 1999 Merger. The sale to JJFMSI generated a deferred gain
of $18.0 million.
On January 1, 1999, Old Prison Realty merged with and into the Company
(the "Prison Realty Merger"). In the Prison Realty Merger, Old Prison
Realty shareholders received 1.0 share of common stock or 8.0% Series A
Cumulative Preferred Stock of the Company in exchange for each Old Prison
Realty common share or Series A Cumulative Preferred Share. The Prison
Realty Merger was accounted for as a purchase acquisition of Old Prison
Realty. Subsequent to the Prison Realty Merger, the Company acquires,
develops and leases properties rather than operating and managing prison
facilities.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments in majority-owned
affiliates where control does not exist, including the Company's
investments in PMSI and JJFMSI, are accounted for under the equity
method. Investments in entities of less than 20% of an entity's
outstanding stock and where no significant influence exists, including
the Company's investment in New CCA, are accounted for under the cost
method. All material intercompany transactions and balances have been
eliminated in consolidation.
F-17
136
REAL ESTATE PROPERTIES
Property and equipment is carried at cost. Betterments, renewals and
extraordinary repairs that extend the life of an asset are capitalized;
other repair and maintenance costs are expensed. Interest is capitalized
to the asset to which it relates in connection with the construction of
major facilities. The cost and accumulated depreciation applicable to
assets retired are removed from the accounts and the gain or loss on
disposition is recognized in income. Depreciation is computed by the
straight-line method for financial reporting purposes and accelerated
methods for tax reporting purposes based upon the estimated useful lives
of the related assets of up to 50 years.
ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of" ("SFAS 121"), the Company continually evaluates the
recoverability of the carrying values of its long-lived assets when
events suggest that an impairment may have occurred. In these
circumstances, the Company utilizes estimates of undiscounted cash flows
to determine if an impairment exists. If an impairment exists, it is
measured as the amount by which the carrying amount of the asset exceeds
the fair value of the asset.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash at December 31, 1999 was $24.4 million, of which $15.5
million represents cash collateral for an irrevocable letter of credit
issued in connection with the construction of a facility and $6.9 million
represents cash collateral for a guarantee agreement. The remaining $2.0
million represents cash collateral for outstanding letters of credit
securing workers' compensation claims related to Old CCA.
INVESTMENTS IN DIRECT FINANCING LEASES
Investments in direct financing leases represent the portion of Old CCA's
management contracts with governmental agencies that represent payments
on building and equipment leases. The leases are accounted for using the
financing method and, accordingly, the minimum lease payments to be
received over the term of the leases less unearned income are capitalized
as the Company's investments in the leases. Unearned income is recognized
as income over the term of the leases using the interest method.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized on a straight-line basis over the life
of the related debt and reflected as interest expense.
F-18
137
DEFERRED GAINS ON REAL ESTATE TRANSACTIONS
Deferred gains on real estate transactions were generated in 1997 and
1998 as a result of the sale of real estate properties to Old Prison
Realty by Old CCA. Effective with the Prison Realty Merger on January 1,
1999, the Company eliminated the deferred gains on real estate
transactions and reduced the value of the real estate properties received
in connection with the Prison Realty Merger.
DEFERRED GAINS ON SALES OF CONTRACTS
The Company amortizes these deferred gains into income in accordance with
the Securities and Exchange Commission's Staff Accounting Bulletin No.
81. The deferred gain from the sale to New CCA will be amortized over the
six year period in which principal payments on the CCA Note will be
received. The deferred gains from the sales to PMSI and JJFMSI are being
amortized over a five year period commencing January 1, 1999, which
represents the average remaining lives of the contracts sold to PMSI and
JJFMSI, plus any contractual renewal options.
RENTAL REVENUES
Rental revenues are recognized based on the terms of the Company's
leases. Tenant incentive fees paid to lessees, including New CCA, are
deferred and amortized as a reduction of rental revenue over the term of
related leases. The realizability of capitalized tenant incentive fees is
continually evaluated.
INCOME TAXES
Prior to 1999, income taxes were 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. For the year ended
December 31, 1999, as required by the Company's governing instruments,
the Company currently intends to elect to qualify as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the
Company will generally not be subject to income tax on its taxable income
at corporate rates to the extent it distributes annually at least 95% of
its taxable income to its shareholders and complies with certain other
requirements. Accordingly, no provision has been made for income taxes in
the accompanying 1999 consolidated financial statements. The Company's
election of REIT status for the taxable year ended December 31, 1999 will
be subject to review by the Internal Revenue Service ("IRS"), for a
period of three years from the date of filing of its 1999 tax return. In
the event that the Company completes the Fortress/Blackstone
Restructuring, as defined in Note 23, under its existing terms following
required shareholder approval in 2000, the Company will be required to be
taxed as a C corporation commencing with the taxable year ended December
31, 1999. See Note 22 for additional information on the Company's
contingent tax liabilities.
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138
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" ("SFAS 107"), the Company calculates the fair value of
financial instruments using quoted market prices of similar instruments
and discounted cash flow techniques. At December 31, 1999 and 1998, there
were no differences between the carrying amounts and fair values of the
Company's financial instruments, other than as disclosed in this note.
DECEMBER 31,
-----------------------------------------------------
1999 1998
-------------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- --------- ----------
Investments in direct financing
leases $ 74,059 $ 62,650 $ 77,809 $ 71,612
Debt (1,098,991) (1,103,171) (299,833) (307,806)
Interest rate swap arrangement -- 2,407 -- --
Forward contract for convertible
subordinated notes -- -- -- (51,663)
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISKS
The Company's credit risks related primarily to cash and cash
equivalents, restricted cash, investments in direct financing leases and
notes and other receivables from New CCA. See Notes 2 and 5 for
discussion of credit risk related to New CCA. Cash and cash equivalents
and restricted cash are primarily held in bank accounts and overnight
investments. The Company's investments in direct financing leases
represent amounts due from governmental agencies. The Company's financial
instruments are subject to the possibility of loss in carrying value as a
result of either the failure of other parties to perform according to
their contractual obligations or changes in market prices that make the
instruments less valuable.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning
after December 15, 1997. SFAS 130 requires that changes in the amounts of
certain items, including gains and losses on certain securities, be shown
in the financial statements. The Company's adoption of SFAS 130,
effective January 1, 1998, has had no significant impact on the Company's
results of operations as comprehensive income (loss) was equivalent to
the Company's reported net income (loss) for the years ended December 31,
1999, 1998 and 1997.
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139
SEGMENT DISCLOSURES
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), effective for fiscal years beginning after
December 15, 1997. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. The Company adopted the provisions of SFAS 131 effective
January 1, 1998. However, the Company operates in one industry segment
and, accordingly, the adoption of SFAS 131 had no significant effect on
the Company.
START UP COSTS
Effective January 1, 1998, Old CCA adopted the provisions of the AICPA's
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). As a result, Old CCA recorded a $16.1 million
charge as a cumulative effect of accounting change, net of taxes of $10.3
million, for the effect of this change on periods through December 31,
1997. The effect of this accounting change for the year ended December
31, 1998 was a $14.9 million charge reflected in operating expenses.
Prior to adoption of SOP 98-5, project development and facility start-up
costs were deferred and amortized on a straight-line basis over the
lesser of the initial term of the contract plus renewals or five years.
MANAGEMENT CONTRACTS
Prior to 1999, Old CCA had maintained contracts with various governmental
entities to manage their facilities for fixed per diem rates or monthly
fixed rates. Old CCA also maintained contracts with various federal,
state and local governmental entities for the housing of inmates in Old
CCA owned facilities at fixed per diem rates. These contracts usually
contained expiration dates with renewal options ranging from annual to
multi-year renewals. Most of these contracts had current terms that
required renewal every two to five years. Old CCA expected to renew these
contracts for periods consistent with the remaining renewal options
allowed by the contracts or other reasonable extensions. Fixed monthly
rate revenue has been recorded in the month earned and fixed per diem
revenue has been recorded based on the per diem rate multiplied by the
number of inmates housed during the respective period. Old CCA recognized
development revenue on the percentage-of-completion method and recognized
any additional management service revenues when earned or awarded by the
respective authorities. As discussed in Note 3, Old CCA sold its
management contracts and related net assets on December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
SFAS 133, as amended by Statement of Financial Accounting Standards No.
137, "Deferral of the Effective Date of SFAS 133", is effective for
fiscal quarters beginning after June 15, 2000. The Company does not
believe that the impact of adoption of SFAS 133 will have a material
impact on the Company's consolidated financial position, results of
operations or cash flows.
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140
RECLASSIFICATIONS
Certain reclassifications of 1998 and 1997 amounts have been made to
conform with the 1999 presentation.
5. RELATIONSHIP WITH NEW CCA
New CCA is a private prison management company that operates and manages
the substantial majority of facilities owned by the Company. As a result
of the 1999 Merger and certain contractual relationships existing between
the Company and New CCA, the Company is dependent on its significant
sources of income from New CCA. In addition, the Company pays New CCA
tenant incentive fees and fees for services rendered to the Company in
development of its correctional and detention facilities. As of December
31, 1999, New CCA leased 34 of the 42 operating facilities owned by the
Company.
CCA NOTE
As discussed in Note 3, in connection with the 1999 Merger, Old CCA
received a $137.0 million promissory note due from New CCA. The Company
succeeded to the CCA Note as a result of the 1999 Merger. Interest on the
CCA Note is payable annually at the rate of 12%. Principal is due in six
equal annual installments beginning December 31, 2003. Ten percent of the
outstanding principal of the CCA Note is personally guaranteed by the
Company's Chief Executive Officer, who also serves as the Chief Executive
Officer and a member of the Board of Directors of New CCA. As discussed
in Note 2, as of December 31, 1999, the first scheduled payment of
interest, totaling approximately $16.4 million, on the CCA Note was
unpaid. Pursuant to the terms of the CCA Note, New CCA was required to
make the payment on December 31, 1999; however, pursuant to the terms of
a subordination agreement, dated as of March 1, 1999, by and between the
Company and the agent of New CCA's revolving credit facility, New CCA is
prohibited from making the scheduled interest payments on the CCA Note
when New CCA is not in compliance with certain financial covenants. New
CCA is not in compliance with these financial covenants and,
consequently, is prohibited from making the scheduled interest payments
to the Company. Pursuant to the terms of the subordination agreement
between the Company and the agent of New CCA's revolving credit facility,
the Company is prohibited from accelerating payment of the principal
amount of the CCA Note or taking any other action to enforce its rights
under the provisions of the CCA Note for so long as New CCA's revolving
credit facility remains outstanding. The Company has fully reserved the
$16.4 million of interest accrued under the terms of the CCA Note during
1999.
INVESTMENT IN NEW CCA
As discussed in Note 3, in connection with the 1999 Merger, Old CCA
received 100% of the non-voting common stock of New CCA. The Company
succeeded to the investment in New CCA as a result of the 1999 Merger.
The non-voting common stock represents a 9.5% economic interest in New
CCA. The investment in New CCA is valued at $4.8 million and is included
in Investments in affiliates in the accompanying consolidated balance
sheets. For the year ended December 31, 1999, the Company recognized no
income or loss related to its stock ownership investment in New CCA.
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141
DEFERRED GAIN ON SALE TO NEW CCA
As discussed in Note 3, the sale to New CCA generated a deferred gain of
$63.3 million. The $63.3 million deferred gain is included in deferred
gains on sales of contracts in the accompanying consolidated balance
sheets. No amortization of the New CCA deferred gain occurred during the
year ended December 31, 1999.
CCA LEASES
On January 1, 1999, immediately after the 1999 Merger, all existing
leases between Old CCA and Old Prison Realty were cancelled and the
Company entered into the CCA Leases. The terms of the CCA Leases are for
twelve years and may be extended at fair market rates for three
additional five-year periods upon the mutual agreement of the Company and
New CCA.
As of December 31, 1999, the annual base rent with respect to each
facility is subject to increase each year in an amount equal to the
lesser of: (i) 4% of the annualized yearly rental payment with respect to
such facility or (ii) 10% of the excess of New CCA's aggregate gross
management revenues for the prior year over a base amount of $325.0
million.
For the year ended December 31, 1999, the Company recognized gross rental
revenue from New CCA of $263.5 million.
Based on the CCA Leases in effect at December 31, 1999, the future
minimum lease payments scheduled to be received by the Company under the
CCA Leases as of January 1, 2000 are as follows:
Years Ending December 31:
2000 $ 310,651
2001 310,651
2002 310,651
2003 310,651
2004 310,651
Thereafter 1,890,193
----------
$3,443,448
==========
As discussed in Note 2, New CCA failed to make timely contractual
payments under the CCA Leases. As of December 31, 1999, approximately
$24.9 million of rents due from New CCA to the Company were unpaid. The
terms of the CCA Leases provide that rental payments were due and payable
on December 25, 1999. During 2000, New CCA has paid $12.9 million of
lease payments related to 1999 and no lease payments related to 2000.
In addition, the Company expects that the CCA Leases will be materially
impacted by either the prospective equity investment and related
restructuring discussed in Note 23 or by renegotiation of the CCA Leases
with New CCA.
F-23
142
TENANT INCENTIVE ARRANGEMENT
On May 4, 1999, the Company and New CCA entered into an amended and
restated tenant incentive agreement (the "Amended and Restated Tenant
Incentive Agreement"), effective as of January 1, 1999, providing for (i)
a tenant incentive fee of up to $4,000 (four thousand dollars) per bed
payable with respect to all future facilities developed and facilitated
by New CCA, as well as certain other facilities which, although
operational on January 1, 1999, had not achieved full occupancy, and (ii)
an $840 (eight hundred forty dollars) per bed allowance for all beds in
operation at the beginning of January 1999, approximately 21,500 beds,
that were not subject to the tenant allowance in the first quarter of
1999. The amount of the amended tenant incentive fee includes an
allowance for rental payments to be paid by New CCA prior to the facility
reaching stabilized occupancy. The term of the Amended and Restated
Tenant Incentive Agreement is four years, unless extended upon the
written agreement of the Company and New CCA. The incentive fees with New
CCA were deferred and the Company expected to amortize them as a
reduction to rental revenues over the respective lease term.
For the year ended December 1999, the Company had paid tenant incentive
fees of $68.6 million, with $2.9 million of those fees amortized against
rental revenues. During the fourth quarter of 1999, the Company undertook
a plan that contemplates either merging with New CCA and thereby
eliminating the CCA Leases or amending the CCA Leases to reduce the lease
payments to be paid by New CCA to the Company during 2000. Consequently,
the Company determined that the remaining deferred tenant incentive fees
under the existing lease arrangements at December 31, 1999 were not
realizable and wrote off fees totaling $65.7 million.
TRADE NAME USE AGREEMENT
In connection with the 1999 Merger, Old CCA entered into a trade name use
agreement with New CCA (the "Trade Name Use Agreement"). Under the Trade
Name Use Agreement, which has a term of ten years, Old CCA granted to New
CCA the right to use the name "Corrections Corporation of America" and
derivatives thereof, subject to specified terms and conditions therein.
The Company succeeded to this interest as a result of the 1999 Merger. In
consideration for such right under the terms of the Trade Name Use
Agreement, New CCA will pay a fee equal to (i) 2.75% of the gross
revenues of New CCA for the first three years, (ii) 3.25% of New CCA's
gross revenues for the following two years, and (iii) 3.625% of New CCA's
gross revenues for the remaining term, provided that after completion of
the 1999 Merger the amount of such fee may not exceed (a) 2.75% of the
gross revenues of the Company for the first three years, (b) 3.5% of the
Company's gross revenues for the following two years, and (c) 3.875% of
the Company's gross revenues for the remaining term.
For the year ended December 31, 1999, the Company recognized income of
$8.7 million from New CCA under the terms of the Trade Name Use
Agreement.
CCA RIGHT TO PURCHASE AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company and
New CCA entered into a Right to Purchase Agreement (the "CCA Right to
Purchase Agreement") pursuant to which New CCA granted to the Company a
right to acquire, and lease back to New CCA at fair market rental rates,
any correctional or detention facility acquired or developed and owned by
New CCA in the future for a period of ten years following the date
inmates are first received at such facility. The initial annual rental
rate on such facilities will be the fair market rental rate as determined
by the Company and New CCA. Additionally, New CCA granted the Company a
right of first refusal to
F-24
143
acquire any New CCA-owned correctional or detention facility should New
CCA receive an acceptable third party offer to acquire any such facility.
Since January 1, 1999, the Company has not purchased any assets from New
CCA under the CCA Right to Purchase Agreement.
CCA SERVICES AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a services agreement (the "CCA Services Agreement") with New
CCA pursuant to which New CCA will serve as a facilitator of the
construction and development of additional facilities on behalf of the
Company for a term of five years from the date of the CCA Services
Agreement. In such capacity, New CCA will perform, at the direction of
the Company, such services as are customarily needed in the construction
and development of correctional and detention facilities, including
services related to construction of the facilities, project bidding,
project design, and governmental relations. In consideration for the
performance of such services by New CCA, the Company agreed to pay a fee
equal to 5% of the total capital expenditures (excluding the incentive
fee discussed below and the 5% fee herein referred to) incurred in
connection with the construction and development of a facility, plus an
amount equal to approximately $560 (five hundred sixty dollars) per bed
for facility preparation services provided by New CCA prior to the date
on which inmates are first received at such facility. The Board of
Directors of the Company has authorized payments up to an additional 5%
of the total capital expenditures (as determined above) to New CCA if
additional services are requested by the Company. A majority of the
Company's current development projects have been subject to a fee
totaling 10%.
Costs incurred by the Company under the CCA Services Agreement are
capitalized as part of the facilities' development cost. Costs incurred
under the CCA Services Agreement and capitalized as part of the
facilities' development cost totaled $41.6 million for the year ended
December 31, 1999.
BUSINESS DEVELOPMENT AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a four year business development agreement (the "Business
Development Agreement") with New CCA, which provides that New CCA will
perform, at the direction of the Company, services designed to assist the
Company in identifying and obtaining new business. Pursuant to the
agreement, the Company has agreed to pay to New CCA a total fee equal to
4.5% of the total capital expenditures (excluding the amount of the
tenant incentive fee and the services fee discussed above as well as the
4.5% fee) incurred in connection with the construction and development of
each new facility, or the construction and development of an addition to
an existing facility, for which New CCA performed business development
services.
Costs incurred by the Company under the Business Development Agreement
are capitalized as part of the facilities' development cost. Costs
incurred under the Business Development Agreement and capitalized as part
of the facilities' development cost totaled $15.0 million for the year
ended December 31, 1999.
RECEIVABLE FROM NEW CCA
As of December 31, 1999, the Company had recorded a receivable of $28.6
million from New CCA. This receivable was comprised primarily of rent due
under the CCA Leases for the month of December 1999 ($24.9 million) and
licensing fees due under the Trade Name Use Agreement ($2.2 million).
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NEW CCA FINANCIAL INFORMATION
The following summarized operating information presents New CCA's results
of operations for the year ended December 31, 1999:
Revenues $ 499,292
Net loss (202,918)
The following summarized balance sheet information presents New CCA's
financial position as of December 31, 1999:
Current assets $ 88,647
Total assets 184,701
Current liabilities 258,421
Deferred credits 107,070
Total liabilities 365,491
Stockholders' deficit (180,790)
The following summary presents New CCA's cash flows for the year ended
December 31, 1999:
Cash flows used in operating activities $(16,332)
Cash flows used in investing activities (2,091)
Cash flows provided by financing activities 10,089
---------
Net decrease in cash for 1999 $ (8,334)
=========
New CCA has utilized cash from borrowings under its revolving credit
facility, equity issuances and payments from the Company for tenant
incentive arrangements and other services to offset the cash requirements
of its operating losses. New CCA expects to continue to use these sources
of cash to offset its anticipated losses from operations; however,
amounts presently anticipated to be available to New CCA will not be
sufficient to offset all of New CCA's expected future operating losses.
6. REAL ESTATE PROPERTIES
At December 31, 1999, the Company owned or was in the process of
developing 52 real estate properties (including 50 correctional and
detention facilities and two corporate office buildings), of which 44
properties were operating, five were under construction or expansion and
three were in the planning stages, with a total aggregate cost of $2.3
billion. At December 31, 1999, New CCA leased 36 properties from the
Company, governmental agencies leased five facilities from the Company
and private operators leased three facilities from the Company. The
Company expects to lease four of the facilities under construction or
development to New CCA.
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145
Real estate properties as of December 31, 1999 consist of the following:
COSTS CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
---------------------------- -----------------------------
BUILDINGS, BUILDINGS,
IMPROVEMENTS, IMPROVEMENTS,
EQUIPMENT, EQUIPMENT,
CONSTRUCTION IN CONSTRUCTION IN
LAND PROGRESS LAND PROGRESS
---------- ---------- ---------- ----------
Texas (9 properties) $ 2,930 $ 275,059 $ 559 $ 4,959
Oklahoma (4 properties) 826 225,572 -- 7,998
Kentucky (4 properties) 1,818 25,028 -- 33,489
Tennessee (5 properties) 15,485 114,052 -- 2,948
New Mexico (3 properties) 1,376 88,618 403 23,813
Arizona (3 properties) 2,688 401,666 -- 1,462
Colorado (3 properties) 956 78,978 -- 18,665
Georgia (5 properties) 1,297 154,058 -- --
California (4 properties) 3,699 231,824 -- --
North Carolina (2 properties) 406 83,448 -- --
Ohio (2 properties) 1,507 163,967 -- 2,215
All Other States (7 properties) 3,462 194,026 -- 873
United Kingdom (1 property) -- 88,151 -- --
---------- ---------- ---------- ----------
$ 36,450 $2,124,447 $ 962 $ 96,422
========== ========== ========== ==========
TOTAL HISTORICAL COST AT DECEMBER 31, 1999
-------------------------------------------
BUILDINGS,
IMPROVEMENTS,
EQUIPMENT,
CONSTRUCTION IN ACCUMULATED
LAND PROGRESS TOTAL DEPRECIATION
---------- ---------- ---------- ----------
Texas (9 properties) $ 3,489 $ 280,018 $ 283,507 $ 7,141
Oklahoma (4 properties) 826 233,570 234,396 5,599
Kentucky (4 properties) 1,818 58,517 60,335 1,293
Tennessee (5 properties) 15,485 117,000 132,485 7,197
New Mexico (3 properties) 1,779 112,431 114,210 3,166
Arizona (3 properties) 2,688 403,128 405,816 7,737
Colorado (3 properties) 956 97,643 98,599 4,497
Georgia (5 properties) 1,297 154,058 155,355 2,252
California (4 properties) 3,699 231,824 235,523 802
North Carolina (2 properties) 406 83,448 83,854 2,348
Ohio (2 properties) 1,507 166,182 167,689 4,104
All Other States (7 properties) 3,462 194,899 198,361 3,649
United Kingdom (1 property) -- 88,151 88,151 --
---------- ---------- ---------- ----------
$ 37,412 $2,220,869 $2,258,281 $ 49,785
========== ========== ========== ==========
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146
The following schedule is a reconciliation of the total changes in the
historical cost of real estate properties and accumulated depreciation
for the Company for the period December 31, 1998 to December 31, 1999:
ACCUMULATED
HISTORICAL COST DEPRECIATION
--------------- ---------------
Balance, December 31, 1998 $ 637,640 $ 10,251
Old Prison Realty Merger 1,223,371 --
Depreciation expense -- 44,062
Disposals of assets (53,586) (2,882)
Impairment loss (78,079) (1,646)
Additions of property and equipment 528,935 --
--------------- ---------------
Balance, December 31, 1999 $ 2,258,281 $ 49,785
=============== ===============
Pursuant to the 1999 Merger, the Company acquired all of the assets and
liabilities of Old Prison Realty on January 1, 1999, including 23 leased
facilities and one real estate property under construction. The real
estate properties acquired by the Company in conjunction with the
acquisition of Old Prison Realty have been recorded at estimated fair
market value in accordance with the purchase method of accounting
prescribed by APB 16 resulting in a $1.2 billion increase to real estate
properties at January 1, 1999.
SFAS 121 requires impairment losses to be recognized for long-lived
assets used in operations when indications of impairment are present and
the estimate of undiscounted future cash flows is not sufficient to
recover asset carrying amounts. In December 1999, the poor financial
position, results of operations and cash flows of New CCA indicated to
management that certain of its correctional and detention facilities
might be impaired. In accordance with SFAS 121, the Company estimated the
undiscounted net cash flows for each of its properties and compared the
sum of those undiscounted net cash flows to the Company's investment in
that property. Through its analysis, the Company determined that three of
its correctional and detention facilities in the state of Kentucky had
been impaired. For these three properties, the Company reduced the
carrying values of the underlying assets to their estimated fair values,
as determined based on anticipated future cash flows discounted at rates
commensurate with the risks involved. The resulting impairment loss
totaled $76.4 million.
Eight of the facilities owned by the Company are subject to options that
allow various governmental agencies to purchase those facilities. In
addition, two of the facilities are constructed on land that the Company
leases from governmental agencies under ground leases. Under the terms of
those ground leases, the facilities become the property of the
governmental agencies upon expiration of the ground leases. The Company
depreciates these two properties over the term of the ground lease.
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147
7. ACQUISITIONS AND DIVESTITURES
In April 1998, Old CCA acquired all of the issued and outstanding capital
stock of eight subsidiaries of U.S. Corrections Corporation ("USCC") (the
"USCC Acquisition") for approximately $10.0 million, less cash acquired.
The transaction was accounted for as a purchase transaction and the
purchase price was allocated to the assets and liabilities acquired based
on the fair value of the assets and liabilities acquired. By virtue of
the USCC Acquisition, Old CCA acquired contracts to manage four currently
operating facilities in Kentucky, each of which was owned by Old Prison
Realty at December 31, 1998, one facility in Florida, which is owned by a
governmental entity in Florida, as well as one facility in Texas, which
is owned by a governmental entity in Texas. During 1998, subsequent to
the USCC Acquisition, the contract to manage the Texas facility expired
and was not renewed. Old CCA also obtained the right to enter into
contracts to manage two North Carolina facilities previously owned by Old
Prison Realty, both of which were under construction as of the date of
the USCC Merger. During 1998, both North Carolina facilities became
operational and Old CCA entered into contracts to manage those facilities
upon completion of the construction.
In April 1999, the Company purchased the Eden Detention Center in Eden,
Texas for $28.1 million. The facility has a design capacity of 1,225 beds
and is leased to New CCA under lease terms substantially similar to the
CCA Leases.
In June 1999, the Company incurred a loss of $1.6 million as a result of
a settlement with the State of South Carolina for property previously
owned by Old CCA. Under the settlement, the Company, as the successor to
Old CCA, will receive $6.5 million in three installments by June 30, 2001
for the transferred assets. The net proceeds were approximately $1.6
million less than the surrendered assets' depreciated book value. The
Company received $3.5 million of the proceeds during 1999. As of December
31, 1999, the Company has a receivable of $3.0 million related to this
settlement.
In December 1999, the Company incurred a loss of $0.4 million resulting
from a sale of a new facility in Florida. Construction on the facility
was completed by the Company in May 1999. In accordance with the terms of
the management contract between Old CCA and Polk County, Florida, Polk
County exercised an option to purchase the facility. Net proceeds of
$40.5 million were received by the Company.
8. INVESTMENTS IN AFFILIATES
As discussed in Note 3, in connection with the 1999 Merger, Old CCA
received 100% of the non-voting interest in PMSI and JJFMSI valued at the
implied fair market values of $67.1 million and $55.9 million,
respectively. The Company succeeded to these interests as a result of the
1999 Merger. The Company's ownership interests obligate PMSI and JJFMSI
to make distributions to the Company equal to 95% of their net income as
determined in accordance with generally accepted accounting principles
("GAAP") plus non-cash expenses, as defined. For the year ended December
31, 1999, the Company recognized equity in earnings of PMSI and JJFMSI of
$4.7 million and $7.5 million, respectively, and received distributions
from PMSI and JJFMSI of $11.0 million and $10.6 million, respectively.
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Investments in affiliates consist of the following:
DECEMBER 31,
----------------------------------
1999 1998
--------------- ---------------
Investment in PMSI $ 60,756 $ 67,059
Investment in JJFMSI 52,726 55,882
Investment in New CCA 4,750 4,750
--------------- ---------------
$ 118,232 $ 127,691
=============== ===============
The following operating information presents a combined summary of the
results of operations of PMSI and JJFMSI for the year ended December 31,
1999:
Revenues $ 288,289
Net income 12,851
The following balance sheet information presents a combined summary of
the financial position of PMSI and JJFMSI as of December 31, 1999:
Current assets $ 60,741
Total assets 151,167
Current liabilities 31,750
Total liabilities 32,622
Stockholders' equity 118,545
9. INVESTMENTS IN DIRECT FINANCING LEASES
At December 31, 1999, the Company's investments in direct financing
leases represent net receivables under building and equipment leases
between the Company and certain governmental agencies. Certain of the
agreements contain provisions that allow the governmental agencies to
purchase the buildings and equipment for predetermined prices at specific
intervals during the term of the agreement.
A schedule of future minimum rentals to be received under direct
financing leases in years subsequent to December 31, 1999, is as follows:
YEAR AMOUNT
------ --------------
2000 $ 5,101
2001 5,101
2002 5,101
2003 5,101
2004 5,101
Thereafter 60,293
--------------
Total minimum obligation 85,798
Less unearned interest income (11,739)
--------------
Investments in direct financing leases $ 74,059
==============
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During the years ended December 31, 1999, 1998 and 1997, the Company
recorded interest income of $3.4 million, $3.5 million and $3.3 million,
respectively, under these leases.
In May 1998, the Company agreed to pay a governmental agency $3.5 million
in consideration of the governmental agency's relinquishing its rights to
purchase a facility. As a result, the Company converted the facility from
a direct financing lease to property and equipment.
10. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31,
----------------------------------
1999 1998
--------------- ---------------
Debt issuance costs, less accumulated amortization of
$5,888 and $627, respectively $ 41,462 $ 7,028
Receivable from Agecroft Prison Management, Inc.
4,665 1,549
Receivable for South Carolina settlement 3,000 --
Deferred acquisition costs 2,514 26,270
Executive notes receivable 2,094 --
Receivable from PMSI 1,283 --
Other assets 5,607 3,360
--------------- ---------------
$ 60,625 $ 38,207
=============== ===============
In connection with procuring the Company's $1.0 billion Amended Credit
Facility discussed in Note 12, the Company incurred $41.2 million of debt
issuance costs, of which $5.1 million has been amortized as of December
31, 1999. In connection with procuring the Company's $100.0 million
Senior Notes discussed in Note 12, the Company incurred $5.5 million of
debt issuance costs, of which $0.4 million has been amortized as of
December 31, 1999.
In 1998, Old CCA entered into an agreement with Agecroft Prison
Management, Inc. ("APM") to loan APM approximately $5.0 million. The
Company succeeded to this interest as a result of the 1999 Merger.
Interest at 13.367% is payable semi-annually. All principal is due
January 2025. APM manages an 800 bed medium-security prison in Salford,
England for an agency of the British government.
In connection with the prospective equity investment and related
restructuring discussed in Note 23, the Company has incurred a total of
$6.4 million of costs, of which $2.5 million have been deferred as other
assets. The Company anticipates it will begin amortization of these
deferred costs following the consummation of the prospective equity
investment and related restructuring. In the event the proposed
transactions are not completed, the Company will expense these costs in
the period during which their continuing value is determined to be
impaired.
The executive notes receivable were issued to three key executives.
Interest at the thirty day London Interbank Offered Rate ("LIBOR") rates
plus 2.5% is payable annually. The original principal amount of the
executive notes was $3.0 million. The reduction in principal resulted
from payments made during 1999 in relation to severance agreements with
two of the executives. The remaining principal payments begin in 2003 and
conclude in 2005.
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The receivable from PMSI represents amounts loaned to PMSI on a
short-term basis to fund construction costs of PMSI. The loan is
non-interest bearing. Principal is due on demand.
11. DISTRIBUTIONS TO SHAREHOLDERS
The Company, as a REIT, cannot complete any taxable year with accumulated
earnings and profits from a taxable corporation. Accordingly, the Company
was required to distribute Old CCA's earnings and profits to which it
succeeded in the 1999 Merger (the "Accumulated Earnings and Profits").
During the year ended December 31, 1999, the Company made $217.7 million
of distributions related to its common stock and 8.0% Series A Cumulative
Preferred Stock. For purposes of meeting the distribution requirements
discussed above, $152.5 million of the total distributions in 1999 have
been designated as distributions of the Accumulated Earnings and Profits.
In addition to distributing the Accumulated Earnings and Profits, the
Company, as a REIT, is also required to distribute 95% of its taxable
income for 1999. Although dividends sufficient to distribute 95% of the
Company's taxable income for 1999 have not been declared as of December
31, 1999, the Company currently intends to pay sufficient dividends
either in cash or in securities to satisfy all distribution requirements
for qualification as a REIT for 1999 and currently estimates that $143.7
million will be distributed in 2000 to meet this requirement. The Company
is currently considering the exact timing and method of the payment of
these required distributions. The Company may partially satisfy these
requirements through the payment of a one-time special dividend (the
"Special Dividend"). Certain provisions of the Amended Credit Facility
restrict the Company's ability to pay these required distributions in
cash. As of December 31, 1999, $2.2 million of distributions relating to
the 8.0% Series A Cumulative Preferred Shares have been declared and
accrued in the accompanying consolidated balance sheets. The remaining
$141.5 million of distributions that must be paid to shareholders in 2000
in order for the Company to maintain its status as a REIT have not been
declared by the Board of Directors and, accordingly, have not been
accrued in the accompanying consolidated balance sheets. If the Company
completes the Fortress/Blackstone Restructuring, as defined in Note 23,
under its existing terms following required shareholder approval in 2000,
the Company will be required to be taxed as a C corporation commencing
with the taxable year ended December 31, 1999, and no further dividends
would be paid on the Company's common stock.
As a result of the Company's failure to declare, prior to December 31,
1999, and failure to distribute, prior to January 31, 2000, dividends
sufficient to distribute 95% of its taxable income for 1999, the Company
is subject to excise taxes, which are currently estimated to be $7.1
million and which have been accrued as of December 31, 1999 in accounts
payable and accrued expenses in the consolidated balance sheets.
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Quarterly distributions and the resulting tax classification for common
stock distributions are as follows:
Declaration Record Payment Distribution Ordinary Return of
Date Date Date Per Share Income Capital
---------------------- ---------------- ----------------- ----------------- ----------------- -------------------
03/04/99 03/19/99 03/31/99 $0.60 100.0% 0.0%
05/11/99 06/18/99 06/30/99 0.60 100.0% 0.0%
08/27/99 09/17/99 09/30/99 0.60 100.0% 0.0%
Quarterly distributions and the resulting tax classification for the 8.0%
Series A Cumulative Preferred Shares are as follows:
Declaration Record Payment Distribution Ordinary Return of
Date Date Date Per Share Income Capital
---------------------- ---------------- ----------------- ----------------- ----------------- -------------------
03/04/99 03/31/99 04/15/99 $0.50 100.0% 0.0%
05/11/99 06/30/99 07/15/99 0.50 100.0% 0.0%
08/27/99 09/30/99 10/15/99 0.50 100.0% 0.0%
12/22/99 12/31/99 01/15/00 0.50 100.0% 0.0%
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12. DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------------------------------
1999 1998
--------------- ---------------
Amended Credit Facility, principal payable quarterly with remaining
unpaid balances due at maturity in 2002, interest payable
periodically at a variable rate (10.0% at December
31, 1999) $ 928,234 $ --
Senior Notes, principal due at maturity in June 2006, interest
payable semi-annually at 12% 100,000 --
9.5% Convertible Subordinated Notes, principal due at maturity
in December 2008, interest payable semi-annually at 9.5%
40,000 20,000
7.5% Convertible Subordinated Notes, principal due at maturity in
February 2005 with call provisions beginning in February 2003,
interest payable quarterly at 7.5%
30,000 30,000
Old CCA Revolving Credit Facility payable to a group of banks,
interest at a variable rate, repaid in 1999 -- 222,000
Convertible Subordinated Notes, interest at 7.5%, converted in
1999 -- 20,000
Convertible Subordinated Notes, interest at 8.5%, converted in
1999 -- 7,000
Other 757 833
--------------- ---------------
$ 1,098,991 $ 299,833
=============== ===============
THE CREDIT FACILITY AND AMENDED CREDIT FACILITY
At December 31, 1998, the Company was successor to Old CCA's outstanding
revolving credit borrowings of $222.0 million under a revolving credit
facility providing for borrowings up to $350.0 million. The facility bore
interest at the bank's prime rate or LIBOR plus 1.25%. In connection with
the merger transactions and divestitures discussed in Note 3, PMSI and
JJFMSI each assumed $5.0 million of debt related to the Company's
revolving credit facility. In January 1999, PMSI and JJFMSI repaid their
portions of the outstanding debt balance. Old CCA's revolving credit
facility was replaced on January 1, 1999 with a new credit facility
discussed below.
On January 1, 1999, in connection with the completion of the 1999 Merger,
the Company obtained a $650.0 million secured credit facility (the
"Credit Facility") from NationsBank, N.A., as Administrative Agent, and
several U.S. and non-U.S. banks. The Credit Facility included up to a
maximum of $250.0 million in tranche B term loans and $400.0 million in
revolving loans, including a $150.0 million subfacility for letters of
credit. The term loan requires quarterly principal payments of $625
throughout the term of the loan with the remaining balance maturing on
December 31, 2002. The revolving loans mature on January 1, 2002.
Interest rates, unused commitment fees and letter of credit fees on the
Credit Facility were subject to change based on the Company's senior debt
rating. The Credit Facility was secured by mortgages on the Company's
real property.
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On August 4, 1999, the Company completed an amendment and restatement of
the Credit Facility (the "Amended Credit Facility") increasing amounts
available to the Company under the original Credit Facility to $1.0
billion through the addition of a $350.0 million tranche C term loan. The
tranche C term loan is payable in equal quarterly installments in the
amount of $875 through the calendar quarter ending September 30, 2002,
with the balance to be paid in full on December 31, 2002. Under the
Amended Credit Facility, Lehman Commercial Paper Inc. replaced
NationsBank, N.A. as Administrative Agent.
The Amended Credit Facility, similar to the Credit Facility, provides for
interest rates, unused commitment fees and letter of credit fees to
change based on the Company's senior debt rating. Similar to the Credit
Facility, the Amended Credit Facility bears interest at variable rates of
interest based on a spread over the base rate or LIBOR (as elected by the
Company), which spread is determined by reference to the Company's credit
rating. The spread ranges from 0.50% to 2.25% for base rate loans and
from 2.00% to 3.75% for LIBOR rate loans. These ranges replaced the
original spread ranges of 0.25% to 1.25% for base rate loans and 1.375%
to 2.75% for LIBOR rate loans. The term loan portions of the Amended
Credit Facility bear interest at a variable rate equal to 3.75% to 4.00%
in excess of LIBOR or 2.25% to 2.50% in excess of a base rate. This rate
replaced the variable rate equal to 3.25% in excess of LIBOR or 1.75% in
excess of a base rate in the Credit Facility.
Upon the lenders' determination that the Company is in default under the
terms of the Amended Credit Facility, the Company is required to pay a
default rate of interest equal to the rate of interest as determined
based on the terms described above, plus 2.00%. As discussed below, the
Company is currently in default under the Amended Credit Facility and,
consequently, has become subject to the default rate of interest
effective on January 25, 2000.
The Company incurred costs of $59.2 million in consummating the Credit
Facility and the Amended Credit Facility transactions, including $41.2
million related to the amendment and restatement. The Company wrote off
$9.0 million of expenses related to the Credit Facility upon completion
of the amendment and restatement.
In accordance with the terms of the Amended Credit Facility, the Company
entered into certain swap arrangements guaranteeing that it will not pay
an index rate greater than 6.51% on outstanding balances of at least (a)
$325.0 million through December 31, 2001 and (b) $200.0 million through
December 31, 2002. The effect of these arrangements is recognized in
interest expense.
The Amended Credit Facility, similar to the Credit Facility, is secured
by mortgages on the Company's real property. Borrowings are limited based
on a borrowing base formula that considers, among other things, eligible
real estate. The Amended Credit Facility contains certain financial
covenants, primarily: (a) maintenance of leverage, interest coverage,
debt service coverage and total indebtedness ratios and (b) restrictions
on the incurrence of additional indebtedness.
The Amended Credit Facility also restricted the Company's ability to make
the 1999 cash payment of the Special Dividend unless (a) the Company had
liquidity of at least $75.0 million at the dividend declaration date
after giving effect to the payment of the Special Dividend, (b) the
Company received at least $100.0 million in cash proceeds for the
issuance of equity or similar securities from a new investor receiving
representation on the Company's Board of Directors and (c) New CCA
received at least $25.0 million in cash proceeds from the issuance of any
combination of equity securities and subordinated debt. The Amended
Credit Facility also restricts the cash payment of the Special Dividend
in 2000.
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The current financial condition of the Company, the inability of New CCA
to make certain of its payment obligations to the Company, the ongoing
process surrounding the prospective equity investment and related
restructuring, and the actions taken by the Company and New CCA in
attempts to resolve current liquidity issues of the Company and New CCA
have rendered a series of default or potential default issues under the
Amended Credit Facility. These defaults and potential defaults consist of
the following:
- Restrictions upon the ability of the Company to amend the terms of
its agreements with New CCA without the consent of its senior
lenders create a potential default due to the Company's
anticipation of required amendments to alter the timing and amount
of payments under the terms of the CCA Leases, as well as interest
payments on the CCA Note, as discussed in Note 23.
- Restrictions upon the ability of the Company to enter into any
agreement constituting a "change of control" provision, as defined
in the Amended Credit Facility, create the need for a consent based
upon the execution of a securities purchase agreement with a
prospective equity investor (as discussed in Note 23) and the
appointment of a new Chairman of the Board of Directors of the
Company and a new President of the Company.
- For the fiscal quarter ending December 31, 1999, the Company was
not in compliance with the following financial covenants, as
defined in the Amended Credit Facility: (i) the Company's interest
coverage ratio and (ii) the Company's leverage ratio.
- The existence of explanatory paragraphs in the reports of each of
the Company's and New CCA's reports of independent public
accountants relating to the Company's and New CCA's financial
statements as to the ability of each of the Company and New CCA to
continue as a going concern render the Company in violation of the
provisions of the Amended Credit Facility requiring unqualified
opinions for the Company and New CCA.
- The March 21, 2000 declaration of the quarterly dividend on the
8.0% Series A Cumulative Preferred Stock for the quarter ended
March 31, 2000, payable April 17, 2000, constituted an event of
default, based on the Company's unwaived defaults at the time the
dividend was declared.
- New CCA's revolving credit facility requires that New CCA have a
net worth in excess of certain specified amounts. On December 31,
1999, New CCA was not, and it currently is not, in compliance with
this financial covenant, which is an event of default under the
Company's Amended Credit Facility.
- As of March 31, 2000, the Company projects that it will not be in
compliance with the following financial covenants, as defined in
the Amended Credit Facility: (i) the Company's debt service
coverage ratio; (ii) the Company's interest coverage ratio; (iii)
the Company's leverage ratio; and (iv) the Company's ratio of total
indebtedness to total capitalization.
- In addition, as described below, the Company is in default under
the provisions of the 9.5% Convertible Notes. Due to cross-default
provisions existing between the Amended Credit Facility and the
9.5% Convertible Notes, the Company has been considered in default
of this provision of the Amended Credit Facility since January 25,
2000.
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155
The Company plans to request the consent of the requisite percentage of
its senior lenders under the Amended Credit Facility for a waiver of the
Amended Credit Facility's restrictions relating to certain amendments of
the Company's agreements with New CCA. The Company also plans to request
the consent of such lenders with respect to an additional waiver of the
Amended Credit Facility's financial covenants described above, as well as
a temporary amendment to the Amended Credit Facility changing the
definition of the Company's borrowing base to alleviate the adverse
effect of the deferred rental payments on the Company's borrowing base.
In connection with the waiver of the financial covenants, the Company
will request that the calculation of the Company's interest coverage
ratio and the Company's leverage ratio as of December 31, 1999 be
amended. In addition, the Company anticipates the request of the waiver,
subject to certain conditions, of events of default under the provisions
of the Amended Credit Facility relating to certain defaults under the
9.5% Convertible Notes. These proposed waivers of, and amendment to, the
terms of the Amended Credit Facility would remain in effect only until
the earlier to occur of: (i) the completion of a prospective equity
investment and related restructuring, (ii) termination of the agreements
with the Fortress/Blackstone Investors or (iii) a yet undetermined date.
Management expects the conditions to the effectiveness of all of the
proposed waivers of, and amendment to, the provisions of the Amended
Credit Facility will include, among other conditions (i) New CCA having
obtained a waiver of, and an amendment to, certain provisions of its
revolving credit facility and (ii) the Company having delivered to the
trustee of the Company's $100.0 million Senior Notes an opinion as to the
fairness, from a financial point of view, to the Company of the
amendments to the terms of the CCA Leases and the amendments to the
Business Development Agreement, the CCA Services Agreement and the
Amended and Restated Tenant Incentive Agreement issued by an accounting,
appraisal or investment banking firm of national standing.
There can be no assurance that the lenders under the Amended Credit
Facility will consent to any proposed waiver of, and amendments to, the
note agreement, or will not seek to declare an event of default prior to
the execution of any proposed waiver and amendments. Moreover, the
effectiveness of the proposed waivers of, and amendments to, the
Company's bank credit facility is subject to the satisfaction of the
conditions described above and the attainment of the waivers of, and
amendments to, the applicable provisions of New CCA's bank credit
facility. In the event the Company is unable to obtain the necessary
waivers or amendments to the bank credit facility, or to comply with and
maintain the proposed waivers and amendments, or if the Company defaults
under the terms of any of its other indebtedness, and such indebtedness
is accelerated, the senior lenders under the Company's bank credit
facilities are entitled, at their discretion, to exercise certain
remedies, including acceleration of the outstanding borrowings under the
bank credit facility. In addition, the Company's Senior Notes (as defined
herein), the $40.0 million 9.5% convertible, subordinated MDP Notes and
the $30.0 million 7.5% convertible, subordinated notes payable to PMI
contain provisions which allow those creditors to accelerate their debt
and seek remedies if the Company has a payment default under its bank
credit facility or if the obligations under the Company's bank credit
facility have been accelerated. If the senior lenders under the Company's
bank credit facility elect to exercise their rights to accelerate the
Company's obligations under the bank credit facility, and/or if the
senior lenders do not consent to the proposed waivers and amendments (or
acceptable alternative waivers and amendments), such events could result
in the acceleration of all or a portion of the outstanding principal
amount of the Company's Senior Notes (as defined herein) or its
convertible, subordinated notes, which would have a material adverse
effect on the Company's liquidity and financial position. The Company
does not have sufficient working capital to satisfy its debt obligations
in the event of an acceleration of all of the Company's outstanding
indebtedness.
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156
The Company has limited resources currently available to it to meet its
operating, capital expenditure and debt service requirements. As a
result, the Company currently is, and will continue to be, dependant on
its ability to borrow funds under the terms of its bank credit facility
to meet these requirements. Due to the Company's financial condition and
non-compliance with certain covenants under the terms of its bank credit
facility, the availability of borrowing under its bank credit facility is
uncertain. Accordingly, there can be no assurance that the Company will
be able to meet its operating, capital expenditure and debt service
requirement in the future.
SENIOR NOTES
On June 11, 1999, the Company completed its offering of $100.0 million
aggregate principal amount of 12% Senior Notes due 2006 (the "Senior
Notes"). Interest on the Senior Notes is paid semi-annually in arrears,
and the Senior Notes have a seven year non-callable term due June 1,
2006. Net proceeds from the offering were approximately $95.0 million
after deducting expenses payable by the Company in connection with the
offering. The Company used the net proceeds from the sale of the Senior
Notes for general corporate purposes and to repay revolving bank
borrowings under its Credit Facility.
As of December 31, 1999, the Company is not in default under the terms of
the Senior Notes. However, amendment of the Company's agreements with New
CCA without prior delivery of fairness opinions, as described above, to
the trustee of the Senior Notes would constitute an event of default.
In addition, the indenture governing the Senior Notes contains a
provision which allows the holders thereof to accelerate the Senior Notes
and seek remedies if the Company has a payment default under its bank
credit facility or if the obligations under the Company's bank credit
facility have been accelerated.
9.5% CONVERTIBLE SUBORDINATED NOTES
On January 29, 1999, the Company issued $20.0 million of convertible
subordinated notes due in December 2008, with interest payable
semi-annually at 9.5%. This issuance constituted the second tranche of a
commitment by the Company to issue an aggregate of $40.0 million of
convertible subordinated notes, with the first $20.0 million tranche
issued in December 1998 under substantially similar terms. The 9.5%
Convertible Notes require that the Company revise the conversion price as
a result of the payment of a dividend or the issuance of stock or
convertible securities below market price. As of December 31, 1999, the
conversion price for the 9.5% Convertible Notes was $23.63 per share as
compared to $28.00 per share at issuance. This change in conversion price
resulted from dividends paid by the Company in 1999 and from the March 8,
1999 conversion of a $7.0 million convertible subordinated note issued to
Sodexho into 1.7 million shares of common stock at a conversion price of
$4.09 per share and the conversion of a $20.0 million convertible
subordinated note issued to Sodexho into 2.6 million shares of common
stock at a conversion price of $7.80 per share, as provided in the
original terms of the 9.5% Convertible Notes.
The provisions of the 9.5% Convertible Notes provide that the execution
of the securities purchase agreement with the prospective equity investor
as discussed in Note 23 by the Company constitutes a "change of control"
of the Company. This "change of control" gave rise to a right of the
holders of such notes to require the Company to repurchase the notes at a
price of 105% of the aggregate principal amount of such notes within 45
days after the provision of written notice by such holder to the Company.
In addition, as of February 5, 2000, the Company was no longer in
compliance with a financial covenant contained in the note agreement
relating to the ratio of the Company's total
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157
indebtedness to total capitalization. As a result of the violation of
these covenants, the Company is in default under the provisions of the
note agreement, and the holders of such notes may, at their option,
accelerate all or a portion of the outstanding principal amount of this
indebtedness. Moreover, during any period in which the Company is in
default under the provisions of the note agreement, the holders of the
notes may require the Company to pay an applicable default rate of
interest of 20%. In addition to the default rate of interest, as a result
of the default, the Company is obligated, under the terms of the 9.5%
Convertible Notes, to pay the holders of the notes contingent interest
sufficient to permit those note holders to receive a 15% rate of return
on the $40.0 million principal amount, unless the holders of the notes
elect to convert the notes into the Company's common stock under the
terms of the note agreement. Such contingent interest is retroactive to
the date of issuance of the 9.5% Convertible Notes. Because the
conversion into common stock is at the election of the note holders, the
Company has accrued the contingent interest from the date of issuance
through December 31, 1999 of approximately $2.1 million.
The Company has initiated discussions with the holders of these notes to
waive the occurrence of a "change of control" arising from the Company's
execution of the securities purchase agreement with the prospective
equity investor, thereby extinguishing the Company's obligation to
repurchase the notes at a premium. In addition, the Company has requested
that the provisions of the note agreement be amended to: (i) remove the
financial covenant relating to the Company's total indebtedness to total
capitalization; (ii) remove a covenant requiring the Company to use its
best efforts to qualify as a REIT for federal income tax purposes; and
(iii) remove a covenant restricting the Company's ability to conduct
business other than the financing, ownership and development of prisons
and other correctional facilities.
There can be no assurance that the holders of these notes will consent to
any proposed waiver of, and amendments to, the note agreement, or will
not seek to declare an event of default prior to the execution of any
proposed waiver and amendments.
7.5% CONVERTIBLE SUBORDINATED NOTES
The $30.0 million 7.5% Convertible Notes require that the Company revise
the conversion price as a result of the payment of a dividend or the
issuance of stock or convertible securities below market price. As of
December 31, 1999, the conversion price for the note was $23.63 per share
as compared to $27.42 per share at issuance. This change in conversion
price resulted from dividends paid by the Company in 1999 and from the
March 8, 1999 conversion of a $7.0 million convertible subordinated note
issued to Sodexho into 1.7 million shares of common stock at a conversion
price of $4.09 per share and the conversion of a $20.0 million
convertible subordinated note issued to Sodexho into 2.6 million shares
of common stock at a conversion price of $7.80 per share, as provided in
the original terms of the 7.5% Convertible Notes.
The provisions of the note agreement contain financial covenants relating
to: (i) the Company's debt service coverage ratio; (ii) the Company's
interest coverage ratio; and (iii) the Company's ratio of total
indebtedness to total capitalization. It is likely that as of March 31,
2000, the Company will not be in compliance with one or more of these
financial covenants. If one or more of these covenants are violated, such
a violation would result in an event of default under the provisions of
the note agreement, and the holder of such notes may, at its option,
accelerate all or a portion of the outstanding principal amount of this
indebtedness.
If an event of default occurs under the provisions of the note agreement,
the Company will initiate discussions with the holder of such notes and
attempt to obtain a waiver of, or amendment to, the financial covenants
contained in the note agreement violated by the Company. In addition, in
order to prevent an event of default under the note agreement, prior to
completion of a prospective equity
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158
investment and related restructuring, the Company will be required to
amend the provisions of the note agreement to remove a covenant requiring
the Company to elect to be taxed as a REIT for federal income tax
purposes, if necessary.
There can be no assurance that the holder of these notes will consent to
any proposed waiver of, and amendments to, the note agreement, or will
not seek to declare an event of default prior to the execution of any
proposed waiver and amendments.
OTHER DEBT TRANSACTIONS
On March 8, 1999, the Company issued a $20.0 million convertible
subordinated note to Sodexho pursuant to a forward contract assumed by
the Company from Old CCA in the 1999 Merger. The note bore interest at
LIBOR plus 1.35% and was convertible into shares of the Company's common
stock at a conversion price of $7.80 per share. On March 8, 1999, Sodexho
converted (i) a $7.0 million convertible subordinated note bearing
interest at 8.5% into 1.7 million shares of the Company's common stock at
a conversion price of $4.09 per share, (ii) a $20.0 million convertible
subordinated note bearing interest at 7.5% into 700,000 shares of the
Company's common stock at a conversion price of $28.53 per share and
(iii) a $20.0 million convertible subordinated note bearing interest at
LIBOR plus 1.35% into 2.6 million shares of the Company's common stock at
a conversion price of $7.80 per share.
In 1998, convertible subordinated notes with a face value of $5.8 million
were converted into 2.9 million shares of common stock.
At December 31, 1999 and 1998, the Company had $16.3 million and $1.6
million in letters of credit, respectively. The letters of credit were
issued to secure the Company's construction of one facility and Old CCA's
worker's compensation insurance policy, performance bonds and utility
deposits. The Company is required to maintain cash collateral for the
letters of credit.
The Company capitalized interest of $37.7 million, $11.8 million and $6.3
million in 1999, 1998 and 1997, respectively.
Maturities of long-term debt (excluding acceleration or demand
provisions) for the next five years and thereafter are:
2000 $ 6,084
2001 6,093
2002 916,337
2003 114
2004 126
Thereafter 170,237
--------------
$ 1,098,991
==============
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13. DEFERRED GAINS ON SALES OF CONTRACTS
Deferred gains on the sales of contracts consist of the following:
DECEMBER 31,
----------------------------------
1999 1998
--------------- ---------------
Deferred gain from sale to New CCA $ 63,337 $ 63,316
Deferred gain from sale to PMSI 28,290 35,363
Deferred gain from sale to JJMS 14,418 18,022
--------------- ---------------
$ 106,045 $ 116,701
=============== ===============
For the year ended December 31, 1999, the Company recognized $7.1 million
and $3.6 million of amortization of the deferred gains from the sales to
PMSI and JJFMSI, respectively.
14. INCOME TAXES
The Company, formerly a taxable corporation, currently intends to elect
to change its tax status from a taxable corporation to a REIT effective
with the filing of its 1999 federal income tax return. As of December 31,
1998, the Company's balance sheet reflected $83.2 million in gross
deferred tax assets. In accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"), the Company provided a provision for these deferred tax
assets, excluding any estimated tax liabilities required for prior tax
periods, upon completion of the 1999 Merger and the election to be taxed
as a REIT. As such, the Company's results of operations reflect a
provision for change in tax status of $83.2 million for the year ended
December 31, 1999.
The provision for income taxes is comprised of the following components:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------- ------------- -------------
CURRENT PROVISION
Federal $ - $ 41,904 $ 35,930
State - 7,914 3,540
------------- ------------- -------------
- 49,818 39,470
------------- ------------- -------------
INCOME TAXES CHARGED TO EQUITY
Federal - 4,016 5,679
State - 459 649
------------- ------------- -------------
- 4,475 6,328
------------- ------------- -------------
DEFERRED PROVISION (BENEFIT)
Federal 74,664 (34,848) (11,360)
State 8,536 (4,021) (1,297)
------------- ------------- -------------
83,200 (38,869) (12,657)
------------- ------------- -------------
Provision for income taxes $ 83,200 $ 15,424 $ 33,141
============= ============= =============
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In addition to the above, the cumulative effect of accounting change for
1998 was reported net of $10.3 million of estimated tax benefit. Of the
$10.3 million total tax benefit related to the cumulative effect of
accounting change, approximately $4.0 million related to current tax
benefit and approximately $6.3 million related to deferred tax benefit.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 are as follows:
CURRENT DEFERRED TAX ASSETS
Asset reserves and liabilities not yet deductible for tax $ 2,750
Deferred revenue 2,300
Other 796
--------------
Total current deferred tax assets 5,846
--------------
NONCURRENT DEFERRED TAX ASSETS
Deferred gain on real estate transactions and sales of contracts 44,779
Other 2,055
--------------
Total noncurrent deferred tax assets 46,834
--------------
NONCURRENT DEFERRED TAX LIABILITIES
Tax in excess of book depreciation (411)
Income items not yet taxable and other (1,069)
--------------
Total noncurrent deferred tax liabilities (1,480)
--------------
Net deferred tax assets $ 51,200
==============
A reconciliation of the statutory federal income tax rate and the
effective tax rate as a percentage of pretax income for the years ended
December 31, 1998 and 1997 is as follows:
1998 1997
---- ----
Statutory federal rate 35.0% 35.0%
State taxes, net of federal tax benefit 4.0 4.0
New CCA compensation charge 21.0 -
Deductions not previously benefited (29.4) -
Other items, net 5.8 (.9)
---- ----
36.4% 38.1%
==== ====
In the event that the Company completes the Fortress/Blackstone
Restructuring, as defined in Note 23, under its existing terms following
required shareholder approval in 2000, the Company will be required to be
taxed as a C corporation commencing with the taxable year ended December
31, 1999. See Note 22 for additional information on the Company's
contingent tax liabilities.
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15. NEW CCA COMPENSATION CHARGE
Old CCA recorded a $22.9 million charge to expense in 1998 for the
implied fair value of approximately 5.0 million shares of New CCA voting
common stock issued by New CCA to certain employees of Old CCA and Old
Prison Realty. The shares were granted to certain founding shareholders
of New CCA in September 1998. Neither the Company, Old CCA nor New CCA
received any proceeds from the issuance of these shares. The fair value
of these common shares was determined at the date of the 1999 Merger
based upon the implied value of New CCA derived from $16.0 million in
cash investments made by outside investors in December 1998 in return for
a 32% ownership interest in New CCA.
16. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under
the standards established by SFAS 128, earnings per share is measured at
two levels: basic earnings per share and diluted earnings per share.
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed by dividing net income (as
adjusted) by the weighted average number of common shares after
considering the additional dilution related to convertible preferred
stock, convertible subordinated notes, options and warrants.
For the year ended December 31, 1999, the Company's stock options and
warrants and convertible subordinated notes were convertible into 0.2
million and 3.2 million shares, respectively. These incremental shares
were excluded from the computation of diluted earnings per share for the
year ended December 31, 1999 as the effect of their inclusion would have
been anti-dilutive.
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In computing diluted earnings per common share, the Company's stock
warrants and stock options are considered dilutive using the treasury
stock method, and the Series B convertible preferred stock and the
various convertible subordinated notes are considered dilutive using the
if-converted method for the years ended December 31, 1998 and 1997. The
following table presents information necessary to calculate diluted
earnings per share for the years ended December 31:
1999 1998 1997
--------- --------- ---------
Net income (loss) available to common
shareholders $ (61,976) $ 10,836 $ 53,955
Interest expense applicable to convertible
subordinated notes, net of tax
-- 366 700
--------- --------- ---------
Adjusted net income (loss) available to
common shareholders $ (61,976) $ 11,202 $ 54,655
========= ========= =========
Weighted average common shares outstanding
115,097 71,380 67,568
Effect of dilutive options and warrants -- 3,689 6,369
Conversion of preferred stock -- 481 159
Conversion of convertible subordinated notes
-- 3,389 4,863
--------- --------- ---------
Adjusted diluted common shares outstanding 115,097 78,939 78,959
========= ========= =========
Diluted earnings (loss) per share $ (.54) $ .14 $ .69
========= ========= =========
17. STOCKHOLDERS' EQUITY
PREFERRED STOCK
During 1998, the Company authorized 20.0 million shares of $.01 (one
cent) par value preferred stock of which 4.3 million shares are
designated as 8.0% Series A Cumulative Preferred Stock.
As discussed in Note 3, in connection with the Prison Realty Merger, Old
Prison Realty shareholders received 1.0 share of Series A Cumulative
Preferred Stock of the Company in exchange for each Old Prison Realty
Series A Cumulative Preferred Share. Consequently, the Company issued 4.3
million shares of its 8.0% Series A Cumulative Preferred Stock on January
1, 1999. The Series A Cumulative Preferred Shares are redeemable at any
time by the Company on or after January 30, 2003 at $25 per share, plus
dividends accrued and unpaid to the redemption date. The 8.0% Series A
Cumulative Preferred Shares have no stated maturity, sinking fund
provision or mandatory redemption and are not convertible into any other
securities of the Company. Dividends on the 8.0% Series A Cumulative
Preferred Shares are cumulative from the date of original issue of such
shares and are payable quarterly in arrears on the fifteenth day of
January, April, July and October of each year, to shareholders of record
on the last day of March, June, September and December of each year,
respectively, at a fixed annual rate of 8.0%.
Old CCA had authorized 400,000 shares of $1 (one dollar) par value Series
B convertible preferred stock. During 1997, Old CCA issued approximately
380,000 shares of Series B convertible preferred stock. The preferred
stock had the same voting rights as Old CCA's common stock.
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Dividends were to be paid on the preferred stock at a rate equal to two
times the dividend being paid on each share of Old CCA's common stock.
Each share of the preferred stock was convertible into 1.94 shares of Old
CCA's common stock. On October 2, 1998, pursuant to the terms of an
Exchange Agreement by and among Old CCA, American Corrections Transport,
Inc. ("ACT") and certain shareholders of ACT, and the charter of Old CCA,
as amended, Old CCA converted each share of its Series B convertible
preferred stock into 1.94 shares of Old CCA's common stock. Old CCA
received no cash proceeds as a result of the transaction.
STOCK OFFERINGS
On November 4, 1998, Old CCA filed a Registration Statement on Form S-3
to register up to 3.0 million shares of Old CCA common stock for sale on
a continuous and delayed basis using a "shelf" registration process.
During December 1998, Old CCA sold, in a series of private placements,
2.9 million shares of Old CCA common stock to institutional investors
pursuant to this registration statement. The net proceeds of
approximately $65.4 million were utilized by Old CCA for general
corporate purposes, including the repayment of indebtedness, financing
capital expenditures and working capital.
On January 11, 1999, the Company filed a Registration Statement on Form
S-3 to register an aggregate of $1.5 billion in value of its common
stock, preferred stock, common stock rights, warrants and debt securities
for sale to the public (the "Shelf Registration Statement"). Proceeds
from sales under the Shelf Registration Statement have been and will be
used for general corporate purposes, including the acquisition and
development of correctional and detention facilities. During 1999, the
Company issued and sold approximately 6.7 million shares of its common
stock under the Shelf Registration Statement, resulting in net proceeds
to the Company of approximately $120.0 million.
On May 7, 1999, the Company registered 10.0 million shares of the
Company's common stock for issuance under the Company's Dividend
Reinvestment and Stock Purchase Plan (the "Plan"). The Plan provides a
method of investing cash dividends in, and making optional monthly cash
purchases of, the Company's common stock, at prices reflecting a discount
between 0% and 5% from the market price of the common stock on the New
York Stock Exchange ("NYSE"). As of December 31, 1999, the Company has
issued 1,261,431 shares under the Plan, with 1,253,232 of these shares
issued under the Plan's optional cash feature resulting in proceeds of
$12.3 million.
STOCK WARRANTS
Old CCA had issued stock warrants to certain affiliated and unaffiliated
parties for providing certain financing, consulting and brokerage
services to Old CCA and to stockholders as a dividend. All outstanding
warrants were exercised in 1998 for 3.9 million shares of common stock
with no cash proceeds received by Old CCA.
TREASURY STOCK
Old CCA's Board of Directors approved a stock repurchase program for up
to an aggregate of 350,000 shares of Old CCA's stock for the purpose of
funding the employee stock options, stock ownership and stock award
plans. In September 1997, Old CCA repurchased 108,000 shares of its stock
from a member of the Board of Directors of Old CCA at the market price
pursuant to this program. In March 1998, the Old CCA repurchased 175,000
shares from its Chief Executive Officer at the market price pursuant to
this program.
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On December 31, 1998, all then outstanding treasury stock was retired in
connection with the 1999 Merger. Treasury stock was recorded in 1999
related to the cashless exercise of stock options.
STOCK OPTION PLANS
The Company has incentive and nonqualified stock option plans under which
options were granted to "key employees" as designated by the Board of
Directors. The options are granted with exercise prices equal to the
market value at the date of grant. In general, one-fourth of the options
granted to employees vest immediately, with the remaining options
becoming exercisable ratably on the first, second and third anniversary
of the dates of grant. Options granted to non-employee trustees vest at
the date of grant. The term of such options is ten years from the date of
grant.
In connection with the 1999 Merger, all options outstanding at December
31, 1998 to purchase Old CCA common stock and all options outstanding at
January 1, 1999 to purchase Old Prison Realty common stock, were
converted into options to purchase shares of the Company's common stock
after giving effect to the exchange ratio and carryover of the vesting
and other relevant terms. Options granted under Old CCA's stock option
plans are exercisable after the later of two years from the date of
employment or one year after the date of grant until ten years after the
date of grant. Options granted under Old Prison Realty's stock option
plans were granted with terms similar to the terms of the Company's
plans.
Stock option transactions relating to the Company's incentive and
nonqualified stock option plans are summarized below:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
------------ -------------
(In thousands, except exercise prices)
Outstanding at December 31, 1996 3,276 $ 10.76
Granted 397 27.23
Exercised (943) 8.69
Cancelled (23) 29.95
------------ -------------
Outstanding at December 31, 1997 2,707 13.73
------------ -------------
Granted 467 38.55
Exercised (1,393) 6.21
Cancelled (51) 28.23
------------ -------------
Outstanding at December 31, 1998 1,730 26.08
------------ -------------
Old Prison Realty options 1,222 22.92
Granted 397 19.93
Exercised (144) 2.82
Cancelled (783) 24.21
------------ -------------
Outstanding at December 31, 1999 2,422 $ 25.48
============ =============
Available for future grant 781 -
============ =============
Exercisable 2,142 $ 26.04
============ =============
The weighted average fair value of options granted during 1999, 1998 and
1997 was $3.88, $16.43, and $11.59 per option, respectively, based on the
estimated fair value using the Black-Scholes option-pricing model.
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Stock options outstanding at December 31, 1999 are summarized below:
WEIGHTED AVERAGE
OPTIONS REMAINING OPTIONS
EXERCISE OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISABLE AT
PRICE DECEMBER 31, 1999 (IN YEARS) EXERCISE PRICE DECEMBER 31, 1999
----------------- ----------------- ----------------- ----------------- -----------------
$1.46 7 2.17 $ 1.46 7
$2.21 - $2.43 42 3.78 $ 2.23 42
$4.75 - $6.50 148 5.05 $ 5.88 148
$10.04 24 5.42 $ 10.04 24
$16.71 - $23.00 1,065 7.83 $ 20.49 796
$27.71 - $40.00 1,136 7.36 $ 34.05 1,125
----------------- -----------------
2,422 2,142
================= =================
During 1995, Old CCA authorized the issuance of 295,000 shares of common
stock to certain key employees as a deferred stock award. The award
becomes fully vested ten years from the date of grant based on continuous
employment with the Company. The Company is expensing the $3.7 million of
awards over the vesting period.
During 1997, Old CCA granted 70,000 stock options to a member of the
Board of Directors of Old CCA to purchase Old CCA's common stock. The
options were granted with an exercise price less than the market value on
the date of grant and were exercisable immediately. As of December 31,
1998, Old CCA had recognized $0.5 million of compensation expense related
to the issuance of these stock options.
During 1999, the Company authorized the issuance of 23,000 shares of
common stock to four executives as deferred stock awards. The value of
the awards on the date of grant was approximately $0.5 million. The
awards vested 25% immediately upon date of the grant with the remaining
shares vesting 25% on each anniversary date of the grant in each of the
next three years. Effective December 31, 1999, two of the executives that
received the awards resigned from the Company. All unvested shares issued
to those two executives were forfeited upon their resignation. The
Company expensed $0.1 million related to the shares in 1999.
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166
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and accounts for stock-based compensation
using the intrinsic value method as prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations. As a result, no compensation cost has been
recognized for the Company's stock option plans under the criteria
established by SFAS 123. Had compensation cost for the stock option plans
been determined based on the fair value of the options at the grant date
for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS
123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below for the years ended
December 31:
1999 1998 1997
------------ ------------ -----------
Net income (loss) - as reported $ (61,976) $ 10,836 $ 53,955
Net income (loss) - pro forma (64,974) 6,769 48,911
Net income (loss) per share - Basic -
as reported $ (.54) $ .15 $ .80
Net income (loss) per share - Basic -
pro forma (.56) .09 .72
Net income (loss) per share - Diluted -
as reported $ (.54) $ .14 $ .69
Net income (loss) per share - Diluted -
pro forma (.56) .09 .62
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not
be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions:
1999 1998 1997
-------- -------- --------
Expected dividend yield 9.0% 0.0% 0.0%
Expected stock price volatility 49.1% 47.7% 40.4%
Risk-free interest rate 5.4% 4.6% 5.3%
Expected life of options 10 YEARS 4 years 4 years
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PRISON REALTY TRUST 401(k) SAVINGS AND RETIREMENT PLAN
On December 17, 1998, the Company's Board of Directors adopted the Prison
Realty Trust, Inc. 401(k) Savings and Investment Plan (the "401(k)
Plan"). Effective January 1, 1999, in conjunction with the 1999 Merger,
the Employee Savings and Stock Ownership Plan (the "ESOP") of Old Prison
Realty was replaced by the 401(k) Plan. The 401(k) Plan is a voluntary
compensation deferral plan under Section 401(k) of the Code. All
employees of the Company are eligible to participate upon reaching age 18
and completing six months of qualified service, as defined in the 401(k)
Plan. Eligible employees may elect to defer from 1% to 15% of their
compensation. The Company will match a discretionary percentage of the
employees' salary deferral, and the deferrals are invested securities and
investments as permitted by the 401(k) Plan and directed by each
employee. For the year ended December 31, 1999, the Company contributed
$37 to the 401(k) Plan.
18. REVENUES AND EXPENSES
Approximately 95% of the Company's revenues for the year ended December
31, 1999 relates to amounts earned under lease arrangements from tenants,
primarily New CCA. See Note 5 for discussion of lease arrangements with
New CCA.
Approximately 96% and 98% of Old CCA's revenues for the years ended
December 31, 1998 and 1997, respectively, relate to amounts earned from
federal, state and local governmental management and transportation
contracts. Old CCA had revenues of 18% and 21% from the federal
government and 65% and 59% from state governments for the years ended
December 31, 1998 and 1997, respectively. One state government accounted
for revenues of 10% and 13% for the years ended December 31, 1998 and
1997, respectively. In 1997, Old CCA recognized $7.9 million of
additional management service revenues. Old CCA recognized after tax
development fee income of $2.5 million in 1997 related to a contract to
design, construct and equip a managed detention facility.
Accounts payable at December 31, 1999 and 1998, consists of the
following:
1999 1998
---------- -----------
Trade $ 10,099 $ 21,999
Construction 32,252 44,665
---------- -----------
$ 42,351 $ 66,664
========== ===========
Salaries and related benefits represented 12% of general and
administrative expenses for the year ended December 31, 1999. Salaries
and related benefits represented 61% and 66% of operating expenses for
the years ended December 31, 1998 and 1997, respectively.
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168
19. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information for each of the quarters in the
years ended December 31, 1999 and 1998 is as follows:
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------------- --------------- --------------- ---------------
Revenues $ 71,986 $ 73,841 $ 74,975 $ 64,916
Operating income (loss) 61,187 61,614 61,772 (109,152)
Net income (loss) (22,605) 60,423 48,145 (139,339)
Net income (loss) available to
common shareholders
(24,755) 58,273 45,995 (141,489)
Net income (loss) per common
share - Basic (0.23) 0.50 0.39 (1.20)
Net income (loss) per common
share - Diluted (0.23) 0.50 0.39 (1.20)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------------- --------------- --------------- ---------------
Revenues $ 141,298 $ 164,071 $ 179,136 $ 177,554
Operating income (loss) 22,143 26,198 28,534 (35,197)
Income (loss) before cumulative
effect of accounting change
18,443 21,088 21,102 (33,652)
Cumulative effect of accounting
change, net of taxes
- - - 16,145
Net income (loss) 18,443 21,088 21,102 (49,797)
Net income (loss) available to
common shareholders
18,443 21,088 21,102 (49,797)
Net income (loss) per common
share - Basic 0.27 0.30 0.30 (.67)
Net income (loss) per common
share - Diluted 0.23 0.27 0.27 (.67)
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169
20. INTERNATIONAL ALLIANCE
Old CCA entered into an International Alliance (the "Alliance") with
Sodexho to pursue prison management business outside the United States.
In conjunction with the Alliance, Sodexho purchased an equity position in
Old CCA by acquiring several instruments. In 1994, Old CCA sold Sodexho
2.5 million shares of common stock at $4.29 per share and a $7.0 million
convertible subordinated note bearing interest at 8.5%. Sodexho also
received warrants that were exercised in 1998 for 3.9 million shares of
common stock. In consideration of the placement of the aforementioned
securities, Old CCA paid Sodexho $4.0 million over a four-year period
ending in 1998. These fees include debt issuance costs and private
placement equity fees. These fees have been allocated to the various
instruments based on the estimated cost to Old CCA of raising the various
components of capital and are charged to debt issuance costs or equity as
the respective financings are completed.
In 1995, Old CCA and Sodexho entered into a forward contract whereby
Sodexho would purchase up to $20.0 million of convertible subordinated
notes at any time prior to December 1997. In 1997, Old CCA and Sodexho
extended the expiration date of this contract to December 1999. As
discussed in Note 12, on March 8, 1999, the Company issued the $20.0
million convertible, subordinated notes to Sodexho. The notes bore
interest at LIBOR plus 1.35% and were convertible into shares of the
Company's common stock at a conversion price of $7.80 per share.
In 1996, Old CCA sold $20.0 million of convertible notes to Sodexho
pursuant to their contractual preemptive right. The notes had an interest
rate of 7.5% and were convertible into common shares at a conversion
price of $28.53 per share.
As discussed in Note 12, on March 8, 1999, Sodexho converted (i) the $7.0
million convertible subordinated note bearing interest at 8.5% into 1.7
million shares of the Company's common stock at a conversion price of
$4.09 per share, (ii) the $20.0 million convertible subordinated note
bearing interest at 7.5% into 700,000 shares of the Company's common
stock at a conversion price of $28.53 per share and (iii) the $20.0
million convertible subordinated note bearing interest at LIBOR plus
1.35% into 2.6 million shares of the Company's common stock at a
conversion price of $7.80 per share.
21. RELATED PARTY TRANSACTIONS
Old CCA paid legal fees to a law firm of which one of the partners is a
stockholder of the Company and had been a member of the Old CCA Board of
Directors. Legal fees, including fees related to Old CCA's mergers and
acquisitions, paid to the law firm amounted to $3.0 million and $1.1 in
1998 and 1997, respectively. The Company paid $5.8 million to this law
firm during 1999.
Old CCA paid $0.3 million and $0.4 million in 1998 and 1997,
respectively, to a member of the Old CCA Board of Directors for
consulting services related to various contractual relationships. The
Company did not make any payments to this individual during 1999.
Old CCA paid $1.3 million and $0.9 million in 1998 and 1997,
respectively, to a company that is majority-owned by an individual that
was a member of the Old CCA Board of Directors, for services rendered at
one of its facilities. The Company did not make any payments to this
individual during 1999.
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170
During 1999, the Company paid $26.5 million to a construction company
that is owned by a member of the Company's Board of Directors, for
services rendered in the construction of facilities. During 1998, Old CCA
paid $40.8 million and Old Prison Realty paid $8.7 million to this
construction company.
During 1998, the Company paid $3.0 million in 1998 to a member of the
Company's Board of Directors for consulting services rendered in
connection with the merger transactions discussed in Note 3. The Company
did not make payments to this individual during 1999 other than Board of
Director fees.
22. COMMITMENTS AND CONTINGENCIES
LITIGATION
As a result of the 1999 Merger, the Company became subject to a variety
of legal proceedings outstanding as of December 31, 1998 against Old CCA
arising in the ordinary course of Old CCA's business, including certain
claims brought by and on behalf of inmates and employees of facilities
managed and operated by Old CCA prior to the 1999 Merger. The Company
does not believe that such litigation, if resolved against the Company,
would have a material adverse effect upon its consolidated financial
position, results of operations and cash flows. Also, as a result of the
1999 Merger, the Company became subject to certain legal proceedings
outstanding as of January 1, 1999 against Old Prison Realty arising in
the ordinary course of Old Prison Realty's business, including certain
claims arising in connection with the construction and development of its
facilities. The Company does not believe that such litigation, if
resolved against the Company, would have a material adverse effect upon
its consolidated financial position, results of operations and cash
flows.
At December 31, 1998, Old CCA was a party to two inmate lawsuits at the
Northeast Ohio Correctional Center for wrongful deaths. These lawsuits
were assumed by the Company in the 1999 Merger. While the outcome of
these lawsuits is not determinable, the Company does not believe that
such litigation, if resolved against the Company, would have a material
adverse effect upon its consolidated financial position, results of
operations and cash flows.
On December 29, 1999, a purported class action lawsuit was filed on
behalf of the shareholders of the Company in the Chancery Court for
Davidson County, Tennessee. The lawsuit, captioned Bernstein v. Prison
Realty Trust, et al., names as defendants the Company and its directors,
as well as the investors in the prospective equity investment and related
restructuring discussed in Note 23. The lawsuit alleges that the
directors breached their fiduciary duties to the Company's shareholders
by "effectively selling control" of the Company for inadequate
consideration and without having adequately considered or explored all
other alternatives to the prospective equity investment and related
restructuring or having taken steps to maximize stockholder value. The
plaintiffs seek an injunction preventing the completion of the equity
investment and related restructuring, declaratory relief, and costs and
fees. On each of January 4, 2000 and January 12, 2000, nearly identical
purported class action lawsuits were filed in the same court on behalf of
different purported class representatives. The lawsuits, captioned Hardee
v. Prison Realty Trust, et al. and Holle v. Prison Realty Trust, et al.,
name as defendants the Company and its directors, as well as the
investors. The plaintiffs in these three actions have moved for
consolidation.
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On December 30, 1999, a purported class action lawsuit was filed in
federal court in the United States District Court for the Middle District
of Tennessee, on behalf of the stockholders of the Company. The lawsuit,
captioned Neiger v. Doctor Crants, et al., names as defendants the
Company, Doctor R. Crants and D. Robert Crants, III. The lawsuit alleges
violations of federal securities laws based on the allegation that the
defendants knew or should have known that the Company would not make any
further dividend payments on its common stock, including the Special
Dividend prior to the date on which it was disclosed to the public and
therefore certain statements made by them prior to that time were false
and misleading. The plaintiffs seek an unspecified amount of monetary
damages and costs and fees. On February 4, 2000, a nearly identical
purported class action lawsuit was filed in the same court on behalf of
different purported class representatives. The lawsuit, captioned
Anderson v. Doctor Crants, et al., names as defendants the Company,
Doctor R. Crants and D. Robert Crants, III. On February 24, 2000, a
nearly identical complaint was filed in the same court on behalf of one
plaintiff. The lawsuit, captioned Brody, et al. v. Prison Realty Trust,
Inc. et al., names as defendants the Company, Doctor R. Crants, D. Robert
Crants, III and Darrell K. Massengale. Additionally, on March 3, 2000, a
similar lawsuit was filed on behalf of two plaintiffs in the Chancery
Court for the State of Tennessee, Twentieth Judicial District. The
lawsuit, captioned Buchanan v. Prison Realty Trust, Inc., et al., names
as defendants the Company, Doctor R. Crants, D. Robert Crants, III and
Darrell K. Massengale and alleges violations of state securities laws
based on claims substantially identical to those enumerated above.
The Company is also currently subject to two separate class actions filed
in federal court in the United States District Court for the Middle
District of Tennessee, alleging securities fraud in connection with the
agreements entered into by the Company and New CCA in May 1999 to
increase payments made by the Company to New CCA under the terms of
certain agreements. The plaintiffs' class in In re Old CCA Securities
Litigation consists of former shareholders of Old CCA who acquired shares
of the Company as the result of the 1999 Merger. The plaintiffs' class in
In re Prison Realty Securities Litigation consists of former shareholders
of Old Prison Realty who acquired shares of the Company as the result of
the 1999 Merger and all persons who acquired shares of the Company in the
open market prior to May 17, 1999. Each of these actions alleges
violations of federal securities laws based on the allegations that the
Company and the individual defendants in the actions knew or should have
known of the increased payments to New CCA prior to the date that they
were disclosed to the public, and therefore certain public filings and
representations made by the Company and certain of the defendants were
false and misleading. These two actions represent the consolidation of
sixteen complaints filed in May and June 1999. In addition, a purported
stockholders' derivative complaint has been filed in the Chancery Court
for Davidson County, Tennessee in Nashville, captioned Wanstrath v.
Crants, et al., against the Company, New CCA and persons who were
directors at the time the Company entered into the agreements regarding
the increased payments to New CCA. The derivative action alleges, among
other things, that the directors of the Company violated their fiduciary
duties in approving the increased payments to New CCA. The plaintiffs in
this action have also moved for a preliminary injunction to prevent the
completion of the proposed equity investment and restructuring.
The Company also is subject to a complaint filed in August 1998 in the
Chancery Court for Davidson County, Tennessee, inherited from Old CCA in
the 1999 Merger. The lawsuit, captioned Dasburg, S.A. v. Corrections
Corporation of America, et al., claims that Old CCA and the individual
named defendants violated state law by making false and misleading
statements in order to keep Old CCA's stock price at an artificially high
level during the period from April 1997 through April 1998, so that the
individual named defendants could sell shares of Old CCA stock at
inflated prices.
The Company was the subject of a purported class action complaint filed
in the Circuit Court for Davidson County, Tennessee, on January 28, 2000.
The lawsuit, captioned White v. Prison Realty Trust, Inc., et al.,
alleged that the defendants engaged in unfair and deceptive practice of
permitting telephone service providers exclusive service rights in return
for illegal payments and kickbacks,
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which exclusive agreements allow and require the providers to charge
unconscionable fees for phone services. This complaint was subsequently
dismissed by the Circuit Court on February 23, 2000. A similar complaint,
captioned Hunt v. Prison Realty Trust, Inc., was filed on February 23,
2000 in the Circuit Court for Davidson County, Tennessee, naming as
defendants the Company, New CCA, JJFMSI and PMSI. Plaintiffs are asking
for unspecified treble damages pursuant to the Tennessee Consumer
Protection Act plus restitution of the amounts collected by the
defendants under such arrangements, as well as a permanent injunction
restraining the defendants from engaging in such conduct, in addition to
unspecified damages.
The Company is defending vigorously its actions in each of the various
shareholder or class action lawsuits. It is possible additional lawsuits
will be filed in connection with the proposed equity investment and
related restructuring. It is also possible that the Company's liability
in regard to the shareholder or class action lawsuits will exceed the
Company's insurance coverage limits and will have a material adverse
impact on the Company's consolidated financial position, results of
operations and cash flows.
With the exception of the foregoing matters, the Company is not presently
subject to any material litigation nor, to the Company's knowledge, is
any litigation threatened against the Company, other than routine
litigation arising in the ordinary course of business, some of which is
expected to be covered by liability insurance, and all of which
collectively is not expected to have a material adverse effect on the
consolidated financial statements of the Company.
INCOME TAX CONTINGENCIES
As required by its governing instruments, the Company currently intends
to elect to be taxed as a REIT for the year ended December 31, 1999. In
the event that the Company completes the Fortress/Blackstone
Restructuring, as defined in Note 23, under its existing terms following
required shareholder approval in 2000, the Company will be required to be
taxed as a C corporation commencing with the taxable year ended December
31, 1999. As discussed in Note 11, in order to qualify as a REIT, the
Company is required to distribute 95% of its taxable income for 1999.
Although dividends sufficient to distribute 95% of the Company's taxable
income for 1999 have not been declared as of December 31, 1999, the
Company intends to pay sufficient dividends either in cash or in
securities to satisfy all distribution requirements for qualification as
a REIT for 1999 and estimates that $143.7 million will be distributed in
2000 to meet this requirement. The Company is currently considering the
exact timing and method of the payment of these required distributions.
As of December 31, 1999, $2.2 million of distributions relating to the
8.0% Series A Cumulative Preferred Shares have been declared and accrued
in the accompanying consolidated balance sheets. The remaining $141.5
million of distributions that must be paid to shareholders in 2000 in
order for the Company to maintain its status as a REIT have not been
declared by the Board of Directors and, accordingly, have not been
accrued in the accompanying consolidated balance sheets. It is likely
that the Company's debt holders would be required to consent to the
Company's payment of these distributions. The Company's failure to
distribute 95% of its taxable income for 1999 or the failure of the
Company to comply with other requirements for REIT qualification under
the Code would have a material adverse impact on the Company's
consolidated financial position, results of operations and cash flows.
The Company's election of REIT status for the taxable year ended December
31, 1999 will be subject to review by the IRS for a period of three years
from the date of filing of its 1999 tax return. Should the IRS review the
Company's election to be taxed as a REIT for the 1999 taxable year and
reach a conclusion requiring the Company to be treated as a taxable
corporation for the 1999 taxable year, the Company would be subject to
income taxes and interest on its 1999 taxable income and possibly subject
to fines and/or penalties. In the event that the Company completes the
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Fortress/Blackstone Restructuring, as defined in Note 23, under its
existing terms following required shareholder approval in 2000, the
Company will be required to be taxed as a C corporation commencing with
the taxable year ended December 31, 1999. Income taxes for the year ended
December 31, 1999 could exceed $83.5 million, which would have an adverse
impact on the Company's consolidated financial position, results of
operations and cash flows.
In connection with the 1999 Merger, the Company assumed any tax
obligations of Old CCA resulting from disputes with federal and state
taxing authorities related to tax returns filed by Old CCA in 1998 and
prior taxable years. The IRS is currently conducting an audit of Old
CCA's federal tax return for the taxable year ending December 31, 1997.
The Company currently is unable to predict the ultimate outcome of the
IRS's audit of Old CCA's 1997 federal tax return or the ultimate outcome
of audits of other tax returns of the Company or Old CCA by the IRS or by
other taxing authorities; however, it is possible that such audits will
result in claims against the Company in excess of the reserves currently
recorded by the Company. In addition, to the extent that IRS audit
adjustments increase the Accumulated Earnings and Profits of Old CCA, the
Company would be required to make timely distribution of the Accumulated
Earnings and Profits of Old CCA to shareholders. Such results would have
a material adverse impact on the Company's financial position, results of
operations and cash flows.
GUARANTEES
The Company has guaranteed the bond indebtedness (outstanding balance of
$69.1 million at December 31, 1999) and forward purchase agreement
(estimated obligation of $6.9 million at December 31, 1999) of a
governmental entity for which PMSI currently provides management services
at a 302-bed correctional facility. Under the terms of its guarantee
agreements, the Company is required to maintain a restricted cash account
(balance of $6.9 million at December 31, 1999) to collateralize the
guarantee of the forward purchase agreement.
23. PROSPECTIVE EQUITY INVESTMENT AND RELATED RESTRUCTURING
RESTRUCTURING AND RELATED TRANSACTIONS
During the third quarter of 1999, the Company and New CCA retained
Merrill Lynch & Co. ("Merrill Lynch") as their financial advisor to
assist them in completing a sale of equity and/or debt securities as
required by the Amended Credit Facility in order to make the Special
Dividend payment in cash. Following extensive analysis by Merrill Lynch
concerning the Company's capital structure, liquidity, and potential
investor candidates, the advisor recommended that the Board of Directors
consider more comprehensive investment alternatives.
In order to address the capital and liquidity constraints facing the
Company and New CCA and concerns regarding the corporate structure and
management of the Company, the Company intends to complete a
comprehensive restructuring (the "Restructuring") pursuant to which it is
currently anticipated that the Company will:
- merge with each of New CCA, PMSI and JJFMSI and operate under the name
"Corrections Corporation of America" as a taxable corporation, rather
than a REIT, for federal income tax purposes (the "Combination");
- raise additional equity (the "Equity Investment");
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- refinance all or a portion of its existing indebtedness, including
its existing $1.0 billion Amended Credit Facility; and
- incorporate changes to existing executive management.
PROPOSED RESTRUCTURING LED BY AFFILIATES OF FORTRESS AND BLACKSTONE
On December 26, 1999, the Company entered into a series of agreements
concerning a proposed Restructuring led by a group of institutional
investors (the "Fortress/Blackstone Investors") consisting of an
affiliate of Fortress Investment Group LLC and affiliates of The
Blackstone Group, together with an affiliate of Bank of America
Corporation (the "Fortress/Blackstone Restructuring"). Under the terms of
the Fortress/Blackstone Restructuring, the Company would:
- complete the Combination and operate as a taxable corporation
commencing with the Company's 1999 taxable year;
- raise up to $350.0 million by selling shares of convertible
preferred stock and warrants to purchase shares of common stock to
the Fortress/Blackstone Investors in a private placement and to the
Company's existing common stockholders in a $75.0 million rights
offering;
- obtain a new $1.2 billion credit facility;
- incorporate changes to existing management through a newly
constituted Board of Directors and executive management team; and
- amend the Company's existing charter and bylaws to accommodate the
Fortress/Blackstone Restructuring.
Approval of the holders of the Company's common stock will be required in
order to complete the Fortress/Blackstone Restructuring and related
transactions. In this regard, on February 17, 2000, the Company filed a
preliminary proxy statement with the Securities and Exchange Commission
to be used in connection with a special meeting of the Company's
stockholders expected to be held during 2000.
In connection with the Fortress/Blackstone Restructuring, through
December 31, 1999, the Company has incurred a total of $6.4 million of
costs and expenses. In addition to these costs and expenses already
incurred, the Company will incur certain costs and expenses in 2000
related to the performance of various parties under contractual
agreements. Regardless of whether or not the Fortress/Blackstone
Restructuring is completed, the Company is presently obligated to pay to
the Fortress/Blackstone Investors a $15.7 million transaction fee, which
is payable upon the earlier of (i) the issuance of the convertible
preferred stock and warrants to purchase shares of common stock described
above, (ii) four months from December 26, 1999, or (iii) the completion
of an alternative Restructuring.
If the Fortress/Blackstone Restructuring is completed, the Company will
bear all costs and expenses, including the fees and expenses of advisors,
accountants, attorneys, consultants and other parties engaged by the
Company and by the Fortress/Blackstone Investors in connection with the
evaluation, negotiation and consummation of Fortress/Blackstone
Restructuring. Under the terms of the Fortress/Blackstone Restructuring,
these costs and expenses will include an annual monitoring fee of $1.5
million to be paid to the Fortress/Blackstone Investors until a newly
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constituted executive management team, which has been approved by the
Company's Board of Directors and the Fortress/Blackstone Investors, is in
place.
In addition, if prior to the consummation of the Fortress/Blackstone
Restructuring or during a period of one year following any termination of
the Fortress/Blackstone Restructuring, the Company, New CCA, PMSI or
JJFMSI enters into any agreement with a third party without the consent
of the Fortress/Blackstone Investors providing for the issuance of equity
or convertible securities with proceeds in excess of $100.0 million or
providing for any merger, consolidation, transfer of substantial assets,
any tender or exchange offer, or similar transactions involving the
Company, New CCA, PMSI or JJFMSI, then the Company must pay a $7.5
million break-up fee to the Fortress/Blackstone Investors.
PROPOSED RESTRUCTURING LED BY PACIFIC LIFE
On February 23, 2000, the Board of Directors of the Company received an
unsolicited proposal from Pacific Life Insurance Company ("Pacific Life")
regarding a proposed Restructuring intending to serve as an alternative
to the Fortress/Blackstone Restructuring (the "Pacific Life
Restructuring"). In connection with the receipt of the unsolicited
proposal regarding the Pacific Life Restructuring, the Company's Board of
Directors determined, after reviewing the proposal with its financial and
legal advisors, that it is appropriate for the Company and its financial
advisors to commence negotiations with Pacific Life regarding a potential
Restructuring led by Pacific Life.
TRANSACTIONS BETWEEN THE COMPANY AND NEW CCA
As of December 31, 1999, approximately $24.9 million of December 1999
rents due from New CCA to the Company were unpaid. In an effort to
address the liquidity needs of the Company and New CCA prior to the
Restructuring, the Company and New CCA currently intend to amend the
terms of the CCA Leases. Pursuant to this proposed amendment, rent will
be payable on each June 30 and December 31, instead of monthly. In
addition, the proposed amendment provides that New CCA is required to
make certain scheduled monthly installment payments to the Company from
January 1, 2000 through June 30, 2000. Approximately $12.9 million of the
balance outstanding at December 31, 1999 was paid February 14, 2000, and
the Company expects that the remaining $12.0 million of 1999 rents will
be received during the second quarter of 2000. In regard to rent accruing
from January 1, 2000 through June 30, 2000, the Company and New CCA are
currently negotiating the scheduled monthly installment payments that are
to occur during the second quarter of 2000. At the time these installment
payments are made, New CCA will also be required to pay interest to the
Company upon such payments at a rate equal to the then current interest
rate under the Amended Credit Facility.
The Company and New CCA also intend to amend the terms of certain other
agreements between the Company and New CCA (the Business Development
Agreement, the CCA Services Agreement, and the Amended and Restated
Tenant Incentive Agreement) to provide for the deferral of the payment of
all fees under these agreements by the Company to New CCA until September
30, 2000.
LENDER CONSENTS
The proposed amendments to the contractual agreements between the Company
and New CCA as described above are subject to the consent of the
Company's and New CCA's lenders. The consummation of the Restructuring,
absent a refinancing of the Company's debt, also is subject to the
consent of the Company's and New CCA's lenders.
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No assurance can be given that the Restructuring and related transactions
will be consummated. In addition, no assurance can be given that the
amendment of the various contractual agreements between the Company and
New CCA and the various lenders' consent to such amendments will be
obtained and be sufficient to address the liquidity needs of the Company
and New CCA prior the Restructuring. The failure to consummate the
Restructuring and/or the failure to amend the various contractual
agreements between the Company and New CCA and to gain the various
lenders' consent to such amendments could have a material adverse impact
on the Company's consolidated financial position, results of operations
and cash flows.
CURRENT STATUS
The Company is currently in discussion with each of the
Fortress/Blackstone Investors and representatives from Pacific Life with
respect to the terms of the proposed Restructuring. In the event the
Company is unable to reach an agreement with these parties or complete a
Restructuring with another third party, the Company and New CCA will be
forced to pursue certain standalone alternatives not involving a third
party investor and such alternatives have significant drawbacks. In
connection with such standalone alternatives, the Company will be forced
to restructure or renegotiate its existing indebtedness which may not be
possible or, if possible, obtained on significantly less favorable terms,
given New CCA's recent operating performance and failure to meet its
projected results. No assurance, however, can be given that any debt
restructuring or renegotiation could be accomplished. Further, a
standalone combination would not address the Company's capital needs with
respect to the construction and expansion of correctional and detention
facilities as well as its financial ability to expand its existing and
perspective business opportunities.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corrections Corporation of America:
We have audited the accompanying consolidated balance sheets of CORRECTIONS
CORPORATION OF AMERICA (a Tennessee corporation and formerly Correctional
Management Services Corporation) AND SUBSIDIARIES as of December 31, 1999 and
1998, the related consolidated statement of operations for the year ended
December 31, 1999, and the related consolidated statements of stockholders'
equity and cash flows for the year ended December 31, 1999 and for the period
from September 11, 1998 (inception) through December 31, 1998. These
consolidated financial statements are the responsibility of Corrections
Corporation of America's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Corrections
Corporation of America and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations for the year ended December 31, 1999, and their
cash flows for the year ended December 31, 1999 and for the period from
September 11, 1998 (inception) through December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Corrections Corporation of America will continue as a going concern. As
discussed in Note 3 to the consolidated financial statements, Corrections
Corporation of America and Subsidiaries have incurred significant net losses for
the year ended December 31, 1999, are in default of their revolving credit
facility, are in default under their promissory note with Prison Realty Trust,
Inc., have not made certain required lease payments to Prison Realty Trust,
Inc., and have a net working capital deficiency and a net capital deficiency at
December 31, 1999, all of which raise substantial doubt about their ability to
continue as a going concern. Management's plans in regard to these matters,
including the Proposed Merger of Corrections Corporation of America with Prison
Realty Trust, Inc., the possibility of obtaining waivers related to their
revolving credit facility and the possibility of deferring certain payments to
Prison Realty Trust, Inc., are also described in Note 3. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should Corrections Corporation
of America be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 29, 2000
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
ASSETS 1999 1998
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 10,725 $ 19,059
Accounts receivable, net of allowances 66,414 64,077
Prepaid expenses 3,733 4,602
Other current assets 7,775 7,103
--------- ---------
Total current assets 88,647 94,841
PROPERTY AND EQUIPMENT, NET 19,959 24,668
OTHER ASSETS:
Investment in contracts 67,363 67,795
Other 8,732 8,977
--------- ---------
Total assets $ 184,701 $ 196,281
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,938 $ 15,766
Lease and trade name use payables to Prison 27,080 --
Realty
Accrued salaries and wages 5,842 4,419
Accrued property taxes 9,393 4,301
Accrued interest to Prison Realty 16,440 --
Other accrued expenses 17,514 13,444
Short-term debt 16,214 --
Promissory note to Prison Realty 137,000 --
--------- ---------
Total current liabilities 258,421 37,930
PROMISSORY NOTE TO PRISON REALTY -- 137,000
DEFERRED LEASE INCENTIVES AND SERVICE FEES RECEIVED
FROM PRISON REALTY 107,070 --
--------- ---------
Total liabilities 365,491 174,930
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - Class A - $0.01 (one cent) par
value; 100,000 shares authorized, 9,349 shares 93 93
issued and outstanding
Common stock - Class B - $0.01 (one cent) par
value; 100,000 shares authorized, 981 shares 10 10
issued and outstanding
Additional paid-in capital 25,133 25,133
Deferred compensation (3,108) (3,885)
Retained deficit (202,918) --
--------- ---------
Total stockholders' equity (180,790) 21,351
--------- ---------
Total liabilities and stockholders' equity $ 184,701 $ 196,281
========= =========
The accompanying notes are an integral part of these consolidated statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
REVENUES $ 499,292
----------
EXPENSES:
Operating 376,724
Trade name use agreement 8,699
Lease 261,546
General and administrative 26,166
Depreciation and amortization 8,601
----------
681,736
----------
OPERATING LOSS (182,444)
INTEREST EXPENSE, NET 20,474
----------
NET LOSS $ (202,918)
==========
The accompanying notes are an integral part of this consolidated statement.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
SEPTEMBER 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
--------------------------------------
CLASS A CLASS B PAID-IN DEFERRED RETAINED STOCKHOLDERS'
------------------ -----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------- ------ ------- ------ ---------- ------------ ---------- -------------
Issuance of common stock 9,349 $93 981 $10 $24,532 $(3,885) $ -- $ 20,750
Issuance of stock warrants -- -- -- -- 601 -- -- 601
----- --- --- --- ------- ------- --------- ---------
BALANCE, DECEMBER 31, 1998 9,349 93 981 10 25,133 (3,885) -- 21,351
Net loss -- -- -- -- -- -- (202,918) (202,918)
Amortization of
deferred compensation -- -- -- -- -- 777 -- 777
----- --- --- --- ------- ------- --------- ---------
BALANCE, DECEMBER 31, 1999 9,349 $93 981 $10 $25,133 $(3,108) $(202,918) $(180,790)
===== === === === ======= ======= ========= =========
The accompanying notes are an integral part of these consolidated statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM SEPTEMBER
11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
1999 1998
--------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(202,918) $ --
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 8,601 --
Lease incentives and service fees received from Prison --
Realty 109,349
Amortization of lease incentives and service fees received --
from Prison Realty (4,427)
Other noncash items 2,861 --
Write-off of debt issuance costs 2,706 --
Gain on sale of assets (22) --
Changes in assets and liabilities, net:
Accounts receivable (654) --
Prepaid expenses 869 --
Other current assets (2,062) --
Other assets 1,541 --
Accounts payable 14,375 --
Lease and trade name use payables to Prison Realty 27,080
Accrued salaries and wages 1,423 --
Accrued property taxes 5,092 --
Accrued interest to Prison Realty 16,440 --
Other accrued expenses 3,414 --
--------- -------
Net cash used in operating activities (16,332) --
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 657 --
Property and equipment additions, net (2,748) --
Cash acquired in purchase of contracts and related net assets -- 3,059
--------- -------
Net cash provided by (used in) investing activities (2,091) 3,059
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on short-term debt, net 16,214 --
Payment of debt issuance costs (6,125) --
Proceeds from issuance of common stock -- 16,000
--------- -------
Net cash provided by financing activities 10,089 16,000
--------- -------
(Continued)
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE
PERIOD FROM SEPTEMBER 11, 1998 (INCEPTION)
THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
(Continued)
1999 1998
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (8,334) $ 19,059
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,059 --
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,725 $ 19,059
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,111 $ --
======== =========
Income taxes $ -- $ --
======== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of management contracts and related net assets
through issuance of the promissory note and common stock
to Prison Realty:
Accounts receivable, net of allowances $ -- $ (64,077)
Prepaid expenses -- (4,602)
Other current assets -- (7,103)
Property and equipment -- (24,668)
Investment in contracts -- (70,854)
Other assets -- (8,376)
Accounts payable -- 15,766
Accrued salaries and wages -- 4,419
Accrued property taxes -- 4,301
Other accrued expenses -- 13,444
Promissory note to Prison Realty -- 137,000
Common stock -- 4,750
-------- ---------
$ -- $ --
======== =========
Issuance of stock warrants for financing services:
Other assets $ -- $ 601
Additional paid-in capital -- (601)
-------- ---------
$ -- $ --
======== =========
The accompanying notes are an integral part of these consolidated statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND FORMATION TRANSACTIONS
Correctional Management Services Corporation, a Tennessee corporation, was
formed on September 11, 1998, and changed its name to Corrections
Corporation of America (the "Company") in 1999. The Company was formed in
anticipation of the expected merger transactions (the "1999 Merger") between
Corrections Corporation of America ("Old CCA"), CCA Prison Realty Trust
("Old Prison Realty") and Prison Realty Trust, Inc. ("Prison Realty",
formerly Prison Realty Corporation). On September 22, 1998, the Company
issued 5.0 million shares of Class A voting common stock to certain founding
shareholders at par value. Additionally, on September 22, 1998, the Company
issued 0.8 million restricted shares of Class A voting common stock to
certain wardens of Old CCA facilities at the implied fair value of $3.9
million. Immediately prior to the acquisition of management contracts
discussed in Note 2, the Company issued 3.5 million shares of Class A voting
common stock to outside investors in consideration of cash proceeds totaling
$16.0 million. The Company operates and manages prisons and other
correctional facilities and provides prisoner transportation services for
governmental agencies. In addition, the Chief Executive Officer of the
Company is also the Chief Executive Officer of Prison Realty.
2. ACQUISITION OF MANAGEMENT CONTRACTS AND OTHER RELATIONSHIPS WITH PRISON
REALTY
Immediately after the issuance of the Class A voting common stock discussed
in Note 1, on December 31, 1998, the Company acquired all of the issued and
outstanding capital stock of certain wholly-owned corporate subsidiaries of
Old CCA, certain management contracts and certain other related assets and
liabilities of Old CCA, and entered into a trade name use agreement with Old
CCA, as described below. In exchange, the Company issued an installment
promissory note in the principal amount of $137.0 million that bears
interest at 12% per annum and is payable over 10 years (the "Promissory
Note") and 1.0 million shares of the Company's Class B non-voting common
stock, which represents 9.5% of the Company's outstanding stock. The Class B
non-voting common stock was valued at the implied fair market value of $4.75
million.
The acquisition of the capital stock, the management contracts and related
assets and liabilities was accounted for as a purchase transaction in
accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations," and the aggregate purchase price of $141.8 million was
allocated to the assets and liabilities acquired based on management's
estimates of the fair value of the assets and liabilities acquired. An
amount of $67.8 million was initially assigned to the value of the
management contracts acquired and is being amortized over a fifteen-year
period, which represents the average remaining lives of the contracts
acquired plus any contractual renewal options. During 1999, the Company
continued to evaluate the values assigned to the management contracts and
the assets and liabilities acquired. As a result, the Company increased the
value of the management contracts by approximately $4.4 million.
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TRADE NAME USE AGREEMENT
On December 31, 1998, immediately prior to the 1999 Merger and in connection
with the transactions described above, the Company entered into a trade name
use agreement with Old CCA (the "Trade Name Use Agreement"). Under the Trade
Name Use Agreement, which has a term of ten years, the Company obtained the
right to use the name, "Corrections Corporation of America" and derivatives
thereof, subject to specified terms and conditions therein. In consideration
for such right, the Company agreed to pay a fee equal to (i) 2.75% of the
Company's gross revenues for the first three years of the Trade Name Use
Agreement, (ii) 3.25% of the Company's gross revenues for the following two
years of the Trade Name Use Agreement, and (iii) 3.625% of the Company's
gross revenues for the remaining term of the Trade Name Use Agreement,
provided that the amount of such fee may not exceed (a) 2.75% of the gross
revenues of Prison Realty for the first three years of the Trade Name Use
Agreement, (b) 3.5% of Prison Realty's gross revenues for the following two
years of the Trade Name Use Agreement, and (c) 3.875% of Prison Realty's
gross revenues for the remaining term of the Trade Name Use Agreement. The
Company incurred $8.7 million of operating expenses under the Trade Name Use
Agreement for the year ended December 31, 1999, of which $6.5 million had
been paid as of December 31, 1999.
CCA LEASES
On January 1, 1999, the Company entered into a master lease agreement and
leases with respect to the thirty-six leased properties with Prison Realty
(the "CCA Leases"). The initial terms of the CCA Leases are 12 years and may
be extended at fair market rates for three additional five-year periods upon
the mutual agreement of the Company and Prison Realty. The Company incurred
$263.5 million in gross lease expense under the CCA Leases for the year
ended December 31, 1999, of which $238.6 million had been paid as of
December 31, 1999.
On December 31, 1999, Prison Realty and the Company amended the terms of the
CCA Leases to change the annual base rent escalation formula with respect to
each facility leased to the Company. Previously, the annual base rent
payable with respect to each facility was subject to increase each year in
an amount equal to a percentage of the total rental payments with respect to
each facility, such percentage being the greater of (i) 4%; or (ii) 25% of
the percentage increase of gross management revenue derived from such
facility. As a result of this amendment, the annual base rent with respect
to each facility is subject to increase each year in an amount equal to the
lesser of: (i) 4% of the annualized yearly rental payments with respect to
such facility; or (ii) 10% of the excess of the Company's aggregate gross
management revenues for the prior year over a base amount of $325.0 million.
CCA RIGHT TO PURCHASE AGREEMENT
Effective January 1, 1999, the Company and Prison Realty entered into a
Right to Purchase Agreement (the "CCA Right to Purchase Agreement") pursuant
to which the Company granted to Prison Realty the right to acquire and lease
back to the Company at fair market rental rates, any correctional or
detention facility acquired or developed and owned by the Company in the
future for a period of ten years following the date inmates are first
received at such facility. The initial annual rental rate on such facilities
will be the fair market rental rate as determined by the Company and Prison
Realty. Additionally, the Company granted Prison Realty the right of first
refusal to acquire any Company-owned correctional or detention facility
should the Company receive an acceptable
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third party offer to acquire any such facility. The Company sold no
facilities to Prison Realty during the year ended December 31, 1999 under
the CCA Right to Purchase Agreement.
CCA SERVICES AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company entered
into a services agreement (the "CCA Services Agreement") with Prison Realty
pursuant to which the Company agreed to serve as a facilitator of the
construction and development of additional facilities on behalf of Prison
Realty for a term of five years from the date of the CCA Services Agreement.
In such capacity, the Company will perform, at the direction of Prison
Realty, such services as are customarily needed in the construction and
development of correctional and detention facilities, including services
related to construction of the facilities, project bidding, project design
and governmental relations. In consideration for the performance of such
services by the Company, Prison Realty agreed to pay a fee equal to 5% of
the total capital expenditures (excluding the incentive fee discussed below
and the 5% fee herein referred to) incurred in connection with the
construction and development of a facility, plus an amount equal to
approximately $560 (five hundred sixty dollars) per bed for facility
preparation services provided by the Company prior to the date on which
inmates are first received at such facility. The Company may receive
payments up to an additional 5% of the total capital expenditures (as
determined above) from Prison Realty if additional services are requested by
Prison Realty. The Company has received a fee of 10% on a majority of the
construction and development services provided to Prison Realty. Amounts
that exceed the reimbursement of actual costs incurred by the Company on
facilities the Company will lease from Prison Realty are being deferred and
amortized as reductions in lease expense over the terms of the respective
leases. The Company billed $41.6 million in fees under the CCA Services
Agreement for the year ended December 31, 1999, of which $39.4 million had
been collected as of December 31, 1999. The Company recognized $8.1 million
as revenues for services provided on projects where the Company does not
lease the facility from Prison Realty, $5.6 million as a reduction in
operating expenses, and deferred $27.9 million as deferred credits, of which
$0.1 million was amortized as a reduction in lease expense.
TENANT INCENTIVE AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company entered
into a tenant incentive agreement with Prison Realty pursuant to which
Prison Realty agreed to pay the Company an incentive fee to induce the
Company to enter into leases with respect to those facilities developed and
facilitated by the Company. The amount of the incentive fee was initially
set at $840 (eight hundred forty dollars) per bed for each facility leased
by the Company where the Company has served as developer and facilitator. On
May 4, 1999, Prison Realty and the Company entered into an amended and
restated tenant incentive agreement (the "Amended and Restated Tenant
Incentive Agreement"), effective as of January 1, 1999, providing for (i) a
tenant incentive fee of up to $4,000 (four thousand dollars) per bed payable
with respect to all future facilities developed and facilitated by the
Company, as well as certain other facilities which, although operational on
January 1, 1999, had not achieved full occupancy, and (ii) an $840 (eight
hundred forty dollars) per bed allowance for all beds in operation at the
beginning of January 1999, approximately 21,500 (twenty-one thousand five
hundred) beds, that were not subject to the tenant allowance in the first
quarter of 1999. The term of the Amended and Restated Tenant Incentive
Agreement is four years unless extended upon the written agreement of the
Company and Prison Realty. The incentive fees received by the Company are
being deferred and amortized as reductions in lease expense over the terms
of the respective leases. The Company received $68.6 million in tenant
incentive fees under
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the Amended and Restated Tenant Incentive Agreement for the year ended
December 31, 1999. The Company amortized $4.1 million as reductions in lease
expense, with $64.5 million remaining in deferred credits at December 31,
1999.
BUSINESS DEVELOPMENT AGREEMENT
Effective January 1, 1999, the Company entered into a business development
agreement (the "Business Development Agreement") with Prison Realty which
provides that the Company will perform, at the direction of Prison Realty,
services designed to assist Prison Realty in identifying and obtaining new
business. Such services include, but are not limited to, marketing and other
business development services designed to increase awareness of Prison
Realty and the facility development and construction services it offers,
identifying potential facility sites and pursuing all applicable zoning
approvals related thereto, identifying potential tenants for Prison Realty's
facilities and negotiating agreements related to the acquisition of the new
facility management contract for Prison Realty's tenants. Pursuant to the
Business Development Agreement, Prison Realty will also reimburse the
Company for expenses related to third-party entities providing government
and community relations services to the Company, in connection with the
provision of the business development services described above. In
consideration for the Company's performance of the business development
services, and in order to reimburse the Company for the third-party
government and community relations expenses described above, Prison Realty
has agreed to pay the Company a total fee equal to 4.5% of the total capital
expenditures (excluding the amount of the tenant incentive fee and the
services fee discussed above as well as the 4.5% fee referred to herein)
incurred in connection with the construction and development of each new
facility, or the construction and development of an addition to an existing
facility, for which the Company performed business development services. The
term of the Business Development Agreement is four years unless extended
upon the written agreement of the Company and Prison Realty. The business
development fees received by the Company are being deferred and amortized as
reductions in lease expense over the terms of the respective leases. The
Company received $15.0 million in fees under the Business Development
Agreement for the year ended December 31, 1999. The Company amortized $0.2
million as reductions in lease expense, with $14.8 million remaining in
deferred credits at December 31, 1999.
3. LIQUIDITY CONCERNS AND PROPOSED MERGER
The Company incurred a net loss of $202.9 million for the year ended
December 31, 1999, has negative working capital of $169.8 million at
December 31, 1999 and has a net stockholders' deficit of $180.8 million at
December 31, 1999.
At December 31, 1999, the Company was in violation of certain provisions of
its revolving credit facility (the "New Credit Facility"), including failure
to comply with a financial covenant pertaining to the Company's net worth.
The default could cause further borrowings under the New Credit Facility to
be limited or totally suspended and the due date of the outstanding
borrowings may be accelerated. The amount outstanding under the New Credit
Facility at December 31, 1999 was $16.2 million.
Rental payments of $24.9 million due to Prison Realty from the Company under
the CCA Leases were unpaid as of December 31, 1999, while the terms of the
CCA Leases provide that rental payments were due and payable on December 25,
1999. The terms of the CCA Leases provide that
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it shall be an event of default if the Company fails to pay any installment
of rent within 15 days after notice of nonpayment from Prison Realty. The
terms of the CCA Leases provide that Prison Realty has certain rights in
the event of default, including the right to require the Company to
relinquish the leased facilities. As of March 29, 2000, Prison Realty has
not provided a notice of nonpayment to the Company and the amount of unpaid
rentals related to 1999 totals $12.0 million. In addition, unpaid rentals
related to periods subsequent to December 31, 1999 total approximately $77.7
million (unaudited) at March 29, 2000.
As a result of the Company's current liquidity position, the Company has
been required to defer the first scheduled payment of accrued interest on
the $137.0 million Promissory Note payable to Prison Realty by the Company,
which was due on December 31, 1999. Pursuant to the terms of a subordination
agreement, dated as of March 1, 1999, by and between Prison Realty and the
agent of the Company's New Credit Facility, the Company is prohibited from
making scheduled interest payments on the Promissory Note if certain
financial covenants relating to the Company's liquidity position are not
met. On December 31, 1999, the Company was not in compliance with these
financial covenants. Accordingly, the Company was prohibited from making the
scheduled interest payment. Pursuant to the terms of the subordination
agreement, Prison Realty is prohibited from accelerating the principal
amount of the Promissory Note or taking any other action to enforce its
rights under the provisions of the Promissory Note for so long as the New
Credit Facility remains outstanding. However, the amount due under the
Promissory Note has been classified as a current liability in the
accompanying consolidated balance sheet at December 31, 1999, since the
Company is in default under the Promissory Note's existing terms.
Prison Realty, the Company's lessor, is also not in compliance with certain
of its debt convenants. In order to address the liquidity and capital needs
of both the Company and Prison Realty, the boards of directors of the
Company and Prison Realty, as well as the boards of directors of two related
service companies, Prison Management Services, Inc. ("PMSI") and Juvenile
and Jail Facility Management Services, Inc. ("JJFMSI") approved the
formation of a special coordinating committee to monitor the financial
situation of both Prison Realty and the Company and to coordinate with the
companies' advisors regarding the consideration of strategic alternatives.
Based on the strategic alternatives considered, (i) the Company's Board of
Directors has approved a proposed merger with Prison Realty, (ii) the
Company and Prison Realty currently intend to amend the terms of the CCA
Leases and the terms of various other agreements between the Company and
Prison Realty, and (iii) the Company is negotiating to obtain waivers of the
default under the New Credit Facility, all of which are discussed in more
detail below. In addition, Prison Realty is in separate negotiations with
one or more groups of investors to make an equity investment in Prison
Realty (the "Potential Prison Realty Equity Investment"), and currently
expects that the completion of the proposed merger will be a condition to
the Potential Prison Realty Equity Investment.
As discussed above, the Company's Board of Directors has approved a proposed
merger and related transactions pursuant to which the Company will combine
with Prison Realty, and the two related service companies, PMSI and JJFMSI
(the "Proposed Merger"). The boards of directors of Prison Realty, PMSI, and
JJFMSI have also approved the Proposed Merger, which is subject to
shareholder approval by each entity's stockholders.
The terms of the Proposed Merger specify that non-outside investor
shareholders of the Company will obtain the right to receive shares of
Prison Realty common stock valued at approximately $10.6 million in exchange
for shares of the Company that those shareholders own at the consummation of
the Proposed Merger. Immediately prior to the Proposed Merger, the outside
investors holding shares of the Company will receive approximately $16.0
million in cash from Prison Realty for the sale of shares of the Company
common stock held by those outside investors. Additionally, the
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terms of the Proposed Merger specify that the $137.0 million Promissory Note
due to Prison Realty will be valued at the carrying amount as consideration
in the Proposed Merger.
Approval of the Proposed Merger requires the affirmative vote of 80% of the
outstanding shares of the Company's common stock (class A and class B voting
together as a single class). Management anticipates that a special meeting
of the shareholders of the Company will be held for the purpose of voting
upon the Proposed Merger. In addition, pursuant to the terms of an agreement
between the Company and a shareholder, Baron Capital Group, Inc, ("Baron"),
the Proposed Merger must be approved separately by Baron. A purported class
action lawsuit has been filed against Prison Realty seeking an injunction
preventing the completion of the Proposed Merger and the Potential Prison
Realty Equity Investment.
In an effort to address the Company's liquidity needs prior to the Proposed
Merger, Prison Realty and the Company currently intend to amend the terms of
the CCA Leases. Pursuant to this proposed amendment, rent will be payable on
each June 30 and December 31, instead of monthly. In addition, the proposed
amendment provides that the Company is required to make certain scheduled
monthly installment payments to Prison Realty from January 1, 2000 through
June 30, 2000. Approximately $12.9 million was paid February 14, 2000, and
future payments are anticipated to be $12.0 million due in April 2000, $4.0
million due April 30, 2000, $6.0 million due May 31, 2000 and $8.0 million
due June 30, 2000. At the time these installment payments are made, the
Company will also be required to pay interest to Prison Realty upon such
payments at a rate equal to the then current interest rate under the New
Credit Facility. These installment payments represent the Company's December
1999 lease payments and a portion of the rent accruing from January 1, 2000
to June 30, 2000. The accrued but unpaid rent which will have accrued at
June 30, 2000, totaling $137.3 million, shall be due and payable on June 30,
2000.
Prison Realty and the Company also currently intend to amend certain
agreements (the Business Development Agreement, the CCA Services Agreement
and the Amended and Restated Tenant Incentive Agreement) between Prison
Realty and the Company to provide for the deferral of the payment of all
fees under these agreements by Prison Realty to the Company until September
30, 2000.
The terms of the Company's New Credit Facility provide that the Company
shall not amend or modify the terms of the CCA Services Agreement, the
Amended and Restated Tenant Incentive Agreement and the Business Development
Agreement in any manner which is on terms and conditions less favorable to
the Company than are in effect immediately prior to such amendment or
modification. If the proposed amendments to these agreements are completed,
these actions will be in violation of the New Credit Facility. The terms of
the New Credit Facility also provide that the execution of the Proposed
Merger agreement in December 1999 resulted in an event of default under the
New Credit Facility.
The Company has initiated discussions with the agent of the New Credit
Facility, and has requested the consent of the requisite percentage of its
participating lenders for a waiver of the restrictions relating to: (i) the
amendment of Prison Realty's agreements with the Company; (ii) the execution
of the Proposed Merger, (iii) the Company's deferral of certain payments
under the CCA Leases and (iv) the financial covenants concerning the
Company's net worth. The Company has requested that the waivers remain in
effect until the earlier of July 31, 2000 or the completion of the Potential
Prison Realty Equity Investment and Proposed Merger.
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There can be no assurance that the requisite participating lenders under the
New Credit Facility will consent to the proposed waivers of the New Credit
Facility or will not seek to declare an event of default prior to such date.
In the event the Company is unable to obtain the necessary waivers or to
comply with and maintain the proposed waivers, the participating lenders are
entitled, at their discretion, to exercise certain remedies, including
acceleration of the outstanding borrowings and suspension of further
borrowings under the New Credit Facility. Upon the occurrence and during the
continuation of a default, the terms of the New Credit Facility allow the
lenders to increase the current interest rate (Prime plus 2.5%) by an
additional 3.0% to a default rate. As of March 29, 2000, the lenders have
not notified the Company of an event of default, and the Company is not
currently subject to the default rate. If the participating lenders elect to
exercise their rights to accelerate the Company's obligations under the New
Credit Facility, and/or if the participating lenders do not consent to the
proposed waivers, such events would have a material adverse effect on the
Company's liquidity and financial position. The Company does not have
sufficient working capital in the event of an acceleration of the due dates
of the New Credit Facility.
In addition to requiring the consent of the Company's lenders, the
completion of the proposed amendments described above are also subject to
the consent of Prison Realty's lenders. No assurance can be given that such
consents will be obtained or that Prison Realty's lenders will not seek to
declare an event of default prior to the effectiveness of the consents. If
Prison Realty does not obtain the proposed waivers and consents, Prison
Realty's lenders could exercise certain remedies including the acceleration
of Prison Realty's outstanding borrowings.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do not
reflect any adjustments that might result if the Company is unable to
continue as a going concern. The Company's outstanding amounts due to Prison
Realty, recent net losses, negative cash flows from operations, negative
working capital and net stockholders' deficit, along with existing defaults
under its New Credit Facility and the Promissory Note raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the amount
and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
4. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company had no operations prior to January 1, 1999. As such, the
accompanying consolidated financial statements represent the Company's
consolidated financial position as of December 31, 1999 and 1998, the
related consolidated statement of operations for the year ended December 31,
1999, and the Company's consolidated cash flows and consolidated activity in
stockholders' equity for the year ended December 31, 1999, and for the
period from September 11, 1998 (inception) through December 31, 1998. All
material intercompany balances have been eliminated in consolidation.
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CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized on a straight-line basis over the life of
the related debt. This amortization is charged to interest expense.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized;
other repairs and maintenance are expensed. The cost and accumulated
depreciation applicable to assets retired are removed from the accounts and
the gain or loss on disposition is recognized in income. Depreciation is
computed by the straight-line method for financial reporting purposes and
accelerated methods for tax reporting purposes based upon the estimated
useful lives of the related assets.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." This statement generally requires the Company to record deferred
income taxes for the differences between book and tax bases of its assets
and liabilities.
MANAGEMENT CONTRACTS
In connection with the acquisition of management contracts discussed in Note
2, the Company obtained contracts with various governmental entities to
manage their facilities for fixed per diem rates. These contracts usually
contain expiration dates with renewal options ranging from annual to
multi-year renewals. The Company expects to renew these contracts for
periods consistent with the remaining renewal options allowed by the
contracts or other reasonable extensions. Fixed per diem revenue is recorded
based on the per diem rate multiplied by the number of inmates housed during
the respective period. The Company recognizes any additional management
service revenues when earned or awarded by the respective authorities.
START-UP COSTS
In accordance with the AICPA's Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities," the Company expenses all start-up costs as
incurred in operating expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Company calculates the fair value of
financial instruments using quoted market prices. At December 31, 1999,
there were no material differences in the book values of the Company's
financial instruments and their related fair values as compared to similar
financial instruments.
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USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company
continually evaluates the recoverability of the carrying values of its
long-lived assets when events suggest that an impairment may have occurred.
In these circumstances, the Company utilizes estimates of undiscounted cash
flows to determine if an impairment exists.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that changes in the
amounts of certain items, including gains and losses on certain securities,
be shown in the financial statements. The provisions of SFAS No. 130 had no
impact on the Company's results of operations as comprehensive loss was
equivalent to the Company's reported net loss for the year ended December
31, 1999.
SEGMENT DISCLOSURES
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business
enterprises or other enterprises that are required to file financial
statements with the Securities & Exchange Commission report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company operates in one industry segment and the provisions
of SFAS No. 131 have no significant effect on the Company's disclosures.
NEWLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective,
as amended, for fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires all derivatives to be
recognized in the statement of financial position and to be measured at fair
value. The Company anticipates adopting the provisions of SFAS No. 133
effective January 1, 2001 and does not believe the adoption of SFAS No. 133
will have a material impact on the Company's consolidated financial position
or results of operations.
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RECLASSIFICATIONS
Certain reclassifications of 1998 amounts have been made to conform with the
1999 presentation.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
DECEMBER 31,
-----------------------
1999 1998
-------- -------
(IN THOUSANDS)
Land $ 4,303 $ 4,303
Building improvements 6,815 10,348
Equipment 9,629 6,689
Office furniture and fixtures 2,888 2,585
Construction in progress 79 743
-------- -------
23,714 24,668
Less accumulated depreciation (3,755) --
-------- -------
$ 19,959 $24,668
======== =======
Depreciation expense was $3.8 million for the year ended December 31, 1999.
6. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31,
-------------------
1999 1998
------ ------
(IN THOUSANDS)
Debt issuance costs $3,442 $2,619
Prepaid rent to a government entity 3,116 4,477
Other assets 2,174 1,881
------ ------
$8,732 $8,977
====== ======
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7. PROMISSORY NOTE AND CREDIT FACILITY
The Promissory Note of $137.0 million is payable to Prison Realty over 10
years and bears interest at 12% per annum. Interest only is payable for the
first four years and the principal is payable over the following six years.
The Chief Executive Officer of the Company has personally guaranteed payment
of 10% of the outstanding principal amount. The original contractual
maturities of the Promissory Note for the next five years and thereafter
are: 2000 - $0; 2001 - $0; 2002 - $0; 2003 - $22.8 million, 2004 - $22.8
million and thereafter - $91.3 million; however, due to the existing
default, these maturities may be accelerated as discussed in Note 3.
At December 31, 1998, the Company had obtained a revolving credit facility
(the "Old Credit Facility") providing for borrowings up to $30.0 million.
The Old Credit Facility's terms required interest at LIBOR plus 4.0%. The
Old Credit Facility could be used for working capital and letters of credit.
The Company had made no draws under the Old Credit Facility as of December
31, 1998.
On March 1, 1999, the Company obtained the New Credit Facility which
provides for borrowings up to $100.0 million and bears interest at Prime
plus 2.50%. The New Credit Facility replaced the $30.0 million Old Credit
Facility in place at December 31, 1998. Prior to obtaining the New Credit
Facility, the Company had made no draws under the Old Credit Facility. The
deferred debt issuance costs totaling $2.7 million related to the Old Credit
Facility were charged to interest expense upon replacement of that credit
facility. Borrowings outstanding under the New Credit Facility are
considered short-term obligations as the New Credit Facility requires the
Company to maintain a lock-box with the lender whereby all receipts are
applied to reduce any borrowings outstanding. At December 31, 1999, there
was $16.2 million outstanding on the New Credit Facility. The New Credit
Facility expires on June 1, 2002.
As discussed in Note 3, at December 31, 1999, the Company was in violation
of several provisions of the New Credit Facility including failure to comply
with a financial covenant which required the Company's net worth to be
greater than negative $105.0 million and the execution of the Proposed
Merger agreement. The defaults could cause repayment of the Company's
outstanding borrowings to be accelerated and could result in a higher
default rate of interest, as discussed in Note 3. The Company has initiated
discussions with the agent of the New Credit Facility, and has requested the
consent of the requisite percentage of its participating lenders for a
waiver of the restrictions relating to: (i) the amendment of Prison Realty's
agreements with the Company, (ii) the execution of the Proposed Merger, and
(iii) the Company's deferral of certain payments under the CCA Leases. The
Company has also requested the consent of such lenders with respect to a
waiver of the financial covenant concerning the Company's net worth
described above. The Company has requested that the waiver remain in effect
until the earlier of July 31, 2000 or the completion of the Potential Prison
Realty Equity Investment and the Proposed Merger.
Interest expense, net, is comprised of the following for the year ended
December 31, 1999 (in thousands):
Interest expense $ 20,974
Interest income (500)
---------
$ 20,474
=========
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8. INCOME TAXES
Deferred income taxes reflect the net tax effects 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 ability to generate taxable income
within the net operating loss carryforward period. Management has considered
these factors in reaching its conclusion as to the valuation allowance for
financial reporting purposes. Significant components of the Company's
deferred tax assets at December 31, 1999 are as follows (in thousands):
Current Deferred Tax Assets:
Asset reserves and liabilities not yet deductible for tax $ 3,059
--------
Total current deferred tax assets 3,059
Less valuation allowance (3,059)
--------
Net current deferred tax assets $ --
========
Noncurrent Deferred Tax Assets:
Deferred lease incentives and service fees $ 41,757
Tax over book basis of certain assets 927
Net operating loss carryforwards 32,588
--------
Total noncurrent deferred tax assets 75,272
Less valuation allowance (75,272)
--------
Net noncurrent deferred tax assets $ --
========
Due to the Company's recent operating losses, there is significant
uncertainty about the Company's ability to generate sufficient taxable
income in the future to realize the deferred tax assets. In accordance with
SFAS No. 109, the Company has provided a valuation allowance at December 31,
1999 to fully reserve the deferred tax assets. At December 31, 1999, the
Company had net operating loss carryforwards for income taxes totaling $83.6
million available to offset future taxable income.
The carryforward period expires in 2019.
The following summarizes the change in the valuation allowance for the year
ended December 31, 1999 (in thousands):
Valuation allowance at January 1, 1999 $ --
Valuation allowance at December 31, 1999 78,331
---------
Increase in valuation allowance $ 78,331
=========
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9. ADMINISTRATIVE SERVICES AGREEMENTS
On January 1, 1999, the Company entered into administrative service
agreements with two separately owned, newly formed companies, PMSI and
JJFMSI, pursuant to which employees of the Company's administrative
departments perform administrative services (including, but not limited to
operational support, legal, finance, management information systems and
government relations services), as needed, for each of the two companies. In
connection therewith, the Company granted each of the two companies the
right to use the name "Corrections Corporation of America" in connection
with the servicing of management contracts. As consideration for the
foregoing, the Company received administrative service fees of $0.25 million
per month from each company for a total of $6.0 million for the year ended
December 31, 1999. The Company has recognized these amounts as revenues in
the statement of operations.
10.STOCKHOLDERS' EQUITY
Preferred Stock -
During 1998, the Company authorized 50.0 million shares of $0.01 (one cent)
par value preferred stock. At December 31, 1999 and 1998, no preferred stock
was issued or outstanding.
Common Stock -
On September 22, 1998, the Company issued 5.0 million shares of Class A
voting common stock to certain employees of Old CCA and Prison Realty who
were also founding shareholders of the Company. Neither the Company nor Old
CCA received any proceeds from the issuance of these shares. However, Old
CCA recorded compensation expense of $22.9 million in 1998 for the implied
fair value of the 5.0 million common shares. The fair value of these common
shares was determined at the date of the 1999 Merger based upon the fair
value of the Company derived from the $16.0 million cash investments in the
Company made by outside investors at December 31, 1998, as discussed in Note
1.
Additionally, on September 22, 1998, the Company issued 0.8 million
restricted shares of Class A voting common stock to certain wardens of Old
CCA facilities. The shares held by the wardens are restricted and will vest
if, and only if, the wardens remain employees of the Company through
December 31, 2003. The Company is expensing the implied fair value
(approximately $3.9 million) of these restricted securities over the
respective vesting period. The implied fair value of these common shares was
also derived from the $16.0 million cash investments in the Company made by
outside investors at December 31, 1998, as discussed in Note 1.
As discussed in Note 1, the Company sold 3.5 million shares of Class A
voting common stock to outside investors immediately prior to the 1999
Merger. The net proceeds of $16.0 million were used for general working
capital purposes.
Stock Warrants -
In connection with the Company's Old Credit Facility, on December 31, 1998,
the Company issued 0.5 million warrants to purchase Class A common shares as
part of the debt issuance costs associated with obtaining the Old Credit
Facility. The warrants were issued with an exercise price
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of $4.57 per warrant and an expiration date of December 31, 2008. The
warrants are exercisable from the date of issuance. The Company determined
the fair value of the warrants issued to be approximately $0.6 million
utilizing the Black-Scholes option-pricing model and recorded the cost as
debt issuance cost within other noncurrent assets on the accompanying
consolidated balance sheets. These debt issuance costs were charged to
interest expense upon replacement of the Old Credit Facility as described in
Note 7. At December 31, 1999 and 1998, all stock warrants remained
outstanding.
11.RETIREMENT PLAN
On December 28, 1998, the Company adopted a 401(k) plan (the "Plan") for all
eligible employees as defined in the plan documents. The Board of Directors
has discretion in establishing the amount of the Company's contributions.
The Company's contributions become 40% vested after four years of service
and 100% vested after five years of service, and the vested portions are
paid on death, retirement or termination. The CCA Employee Stock Ownership
Plan merged with the Plan in 1999. The Company's contributions to the Plan
amounted to $4.6 million for the year ended December 31, 1999.
12.COMMITMENTS AND CONTINGENCIES
All of the Company's leases of its facilities and certain equipment from
Prison Realty are under long-term operating leases expiring through the year
2011. The contractual minimum lease commitments (excluding acceleration or
demand provisions) under existing terms for noncancelable leases are as
follows (in thousands):
YEAR AMOUNT
---- ------
2000 $ 310,651
2001 310,651
2002 310,651
2003 310,651
2004 310,651
Thereafter 1,890,193
----------
Total $3,443,448
==========
As discussed in Note 3, the terms of the CCA Leases provide that it shall be
an event of default if the Company fails to pay any installment of rent
within 15 days after notice of nonpayment from Prison Realty. Approximately
$12.0 million in unpaid rentals related to 1999 exist as of March 29, 2000
as well as approximately $77.7 million (unaudited) in unpaid rentals related
to periods subsequent to December 31, 1999. The terms of the CCA Leases
provide that Prison Realty could require the Company to relinquish the
leased facilities in the event of default. However, as of March 29, 2000,
Prison Realty has not provided a notice of nonpayment to the Company.
The Company has been named as one of the defendants in a purported class
action lawsuit filed by a Prison Realty shareholder against Prison Realty,
the Company and Prison Realty's directors. The lawsuit alleges, among other
things, certain violations of the Prison Realty directors' fiduciary
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duties in connection with the approval of certain payments to the Company.
The Company is continuing to investigate the allegations and an outcome is
not determinable as of March 29, 2000.
Subsequent to year end, the Company was named as one of the defendants in a
purported class action lawsuit alleging that the telephone services at
prisons owned or run by the defendants result in charges for collect calls
placed by inmates that are unconscionably high. Due to the recent filing of
this purported class action lawsuit, an outcome is not determinable as of
March 29, 2000.
In addition to the above legal matters, the nature of the Company's business
results in claims and litigation alleging that the Company is liable for
damages arising from the conduct of its employees or others. In the opinion
of management, other than the outstanding litigation discussed above, there
are no pending legal proceedings that would have a material effect on the
consolidated financial position or results of operations of the Company for
which the Company has not established adequate reserves.
Each of the Company's management contracts and the statutes of certain
states require the maintenance of insurance. The Company maintains various
insurance policies including employee health, worker's compensation,
automobile liability and general liability insurance. These policies are
fixed premium policies with various deductible amounts that are self-funded
by the Company. Reserves are provided for estimated incurred claims within
the deductible amounts.
13.CONCENTRATION OF CREDIT RISK
Approximately 97% of the Company's revenues for the year ended December 31,
1999, relate to amounts earned from federal, state and local governmental
management and transportation contracts.
The Company had revenues of 25% from the federal government and 62% from
state governments for the year ended December 31, 1999 for management
contracts. Two federal agencies accounted for revenues of 11% and 10% and
one state government accounted for revenues of 11% for the year ended
December 31, 1999 for management contracts.
Substantially all of the Company's accounts receivable are due from federal,
state and local governments at December 31, 1999 and 1998.
Salaries and related benefits represented 58% of operating expenses for the
year ended December 31, 1999.
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14. QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly financial information for each of the quarters in the
year ended December 31, 1999 is as follows (in thousands):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- --------- --------- --------- ---------
Revenues $ 112,363 $ 122,985 $ 129,874 $ 134,070 $ 499,292
Operating loss (60,518) (55,923) (63,512) (2,491)(b) (182,444)
--------- --------- --------- --------- ---------
Net loss $ (39,766) $ (37,262) $(118,346)(a) $ (7,544)(b) $(202,918)
========= ========= ========= ========= =========
(a) The net loss in the third quarter reflects the Company's decision that
previously reported income tax benefits of $50.3 million related to its
1999 losses should be fully reserved.
(b) The operating loss and net loss in the fourth quarter were substantially
lower than the first three quarters due to changes in the terms of the
CCA Leases which allowed the Company to reverse previously recorded
straight line rent accruals of $56.9 million.
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To Prison Realty Trust, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Prison Realty Trust, Inc. as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included in this Annual Report on Form 10-K and have issued our report
thereon dated March 27, 2000. Our audit was made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
financial statement schedule listed in the accompanying index is the
responsibility of Prison Realty Trust, Inc.'s management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and
regulations under the Securities and Exchange Act of 1934 and is not a required
part of the basic consolidated financial statements. The financial statement
schedule has been subjected to the auditing procedures applied in the audit of
the basic consolidated financial statements and, in our opinion, fairly states,
in all material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 27, 2000
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SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
Costs
Capitalized Subsequent
Initial Cost to Acquisition
------------------------- ----------------------
Buildings, Buildings,
Improvements, Improvements,
Equipment, Equipment,
Construction in Construction in
Properties by State Encumbrances Land Progress Land Progress
- ---------------------------------- ------------ ------- --------------- ---- ---------------
Texas (9 properties) Note 1 $ 2,930 $ 275,059 $559 $ 4,959
Oklahoma (4 properties) Note 1 826 225,572 -- 7,998
Kentucky (4 properties) - Note 4 Note 1 1,818 25,028 -- 33,489
Tennessee (5 properties) Note 1 15,485 114,052 -- 2,948
New Mexico (3 properties) Note 1 1,376 88,618 403 23,813
Arizona (3 properties) Note 1 2,688 401,666 -- 1,462
Colorado (3 properties) Note 1 956 78,978 -- 18,665
Georgia (5 properties) Note 1 1,297 154,058 -- --
California (4 properties) Note 1 3,699 231,824 -- --
North Carolina (2 properties) Note 1 406 83,448 -- --
Ohio (2 properties) Note 1 1,507 163,967 -- 2,215
All Other States (7 properties) Note 1 3,462 194,026 -- 873
properties)
United Kingdom (1 property) Note 1 -- 88,151 -- --
------- ---------- ---- ----------
$36,450 $2,124,447 $962 $ 96,422
======= ========== ==== ==========
Total Historical Cost at
December 31, 1999
--------------------------------------
Life on
Buildings, which
Improvements, depreciation
Equipment, in latest
Construction in Accumulated Date of Date income statement
Properties by State Land Progress Total Depreciation Construction Acquired is prepared
- ---------------------------------- ------- --------------- ---------- ------------ ------------ -------- ----------------
Texas (9 properties) $ 3,489 $ 280,018 $ 283,507 $ 7,141 Note 2 Note 2 Note 3
Oklahoma (4 properties) 826 233,570 234,396 5,599 Note 2 Note 2 Note 3
Kentucky (4 properties) - Note 4 1,818 58,517 60,335 1,293 Note 2 Note 2 Note 3
Tennessee (5 properties) 15,485 117,000 132,485 7,197 Note 2 Note 2 Note 3
New Mexico (3 properties) 1,779 112,431 114,210 3,166 Note 2 Note 2 Note 3
Arizona (3 properties) 2,688 403,128 405,816 7,737 Note 2 Note 2 Note 3
Colorado (3 properties) 956 97,643 98,599 4,497 Note 2 Note 2 Note 3
Georgia (5 properties) 1,297 154,058 155,355 2,252 Note 2 Note 2 Note 3
California (4 properties) 3,699 231,824 235,523 802 Note 2 Note 2 Note 3
North Carolina (2 properties) 406 83,448 83,854 2,348 Note 2 Note 2 Note 3
Ohio (2 properties) 1,507 166,182 167,689 4,104 Note 2 Note 2 Note 3
All Other States (7 properties) 3,462 194,899 198,361 3,649 Note 2 Note 2 Note 3
United Kingdom (1 property) -- 88,151 88,151 -- Note 2 Note 2 Note 3
------- ---------- ---------- ----------
$37,412 $2,220,869 $2,258,281 $ 49,785
======= ========== ========== ==========
Note 1 - All facilities are pledged as security under the Company's secured bank
credit facility. The outstanding balance on the secured bank credit
facility was $928.2 million at December 31, 1999.
Note 2 - Individual facility profiles are included in Part I, Item 2.
Note 3 - The Company has elected depreciable lives of 50 years for buildings and
improvements and 5 to 10 years for equipment.
Note 4 - During the year ended December 31, 1999, in accordance with the
provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of", the Company recorded an aggregate impairment loss
of $76.4 million on three of its correctional and detention facilities
in the state of Kentucky. The Company reduced the carrying values of
these properties to their estimated fair values, as determined based on
anticipated future cash flows.
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The following schedule is a reconciliation of the total changes in cost
of real estate properties and accumulated depreciation for the year ended
December 31, 1999.
Accumulated
Historical Cost Depreciation
--------------- ------------
Balance, December 31, 1998 $ 637,640 $ 10,251
Old Prison Realty Merger 1,223,371 --
Depreciation expense -- 44,062
Disposals of assets (53,586) (2,882)
Impairment loss (78,079) (1,646)
Additions of property and equipment 528,935 --
----------- -----------
Balance, December 31, 1999 $ 2,258,281 $ 49,785
=========== ===========
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