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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-25245
PRISON REALTY CORPORATION
(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
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
8.0% Series A Cumulative Preferred New York Stock Exchange
Stock, $.01 par value
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 12 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 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 Registrant's Common Stock
held by non-affiliates was approximately $2,140,713,608 as of March 19, 1999,
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
19, 1999 was 113,041,110.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates by reference information from the
definitive Proxy Statement for the Annual Meeting of Stockholders, to be held in
May 1999, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934 no later than
March 31, 1999.
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PRISON REALTY CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I.
1. Business. 2
2. Properties. 22
3. Legal Proceedings. 27
4. Submission of Matters to a Vote of Stockholders. 28
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters. 29
6. Selected Financial Data. 37
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 39
7A. Quantitative and Qualitative Disclosures about Market Risk. 56
8. Financial Statements and Supplementary Data. 57
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 57
PART III.
10. Directors and Executive Officers of the Company. 58
11. Executive Compensation. 58
12. Security Ownership of Certain Beneficial Owners and Management. 58
13. Certain Relationships and Related Transactions. 58
PART IV.
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 59
SIGNATURES.
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PRESENTATION OF PRISON REALTY CORPORATION - EXPLANATORY NOTE
This Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the
"Annual Report") relates to Prison Realty Corporation, a Maryland corporation
(the "Company"). The Company, which was formed in September 1998, began
operations on January 1, 1999 as the result of the completion of the mergers of
Corrections Corporation of America, a Tennessee corporation ("CCA"), and CCA
Prison Realty Trust, a Maryland real estate investment trust ("Prison Realty"),
with and into the Company on December 31, 1998 and January 1, 1999, respectively
(collectively, the "Merger"). Generally, the information presented herein
reflects the completion of the Merger and the current business and operations of
the Company. However, certain information contained herein, including the
Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements, is reported as
of December 31, 1998 and, therefore, reflects the condition of the Company on
that date. As such, this information describes the Company after the completion
of its merger with CCA (the "CCA Merger"), but prior to its merger with Prison
Realty (the "Prison Realty Merger").
The Merger has been legally structured as a common control transfer from CCA to
the Company. For accounting purposes, the Merger has been accounted for as a
reverse acquisition of the Company by CCA and the purchase of Prison Realty by
the Company. As such, CCA has been treated as the acquiring company, and Prison
Realty has been treated as the acquired company, for financial reporting
purposes. Accordingly, as of January 1, 1999, the historical book basis of the
assets, liabilities and shareholders' equity of CCA has become the carrying
value of the assets, liabilities and stockholders' equity of the Company, and
the assets and liabilities of Prison Realty have been recorded on the books of
the Company at their estimated fair value.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
This Annual Report contains or incorporates by reference certain
"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"), which are
intended to be covered by the "safe harbors" created thereby. Those statements
include, but may not be limited to, the discussions of the Company's
expectations concerning its future profitability, operating performance, growth
strategy and its assumptions regarding other matters. Also, when any of the
words "believes," "expects," "anticipates," "intends," "estimates," "plans," or
similar terms or expressions, are used in this Annual Report, forward-looking
statements are being made.
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
stockholder values to differ materially from the Company's expectations. These
risks and uncertainties are disclosed under "Risk Factors" set forth herein, in
the Company's Registration Statement on Form S-3 (Reg. no. 333-70419), filed
with the Securities and Exchange Commission (the "Commission") on January 11,
1999 (the "Registration Statement on Form S-3"), and in "Management's Discussion
and Analysis of Financial Condition and Results of Operation" 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.
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PART I.
ITEM 1. BUSINESS.
BACKGROUND AND FORMATION TRANSACTIONS
THE COMPANY
Effective January 1, 1999, the Company completed the transactions contemplated
by the Amended and Restated Agreement and Plan of Merger, dated September 29,
1998 (the "Merger Agreement"), by and among CCA, Prison Realty and the Company.
The Company intends to operate so as to qualify as a real estate investment
trust, or REIT, for federal income tax purposes commencing with its taxable year
ending December 31, 1999. Currently, the Company is the largest
self-administered and self-managed REIT specializing in acquiring, developing
and owning correctional and detention facilities. As of March 19, 1999, the
Company owned 47 correctional and detention facilities, of which nine new
facilities were under construction, in 17 states, the District of Columbia and
the United Kingdom with a total design capacity in excess of 44,000 beds. As of
March 19, 1999, approximately 30,000 beds were leased under 38 operating leases.
The Company is currently developing 14,000 beds through the construction of the
nine new facilities and the expansion of six currently operating facilities.
As of March 19, 1999, Operating Company, as discussed herein, leased 30 of the
Company's 47 facilities. The Company also leases three of its facilities to
private operators other than Operating Company and leases five of its facilities
to government entities. The Company expects that Operating Company will lease
eight of the nine Company facilities currently under construction. Operating
Company has contracts to manage 38 correctional and detention facilities
currently in operation. Operating Company, together with the Service Companies,
as discussed herein, manage 62 privatized adult facilities in the United States
and 36,589 private beds in the United States. In addition, they have contracts
to operate juvenile facilities with an aggregate design capacity of almost 700
beds.
CCA
Prior to the Merger, CCA was the largest developer and manager of private
correctional and detention facilities worldwide, with facilities in 22 states,
the District of Columbia, Puerto Rico, Australia and the United Kingdom. At the
time of the Merger, CCA had contracts to manage 82 correctional and detention
facilities with a total design capacity of 70,121 beds, of which 70 facilities,
with a total design capacity of 51,223 beds, were in operation, and was in the
process of developing 12 additional facilities. The services provided by CCA to
government agencies included the integrated design, construction and management
of new correctional and detention facilities and the redesign, renovation and
management of older facilities. In addition to providing the fundamental
residential services relating to adult and juvenile inmates, CCA offered a large
variety of rehabilitation and education programs, including basic education,
life skills and employment training and substance abuse treatment. CCA also
provided health care, institutional food services, transportation requirements
and work and recreational programs. In addition, CCA owned TransCor America,
Inc., which provided inmate transportation services for numerous government
agencies.
At the time of the Merger, CCA, through its United Kingdom joint venture, UK
Detention Services, Ltd. ("UKDS"), managed one facility in the United Kingdom
and, through its Australian joint venture, CC Australia, Pty.Ltd. ("CC
Australia"), managed two facilities in Australia and had contracts to provide
inmate transportation services in Australia. In 1994, CCA entered into an
international strategic alliance with Sodexho S.A., a French conglomerate and
predecessor in interest to Sodexho Alliance, S.A.
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("Sodexho"), for the purpose of pursuing prison management business outside the
United States. In connection with the alliance, Sodexho purchased a significant
ownership in CCA and entered into certain agreements with CCA relating to future
financings by CCA and corporate governance and control matters.
PRISON REALTY
Prison Realty was formed in 1997 to acquire and develop correctional and
detention facilities and to lease these facilities to qualified third-party
operators pursuant to long-term leases. Prior to the Merger, Prison Realty was
the largest REIT focusing on the ownership of correctional and detention
facilities. As of December 31, 1998, Prison Realty owned 24 correctional and
detention facilities, with a total design capacity in excess of 18,000 beds, of
which 18 facilities were leased to CCA. Prison Realty operated so as to qualify
as a REIT for federal income tax purposes.
THE MERGER TRANSACTIONS
Pursuant to the terms of the Merger Agreement, each of CCA and Prison Realty was
merged with and into the Company, with the Company being the surviving
corporation. In the Merger, each issued and outstanding share of CCA common
stock, $1.00 par value per share ("CCA Common Stock"), was converted into the
right to receive 0.875 share of common stock, $0.01 par value per share, of the
Company ("Company Common Stock"). Each issued and outstanding common share,
$0.01 par value per share, of Prison Realty ("Prison Realty Common Shares") was
converted into 1.0 share of Company Common Stock. Each issued and outstanding 8%
Series A Cumulative Preferred Share, $0.01 par value per share, of Prison Realty
("Prison Realty Preferred Shares") was converted into 1.0 share of the 8% Series
A Cumulative Preferred Stock, $0.01 par value per share, of the Company
("Company Preferred Stock"). Approximately 105,272,183 shares of Company Common
Stock and 4,300,000 shares of Company Preferred Stock were issued in the Merger.
As a result of the Merger, CCA Common Stock and Prison Realty Common and
Preferred Shares are no longer traded on the New York Stock Exchange (the
"Exchange") or on any other securities exchange or market. On January 4, 1999,
Company Common Stock began trading on the Exchange under the symbol "PZN" and
Company Preferred Stock began trading on the Exchange under the symbol "PZN
PrA."
As a result of the Merger, the Company acquired certain assets from each of CCA
and Prison Realty, including correctional and detention facilities previously
owned by CCA and Prison Realty and ownership of the name "Corrections
Corporation of America." Also as a result of the Merger, the Company succeeded
to CCA's and Prison Realty's rights under certain agreements entered into by the
parties immediately prior to and contemporaneously with the completion of the
Merger. These agreements, and the series of transactions related thereto
(collectively, the "Merger-Related Transactions"), were designed to provide for
the strategic combination of the companies and to enable the Company to meet the
requirements applicable to REITs. The Merger-Related Transactions are summarized
as follows:
- On December 31, 1998, immediately prior to the Prison Realty
Merger and in connection with the CCA Merger, CCA sold to a
newly-formed management company, Correctional Management Services
Corporation, a Tennessee corporation ("Operating Company"), all
of the issued and outstanding capital stock of certain wholly
owned corporate subsidiaries of CCA, certain management contracts
and certain other non-real estate assets related thereto and
entered into the Trade Name Use Agreement with Operating Company,
as defined and discussed below. In
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exchange, CCA received an installment note in the principal
amount of $137.0 million (the "Operating Company Note"), 100% of
the non-voting common stock of Operating Company and certain
additional consideration under the Trade Name Use Agreement. The
non-voting common stock represents approximately a 9.5% economic
interest in Operating Company. The Operating Company 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 Operating Company Note, and the principal will be
amortized over the following six years. Doctor R. Crants,
Chairman of the Board of Directors and Chief Executive Officer of
the Company and a member of the Board of Directors and Chief
Executive Officer of Operating Company, has guaranteed payment of
10% of the outstanding principal amount due under the Operating
Company Note.
- On December 31, 1998, immediately prior to the Prison Realty
Merger and in connection with the CCA Merger, CCA entered into a
service mark and trade name use agreement with Operating Company
(the "Trade Name Use Agreement"). Under the Trade Name Use
Agreement, which has a term of 10 years, CCA granted Operating
Company the right to use the name "Corrections Corporation of
America" and derivatives thereof, subject to the terms and
conditions therein, for a specified fee based, in general, on the
gross revenues of Operating Company. For a more detailed
discussion of the Trade Name Use Agreement, please refer to the
information presented herein under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
- On December 31, 1998, immediately prior to the Prison Realty
Merger and in connection with the CCA Merger, CCA transferred to
Prison Management Services, LLC, a Delaware limited liability
company, certain management contracts and all non-real estate
assets relating to government-owned adult prison facilities
managed by CCA. In exchange, CCA received 100% of the non-voting
membership interest in Prison Management Services, LLC. This
interest obligated Prison Management Services, LLC to make
distributions to CCA equal to 95% of its net income.
- On December 31, 1998, immediately prior to the Prison Realty
Merger and in connection with the CCA Merger, CCA transferred to
Juvenile and Jail Facility Management Services, LLC, a Delaware
limited liability company, certain management contracts and all
non-real estate assets relating to government-owned jails and
juvenile facilities managed by CCA, as well as all of the issued
and outstanding capital stock of those corporate subsidiaries of
CCA constituting its international operations. In exchange, CCA
received 100% of the non-voting membership interest in Juvenile
and Jail Facility Management Services, LLC. This interest
obligated Juvenile and Jail Facility Management Services, LLC to
make distributions to CCA equal to 95% of its net income.
- On January 1, 1999, immediately after the Prison Realty Merger,
Prison Management Services, LLC merged with and into Prison
Management Services, Inc., a Tennessee corporation ("Service
Company A"), with Service Company A as the surviving company. In
connection with this merger, the Company received 100% of the
non-voting common stock of Service Company A. The non-voting
common stock obligates Service Company A to pay dividends to the
Company equal to 95% of its net income.
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- On January 1, 1999, immediately after the Prison Realty Merger,
Juvenile and Jail Facility Management Services, LLC merged with
and into Juvenile and Jail Facility Management Services, Inc., a
Tennessee corporation ("Service Company B"), with Service Company
B as the surviving company. In connection with this merger, the
Company received 100% of the non-voting common stock of Service
Company B. The non-voting common stock obligates Service Company
B to pay dividends to the Company equal to 95% of its net income.
- On January 1, 1999, immediately after the Prison Realty Merger,
all leases between CCA and Prison Realty were cancelled, and the
Company and Operating Company entered into a master lease
agreement (the "Master Agreement to Lease") and leases with
respect to each property owned by the Company and managed by
Operating Company (collectively, the "Operating Company Leases").
The Operating Company Leases have terms of 12 years, which may be
extended at fair market rates for three additional five-year
periods upon the mutual agreement of the Company and Operating
Company. For a more detailed discussion of the Operating Company
Leases, please refer to the information presented herein under
the heading "- Leases and Other Contractual Relationships with
Primary Tenant."
- On January 1, 1999, immediately after the Prison Realty Merger,
the Company and Operating Company entered into a right to
purchase agreement (the "Right to Purchase Agreement") pursuant
to which Operating Company granted to the Company a right to
acquire, and lease back to Operating Company at fair market
rental rates, any correctional or detention facility acquired or
developed and owned by Operating Company in the future for a
period of 10 years following the date inmates are first received
at such facility. Additionally, Operating Company granted the
Company a right of first refusal to acquire any Operating
Company-owned correctional or detention facility should Operating
Company receive an acceptable third party offer to acquire any
such facility. For a more detailed discussion of the Right to
Purchase Agreement, please refer to the information presented
herein under the heading "- Leases and Other Contractual
Relationships with Primary Tenant."
- On January 1, 1999, immediately after the Prison Realty Merger,
the Company entered into a services agreement (the "Services
Agreement") with Operating Company pursuant to which Operating
Company 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 the Services Agreement. For
a more detailed discussion of the Services Agreement, please
refer to the information presented herein under the heading "-
Leases and Other Contractual Relationships with Primary Tenant"
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
- On January 1, 1999, immediately after the Prison Realty Merger,
the Company entered into a tenant incentive agreement (the
"Tenant Incentive Agreement") with Operating Company pursuant to
which the Company will pay to Operating Company an incentive fee
to induce Operating Company to enter into Operating Company
Leases with respect to those facilities developed and facilitated
by
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Operating Company. For a more detailed discussion of the Tenant
Incentive Agreement, please refer to the information presented
herein under the heading "- Leases and Other Contractual
Relationships with Primary Tenant" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
- On January 1, 1999, immediately after the Prison Realty Merger,
each of Service Company A and Service Company B entered into an
administrative services agreement with Operating Company
(collectively, the "Administrative Services Agreements") pursuant
to which employees of Operating Company's administrative
departments perform extensive administrative services (including
but not limited to legal, finance, management information systems
and government relations services), as needed, for the Service
Companies. As consideration for the foregoing, each Service
Company pays Operating Company a management fee of $250,000 per
month. This management fee will be increased annually at the rate
of four percent per year. In addition, Operating Company entered
into a trade name use agreement with each of the Service
Companies under which Operating Company granted to each of the
Service Companies the right to use the name "Corrections
Corporation of America" and derivatives thereof, subject to
specified terms and conditions therein.
RECENT DEVELOPMENTS
BANK CREDIT FACILITY
In connection with the completion of the Merger, the Company obtained a $650.0
million credit facility pursuant to the terms of a 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 (the
"Bank Credit Facility"). The Bank Credit Facility consists of a $400.0 million
revolving credit facility maturing January 1, 2002 (the "Revolving Credit
Facility") and a $250.0 million term loan facility maturing January 1, 2003 (the
"Term Loan Facility"). The Bank Credit Facility, which is secured by
substantially all the assets of the Company, bears interest at a floating rate
calculated from the current London Interbank Offer Rate ("LIBOR") or a base
rate, as may be elected by the Company.
SHELF REGISTRATION
On January 11, 1999, the Company filed the Registration Statement on Form S-3
with the Commission to register an aggregate of $1.5 billion in value of the
Company Common Stock, preferred stock, Common Stock purchase rights, debt
securities and warrants for sale on a continuous or delayed basis. The net
proceeds from the sale of securities under the Registration Statement on Form
S-3 have been and will be used by the Company for general corporate purposes,
including, among others, repaying its obligations as they 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.
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PRIMARY TENANT CREDIT FACILITY
On March 1, 1999, Operating Company obtained a revolving credit facility of up
to $100.0 million pursuant to the terms of a Credit Agreement with Foothill
Capital Corporation (the "Operating Company Credit Facility"). The Operating
Company Credit Facility is secured by substantially all of the assets of
Operating Company, including its trade accounts receivable. The Operating
Company Credit Facility matures March 1, 2003 and bears interest at a floating
rate calculated from the current LIBOR rate or a base rate, as may be elected by
Operating Company. This facility replaced a $30.0 million revolving credit
facility previously obtained by Operating Company with General Electric Capital
Corporation.
CONVERSION OF NOTES BY SODEXHO ALLIANCE, S.A.
On March 8, 1999, the Company, in satisfaction of its obligations under a
forward contract with Sodexho assumed by the Company from CCA in the CCA Merger,
issued a $20.0 million Floating Rate Subordinated, Convertible Note, due March
8, 2004 (the "Sodexho Floating Rate Convertible Note"), 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 certain convertible notes issued to Sodexho in 1994
by CCA and assumed by the Company in the CCA Merger, certain convertible notes
issued to Sodexho in 1996 by CCA and assumed by the Company in the CCA Merger
and the Sodexho Floating Rate Convertible Note into 4,974,937 shares of Company
Common Stock. The Company received no proceeds at conversion from the issuance
of these shares of Company Common Stock to Sodexho. See "Market Price for
Registrant's Common Equity and Related Stockholder Matters-Sale of Unregistered
Securities and Use of Proceeds from Sale of Registered Securities" contained
herein for a more detailed discussion of the Sodexho conversion.
BUSINESS OBJECTIVES AND STRATEGIES
BUSINESS OBJECTIVES
The Company's primary business objectives are to generate increasing returns to
its stockholders through increases in cash flow available for distribution and
to maximize long-term total returns to its stockholders. 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
- Structuring 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.
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BUSINESS STRATEGY
General. The Company believes that it is well positioned to take advantage of
the increasing trend towards privatization. The Company is now 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 Operating Company; (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 the
Service Companies.
The Company's principal business strategy 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 comes from rent payments from leases of correctional and detention
facilities.
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
corrections and detention services as a means of controlling costs and improving
the quality of services.
According to the Private Adult Correctional Facility Census, prepared by the
Private Corrections Project Center for Studies in Criminology and Law,
University of Florida (the "Census"), the design capacity of privately managed
adult correctional and detention facilities worldwide has increased dramatically
since the first privatized facility was opened by 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 185 facilities with a design capacity of 132,572 beds in 1998. The
majority of all private prison management contracts are in the United States.
According to the Census, at December 31, 1997, 159 of the 185 private
correctional facilities were in the United States, with the remaining 26 divided
between Australia, the United Kingdom and South Africa. According to the Census,
the aggregate capacity of private facilities in operation or under construction
rose from 106,940 beds at December 31, 1997, to 132,572 beds at December 31,
1998, an increase of 24%.
The Census reports that at December 31, 1998 there were 31 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 private 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 of inmates housed in
United States federal and state prison and jail facilities increased from
744,208 at December 31, 1985 to 1,802,496 at June 30, 1998, a compound annual
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growth rate of 7.3%. As of June 30, 1998, the BJS reported that one in every 150
United States residents was incarcerated. Further, at least 19 state prison
systems, as well as the federal prison system, are 24% or more over 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 the 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 significant capital resources and its
ability to finance and build facilities in significantly less time than
government entities. The Company believes that it can maintain access to capital
through a conservative capital structure. 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 capital 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 3,000 beds through the expansion
of six of its currently operating facilities. The Company believes
that Operating Company (and other future tenants of the Company) will
continue to attempt to achieve economies of scale through expansions
of existing facilities. The Company intends to provide expansion
space as needed to Operating Company or any of the Company's other
tenants or future tenants.
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Rent Escalations. The current rent schedules under the Company's
leases, including those with Operating Company, provide for a
relatively stable source of cash flow and, with respect to Operating
Company, opportunities to participate in future growth in revenues of
its tenants. The minimum rent for the first year for each facility
under the Operating Company Leases is initially set at a fixed
amount. Thereafter, the minimum rent is expected to escalate by a
percentage equal to the greater of (i) 4%, or (ii) 25% of the
percentage increase in the gross management revenues realized by
Operating Company from such facility, exclusive of any increase
attributable to expansion in the size of or the number of beds in
such facility.
The Company's ability to acquire or develop new facilities or to expand its
existing facilities will depend 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
Leases. Operating Company is the Company's primary tenant, leasing 30 of the
Company's 38 currently operating facilities. In connection with the Merger, the
Company and Operating Company entered into the Operating Company Leases with a
primary term of 12 years (the "Fixed Term") with respect to each facility
currently leased by Operating Company. Each Operating Company 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
"Operating Company Leased Property"). Each Operating Company Lease permits
Operating Company to operate the Operating Company Leased Property only as a
correctional or detention facility. Operating Company has the responsibility in
each Operating Company 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 Operating Company 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") equal to the percentage
of the rent applicable to a particular facility in the preceding year, such
percentage being equal to the greater of (i) 4%, or (ii) the percentage which is
25% of the percentage increase in the gross management revenues realized by
Operating Company from its operations at such facility for the prior year,
exclusive of any increase attributable to expansion in the size of or the number
of beds in such facility. Annual Base Rent and Additional Rent for each
Operating Company Leased Property are payable in monthly installments. The
obligations of Operating Company under each Operating Company Lease are
cross-defaulted to each of the other Operating Company Leases with respect to
payment and certain other defaults. The Company has general recourse to
Operating Company under the Operating Company Leases, although Operating
Company's payment obligations under such Operating Company Leases are not
secured by any assets of Operating Company.
The Operating Company Lease for each facility 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 Operating
Company. Fair market rates for Extended Terms will be determined mutually by the
Company and Operating Company based on their respective analyses of the market
for the relevant facility. The Fixed Term and Extended Terms under each
Operating Company Lease are
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subject to earlier termination upon the occurrence of certain contingencies
described in the Operating Company Lease. Additionally, each Operating Company
Lease may be terminated by the Company, at its option, at any time after the
first five years of the Operating Company Lease, upon 18 months' written notice
to Operating Company.
Each Operating Company Lease is what is commonly known as a "triple-net" lease
or "absolute net" lease, under which Operating Company is to pay the Annual Base
Rent and all additional charges. Under each Operating Company Lease, Operating
Company must, at its sole cost and expense, maintain each Operating Company
Leased Property in good order, repair and appearance and must make structural
improvements or repairs which may be necessary and appropriate to keep such
Operating Company Leased Property in good order, repair and appearance,
excluding ordinary wear and tear. Operating Company, at its sole cost and
expense, may make alterations, additions, changes and/or improvements to each
Operating Company Leased Property with the prior written consent of the Company,
provided that the value and primary intended use of such Operating Company
Leased Property is not impaired. Each Operating Company Lease provides that, at
the request of Operating Company, the Company may make capital additions. In
certain situations, a capital addition to an Operating Company Leased Property
may be made directly by Operating Company 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 Operating Company 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 Operating Company Leases provide that Operating Company may not, without the
prior written consent of the Company, assign, sublease, mortgage, pledge,
hypothecate, encumber or otherwise transfer any Operating Company Lease or any
interest therein with respect to all or any part of the Operating Company Leased
Property.
Other Contractual Relationships. In connection with the Merger, the Company and
Operating Company entered into the Right to Purchase Agreement whereby the
Company has an option to acquire, and lease back to Operating Company at fair
market value, any correctional or detention facility acquired or developed and
owned by Operating Company in the future, for a period of ten 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 Operating Company. Additionally, the Company has a right of first
refusal in the event Operating Company 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 Operating Company or
which is acquired or developed by Operating Company or its subsidiaries in the
future. With respect to a sale of any such facility, if the Company declines to
purchase such facility, Operating Company 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, Operating Company will be free to
obtain first mortgage financing from a third party on terms and conditions no
less favorable to Operating Company than those contained in the third party
offer.
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The Company has also entered into (i) the Services Agreement with Operating
Company pursuant to which Operating Company 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 the Services Agreement, and (ii) the
Tenant Incentive Agreement with Operating Company pursuant to which the Company
will pay to Operating Company an incentive fee to induce Operating Company to
enter into Operating Company Leases with respect to those facilities developed
and facilitated by Operating Company. With respect to the Services Agreement, in
consideration of a fee, Operating Company 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 Tenant Incentive Agreement, the Company has agreed to pay an
incentive fee to Operating Company for each facility leased by Operating Company
for which Operating Company has served as developer and facilitator.
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. The cost of complying with environmental laws
could materially adversely affect the amount of cash available for distribution
by the Company. 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. Each Operating
Company Lease makes various representations and warranties relating to
environmental matters with respect to each Operating Company Leased Property.
Each Operating Company Lease also requires Operating Company to indemnify and
hold harmless the Company and any Operating Company mortgagee from and against
all liabilities, costs and expenses imposed upon or asserted against the Company
or the Operating Company 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 Operating
Company Leased Property.
AMERICANS WITH DISABILITIES ACT
The Company's facilities 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 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 capital
improvements at the facilities. Noncompliance could result in imposition of
fines or an award of damages to private litigants.
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Under the Company=s leases, including the Operating Company Leases, the lessee
is required to make any necessary modifications or improvements to comply with
the ADA. 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.
INSURANCE
Each lease between the Company and its lessees, including the Operating Company
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. Operating
Company currently maintains general liability coverage of $30.0 million. In
addition to the insurance coverage provided by the Company's insurance
requirements under the triple net leases, the Company maintains a general
liability insurance policy of $10.0 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.
EMPLOYEES
The Company did not begin operations until completion of the Merger on January
1, 1999. Therefore, at December 31, 1998, the Company had no employees. As of
March 19, 1999, the Company had 16 full-time employees, all of whom 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 considers its relations with its
personnel to be good.
As of December 31, 1998, Prison Realty had 12 full-time employees, all of whom
were employed at Prison Realty's corporate offices. At December 31, 1998, none
of Prison Realty's employees were subject to a collective bargaining agreement,
and Prison Realty had experienced no labor-related work stoppages and considered
its relations with its personnel to be good. With the exception of one employee,
each employee of Prison Realty became an employee of the Company in the Merger.
Immediately prior to the Merger, CCA employed 13,176 full-time employees and 211
part-time employees. Of such full-time employees, 163 were employed at CCA's
corporate offices and 13,013 were employed at CCA's facilities and its
transportation subsidiary. 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. Each employee of CCA
immediately prior to the Merger became an employee of either Operating Company,
Service Company A or Service Company B in connection with the Merger.
Prior to the Merger, each of the facilities operated under the name "Corrections
Corporation of America" was managed as a separate operational unit by the
facility administrator or warden. All of these facilities followed a
standardized code of policies and procedures. Prior to the Merger, CCA had never
experienced a strike or work stoppage at any of its facilities. In January 1996,
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, CCA entered into an agreement with a union to represent
approximately 60 correctional officers at the Shelby Training Center. In March
1997, CCA assumed management of the DC Correctional Treatment Facility in
Washington, D.C., and CCA agreed to
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recognize organized labor in representing certain employees at this facility. In
December 1998, CCA finalized an agreement with the union to represent
approximately 120 correctional officers and other support services staff. In the
opinion of CCA management, overall employee relations were considered good
immediately prior to the Merger.
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
expects that, in connection with the operation of correctional and detention
facilities, the Company's lessees, including Operating Company, will be parties
to such proceedings. The Company does not believe that such litigation, if
resolved against its lessees, would have a material adverse effect upon its
business or financial position. The Company's leases with its lessees, including
the Operating Company 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. For further discussion
of potential legal proceedings affecting the Company and its tenants, see the
information contained under the heading "- Risk Factors" herein, and, for a
discussion of specific claims to which the Company is a party, including those
claims assumed in the Merger, see the information contained under the heading
"Legal Proceedings" herein.
COMPETITION
The Company's facilities are, and any additional correctional and detention
facilities acquired by the Company will be, subject to competition for inmates
from private prison managers. 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
The Company is subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in certain forward
looking statements contained herein and elsewhere. The following risk factors
identify, among others, those risks as identified by the Company.
THE COMPANY IS SUBJECT TO RISKS INHERENT IN THE CORRECTIONS AND DETENTION
INDUSTRY
General. The Company owns correctional and detention facilities as well as
interests in Operating Company and the Service Companies, companies whose sole
business is the operation and management of these types of facilities. Under the
rules applicable to REITs, the Company cannot operate the facilities it owns,
thus its revenues and its ability to make distributions are dependent on the
ability of its tenants, including Operating Company, to make rental payments and
upon the ability of Operating Company and each of the Service Companies to make
payments to the Company, including dividends, and, with respect to Operating
Company, payments under the Operating Company Note and the Trade Name Use
Agreement. Accordingly, the Company is subject to the following, which are the
primary operating risks generally inherent in the corrections and detention
industry.
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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 payments to the Company. There also exists the risk
that any of Operating Company or the Service Companies may not be able to
maintain certain of their respective management contracts, which may adversely
affect such entity's ability to make payments to the Company or adversely affect
the amount of such payments.
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 dividend or other payments. Further, a primary
part of the Company's business strategy is to acquire facilities from government
entities and to lease those facilities to the government entity or to finance
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, Operating Company or the Service Companies 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, 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 Operating Company. Several
states have enacted legislation imposing restrictions upon private prison
management companies, such as Operating Company. Certain states have enacted
laws requiring licensing of private prison management companies and increasing
regulatory oversight over private prison management companies. At least one
state has attempted to restrict the ability of private prison management
companies to house certain types of out-of-state prisoners in that state.
Although the Company does not believe that such requirements will adversely
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affect Operating Company's ability to make required lease payments under the
Operating Company Leases, there can be no assurance that future legislation
requiring further regulatory private prison management companies would have such
an effect.
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 three of the Company's facilities currently owned or under
development will, upon the expiration of a specified time period, revert to the
respective government agency contracting with the Company or with Operating
Company. See "Properties - Description of 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 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 Operating Company, and the Service
Companies, 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.
THE COMPANY IS SUBJECT TO TAX RELATED RISKS
General. The Company will elect to be taxed 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 is currently distributed to its stockholders.
No assurance can be made that the Company will qualify, or continue to qualify,
as a REIT. Qualification as a REIT involves the application of highly technical
and complex provisions of the Internal Revenue Code of 1986, as amended (the
"Code") for which there are only limited judicial or administrative
interpretations, as well as various factual matters and circumstances which are
not entirely within the Company's control. Application of the Code's provisions
to the Company is even more difficult because of certain aspects of the
Company's organizational structure, including the Company's relationships with
Operating Company and the Service Companies. See "- Tax Status" herein for a
more complete discussion of the requirements for qualification as a REIT.
Adverse Effects of Failure to Qualify as a REIT. If the Company fails to 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. In addition,
unless entitled to relief under certain statutory provisions, the Company also
would be disqualified from re-electing REIT status for the four taxable years
following the year during which qualification is lost. Failure to qualify as a
REIT would reduce the net earnings of the Company available for distribution to
stockholders because of the additional tax liability to the Company for the year
or years involved. To the extent that distributions to stockholders would have
been made in reliance upon the Company's qualifying as a REIT, the Company might
be required to borrow funds or to liquidate certain of its investments to pay
the applicable tax. The failure to qualify as a REIT would also constitute a
default under the Company's current, and potentially its future, debt
obligations.
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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. 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 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.
Additionally, although the Operating Company Leases require Operating Company to
maintain insurance with respect to each of the Company's facilities leased to
Operating Company, 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. Should an uninsured loss occur, 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 Operating Company, as the Company's Primary Tenant, for Revenues.
Operating Company is the lessee of a substantial majority of the Company's
facilities. Therefore, the Company is dependent for its revenues upon Operating
Company's ability to make the lease payments required under the Operating
Company Leases for such facilities. Operating Company's obligation to make
payments under the Operating Company Leases is not secured by any of the assets
of Operating Company, although the obligations under the Operating Company
Leases are cross-defaulted so that the Company could terminate all the leases if
Operating Company fails to make required lease payments. If this were to happen,
however, the Company would be required to find other suitable lessees or risk
losing its ability to elect or maintain REIT status, as applicable. The Company
believes that Operating Company has sufficient assets and income to enable it to
satisfy its obligations under such lease agreements at this time; however, there
can be no assurance that Operating Company will have such assets or income in
the future. Moreover, while the Company has leases with tenants other than
Operating Company, there can be no assurance that the Company will be successful
in obtaining lease agreements with lessees other than Operating Company to an
extent such that the Company is not dependent on Operating Company as the
primary source of its revenues. Moreover, there can be no assurance that
Operating Company or the Company's other lessees will elect to renew leases upon
the expiration of their current terms, which would also require the Company to
find suitable replacement lessees. In either circumstance, due to the unique
nature of correctional and detention facilities, the Company may be unable to
locate suitable lessees or to attract such lessees, and may, therefore, be
required to reduce the amounts to be received by the Company under its lease
agreements, which would have the effect of reducing the Company's amounts
available for distribution to the Company's stockholders.
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Dependence on Outside Financing to Support the Company's Growth; Dilutive Effect
of Such Financing. The Company's growth strategy includes acquiring, developing
and expanding correctional and detention facilities as well as other properties.
The Company expects that it generally will not be able to fund its growth with
cash from its operating activities because the Company will be required to
distribute to its stockholders at least 95% of its taxable income each year to
qualify as a REIT. Consequently, the Company will be required to rely primarily
upon the availability of debt or equity capital to fund acquisitions and
improvements.
There can be no assurance that the Company will continue to have access to the
debt markets to fund future growth at an acceptable cost. The Company's Bank
Credit Facility consists of a $400.0 million Revolving Credit Facility and a
$250.0 million Term Loan Facility. 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. 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. Moreover, any breach of these limitations 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. 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.
There can also be no assurance that the Company will have access to the capital
markets to fund future growth at an acceptable cost. To assist in the financing
of its future growth, the Company filed the Registration Statement on Form S-3
with the Commission. Pursuant to the Registration Statement on Form S-3, the
Company may sell or issue shares of Company Common Stock, preferred stock or
other securities convertible into, or exchangeable for, Company Common Stock.
The Company's ability to fund its future growth through the sale of equity
securities may be impaired, however, if the Company is unable to issue
additional equity securities at a price acceptable to the Company. The market
price of the Company's equity securities may be adversely affected by various
factors, including the Company's results of operations, general economic
conditions and changes in market interest rates resulting in changes in yields
of other financial instruments. Additionally, the sale and issuance of any
shares of Company Common Stock under the Registration Statement on Form S-3, or
the issuance of any shares of Company Common Stock upon the conversion of any
securities sold under the Registration Statement on Form S-3, will have the
effect of diluting the ownership interest of the stockholders of the Company,
possibly adversely affecting the market price of the Company Common Stock.
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 the Service Companies or Operating
Company. 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
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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, the Service Companies control
the operations of the government-owned facilities managed and operated by them,
and Operating Company 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 which will provide revenues to the Service Companies or Operating
Company and thus provide the basis for any dividends or other payments to be
made to the Company from the Service Companies or Operating Company.
EXISTING CONFLICTS OF INTEREST MAY HAVE AN EFFECT ON THE COMPANY
Some directors, officers and stockholders of the Company have relationships with
the Company, Operating Company and the Service Companies which may create a
conflict of interest with respect to the business decisions affecting the
Company. Some directors, officers and stockholders of the Company also have an
ownership interest in Operating Company which may create 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,
Operating Company and the Service Companies may present conflicts of interest.
These conflicts 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 Operating Company and their ongoing relationship. The Company has
adopted policies to address these conflicts of interest. See the information
incorporated in this Annual Report by reference under "Certain Relationships and
Transactions" contained herein for a more detailed discussion of these conflicts
of interest.
YEAR 2000 COMPLIANCE ISSUES
An assessment of the Company's information technology hardware and software has
been performed, and the Company believes that both are Year 2000 compliant,
although there can be no assurance that coding errors or other defects will not
be discovered in the future. The Company, however, may be vulnerable to the
failure of third parties, including Operating Company and government entities
for which Operating Company provides services, to remedy their Year 2000 issues.
The failure of government entities for which Operating Company provides services
to resolve their Year 2000 problems, or the failure of Operating Company to
remedy its Year 2000 problems, could result in the delayed collection of
accounts receivable by Operating Company. The delayed collection of accounts
receivable could adversely affect Operating Company's ability to make timely
lease and other payments to the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000
Compliance" contained herein for a more detailed discussion of the Company's
Year 2000 compliance assessment.
TAX STATUS
The Company will elect to be taxed 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 is distributed currently to its stockholders. 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.
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Stock Ownership Restrictions. 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. To maintain its status as a REIT, the Company 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 Operating Company, the
Internal Revenue Service (the "IRS") may not consider part or all of the
payments that the Company receives from Operating Company under the Operating
Company Leases to be Rents from Real Property. First, the IRS could
recharacterize the Operating Company Leases as service contracts or partnership
agreements, rather than as "true leases." Second, the IRS could recharacterize
the Operating Company 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 Operating Company. If either of those events occur,
part or all of the payments under the Operating Company Leases would not be
considered Rents from Real Property. In either event, based upon the expected
amount of rent payments under the Operating Company Leases, the Company likely
would not satisfy either the 75% Income Test or the 95% Income Test and, as a
result, would lose its REIT status.
The Company also realizes on a regular basis (i) interest income under the
Operating Company 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 Service Company A and Service Company B, some or all of which
will not be qualifying income under the 75% Income Test and the 95% Income Test.
The Company anticipates that, taking into account these other sources of income,
it will nonetheless satisfy the 75% Income Test and the 95% Income Test. The
IRS, however, may assert that the payments under the Operating Company Leases
are excessive and treat the excess as attributable to the Trade Name Use
Agreement, the management contracts acquired with the Operating Company Note or
some other source.
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Asset Tests. For the Company 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 quarter. After initially meeting the Asset Tests, the Company will not lose
its status 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 expects that, as of March 31, 1999, it will satisfy the Asset Tests.
However, the Company's determination is not binding on the IRS.
Distribution Requirements. As a REIT, the Company will be required to make
annual distributions to its stockholders 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 Merger, 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. In the Merger, the Company succeeded to
all of CCA's tax attributes, including CCA's accumulated earnings and profits.
To maintain its qualification as a REIT, the Company will be required to make a
distribution of CCA's accumulated earnings and profits (the "Earnings and
Profits Distribution") before the end of 1999.
The Company intends to make distributions sufficient to satisfy its annual
distribution requirements and to make the Earnings and Profits Distribution. It
is possible that, from time to time, the Company may not have sufficient cash or
other liquid assets to meet its distribution requirements. Differences in timing
between the recognition of taxable income and the receipt of cash available for
distribution could require the Company to borrow funds on a short-term, or
possibly long-term, basis to meet its distribution requirements. If the Company
must borrow such funds, it will be further subject to the risks associated with
leverage. See "- Risk Factors - The Company is Subject to Risks Inherent in
Investment in Real Estate Properties - Dependence on Outside Financing to
Support its Growth; Dilutive Effect of Such Financing."
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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.
If the Company fails to qualify as a REIT in any taxable year, the Company would
be subject to federal income tax on its taxable income at regular corporate
rates, and distributions to its stockholders in any such year would not be
deductible by the Company. Moreover, even if the Company qualifies as a REIT,
the Company may be subject to certain federal, state and local taxes on its
income and property.
FOREIGN OPERATIONS
The Company does not currently engage in any foreign operations or derive
revenues from foreign sources. However, the Company, through a subsidiary, owns
the HM Agecroft Prison, a medium security facility currently under construction
in Salford, England. Upon completion of this facility, the Company will lease
the facility to HM Prison Services. Additionally, in connection with the Merger,
CCA transferred all of the issued and outstanding capital stock of certain of
its subsidiaries, constituting all of its international operations, to Service
Company B. The Company may, in the future, pursue other opportunities which may
result in the Company engaging in foreign operations or deriving revenues from
foreign sources in the future.
ITEM 2. PROPERTIES.
GENERAL
Prior to the Merger, the Company owned no facilities. As of December 31, 1998,
after completion of the CCA Merger, the Company owned 14 currently operating
correctional and detention facilities with an aggregate design capacity in
excess of 12,000 beds and nine correctional and detention facilities under
construction or development with an aggregate design capacity in excess of
10,500 beds. On January 1, 1999, the Company acquired an additional 24
facilities with an aggregate design capacity in excess of 18,000 beds as a
result of the Prison Realty Merger. As of March 19, 1999, the Company owned 47
facilities, of which nine new facilities were under construction, in 17 states,
the District of Columbia and the United Kingdom with a total design capacity in
excess of 44,000 beds. As of March 19, 1999, approximately 30,000 beds were
leased under 38 operating leases. The Company is currently developing
approximately 14,000 beds through the construction of the nine new facilities
and the expansion of six currently operating facilities.
THE FACILITIES
GENERAL
The correctional and detention facilities owned 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
correctional and detention facilities can also
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be classified according to the type(s) of inmates or other detainees held at
such facility. The facilities can, generally be grouped in this manner into the
following four 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.
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
Bank Credit Facility. The following tables set forth certain information with
respect to (i) the facilities owned by the Company as of March 19, 1999 which
were acquired from CCA in the Merger on December 31, 1998, and (ii) the
facilities owned by the Company as of March 19, 1999 which were acquired from
Prison Realty in the Merger on January 1, 1999:
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FACILITIES ACQUIRED FROM CCA IN THE MERGER
DESIGN SECURITY LEASE
FACILITIES LOCATION CAPACITY (1) LEVEL TENANT TERM
---------- -------- --------- ----- ------ ----
Kit Carson Correctional Center Burlington, Colorado 768 medium Operating Company 12
Bent County Correctional Facility Las Animas, Colorado 700 medium Operating Company 12
Huerfano County Correctional (2) Walsenburg, Colorado 752 medium Operating Company 12
Center
DC Correctional (3) Washington, D. C. 866 medium District of Columbia 20
Treatment Facility
Coffee Correctional Facility (4) Nicholls, Georgia 1,016 (5) medium Operating Company 12
Wheeler Correctional Facility (4) Alamo, Georgia 1,016 (5) medium Operating Company 12
Prairie Correctional Facility Appleton, Minnesota 1,338 medium Operating Company 12
New Mexico Women's (6) Grants, New Mexico 322 medium Operating Company 12
Correctional Facility
Cibola County Corrections Center Milan, New Mexico 376 (5) medium Operating Company 12
Southern Nevada Women's Las Vegas, Nevada 500 medium State of Nevada(7) 18
Correctional Facility
North Fork Correctional Facility Sayre, Oklahoma 1,440 medium Operating Company 12
Diamondback Correctional Facility Watonga, Oklahoma 1,440 medium Operating Company 12
Shelby Training Center (8) Memphis, Tennessee 200 medium Operating Company 12
Whiteville Correctional Facility Whiteville, Tennessee 1,536 medium Operating Company 12
- -----------------
(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 Operating Company 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.
(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 Operating
Company and the GDOC.
(5) The facility is currently being expanded by the Company.
(6) 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 Operating Company.
(7) The State of Nevada has contracted with Operating Company to manage and
operate the facility.
(8) The facility is subject to a purchase option held by the State of Tennessee
which grants the State of Tennessee the right to purchase the facility for
$150,000 upon expiration of the lease term.
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FACILITIES ACQUIRED FROM PRISON REALTY IN THE MERGER
DESIGN SECURITY LEASE
FACILITIES LOCATION CAPACITY (1) LEVEL TENANT TERM
---------- -------- -------- ------ ------ ----
Eloy Detention Center Eloy, Arizona 1,500 medium Operating Company 12
Central Arizona Detention Center Florence, Arizona 2,304 multi Operating Company 12
Leo Chesney Correctional Center Live Oak, California 240 minimum Cornell Corrections 5
Leavenworth Detention Center Leavenworth, Kansas 327 maximum Operating Company 12
Lee Adjustment Center Beattyville, Kentucky 756 medium Operating Company 12
River City Correctional Center Louisville, Kentucky 363 medium Operating Company 12
Marion Adjustment Center St. Mary, Kentucky 856 minimum Operating Company 12
Otter Creek Correctional Center Wheelwright, Kentucky 656 medium Operating Company 12
Pamlico Correctional Facility Bayboro, North Carolina 528 (2) medium State of 12
North Carolina(3)
Mountain View Correctional Facility Spruce Pine, 528 (2) medium State of 12
North Carolina North Carolina(3)
Torrance County Detention Facility Estancia, New Mexico 910 multi Operating Company 12
Queensgate Correctional Facility Cincinnati, Ohio 850 medium Hamilton County, Ohio 5
Northeast Ohio Correctional Center Youngstown, Ohio 2,016 medium Operating Company 12
Cimarron Correctional Facility (4) Cushing, Oklahoma 960 medium Operating Company 12
Davis Correctional Facility Holdenville, Oklahoma 960 medium Operating Company 12
West Tennessee Detention Facility Mason, Tennessee 600 multi Operating Company 12
Bridgeport PPT Facility Bridgeport, Texas 200 minimum Operating Company 12
Community Education Partners - Dallas, Texas (5) juvenile/ Community Education 12
Dallas County School for minimum Partners
Accelerated Learning
Community Education Partners - Houston, Texas (5) juvenile/ Community Education 12
Southeast Houston School for minimum Partners
Accelerated Learning
Houston Processing Center Houston, Texas 411 medium Operating Company 12
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DESIGN SECURITY LEASE
FACILITIES LOCATION CAPACITY (1) LEVEL TENANT TERM
---------- -------- --------- ----- ------ ----
Laredo Processing Center Laredo, Texas 258 medium Operating Company 12
Webb County Detention Facility Laredo, Texas 512(2) maximum Operating Company 12
Mineral Wells PPT Facility Mineral Wells, Texas 2,103 minimum Operating Company 12
T. Don Hutto Correctional Center Taylor, Texas 480 medium Operating Company 12
- ------------------
(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 Operating Company 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 currently being expanded by the Company.
(3) The State of North Carolina has contracted with Operating Company to manage
and operate the facility.
(4) 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.
(5) This alternative educational facility is currently configured to accommodate
900 at-risk juveniles and may be expanded to accommodate a total of 1400 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 constructing nine new facilities, which are
scheduled to open on various dates ranging between June 1999 to March 2000. Set
forth below is a brief description of each of the facilities currently under
construction. In addition, in April 1999, the Company intends to purchase the
Eden Detention Center, which is also described below:
California City Correctional Facility. The California City Correctional Facility
is currently under construction and will be located on 320 acres in California
City, California. The 489,000 square foot, medium security facility will have a
design capacity of 2,304 beds and is scheduled to open in July 1999. Upon
completion, the facility will be leased to, and managed by, Operating Company.
Crossroads Correctional Center. The Crossroads Correctional Center is currently
under construction and will be located on 80 acres in Shelby, Montana. The
191,000 square foot medium security facility will have a design capacity of 512
beds and is scheduled to open in September 1999. Upon completion, the facility
will be leased to, and managed by, Operating Company. 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 Operating Company.
Florence Correctional Facility. The Florence Correctional Facility is currently
under construction and will be located in Florence, Arizona. The medium security
facility will have a design capacity of 1,600 beds. Upon completion, the
facility will be leased to, and managed by, Operating Company.
HM Agecroft Prison. The HM Agecroft Prison is currently under construction and
will be located in Salford, England. The medium security facility will have a
design capacity of 800 beds. Upon completion, the prison will be leased under a
25-year agreement to HM Prison Service. Estimated
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construction cost for the facility is $80.0 million, and the facility is
expected to open in January 2000. The prison is being designed and built by
UKDS. Upon expiration of the lease agreement with the HM Prison Service, the
facility will revert to the United Kingdom.
Mendota Correctional Facility. The Mendota Correctional Facility will be located
on 247 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 in
2000. Upon completion, the facility will be leased to, and managed by, Operating
Company.
Maurice Sigler Correctional Facility. The Maurice Sigler Correctional Facility
is currently under construction and will be located on 270 acres in Frostproof,
Florida. The 250,000 square foot high security facility will have a design
capacity of 1,008 beds and is scheduled to open in June 1999. Upon completion,
the facility will be leased to, and managed by, Operating Company. Polk County,
Florida has an option to purchase this facility for its depreciated book value
pursuant to the terms of a management contract between it and CCA entered into
prior to the Merger generally at any time during the term of the management
contract.
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 December 1999. Upon completion, this facility will be leased to, and
managed by, Operating Company. This facility will revert to San Diego County,
California approximately 18 years and six months after the date the facility
begins operations.
Tallahatchie County Correctional Center. The Tallahatchie County Correctional
Center is currently under construction and will be located in Tallahatchie,
Mississippi. Construction on the 1,084 bed facility began in February 1999 and
the facility is scheduled to open in the first quarter of the year 2000. Upon
completion, the facility will be leased to, and managed by, Operating Company.
Telfair County Correctional Center. The Telfair County Correctional Center is
currently under construction and will be located in McRae, Georgia. Construction
on the 1,524 medium security prison is scheduled to be completed in the first
quarter of 2000. Upon completion, the facility will be leased to, and managed
by, Operating Company.
Eden Detention Center. The Eden Detention Center, which is scheduled to be
purchased by the Company in April 1999, is located in Eden, Texas. The facility
has a design capacity of 1,225 beds, and it is expected that upon its purchase,
the facility will be leased to, and continued to be managed by, Operating
Company.
ITEM 3. LEGAL PROCEEDINGS.
As a result of the Merger, the Company became subject to a variety of legal
proceedings outstanding as of December 31, 1998 against CCA arising in the
ordinary course of CCA's business, including certain claims brought by and on
behalf of inmates and employees of facilities managed and operated by CCA prior
to the 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.
At December 31, 1998, CCA was party to a class action lawsuit at the Northeast
Ohio Correctional Center (the "NOCC") regarding the alleged violation of inmate
rights. Subsequent to the end of the year this lawsuit was settled for
$1,650,000 plus $756,000 for legal fees and expenses. At December 31, 1998, CCA
was also a party to two inmate lawsuits at the NOCC for wrongful deaths. All of
the lawsuits were assumed by the Company in the Merger. While the outcome of
these lawsuits is not determinable, the
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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 Merger, the Company became subject to certain legal
proceedings outstanding as of January 1, 1999 against Prison Realty arising in
the ordinary course of 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 business or financial
position.
In addition, as a result of the Merger, the Company became subject to a
purported class action suit against CCA by certain of its shareholders
attempting to prohibit completion of the Merger and seeking unspecified monetary
damages. The action was originally filed in April 1998 in the Chancery Court of
Davidson County, Tennessee. The action was settled in principle in November
1998, and the Chancery Court formally approved the settlement on March 18, 1999.
In connection with the settlement, the Chancery Court approved the payment by
the Company of approximately $4.5 million in legal fees and expenses incurred by
the plaintiffs in the prosecution of the action. The Company expects that after
payment of insurance proceeds, the Company will be liable for approximately
$2.75 million of these fees and expenses.
The assumed litigation also consists of a purported class action suit brought by
a purported shareholder of CCA. Filed on August 6, 1998 in Chancery Court for
Davidson County, Tennessee, the suit named CCA and certain of its directors and
executive officers as defendants. The action alleges that the individual
defendants violated certain provisions of Tennessee law by selling shares of CCA
Common Stock during the period from April 1997 through April 1998. Among the
allegations in this action are that CCA and the individual defendants made false
and misleading statements to maintain the price of CCA Common Stock at an
artificially high level in order to be able to sell their shares. Prior to the
Merger, CCA was, and the Company currently is, contesting this action
vigorously.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.
During September 1998 and during the fourth quarter of the year ended December
31, 1998, prior to the completion of the CCA Merger, certain actions regarding
the initial organization of the Company and the completion of the Merger,
including approval of the Agreement and Plan of Merger and the Merger-Related
Transactions, were taken by the founding sole stockholder of the Company by his
written consent.
In September, 1998, the Board of Directors of CCA and the Board of Trustees of
Prison Realty each approved and adopted the Agreement and Plan of Merger and the
Merger-Related Transactions and recommended that the same be adopted and
approved by their respective shareholders. On December 1, 1998, at a special
meeting of the shareholders of CCA, CCA common shareholders approved and adopted
the Agreement and Plan of Merger and the Merger-Related Transactions with
approximately 85.2% of the votes cast (or approximately 61.9% of the total
number of shares eligible to vote) favoring the transaction, approximately 14.6%
of the votes cast (or approximately 10.6% of the total number of
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shares eligible to vote) not favoring the transaction, and less than
approximately 0.2% of the votes cast or total number of shares eligible to vote
abstaining. On December 3, 1998, at a special meeting of the shareholders of
Prison Realty, the Prison Realty common shareholders approved and adopted the
Agreement and Plan of Merger and the Merger-Related Transactions with
approximately 98% of the votes cast (or approximately 82% of the total number of
shares eligible to vote) favoring the transaction, approximately 1.8% of the
votes cast (or approximately 1.5% of the total number of shares eligible to
vote) not favoring the transaction, and less than approximately 0.2% of the
votes cast or total number of shares eligible to vote abstaining.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE OF AND DISTRIBUTIONS ON COMMON STOCK
The Company Common Stock is traded on the Exchange under the symbol "PZN" and
the Company Preferred Stock is traded on the Exchange under the symbol "PZN
PrA." On March 19, 1999, the last reported sale price per share of Company
Common Stock was $19.50 and there were 1,434 registered holders and
approximately 28,570 beneficial holders, respectively, of Company Common Stock.
The Company Common Stock and Preferred Stock did not begin trading on the
Exchange until January 4, 1999, after completion of the Merger. As such, except
for the information regarding the dividend and distribution record and policy of
the Company, the information provided under this section relates to Prison
Realty Common Shares and CCA Common Stock, each of which, as a result of the
Merger, are no longer traded on the Exchange or on any other securities exchange
or market.
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PRISON REALTY
The following table sets forth, for the fiscal quarters indicated (i) the range
of high and low closing prices of Prison Realty Common Shares on the Exchange,
and (ii) the amount of cash distributions paid per share:
PRISON REALTY
CLOSING PRICE PER SHARE
CASH DISTRIBUTION
HIGH LOW PAID
---- --- ----
FISCAL YEAR 1997
Third Quarter (July 15, 1997 through
September 30, 1997).......................... $37.75 $28.83 $0.346(1)
Fourth Quarter............................... 44.63 33.00 0.425
FISCAL YEAR 1998
First Quarter................................ 44.38 39.00 0.425
Second Quarter............................... 41.38 26.63 0.425
Third Quarter................................ 30.25 18.00 0.480
Fourth Quarter .............................. 25.94 16.00 0.480
(1) Represents a pro rata distribution of Prison Realty's initial quarterly
distribution of $0.425 per share based on a partial calendar quarter beginning
on July 18, 1997, the closing date of Prison Realty's initial public offering.
CCA
The following table sets forth, for the fiscal quarters indicated (i) the range
of high and low closing prices of the CCA Common Stock on the Exchange, and (ii)
the amount of cash dividends paid or expected to be paid per share:
CCA
CLOSING PRICE
PER SHARE CASH
HIGH LOW DIVIDEND PAID
---- --- -------------
FISCAL YEAR 1996
First Quarter.............................. $28.50 $17.38 $ 0
Second Quarter............................. 42.44 26.81 0
Third Quarter.............................. 35.50 27.25 0
Fourth Quarter............................. 31.75 23.13 0
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CCA
CLOSING PRICE
PER SHARE CASH
HIGH LOW DIVIDEND PAID
---- --- -------------
FISCAL YEAR 1997
First Quarter...................................... 33.50 24.25 0
Second Quarter..................................... 40.88 23.50 0
Third Quarter...................................... 44.88 37.00 0
Fourth Quarter..................................... 44.56 29.69 0
FISCAL YEAR 1998
First Quarter...................................... 41.00 32.50 0
Second Quarter..................................... 35.06 20.88 0
Third Quarter...................................... 24.69 13.56 0
Fourth Quarter .................................... 21.88 11.44 0
In October 1995, CCA authorized a 2-for-1 stock split on the CCA 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 the CCA
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 to the CCA Common Stock are on a
post-split basis and have not been adjusted to reflect the completion of the
Merger.
THE COMPANY
On March 4, 1999, the Board of Directors of the Company declared a regular
quarterly distribution of $0.55 per share, payable to the holders of record of
Company Common Stock on March 19, 1999. The Company will pay the distribution to
its common stockholders on March 31, 1999. The Company intends to continue to
pay regular quarterly distributions on its shares of Company Common Stock. The
Company also intends to pay regularly quarterly dividends on the Company
Preferred Stock pursuant to the terms of such stock. Future distributions on the
Company Common Stock will be at the discretion of the Board of Directors of the
Company and will depend on the Company's financial condition, its capital
requirements, the annual distribution requirements under the REIT provisions of
the Code and such other factors as the Board of Directors of the Company deems
relevant, and there can be no assurance that any such distributions will be made
by the Company. Under the Bank Credit Facility, the Company may make
distributions on its capital stock (including distributions on the Company
Common Stock and the dividends on the Company Preferred Stock discussed herein)
only if the Company is not in default under the Bank Credit Facility.
In order to maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 95% of its taxable income
(excluding net capital gains). Under certain
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circumstances, the Company may be required to make distributions in excess of
available cash in order to meet such distribution requirements. In such event,
the Company would seek to borrow the amount to obtain the cash necessary to make
distributions to retain its qualification as a REIT for federal income tax
purposes.
As a result of the Merger, the Company succeeded to CCA's accumulated earnings
and profits. As a REIT, the Company cannot complete any taxable year as a REIT
with accumulated earnings and profits from a taxable corporation. Accordingly,
to preserve its REIT status, the Company must make the Earnings and Profits
Distribution to all holders of shares of Company Common Stock, including those
holding shares of Company Common Stock received as a result of the Merger.
Accordingly, the Company will declare the Earnings and Profits Distribution
payable on shares of Company Common Stock in an amount which the Company
determines is necessary to disburse undistributed accumulated and current
earnings and profits of CCA. Currently, the Earnings and Profits Distribution is
expected to be fully paid by the fourth quarter of 1999. The Board of Directors
of the Company declared a special dividend of $0.05 per share to the holders of
record of the Company Common Stock on March 19, 1999. The special dividend,
which will be paid by the Company on March 31, 1999, constitutes a portion of
the Earnings and Profits Distribution.
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 CCA and Prison Realty during the three-year period prior
to the 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 CCA Common
Stock and Prison Realty Common Shares are reflected on a converted basis
assuming the completion of the Merger. In the Merger, all outstanding shares of
CCA Common Stock, including unregistered shares, were exchanged for shares of
Company Common Stock at an exchange ratio of 0.875 to 1, and all outstanding
Prison Realty Common Shares were exchanged for shares of Company 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").
CCA
1996 Sales. On February 29, 1996, CCA sold an aggregate principal amount of
$30.0 million of Convertible Subordinated Notes to PMI Mezzanine Fund, L.P. (the
"1996 PMI Convertible Notes"). The 1996 PMI Convertible Notes, which bore
interest at a rate of 7.5% per annum, were to mature on February 29, 2002, and,
as of December 31, 1998, the principal and accrued interest thereon were
convertible into 1,094,120 shares of CCA Common Stock at a conversion price, as
adjusted, of $27.42 per share.
In April 1996, as a result of Sodexho's preemptive right triggered in connection
with the issuance of the 1996 PMI Convertible Notes, CCA sold an aggregate
principal amount of $20.0 million Convertible Subordinated Notes to Sodexho (the
"1996 Sodexho Convertible Notes"). The 1996 Sodexho Convertible Notes, which
bore interest at a rate of 7.5% per annum, were to mature on April 5, 2002, and,
as of December 31, 1998, the principal and accrued interest thereon were
convertible into 701,135 shares of CCA Common Stock at a conversion price, as
adjusted, of $28.53 per share.
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In August 1996, CCA issued and sold an aggregate principal amount of $24.7
million Corrections Corporation of America Detention Center Revenue Bonds Series
1996 in a private placement pursuant to Rule 506 of Regulation D promulgated
under the Securities Act. Such bonds were issued pursuant to a Trust Indenture
between CCA and Liberty Bank and Trust Company of Tulsa, National Association
(the "Trust Indenture"). The bonds and interest thereon were limited obligations
of CCA payable solely from revenues and funds pledged under the Trust Indenture
and from moneys drawn under an irrevocable letter of credit. The bonds were
scheduled to mature on December 15, 2015, but were paid in full with proceeds
from the sale of nine of CCA's correctional and detention facilities to Prison
Realty in connection with the formation of Prison Realty in July 1997.
1997 Sales. 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 CCA Common Stock were acquired by American
Corrections Transport, Inc., a Tennessee corporation ("ACT"), pursuant to the
Share Exchange Agreement by and among CCA, TransCor America, Inc. ("TransCor"),
and the shareholders of TransCor, and in connection with CCA's acquisition of
TransCor. ACT was a shareholder of TransCor at the time of the 1994 exchange.
Subsequently, in October 1997, CCA agreed to exchange those shares of CCA Common
Stock held by ACT for 379,882 shares of CCA's newly authorized Series B
Convertible Preferred Stock (the "CCA Series B Preferred Stock"). ACT agreed to
liquidate and distribute its assets, including the CCA Series B Preferred Stock,
to its shareholders immediately following the exchange. Accordingly, on October
2, 1997, 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 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 shareholder obtained certain
tax benefits as a result of the 1997 exchange transaction. CCA assumed no
liabilities of ACT as a result of the exchange. The rights and preferences of
the CCA Series B Preferred Stock, generally, were as follows: The shares were
convertible into shares of CCA Common Stock on a 1.94 to 1 basis, subject to
adjustment, and were automatically convertible into shares of CCA Common Stock
upon notification of CCA. The holders of the CCA Series B Preferred Stock could
convert the shares into shares of CCA's common stock in varying increments
through September 1, 2000, at which time up to 75% could be converted. The
holders of the CCA Series B Preferred Stock could not transfer or assign such
shares before September 1, 2000, except upon death. The holders of the CCA
Series B Preferred Stock were to share in distribution upon an event of sale or
liquidation along with holders of CCA Common Stock based on their respective
ownership. The CCA Series B Preferred Stock had the same voting rights as CCA
common stock, and no dividends were to be declared and paid on the CCA Common
Stock unless dividends were declared and paid on the CCA Series B Preferred
Stock at the same time at a rate equal to twice that of the CCA Common Stock.
1998 Sales. On October 15, 1998, CCA issued 43,750 shares of CCA Common Stock to
a director, in consideration of a purchase price of $756,250 paid to CCA. These
shares were purchased pursuant to an agreement between CCA and the director, and
such sale was approved in advance by the Board of Directors of CCA.
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36
On September 18, 1998, pursuant to the 1997 ACT Exchange Agreement, CCA
exercised its right to convert the CCA Series B Preferred Stock into shares of
CCA Common Stock by providing notice to each holder of shares of CCA Series B
Preferred Stock. On October 2, 1998, CCA converted each outstanding share of CCA
Series B Preferred Stock into 1.94 shares of CCA Common Stock. As a result of
this conversion, CCA issued an aggregate of 639,030 shares of CCA Common Stock,
including 322,432 shares of CCA Common Stock to 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 CCA Series B
Preferred Stock.
Prison Realty
Prison Realty was formed as a Maryland real estate investment trust in April
1997, with one shareholder being issued 1,000 Prison Realty Common Shares in
consideration of $1,000.
On July 18, 1997, upon completion of Prison Realty's initial public offering of
21,275,000 Prison Realty Common Shares, D. Robert Crants, III and Michael W.
Devlin each received 150,000 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 Prison Realty, the completion of Prison
Realty's initial public offering and the closing of Prison Realty's purchase of
nine facilities from CCA. The reimbursed costs include certain costs related to
property due diligence, employee compensation, travel and overhead. 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
stockholder being issued 100 shares of Company Common Stock in consideration of
$1,000. Upon completion of the Merger, these shares of Company Common Stock were
repurchased by the Company.
The Company sold $40.0 million aggregate principal amount of Convertible
Subordinated Notes (the "MDP Notes") to MDP Ventures IV LLC, a New York limited
liability company ("MDP"), and certain affiliated purchasers, 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 MDP Notes bear interest
at 9.5% per annum and are due December 31, 2008 and January 29, 2009,
respectively. The MDP Notes are convertible into shares of Company Common Stock
at a conversion price of approximately $28 per share, as may be 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 Common Stock to be issued to MDP upon the conversion of the MDP
Notes.
In connection with the Merger, the Company issued $30.0 million aggregate
principal amount 7.5% Convertible Subordinated Notes (the "1998 PMI Convertible
Notes"), due February 28, 2005, to PMI Mezzanine Fund, L.P. The 1998 PMI
Convertible Notes, which replace the 1996 PMI Convertible Notes previously
issued by CCA on February 29, 1996, are currently convertible into 1,094,120
shares of Company Common Stock at a conversion price of $27.42 per share. The
Company received no cash proceeds from the issuance of the 1998 PMI Convertible
Notes.
Also in connection with the Merger, the Company assumed: (i) the 1996 Sodexho
Convertible Notes, which, upon assumption, were convertible into 701,135 shares
of Company Common Stock at a conversion price of $28.53 per share; and (ii) the
$7.0 million 8.5% Convertible Subordinated Notes due
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November 7, 1999, originally issued to Sodexho by CCA on June 23, 1994 (the
"1994 Sodexho Convertible Notes"), which, upon assumption, were convertible into
1,709,699 shares of Company Common Stock at a conversion price of $4.09 per
share. The Company also assumed CCA's obligations under a forward contract
between CCA and Sodexho (the "Sodexho Forward Contract"), in which 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 Company 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 CCA's obligations under
the Sodexho Forward Contract.
On January 6, 1999, the Company issued a total of 1,410 shares of Company Common
Stock to eight non-employee directors of the Company. These shares were issued
to these directors in satisfaction of Prison Realty's obligations under the
Prison Realty Non-Employee Trustees' Compensation Plan, under which these
individuals, previously trustees of Prison Realty, opted to receive Prison
Realty Common Shares in lieu of certain trustees' fees. On January 29, 1999, the
Company issued 75,717 shares of Company Common Stock to a former director of CCA
in satisfaction of its obligations under the CCA Non-Employee Directors' Stock
Option Plan, which was assumed by the Company in the Merger. These shares of
Company Common Stock were valued based on market prices of the Company Common
Stock on the Exchange. The Company received no cash proceeds from the issuance
of these shares of Company 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 Company
Common Stock. The Company received no proceeds from the issuance of these shares
of Company 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 CCA, 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 Merger, all outstanding shares of CCA
Common Stock, all outstanding Prison Realty Common Shares and all outstanding
Prison Realty Preferred Shares were exchanged for shares of the Company pursuant
to the Registration Statement on Form S-4.
CCA
Offering of Common Stock on a Continuous and Delayed Basis. On November 4, 1998,
CCA filed a Registration Statement on Form S-3 (Reg. no. 333-66783), to register
up to 2,981,978 shares of CCA Common Stock for sale on a continuous and delayed
basis using a "shelf" registration process. During December 1998, CCA, in a
series of private placements, sold 2,882,296 shares of CCA Common Stock to
institutional investors pursuant to this registration statement, which was
declared effective on November 16, 1998. The cash proceeds to CCA from these
sales were approximately $65.5 million, and these proceeds were utilized by CCA
for general corporate purposes, including the repayment of indebtedness,
financing capital expenditures and working capital.
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Prison Realty
Offering of Prison Realty Preferred Shares. On January 30, 1998, pursuant to
Prison Realty's Registration Statement on Form S-11 (Reg. no. 333-43935),
declared effective by the Commission on January 26, 1998, Prison Realty
completed an offering of 4,300,000 Prison Realty Preferred Shares (including
300,000 Prison Realty Preferred Shares issued as a result of the exercise of an
over-allotment option by the underwriters), at a price of $25.00 per share. The
Prison Realty Preferred Shares were 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 Prison Realty Preferred Shares had no stated maturity,
sinking fund provision or mandatory redemption and were not convertible into any
other securities of Prison Realty. Dividends on the Prison Realty Preferred
Shares were cumulative from the date of original issue of such shares and were
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%. The shares were listed on the Exchange under the symbol "PZN Pr A." The
offering of the Prison Realty Preferred Shares 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 Prison Realty Preferred Shares
were approximately $107.5 million, generating net proceeds to Prison Realty of
approximately $103.5 million after deduction of the underwriting discount and
estimated offering expenses. 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 Commission, CCA was required to act as a
co-registrant on this registration statement (Reg. no. 333-43935-01) with
respect to this offering. CCA, however, received no proceeds from this offering.
Offering of Common Shares on a Continuous and Delayed Basis. On September 16,
1998, 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 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, Prison Realty issued 324,000 of Prison Realty Common Shares
to certain trustees and officers of Prison Realty in a series of private
placements, resulting in aggregate cash proceeds to Prison Realty of
approximately $6.9 million. Prison Realty used these proceeds to reimburse the
cost of a like number of Prison Realty Common Shares purchased by Prison Realty
on the open market. Prison Realty also issued a total of 3,732,542 Prison Realty
Common Shares to institutional investors in a series of private placements
pursuant to this registration statement, resulting in aggregate cash proceeds to
Prison Realty of $85.0 million. These proceeds were used by 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 Commission, CCA was
required to act as a co-registrant on Prison Realty's registration statement
(Reg. no. 33-63475-01) with respect to this offering. CCA, however, received no
proceeds from this offering.
The Company
Issuance of Capital Stock in Connection with the Merger. In the Merger, the
Company issued 105,272,183 shares of Company Common Stock in exchange for all
outstanding shares of CCA Common Stock and all outstanding Prison Realty Common
Shares pursuant to the Registration Statement on Form S-4. The Merger Agreement
provided that each outstanding share of CCA Common Stock was converted into the
right to receive .875 share of the Company Common Stock, and each Prison Realty
Common Share was converted into 1.0 share of the Company Common Stock. The
Company also issued 4,300,00 shares of Company Preferred Stock in exchange for
all outstanding Prison Realty Preferred Shares in the Merger.
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The Merger Agreement provided that each outstanding Prison Realty Preferred
Share was converted into 1.0 share of Company Preferred Stock with identical
liquidation preferences and dividend and redemption rights. The Company received
no proceeds from this exchange. In connection with the Merger, Stephens Inc.
provided an opinion to the Board of Directors of CCA that the Merger was fair,
from a financial point of view, to CCA and its shareholders, and J.C. Bradford &
Co., LLC, provided an opinion to the Board of Trustees of Prison Realty that the
Merger was fair, from a financial point of view, to Prison Realty and its
shareholders.
On January 11, 1999, the Company filed the Registration Statement on Form S-3
(Reg. No. 333-70419), which became effective on January 19, 1999 with the
Commission to register an aggregate of $1.5 billion in value of the Company
Common Stock, preferred stock, Common Stock purchase rights, debt securities and
warrants for sale on a continuous or delayed basis. As of March 19, 1999, the
Company has sold 2,694,259 shares of Company Common Stock under the Registration
Statement on Form S-3, resulting in net proceeds of approximately $52.8 million.
These net proceeds will be used by the Company for general corporate purposes,
including, among others, repaying its obligations as they 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.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data presents CCA's historical consolidated
selected results of operations through the date of the CCA Merger. The Company
did not begin operations until January 1, 1999, subsequent to the Prison Realty
Merger. The following selected balance sheet data presents the Company's
consolidated financial position subsequent to the CCA Merger and subsequent to
the Merger-Related Transactions, but prior to the Prison Realty Merger.
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PRISON REALTY CORPORATION
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS:
Revenues $ 662,059 $ 462,249 $ 292,513 $ 207,241 $ 152,375
----------- ----------- ----------- ----------- -----------
Expenses:
Operating 496,522 330,470 211,208 153,692 123,273
Lease 58,018 18,684 2,786 5,904 741
General and administrative 28,628 16,025 12,607 13,506 8,939
Loan costs write-off 2,043 -- -- -- --
CMSC compensation charge 22,850 -- -- -- --
Depreciation and amortization 15,973 14,093 11,339 6,524 5,753
----------- ----------- ----------- ----------- -----------
624,034 379,272 237,940 179,626 138,706
----------- ----------- ----------- ----------- -----------
Operating income 38,025 82,977 54,573 27,615 13,669
Interest expense (income), net (4,380) (4,119) 4,224 3,952 3,439
----------- ----------- ----------- ----------- -----------
Income before income taxes 42,405 87,096 50,349 23,663 10,230
Provision for income taxes 15,424 33,141 19,469 9,330 2,312
----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of accounting change 26,981 53,955 30,880 14,333 7,918
Cumulative effect of accounting 16,145 -- -- -- --
change, net of taxes
----------- ----------- ----------- ----------- -----------
Net Income $ 10,836 $ 53,955 $ 30,880 $ 14,333 $ 7,918
Preferred stock dividends -- -- -- -- 204
----------- ----------- ----------- ----------- -----------
Net income allocable to
common stockholders $ 10,836 $ 53,955 $ 30,880 $ 14,333 $ 7,714
=========== =========== =========== =========== ===========
Basic net income per share:
Before cumulative effect of
accounting change $ 0.38 $ 0.80 $ 0.49 $ 0.26 $ 0.16
Cumulative effect of accounting
change (.23) -- -- -- --
----------- ----------- ----------- ----------- -----------
$ 0.15 $ 0.80 $ 0.49 $ 0.26 $ 0.16
=========== =========== =========== =========== ===========
Diluted net income per share:
Before cumulative effect of
accounting change $ 0.34 $ 0.69 $ 0.42 $ 0.21 $ 0.14
Cumulative effect of accounting
change (.20) -- -- -- --
----------- ----------- ----------- ----------- -----------
$ .14 $ 0.69 $ 0.42 $ 0.21 $ 0.14
=========== =========== =========== =========== ===========
Weighted average shares outstanding
Basic 71,380 67,568 62,793 54,475 47,688
Diluted 78,939 78,959 76,160 71,396 54,586
BALANCE SHEET:
Total assets $ 1,090,437 $ 697,940 $ 468,888 $ 213,478 $ 141,792
Long-term debt, less current
portion 290,257 127,075 117,535 74,865 47,984
Total liabilities excluding
deferred gains 395,999 214,112 187,136 116,774 80,035
Stockholders' equity 451,986 348,076 281,752 96,704 61,757
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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.
GENERAL
The Company, which was formed in September 1998, began operations on January 1,
1999 as a result of the completion of the Mergers of CCA and Prison Realty with
and into the Company on December 31, 1998 and January 1, 1999, respectively. The
following information reflects the condition of the Company on December 31,
1998. As such, this information describes the Company after the completion of
the CCA Merger, but prior to its merger with Prison Realty.
The Company is the accounting successor to CCA. CCA merged with and into the
Company on December 31, 1998 pursuant to the terms of the Merger Agreement. In
the CCA Merger, CCA shareholders received .875 share of the Company Common Stock
in exchange for each share of CCA Common Stock they owned. The CCA Merger was
legally structured as a common control transfer from CCA to the Company. For
accounting purposes, the CCA Merger has been accounted for as a reverse
acquisition of the Company by CCA. As such, CCA's assets and liabilities have
been carried forward at historical cost; CCA's historical financial statements
are presented as the continuing accounting entity's; and the equity section of
the balance sheets, earnings per share and the statements of stockholders'
equity have been retroactively restated to reflect the effect of the exchange
ratio and the effects of the differences in par values of the respective
companies' common stock.
At December 31, 1998 and prior to the Merger, CCA had contracts to manage 82
correctional and detention facilities with an aggregate design capacity of
70,121 beds. Of these 82 facilities, 70 were in operation and 12 were under
development by CCA. CCA, through its United Kingdom joint venture, UKDS, managed
one facility in the United Kingdom and, through its Australian joint venture, CC
Australia, managed two facilities in Australia. CCA's ownership interest in UKDS
and CC Australia was accounted for under the equity method. Of the 12 facilities
under development by CCA, six were scheduled to commence operations in 1999. In
addition, at December 31, 1998, CCA had outstanding written responses to RFPs
and other solicitations for 11 projects with an aggregate design capacity of
8,116 beds.
The following table sets forth the number of facilities under contract or award
by CCA at the end of the periods shown:
AS OF DECEMBER 31,
------------------
1998 1997 1996
---- ---- ----
Contracts(1) 82 67 59
Facilities in operation 70 54 42
Design capacity of contracts 70,121 52,890 41,135
Design capacity of facilities in operation 51,223 38,509 24,310
Compensated mandays(2) 15,107,533 10,524,537 7,113,794
- --------------
(1) Consists of facilities in operation by CCA and facilities under development
by CCA for which contracts have been finalized.
(2) Compensated mandays for a period ended are calculated, for per diem rate
facilities, as the number of beds occupied by residents on a daily basis during
the period ended and, for fixed rate facilities, as the design capacity of the
facility multiplied by the number of days the facility was in operation during
the period.
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CCA derived substantially all of its revenues from the management of
correctional and detention facilities for national, federal, state and local
government agencies in the United States and abroad. The following table
summarizes information with respect to certain management contracts relating to
facilities which as a result of the Merger are currently operated and managed by
Operating Company and the Service Companies:
Operating Company:
CONTRACTING CONTRACT EXPIRATION
----------- -------------------
FACILITIES AND LOCATION ENTITY DATE RENEWAL OPTION
----------------------- ------ ---- --------------
Bent County Correctional Facility State of Colorado July 2018 None
Las Animas, CO
Bridgeport Pre-Parole Transfer Facility State of Texas August 1999 None
Bridgeport, TX
Central Arizona Detention Center USMS; States of Various times through None
Florence, AZ Alaska and Montana October 2014
Cibola County Correction Center USMS; State of Various times through None
Milan, NM New Mexico April 2018
Cimarron Correctional Facility State of Oklahoma June 1999 Three one-year
Cushing, OK renewal options
Coffee Correctional Facility State of Georgia July 1999 Twenty one-year
Nicholls, GA renewal options
Davis Correctional Center State of Oklahoma June 1999 One two-year
Holdenville, OK renewal option
Diamondback Correctional Facility States of Hawaii November 2018 None
Watonga, OK and Indiana
Eloy Detention Center BOP; INS February 2002 Seven one-year
Eloy, AZ renewal options
Houston Processing Center INS April 1999 Two three-month
Houston, TX renewal options
Huerfano County Correctional Center State of Colorado June 1999 None
Walsenburg, CO
Kit Carson Correctional Center State of Colorado November 2018 None
Burlington, CO
Laredo Processing Center INS July 2001 One two-year
Laredo, TX renewal option
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CONTRACTING CONTRACT EXPIRATION
----------- -------------------
FACILITIES AND LOCATION ENTITY DATE RENEWAL OPTION
----------------------- ------ ---- --------------
Leavenworth Detention Center USMS December 1999 Four one-year
Leavenworth, KS renewal options
Lee Adjustment Center State of Kentucky December 1999 One two-year
Beattyville, KY renewal option
Marion Adjustment Center State of Kentucky December 1999 One two-year
St. Mary, KY renewal option
Mineral Wells Pre-Parole Transfer Facility Texas Department of August 1999 None
Mineral Wells, TX Criminal Justice,
Board of Pardons
and Paroles
New Mexico Women's Correctional Facility State of New Mexico June 1999 Five two-year
Grants, NM renewal options
North Fork Correctional Facility State of Wisconsin May 2018 None
Sayre, OK
Northeast Ohio Correctional Center District of Columbia July 1999 Three one-year
Youngstown, OH renewal options
Otter Creek Correctional Facility State of Kentucky December 1999 One two-year
Wheelwright, KY renewal option
Prairie Correctional Facility USMS; States of Various times through None
Appleton, MN Hawaii, Minnesota July 2018
and North Dakota
River City Correctional Center Jefferson County, June 1999 None
Louisville, KY Kentucky
Shelby Training Center BOP; Shelby County, Various times through None
Memphis, TN Tennessee April 2015
T. Don Hutto Correctional Center Williamson County, Various times through None
Taylor, TX Texas; State of January 2000
Texas
Torrance County Detention Facility USMS; BOP; State of Various times through None
Estancia, NM New Mexico; December 2010
Torrance County,
New Mexico;
District of Columbia
Webb County Detention Facility Webb County, Texas October 2018 None
Laredo, TX
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CONTRACTING CONTRACT EXPIRATION
----------- -------------------
FACILITIES AND LOCATION ENTITY DATE RENEWAL OPTION
----------------------- ------ ---- --------------
West Tennessee Detention Facility State of Montana; September 1999; None
Mason, TN USMS; BOP; INS; September 2010(3)
Virgin Islands
Wheeler Correctional Facility State of Georgia July 1999 Twenty one-year
Alamo, GA renewal options
Whiteville Correctional Facility State of Wisconsin March 2000 One one-year
Whiteville, TN renewal option
Service Company A:
CONTRACTING CONTRACT EXPIRATION
----------- -------------------
FACILITIES AND LOCATION ENTITY DATE RENEWAL OPTION
----------------------- ------ ---- --------------
Bay Correctional Facility State of Florida August 2000 None
Panama City, Florida
Delta Correctional Facility State of Mississippi September 1999 One two-year
Greenwood, Mississippi renewal option
Gadsden Correctional Institution State of Florida March 2000 None
Gadsden, Florida
Guayama Correctional Center Puerto Rico December 2000 One five-year
Guayama, Puerto Rico renewal option
Hardeman County Correctional Facility State of Tennessee June 2000 Six three-year
Whiteville, Tennessee renewal options
Lawrenceville Correctional Center State of Virginia March 2003 None
Lawrenceville, Virginia
Ponce Adult Correctional Facility Puerto Rico February 2002 One five-year
Ponce, Puerto Rico renewal option
South Central Correctional Facility State of Tennessee March 2000 One two-year
Clifton, Tennessee renewal option
Wilkinson County Correctional Facility State of Mississippi January 2001 One two-year
Woodville, Mississippi renewal option
Winn Correctional Center State of Louisiana March 2000 None
Winnfield, Louisiana
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Service Company B:
CONTRACTING CONTRACT EXPIRATION
----------- -------------------
FACILITIES AND LOCATION ENTITY DATE RENEWAL OPTION
----------------------- ------ ---- --------------
Bartlett State Jail State of Texas August 2000 Two two-year
Bartlett, Texas renewal options
Bay County Jail Bay County, Florida September 1999 One three-year
Panama City, Florida renewal option
Bay County Jail Annex Bay County, Florida September 1999 One three-year
Panama City, Florida renewal option
Brownfield Intermediate Sanction Facility State of Texas August 1999 None
Brownfield, Texas
Citrus County Detention Facility Citrus County, October 2000 One three-year
Lecanto, Florida Florida renewal option
Davidson County Juvenile Detention Center Davidson County, April 1999 None
Nashville, Tennessee Tennessee
Elizabeth Detention Center INS August 1999 None
Elizabeth, New Jersey
Hernando County Jail Hernando County, October 2000 None
Brooksville, Florida Florida
Lake City Correctional Center State of Florida February 2000 One two-year
Lake City, Florida renewal option
Liberty County Jail Liberty County, November 2001 One two-year
Liberty, Texas Texas renewal option
Marion County Jail II Marion County, November 2000 One two-year
Indianapolis, Indiana Indiana renewal option
Metro-Davidson County Detention Facility Davidson County, June 2000 One two-year
Nashville, Tennessee Tennessee renewal option
Okeechobee Juvenile Offender Correction State of Florida December 2002 None
Center
Okeechobee, Florida
Ponce Youthful Offender Correctional Puerto Rico February 2002 One five-year
Facility renewal option
Ponce, Puerto Rico
Silverdale Facilities Hamilton County, September 2000 Four four-year
Chattanooga, Tennessee Tennessee renewal options
Southwest Indiana Youth Village Various Counties April 2000 None
Vincennes, Indiana
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CONTRACTING CONTRACT EXPIRATION
----------- -------------------
FACILITIES AND LOCATION ENTITY DATE RENEWAL OPTION
----------------------- ------ ---- --------------
Tall Trees State of Tennessee January 2004 None
Memphis, Tennessee
Venus Pre-Release Center State of Texas December 1998 One one-year
Venus, Texas renewal option
DOMESTIC GEOGRAPHIC MARKET CONCENTRATION
Prior to the CCA Merger, CCA managed facilities in 20 states, the District of
Columbia and Puerto Rico. Management revenues by state, as a percentage of CCA's
total revenues for the years ended December 31, 1998, 1997 and 1996,
respectively, are as follows:
1998 1997 1996
---- ---- ----
Number Percentage Number Percentage Number Percentage
of of Total of of Total of of Total
Facilities Revenues Facilities Revenues Facilities Revenues
---------- -------- ---------- -------- ---------- --------
Arizona 2 10.5% 2 12.1% 2 14.7%
California 1 .4% -- -- -- --
Colorado 3 4.1% 2 1.9% 1 0.3%
Florida 7 9.1% 7 8.9% 5 10.3%
Georgia 2 .1% -- -- -- --
Indiana 2 1.5% 2 .3% 1 0.4%
Kansas 1 1.1% 1 1.9% 1 3.0%
Kentucky 4 2.1% -- -- -- --
Louisiana 1 2.3% 1 3.1% 1 4.7%
Minnesota 1 3.2% 1 2.6% 1 0.7%
Mississippi 2 2.5% 1 2.1% 1 1.1%
Nevada 1 1.1% 1 .4% -- --
New Jersey 1 1.8% 1 2.4% -- --
New Mexico 3 4.0% 2 3.4% 3 6.7%
North Carolina 2 .3% -- -- -- --
Ohio 1 4.7% 1 3.5% -- --
Oklahoma 5 6.3% 3 5.6% 2 3.0%
Puerto Rico 3 5.4% 3 6.2% 1 4.7%
South Carolina -- -- -- .8% 1 2.1%
Tennessee 9 13.0% 9 7.8% 8 19.2%
Texas 15 18.4% 13 21.7% 11 23.6%
Virginia 1 2.0% -- -- -- --
Washington D.C. 1 3.3% 1 3.6% -- --
To the extent favorable or unfavorable changes in regulations or market
conditions occur in these markets, such changes would likely have a
corresponding impact on CCA's results of operations.
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Revenues for operation of correctional and detention facilities are recognized
as the services are provided, based on a gross rate per day per inmate or on a
fixed monthly rate. Of CCA's 67 domestic facilities in operation at the time of
the CCA Merger, 66 were compensated on a per diem basis and one was compensated
at fixed monthly rates. The per diem rates or fixed monthly rates vary according
to the type of facility and the extent of services provided at the facility. CCA
had certain contracts which provided for the realization of operating bonuses
which are contingent upon various criteria. CCA also realized development fee
revenues on the percentage-of-completion method for certain correctional
facilities. Transportation revenues were based on a per mile charge or a fixed
fee per trip.
CCA incurred all facility operating expenses, except for certain debt service
and lease payments with respect to certain facilities that CCA did not own or
lease. At the time of the CCA Merger, CCA owned 14 of the domestic facilities it
managed, managed 42 domestic facilities that were owned or leased by a
government agency, construction of which were financed by the agency through one
or more of a variety of methods and managed 17 domestic facilities that were
owned and leased to CCA by Prison Realty.
Facility payroll and related taxes constituted the majority of facility
operating expenses for CCA. Substantially all other operating expenses consisted
of food, clothing, medical services, utilities, supplies, maintenance, insurance
and other general operating expenses. As inmate populations increased following
the start-up of a facility, operating expenses generally decreased as a
percentage of related revenues. Each facility was fully staffed at the time it
was opened or taken over by CCA, although it may have been operated at a
relatively low occupancy rate at such time.
CCA's general and administrative costs consisted of salaries of officers and
other corporate headquarters personnel, legal, accounting and other professional
fees (including pooling expenses related to certain acquisitions), travel
expenses, executive office rental, and promotional and marketing expenses. The
most significant component of these costs related to the hiring and training of
experienced corrections and administrative personnel necessary for the
implementation and maintenance of the facility management and transportation
contracts.
Operating income for each facility depended upon the relationship between
operating costs, the rate at which CCA was compensated per manday, and the
occupancy rate. The rates of compensation were fixed by contract and
approximately two-thirds of all operating costs were fixed costs. Therefore,
operating income varied from period to period as occupancy rates fluctuated.
Operating income was affected adversely as CCA increased the number of
newly-constructed or expanded facilities under management and experienced
initial low occupancy rates. After a management contract was awarded, CCA
incurred facility start-up costs that consisted principally of initial employee
training, travel and other direct expenses incurred in connection with the
contract. Prior to the adoption of SOP 98-5 as of January 1, 1998, these costs
were capitalized and amortized on a straight-line basis over the shorter of the
term of the contract plus renewals or five years. Depending on the contract,
start-up costs were either fully recoverable as pass-through costs or were
billable to the contracting agency over the initial term of the contract plus
renewals. CCA historically financed start-up costs through available cash, the
issuance of various securities, cash from operations and borrowings under CCA's
revolving credit facility.
Newly opened facilities were staffed according to contract requirements when CCA
began receiving inmates. Inmates were typically assigned to a newly opened
facility on a regulated, structured basis over a one-to-three month period.
Until expected occupancy levels were reached, operating losses may have been
incurred.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
revenues of certain items in CCA's statement of operations and the percentage
change from period to period in such items:
PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31, 1998 1997
----------------------- COMPARED COMPARED
1998 1997 1996 TO 1997 TO 1996
------------------------------ ------------------------
Revenues 100.0% 100.0% 100.0% 43.2% 58.0%
Expenses:
Operating 75.0% 71.5% 72.2% 50.2% 56.5%
Lease 8.8% 4.0% 1.0% 210.5% 570.6%
General and administrative 4.3% 3.5% 4.3% 78.6% 27.1%
Loan costs writeoff .3% -- -- N/A N/A
CMSC compensation charge 3.5% -- -- N/A N/A
Depreciation and amortization 2.4% 3.0% 3.9% 13.3% 24.3%
---- ------ -----
Operating income 5.7% 18.0% 18.6% (54.2)% 52.0%
Interest (income) expense, net (.7)% (.9)% 1.4% 6.3% (197.5)%
----- ----- -----
Income before income taxes 6.4% 18.9% 17.2% (51.3)% 73.0%
Provision for income taxes 2.3% 7.2% 6.6% (53.5)% 70.2%
----- ---- -----
Income before cumulative effect
of accounting change 4.1% 11.7% 10.6% (50.0)% 74.7%
Cumulative effect of
accounting change, net of taxes 2.5% -- -- N/A N/A
Net income 1.6% 11.7% 10.6% (79.9)% 74.7%
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
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 CCA in 1997 and 1998.
In 1998, CCA opened 10 new facilities with an aggregate design capacity of 9,256
beds, assumed management of
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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.
OPERATING EXPENSES
Facility operating expenses increased 50.2% to $486.5 million in 1998. There
were significant increases in operating expenses realized due to the increased
compensated mandays and compensated mileage that CCA realized in 1998 as
previously mentioned. Also 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 CCA terminating five contractual relationships, CCA realized
approximately $2.0 million of operating expenses related to transition costs and
deferred contract costs. CCA also incurred $1.0 million of non-recurring
operating expenses related to the Merger.
In 1998, 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. CCA was also subject to two wrongful death lawsuits at one
of its facilities. These lawsuits were assumed by the Company in the Merger. CCA
recognized $2.1 million of expenses in 1998 related to these lawsuits.
LEASE EXPENSE
Lease expense increased 210.5% in 1998 compared to 1997. CCA had entered into
leases with Prison Realty in July 1997 for the initial nine facilities that CCA
had sold to Prison Realty. Throughout 1997 and 1998, CCA sold an additional four
facilities and one expansion to Prison Realty and immediately after these sales,
leased the facilities back pursuant to long-term, triple net leases. As a result
of the USCC acquisition, CCA entered into long-term leases for four additional
facilities with 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 CCA and the industry. Also, in connection with
the Merger, CCA became subject to a purported class action lawsuit attempting to
enjoin the 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, CCA recognized $3.2 million of expense in 1998 to
cover legal fees and the settlement obligation.
LOAN COSTS WRITEOFF
In June 1998, 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
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the completion of the Merger or September 1999. Accordingly, upon consummation
of the Merger the credit facility was terminated and the related unamortized
issuance costs were expensed.
OPERATING COMPANY COMPENSATION CHARGE
CCA recorded a $22.9 million charge to expense in 1998 for the implied fair
value of 5,000 shares of Operating Company voting common stock issued by
Operating Company to certain employees of CCA and Prison Realty. The shares were
granted to certain founding shareholders of Operating Company in September 1998.
Neither CCA nor Operating Company received any proceeds from the issuance of
these shares. The fair value of these common shares was determined at the date
of the Merger based upon the implied value of Operating Company, derived from
$16,000 in cash investments made by outside investors as of December 31, 1998,
as consideration for a 32% ownership interest in Operating Company.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased 13% in 1998 over 1997. The
increase was due to the increase in the number of owned facilities operated by
CCA in 1998 as compared to 1997. Of the 10 new facilities opened by CCA in 1998,
CCA owned six.
INTEREST EXPENSE, NET
Interest expense for 1998 was actually net interest income of $4.4 million as
compared to $4.1 million of interest income in 1997. In 1998, CCA was still
benefitting from interest earnings on the cash proceeds that CCA realized in
1997 when it sold 12 facilities to Prison Realty.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES
As previously mentioned, CCA adopted the provisions of SOP 98-5 in 1998. As a
result, 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.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased 58.0% in 1997 as compared to 1996, with increases in
both management and transportation services. Management revenues increased 59.5%
in 1997, or $167.7 million. This increase was primarily due to the opening of
new facilities and the expansion of existing facilities by CCA in 1996 and 1997.
In 1997, CCA opened 13 new facilities with an aggregate design capacity of
11,644 beds, assumed management of one facility with an aggregate design
capacity of 866 beds and expanded six existing facilities to increase their
design capacity by an aggregate of 2,290 beds. Accordingly, 14,800 new beds were
brought on line in 1997. Due to the growth in beds, compensated mandays
increased 47.9% in 1997 from 7,113,794 to 10,524,537. Average occupancy remained
stable at 93.2% in 1997 as compared to 94.1% in 1996.
Transportation revenues increased $2.0 million or 18.9% in 1997 as compared to
1996. This growth was primarily the result of an expanded customer base and
increased compensated mileage realized through the opening of two new
transportation hubs in the first quarter of 1997 and more "mass transports,"
which are generally moves of 40 or more inmates per trip.
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During the second quarter of 1997, CCA sold 30% of UKDS to Sodexho and
recognized an after-tax gain of $777,000.
FACILITY OPERATING EXPENSES
Facility operating expenses increased 56.5% to 330.5 million in 1997. This
increase was due to the increased compensated mandays and compensated mileage
that CCA realized in 1997 as previously mentioned. As a percentage of revenues,
facility operating expenses decreased to 71.5% in 1997 as compared with 72.2% in
1996. CCA's management operating cost per compensated manday was $30.51 during
1997 as compared to $28.82 in 1996. This increase was primarily due to CCA
bringing the 14,800 new beds on line and having multiple facilities in the
start-up phase of operation throughout 1997 which resulted in increased
personnel costs including employee training and overtime. The increase is also
due to the expanded scope of services that CCA has recently encountered in some
of its new contracts.
LEASE EXPENSE
Lease expense increased 570.6% in 1997 compared to 1996. The significant
increase in lease expense was the result of the Leases that CCA entered into
with Prison Realty in 1997. Annual rent for these 12 facilities was
approximately $50.0 million.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 27.1% in 1997 over 1996. However,
as a percentage of revenues, general and administrative expenses for 1997
declined to 3.5% as compared to 4.3% for 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased 24.3% in 1997 over 1996. The
increase was due to the 58.4% growth in beds in operation at the end of 1997 as
compared to 1996.
INTEREST EXPENSE, NET
Interest expense for 1997 was actually net interest income of $4.1 million as
compared to $4.2 million of interest expense in 1996. This change in net
interest was primarily the result of the sale of the 12 facilities to Prison
Realty for an aggregate purchase price of approximately $455.1 million which
allowed CCA to pay off approximately $182.6 million in debt and benefit from
interest earnings on approximately $128.0 million invested for a portion of
1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUES
CCA's total revenues increased 41% from 1995 to 1996 with increases in both
management and transportation services. CCA's management revenues increased 43%
in 1996, or $84.2 million. This increase was due to the opening of new
facilities and the expansion of existing facilities by CCA in 1995 and 1996. In
1996, CCA opened four new facilities with an aggregate design capacity of 2,501
beds, assumed management of two facilities with an aggregate design capacity of
899 beds and expanded five existing facilities to increase their design capacity
by an aggregate of 1,058 beds. Accordingly, 4,458 new beds were brought on line
in 1996. Due to the growth in beds, compensated mandays increased 48% in 1996
from 4,799,562 to 7,113,794. Average occupancy remained stable at 94.1% for 1996
as compared to 93.9% for 1995.
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Transportation revenues increased $1.1 million or 12% in 1996 as compared to
1995. The 1996 growth was due to a continued marketing effort that expanded the
customer base and resulted in increased compensated mileage. During the second
and fourth quarters of 1996, CCA purchased the remaining two-thirds of UKDS from
its original joint venture partners. After consideration of several strategic
alternatives related to UKDS, CCA sold 20% of the entity to Sodexho, and
recognized an after-tax gain of $515,000. In conjunction with this transaction,
Sodexho was also provided the option to purchase an additional 30% of UKDS,
which option was exercised in the second quarter 1997.
FACILITY OPERATING EXPENSES
Facility operating expenses increased 37.4% to $213.2 million in 1996 compared
to $158.8 million in 1995. This increase was due to the additional beds on line
that increased compensated mandays and the growth in the transportation
services. The average management operating cost per manday was $28.82 for 1996
as compared to $31.59 for 1995. The decrease in average cost per manday was due
to CCA's ability to realize more economies of scale as additional beds were
brought on line. As a percentage of revenues, facility operating expenses
decreased to 73% from 77%. This decrease was primarily attributable to the
expansion of various facilities that added lower incremental operating expenses
and improved economies of scale. Salary and related employee benefits
constituted approximately 63% and 58% of facility operating expenses for 1996
and 1995, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative costs decreased 6.7% in 1996 to $13.4 million as
compared to $14.3 million in 1995. This decrease was due to the non-recurring
pooling expenses associated with acquisitions during fiscal 1995 as well as
CCA's ability to reduce duplication in the general and administrative areas by
integrating the acquired companies into its systems.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 74% to $11.3 million in 1996 as compared
to $6.5 million in 1995. The 1996 increase was due to the growth in total beds
in owned facilities as well as the one-time, non-recurring reserve of $850,000
established for the termination of CCA's contract with South Carolina.
INTEREST EXPENSES NET
Interest expense, net, increased 7% in 1996, consisting of a 48%, or $2.7
million, increase in interest expense, and a 151%, or $2.4 million, increase in
interest income. Interest expense increased due primarily to the addition of
$50.0 million in convertible subordinated notes issued in February and April
1996, bearing interest at 7.5%. Interest income increased as a result of CCA
investing the net proceeds from an equity offering, which closed in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
CCA
CCA's business was capital intensive in relation to the development of a
correctional facility. CCA's efforts to obtain contracts, construct additional
facilities and maintain its day-to-day operations required the continued
acquisition of funds through borrowings and equity offerings. CCA financed these
activities through the sale of capital stock, warrants, subordinated convertible
notes and senior secured debt, through the issuance of taxable and tax-exempt
bonds, by bank borrowings, by assisting government agencies in the issuance of
municipal bonds and, most recently, through the sale and leaseback of certain
correctional facilities to Prison Realty.
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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
Operating Company, Service Company A and Service Company B. In addition, during
1998, CCA utilized approximately $100.0 million of excess cash on hand at
December 31, 1997 from the sale of 12 facilities to Prison Realty in 1997.
CCA's cash flow from operations for 1998 was $54.5 million as compared to $92.0
million for 1997 and $24.4 million in 1996. The decrease in cash flow in 1998
was primarily a result of increased lease payments to 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 and
$68.7 million for 1996. Included in these 1998 cash flow results are two
significant non-cash charges, $22.9 million for the Operating Company
compensation and $26.5 million for the cumulative effect of accounting change
due to the adoption of SOP-98-5. At December 31, 1998, 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.
On November 4, 1998 CCA filed a Registration Statement on Form S-3 that allowed
it, over the following two years, to sell CCA Common Stock in one or more
offerings up to a total dollar amount of $100.0 million. As of December 31,
1998, CCA had sold 2,882,296 shares of CCA Common Stock under this registration
statement, generating net proceeds to CCA of approximately $65.5 million. CCA
used the net proceeds from the sale of CCA Common Stock for general corporate
purposes including without limitation, repayment of indebtedness, financing
capital expenditures and working capital.
In June 1998, 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 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 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 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 Merger, Service Company A and Service Company B
each assumed $5.0 million of debt related to this facility, resulting in an
unused commitment of $19.3 million. In January 1999, the Service Companies paid
off their portions of the outstanding debt and the credit facility was replaced
with a new credit facility as discussed below.
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 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 Merger, this facility was
replaced with the Company's new credit facility as discussed below.
In July 1997, CCA sold 10 of its facilities to Prison Realty for approximately
$378.3 million. The proceeds were used to pay off $131.0 million of 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, CCA sold an
additional facility to Prison Realty for approximately $38.5 million. In
November and December 1997, CCA paid $74.4 million for two correctional
facilities. Subsequently, CCA sold these facilities to Prison Realty for $74.4
million in December 1997 and January 1998, respectively.
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In February 1996, CCA issued $30.0 million of its convertible subordinated notes
to an investor. The proceeds were used to repay the outstanding principal under
CCA's working capital credit facility and construction loan. The notes, bearing
interest at 7.5%, payable quarterly, required CCA to maintain specific ratio
requirements relating to net worth, cash flow and debt coverage. At the time of
issuance, the notes were convertible into shares of CCA Common Stock at a
conversion price, as adjusted, of $29.61 per share. In April 1996, due to the
triggering of its preemptive right in connection with the issuance of the
convertible subordinated notes, Sodexho purchased $20.0 million of convertible
subordinated notes under the same terms and conditions.
In June 1996, CCA completed a public offering of 3,237,500 shares of CCA Common
Stock at a price to the public of $42.86 per share. The proceeds of the
offering, after deducting all associated costs, were $131.8 million.
THE COMPANY
The Company sold $40.0 million aggregate principal amount MDP Notes to MDP and
certain affiliated purchasers, 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 MDP Notes bear interest at 9.5% per annum and
are due December 31, 2008 and January 29, 2009, respectively. The MDP Notes are
convertible into shares of Company Common Stock at a conversion price of
approximately $28 per share, as may be adjusted under the terms of the Note
Purchase Agreement.
On January 11, 1999, the Company filed the Registration Statement on Form S-3
with the Commission to register an aggregate of $1.5 billion in value of Company
Common Stock, preferred stock, Common Stock purchase rights, debt securities and
warrants for sale on a continuous or delayed basis. As of March 26, 1999, the
Company has sold 2,694,259 shares of Company Common Stock under the Registration
Statement on Form S-3, resulting in net proceeds of approximately $52.8 million.
These net proceeds will be used by the Company for general corporate purposes,
including, among others, repaying its obligations as they become due, redeeming
its outstanding indebtedness, financing, all or in part, future purchases of
other companies or real estate properties meeting its business objectives and
strategies, capital expenditures and working capital.
In connection with the completion of the Merger, the Company obtained the $650.0
million Bank Credit Facility. The Bank Credit Facility consists of a $400.0
million Revolving Credit Facility maturing January 1, 2002 and a $250.0 million
Term Loan Facility maturing January 1, 2003. The Company has approximately
$370.0 million currently outstanding under the Revolving Credit Facility and
$250.0 million currently outstanding under the Term Loan Facility. The Revolving
Credit Facility matures January 1, 2002 and the Term Loan Facility matures
January 1, 2003. The Bank Credit Facility is secured by substantially all the
assets of the Company. The Revolving 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 .25% to 1.25% for base rate loans and from 1.375%
to 2.75% for LIBOR rate loans. The Term Loan Facility bears interest at a
variable base rate equal to 3.25% in excess of LIBOR. The Revolving Credit
Facility also allows for a $150.0 million letter of credit sub-facility,
enabling the Company to obtain letters of credit for general corporate purposes.
Amounts drawn under the Revolving Credit Facility included $114.0 million to
temporarily collateralize outstanding letters of credit which are not yet
reissued under the Bank Credit Facility. Approximately $502.0 million of amounts
currently outstanding under the Bank Credit Facility was used to repay
outstanding indebtedness under Prison Realty's and CCA's credit facilities prior
to the Merger.
As a result of the Merger, the Company has certain contractual arrangements with
Operating Company in addition to the Operating Company Leases, the Operating
Company Note and the Right to Purchase Agreement. Such agreements are described
below:
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In consideration for the rights granted under the Trade Name Use Agreement,
Operating Company is obligated to pay to the Company a fee equal to: (i) 2.75%
of its gross revenues for the first three years of the Trade Name Use Agreement;
(ii) 3.25% of its gross revenues for the following two years of the Trade Name
Use Agreement; and (iii) 3.625% of its gross revenues for the remaining term of
the Trade Name Use Agreement, provided, however, that the amount of such fee may
not exceed: (a) 2.75% of the gross revenues of the Company for the first three
years of the Trade Name Use Agreement; (b) 3.5% of the gross revenues of the
Company for the following two years of the Trade Name Use Agreement; and (c)
3.875% of the gross revenues of the Company for the remaining term of the Trade
Name Use Agreement.
The Company has also entered into (i) the Services Agreement with Operating
Company pursuant to which Operating Company 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 the Services Agreement and (ii) the
Tenant Incentive Agreement with Operating Company pursuant to which the Company
will pay to Operating Company an incentive fee to induce Operating Company to
enter into Operating Company Leases with respect to those facilities developed
and facilitated by Operating Company. With respect to the Services Agreement,
Operating Company 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. In consideration for the
performance of such services by Operating Company, the Company will 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 $560 per
new bed for facility preparation services provided by Operating Company prior to
the date on which inmates are first received at such facility. Under the terms
of the Services Agreement, the Company is not obligated to pay the services fee
of $560 per new bed unless the rent payable under the Operating Company Lease
for the facility being developed is determined based upon the fair market value
of the facility with an applicable lease rate of at least 11%. The Company paid
$15.0 million to Operating Company in the first quarter of 1999 pursuant to the
Services Agreement. The Board of Directors of the Company has authorized payment
of up to an additional 5% of the total capital expenditures to Operating Company
if additional services are required by the Company. With respect to the Tenant
Incentive Agreement, the Company has agreed to pay an incentive fee to Operating
Company of $840 per new bed of each facility leased by Operating Company for
which Operating Company has served as developer and facilitator. Under the terms
of the Tenant Incentive Agreement, the Company is not obligated to pay the
incentive fee with respect to a facility unless the rent payable under the
Operating Company Lease for the facility is determined based upon the fair
market value of the facility with an applicable lease rate of at least 11.0%. No
fee will be payable with respect to additions to a facility.
The Company has no commitments with respect to other capital expenditures. The
Company does have an option to acquire, at fair market value, and leaseback to
certain tenants, any facility acquired or developed and owned by such tenant in
the future for a specified period.
The Company expects to meet its long-term liquidity requirements for the funding
of real estate property development and acquisitions by borrowing under the Bank
Credit Facility and by issuing, in public or private transactions, equity or
debt securities. The Company anticipates that as a result of its current debt to
total capitalization ratio and its intention to maintain a debt to total
capitalization ratio of 50% or less, it will be able to obtain financing for its
long-term capital needs. However, there can be no assurance that such additional
financing or capital will be available on terms acceptable to the Company. The
Company may, under certain circumstances, borrow additional amounts in
connection with the renovation or expansion of facilities, the acquisition of
additional properties, or as necessary, to meet certain distribution
requirements imposed on REITs under the Code.
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YEAR 2000 COMPLIANCE
The Year 2000 issue generally relates to computer programs that were written
using two digits rather than four to define the applicable year. In those
programs, the year 2000 may be incorrectly identified as the year 1900, which
can result in a system failure or miscalculations causing a disruption of
operations, including a temporary inability to process transactions, prepare
financial statements or engage in other normal business activities. The
following discussion identifies the actions taken by the Company and Operating
Company to assess and address the Year 2000 issues faced by both companies.
The Company has completed an initial assessment and remediation of its key
information technology systems including its client server and minicomputer
hardware and operating systems and critical financial and nonfinancial
applications. Based on this initial assessment, the Company believes that these
key information technology systems are Year 2000 compliant. However, there can
be no assurance that coding errors or other defects will not be discovered in
the future. The Company is in the process of evaluating the remaining
noncritical information technology systems for Year 2000 compliance.
The Company depends upon the proper functioning of third-party computer and
non-information technology systems. These third parties include commercial banks
and other lenders, construction contractors, architects and engineers and
vendors such as the providers of telecommunications and utilities. The Company
has initiated communications with third parties with whom it has important
financial or operational relationships to determine the extent to which they are
vulnerable to the Year 2000 issue. The Company has not yet received sufficient
information from all parties about their remediation plans to predict the
outcome of their efforts.
The Company is currently developing a contingency plan that is expected to
address financial and operational problems that might arise on and around
January 1, 2000. This contingency plan would include establishing additional
sources of liquidity that could be drawn upon in the event of systems disruption
and identifying alternative vendors and back-up processes that do not rely on
computers, whenever possible.
The Company's key information technology systems were Year 2000 compliant when
acquired in the Merger. As such, the Company has incurred no expenses through
December 31, 1998 and expects to incur no material costs in the future on Year
2000 remediation efforts.
Because Operating Company is the lessee of a substantial majority of the
Company's facilities, the Company may be vulnerable to Operating Company=s
failure to remedy its Year 2000 issues. The failure of Operating Company to
remedy its Year 2000 problems could result in the delayed collection of lease
payments by the Company, potentially resulting in liquidity stress.
Operating Company's Year 2000 compliance program is focused on addressing Year
2000 readiness in the following areas: (i) Operating Company's information
technology hardware and software; (ii) material non-information technology
systems; (iii) Year 2000 compliance of third parties with which Operating
Company has a material relationship; (iv) systems used to track and report
assets not owned by Operating Company (e.g. inmate funds and personal effects);
and (v) development of contingency plans.
Operating Company, and prior to the completion of the Merger CCA, has completed
an initial assessment and remediation of its key information technology systems
including its client server and minicomputer hardware and operating systems and
critical financial and nonfinancial applications. Remediation efforts as of the
date hereof include upgrades of Operating Company's minicomputer hardware and
critical financial applications. Based on this initial assessment and
remediation efforts, Operating Company believes that these key information
technology systems are Year 2000 compliant. However, there can be no assurance
that coding
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57
errors or other defects will not be discovered in the future. Operating Company
is in the process of evaluating the remaining noncritical information technology
systems for Year 2000 compliance.
Operating Company manages and operates facilities it owns, facilities it leases
from Prison Realty, and facilities owned by and leased from government entities.
Operating Company is currently evaluating whether the material non-information
technology systems such as security control equipment, fire suppression
equipment and other physical plant equipment at both the facilities it owns and
the facilities it leases from Prison Realty are Year 2000 compliant. Operating
Company will also request that the owners of the government facilities it
manages provide Year 2000 certification for material information technology and
non-information technology systems at those facilities.
All Operating Company's managed correctional facilities, as a part of general
operating policy, have existing contingency plans that are deployed in the event
key operational systems, such as security control equipment fail (e.g. when a
power failure occurs). In addition, the correctional facilities' key security
systems are "fail secure" systems which automatically "lock down" and are then
operated manually should the related electronic components fail. Therefore,
Operating Company management believes no additional material risks associated
with the physical operation of its correctional facilities are created as a
result of potential Year 2000 issues.
Operating Company depends upon the proper functioning of third-party computer
and non-information technology systems. These third parties include government
agencies for which Operating Company provides services, commercial banks and
other lenders, construction contractors, architects and engineers, and vendors
such as providers of food supplies and services, inmate medical services,
telecommunications and utilities. Operating Company has initiated communications
with third parties with whom it has important financial or operational
relationships to determine the extent to which they are vulnerable to the Year
2000 issue. Operating Company has not yet received sufficient information from
all parties about their remediation plans to predict the outcome of their
efforts.
If third parties with whom Operating Company interacts have Year 2000 problems
that are not remedied, the following problems could result: (i) in the case of
construction contractors and architects and engineers, in the delayed
construction of correctional facilities; (ii) in the case of vendors, in
disruption of important services upon which Operating Company depends, such as
medical services, food services and supplies, telecommunications and electrical
power, (iii) in the case of government agencies, in delayed collection of
accounts receivable potentially resulting in liquidity stress, or (iv) in the
case of banks and other lenders, in the disruption of capital flows potentially
resulting in liquidity stress.
Operating Company is also evaluating Year 2000 compliance of other software
applications used to track and report assets that are not the property of
Operating Company. This includes applications used to track and report inmate
funds and the inmates' personal effects.
Operating Company is currently developing a contingency plan that is expected to
address financial and operational problems that might arise on and around
January 1, 2000. This contingency plan would include establishing additional
sources of liquidity that could be drawn upon in the event of systems disruption
and identifying alternative vendors and back-up processes that do not rely on
computers, whenever possible. Operating Company management expects to have the
contingency plan completed by mid-year 1999.
Operating Company has incurred and expects to continue to incur 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) in order to achieve Year 2000
compliance. Operating Company currently estimates that these costs will total
approximately $4.0 million. Of this total it is estimated that $2.5 million will
be for the repair of software problems and $1.5 million will be for the
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58
replacement of problem systems and equipment. As of December 31, 1998, CCA had
incurred $600,000 in Year 2000 program costs. These costs are expensed as
incurred. Management of Operating Company believes there will be no material
impact on Operating Company's financial condition or results of operations
resulting from other information technology projects being delayed due to Year
2000 efforts.
The costs of Operating Company's Year 2000 compliance program and the date on
which Operating Company plans to complete it are based on current estimates,
which reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of third-party
remediation plans and other factors. Operating Company can give no assurance
that these estimates will be achieved, and actual results could differ
materially from Operating Company's plans. Specific factors that might cause
such material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
relevant computer source codes and embedded technology, the results of internal
and external testing and the timeliness and effectiveness of remediation efforts
of third parties.
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 "Management's Discussion and Analysis
of Financial Condition and Results of Operation - 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 Bank
Credit Facility debt was 100 basis points higher or lower during 1998, the
Company's interest expense net of amounts capitalized would have been increased
or decreased by approximately $1.0 million.
As of March 19, 1999, the Company had outstanding $40.0 million of convertible
notes with a fixed interest rate of 9.5%, $30.0 million of convertible notes
with a fixed interest rate of 7.5% and $103.4 million of preferred stock with a
fixed dividend rate of 8%. Because the interest and dividend rates with respect
to these instruments are fixed, a hypothetical 10 percent decrease in market
interest rates would not have a material impact on the Company. Similarly, as of
March 19, 1999, the Company had a note receivable in the amount of $137.0
million with a fixed interest rate of 12%, the value of which would not be
materially impacted by an increase or decrease in market interest rates.
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 percent increase 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.
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.
The Company does not believe it has any other material exposure to market risks
associated with interest rates.
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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 report on Form 10-K commencing on page F-2 as indicated below.
The consolidated financial statements of Correctional Management Services
Corporation have been inserted in this Annual Report due to its status as a
significant lessee of the Company.
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS OF
PRISON REALTY CORPORATION
Report of Independent Public Accountants. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997. F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996. F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996. F-6
Consolidated Statements of Cash Flows for the years
December 31, 1998, 1997 and 1996. F-7
Notes to the Consolidated Financial Statements. F-10
CONSOLIDATED FINANCIAL STATEMENTS OF
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
Report of Independent Public Accountants. F-29
Consolidated Balance Sheet as of December 31, 1998. F-30
Consolidated Statement of Stockholders' Equity for the
period from September 11, 1998 through December 31, 1998. F-31
Consolidated Statement of Cash Flows for the period from
September 11, 1998 through December 31, 1998. F-32
Notes to the Consolidated Financial Statements. F-33
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 CCA's Board of Directors to serve as CCA's
independent public accountant for the year ended December 31, 1998, and the
Company's Board of Directors has selected Arthur Andersen LLP to serve as the
Company's independent public accountant for the Merger for the year ended
December 31, 1998, and for the year ending December 31, 1999. Arthur Andersen
LLP also served as independent public accountants for Prison Realty prior to the
Merger and currently serves in the same capacity for Operating Company.
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PART III.
Certain information required by this Part III is omitted from this report in
connection with the filing of a definitive proxy statement by the Company within
120 days after the end of its fiscal year pursuant to Regulation 14A of its
Annual Meeting of Stockholders to be held in May 1999 (the "Proxy Statement"),
and the information included in the Proxy Statement is incorporated in this
Annual Report on Form 10-K by reference to the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information responsive to this Item is contained in the sections entitled
"Proposals for Stockholder Action Proposal 1 - Election of Directors" included
in the Company's Proxy Statement, which information is incorporated herein by
this reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information responsive to this Item is contained in the sections entitled
"Executive Compensation," included in the Company's Proxy Statement, other than
the Compensation Committee Report and Performance Graph required by Items 402(k)
and (l) of Regulation S-K, which information is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information responsive to this Item is contained in the section entitled
"Principal Stockholders and Security Ownership of Management" included in the
Company's Proxy Statement, which information is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information responsive to this Item is contained in the section entitled
"Certain Relationships and Related Transactions" included in the Company's Proxy
Statement, which information is incorporated herein by this reference.
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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 report
on Form 10-K have been filed herewith, beginning on Page F-2 of
this report.
(2) Financial Statement Schedules.
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) No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Annual Report. The Company did,
however, file a Current Report on Form 8-K, dated January 6, 1999,
relating to the completion of the Merger and the Merger-Related
Transactions. Each of Prison Realty and CCA filed a Current Report on
Form 8-K, dated November 20, 1998, relating to the settlement of the
Shareholder Litigation.
(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 Company
has duly caused this Annual Report on Form 10-K to be signed on its behalf by
the undersigned, thereunto duly authorized.
PRISON REALTY CORPORATION
Date: March 30, 1999 By: /s/ Doctor R. Crants
--------------------------------------
Doctor R. Crants,
Chairman and 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 the Annual Report on
Form 10-K of Prison Realty Corporation for the fiscal year ended December 31,
1998, 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 1933, this Annual
Report on Form 10-K 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, 1999
- ------------------------------- (Principal Executive Officer),
Doctor R. Crants Chairman and Director
/s/ J. Michael Quinlan Vice-Chairman and Director March 30, 1999
- -------------------------------
J. Michael Quinlan
/s/ D. Robert Crants, III President and Director March 30, 1999
- -------------------------------
D. Robert Crants, III
/s/ Michael W. Devlin Chief Operating Officer March 30, 1999
- ------------------------------- and Director
Michael W. Devlin
/s/ Vida H. Carroll Chief Financial Officer March 30, 1999
- ------------------------------- (Principal Financial and
Vida H. Carroll Accounting Officer),
Secretary and Treasurer
/s/ C. Ray Bell Director March 30, 1999
- -------------------------------
C. Ray Bell
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SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard W. Cardin Director March 30, 1999
- ----------------------------------
Richard W. Cardin
Director March , 1999
- ----------------------------------
Monroe J. Carell, Jr.
/s/ Jean-Pierre Cuny Director March 30, 1999
- ----------------------------------
Jean-Pierre Cuny
/s/ John W. Eakin, Jr. Director March 30, 1999
- ----------------------------------
John W. Eakin, Jr.
/s/ Ted Feldman Director March 30, 1999
- ----------------------------------
Ted Feldman
/s/ Jackson W. Moore Director March 30, 1999
- ----------------------------------
Jackson W. Moore
Director March , 1999
- ----------------------------------
Rusty L. Moore
/s/ Joseph V. Russell Director March 30, 1999
- ----------------------------------
Joseph V. Russell
/s/ Charles W. Thomas, Ph.D. Director March 30, 1999
- ----------------------------------
Charles W. Thomas, Ph.D.
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PRISON REALTY CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS OF
PRISON REALTY CORPORATION
Report of Independent Public Accountants. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997. F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996. F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996. F-6
Consolidated Statements of Cash Flows for the years
December 31, 1998, 1997 and 1996. F-7
Notes to the Consolidated Financial Statements. F-10
CONSOLIDATED FINANCIAL STATEMENTS OF
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
Report of Independent Public Accountants. F-29
Consolidated Balance Sheet as of December 31, 1998. F-30
Consolidated Statement of Stockholders' Equity for the
period from September 11, 1998 through December 31, 1998. F-31
Consolidated Statement of Cash Flows for the period from
September 11, 1998 through December 31, 1998. F-32
Notes to the Consolidated Financial Statements. F-33
F-1
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Prison Realty Corporation:
We have audited the accompanying consolidated balance sheets of PRISON REALTY
CORPORATION (a Maryland corporation and accounting successor to Corrections
Corporation of America - See Note 1) AND SUBSIDIARIES as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of Prison Realty
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 15, 1999
F-2
66
PRISON REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
ASSETS 1998 1997
- ---------------------------------------------- ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 31,141 $ 136,147
Accounts receivable, net of allowances -- 80,900
Prepaid expenses 134 4,868
Deferred tax assets 5,846 --
Other current assets 6,022 11,507
---------- ----------
Total current assets 43,143 233,422
PROPERTY AND EQUIPMENT, NET 627,389 266,493
OTHER ASSETS:
Notes receivable 138,549 59,264
Investments in affiliates and others 127,691 6,941
Investments in direct financing leases 74,059 90,184
Deferred tax assets 45,354 10,195
Other 34,252 31,441
---------- ----------
Total assets $1,090,437 $ 697,940
========== ==========
(continued)
F-3
67
PRISON REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------------------------------ -------------- ----------
CURRENT LIABILITIES:
Accounts payable $ 66,664 $ 32,094
Accrued salaries and wages -- 9,778
Income taxes payable 14,966 14,128
Deferred tax liabilities -- 1,229
Other accrued expenses 14,536 20,361
Current portion of long-term debt 9,576 5,847
Current portion of deferred gains on real estate transactions 13,294 13,223
Current portion of deferred gains on sales of contracts 10,677 --
---------- ----------
Total current liabilities 129,713 96,660
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 290,257 127,075
Deferred gains on real estate transactions, net
of current portion 112,457 122,529
Deferred gains on sales of contracts, net of
current portion 106,024 --
Other noncurrent liabilities -- 3,600
---------- ----------
Total liabilities 638,451 349,864
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - Series B - $1 (one dollar) par value;
400 shares authorized, 0 and 380 shares issued and
outstanding at December 31, 1998 and 1997, respectively -- 380
Common stock - $.01 (one cent) par value; 300,000 shares
authorized, 79,956 and 70,201 shares issued and
outstanding at December 31, 1998 and 1997, respectively 800 702
Additional paid-in capital 398,493 295,361
Retained earnings 52,693 92,475
Treasury stock, at cost -- (40,842)
---------- ----------
Total stockholders' equity 451,986 348,076
---------- ----------
Total liabilities and stockholders' equity $1,090,437 $ 697,940
========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-4
68
PRISON REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
--------- --------- ---------
REVENUES $ 662,059 $ 462,249 $ 292,513
--------- --------- ---------
EXPENSES:
Operating 496,522 330,470 211,208
Lease 58,018 18,684 2,786
General and administrative 28,628 16,025 12,607
Loan costs writeoff 2,043 -- --
CMSC compensation charge 22,850 -- --
Depreciation and amortization 15,973 14,093 11,339
--------- --------- ---------
624,034 379,272 237,940
--------- --------- ---------
OPERATING INCOME 38,025 82,977 54,573
INTEREST (INCOME) EXPENSE, NET (4,380) (4,119) 4,224
--------- --------- ---------
INCOME BEFORE INCOME TAXES 42,405 87,096 50,349
PROVISION FOR INCOME TAXES 15,424 33,141 19,469
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 26,981 53,955 30,880
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES 16,145 -- --
--------- --------- ---------
NET INCOME $ 10,836 $ 53,955 $ 30,880
========= ========= =========
BASIC NET INCOME PER COMMON SHARE:
Before cumulative effect of accounting change $ .38 $ .80 $ .49
Cumulative effect of accounting change (.23) -- --
--------- --------- ---------
$ .15 $ .80 $ .49
========= ========= =========
DILUTED NET INCOME PER COMMON SHARE:
Before cumulative effect of accounting change $ .34 $ .69 $ .42
Cumulative effect of accounting change (.20) -- --
--------- --------- ---------
$ .14 $ .69 $ .42
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC 71,380 67,568 62,793
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, DILUTED 78,939 78,959 76,160
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-5
69
PRISON REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK
--------------------- --------------------------------------------------
SERIES B ISSUED TREASURY STOCK
-------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1995 -- $ -- 56,472 $ 565 (3) $ (37)
Issuance of common stock -- -- 3,238 32 -- --
Stock options exercised and warrants
converted to stock -- -- 5,940 59 (17) (689)
Income tax benefits of incentive stock
option exercises -- -- -- -- -- --
Compensation expense related to
deferred stock awards -- -- -- -- -- --
Net income -- -- -- -- -- --
------ ------- ------- ----- ------ --------
BALANCE, DECEMBER 31, 1996 -- -- 65,650 656 (20) (726)
Exchange of preferred stock for
acquisition of American Corrections
Transport 380 380 -- -- (665) (32,812)
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 -- -- -- -- -- --
------ ------- ------- ----- ------ --------
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 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 STOCKHOLDERS'
CAPITAL EARNINGS EQUITY
------- -------- ------
BALANCE, DECEMBER 31, 1995 $ 80,535 $ 15,641 $ 96,704
Issuance of common stock 131,780 -- 131,812
Stock options exercised and warrants
converted to stock 14,907 (4,389) 9,888
Income tax benefits of incentive stock
option exercises 11,944 -- 11,944
Compensation expense related to
deferred stock awards 524 -- 524
Net income -- 30,880 30,880
--------- -------- ---------
BALANCE, DECEMBER 31, 1996 239,690 42,132 281,752
Exchange of preferred stock for
acquisition of American Corrections
Transport 32,432 -- --
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 -- 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 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
========= ======== =========
The accompanying notes are an integral part of these consolidated statements.
F-6
70
PRISON REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,836 $ 53,955 $ 30,880
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,973 14,093 11,339
Deferred and other noncash income taxes (40,719) (6,329) 13,117
Other noncash items 757 457 524
(Gain) loss on disposal of assets 1,083 (881) (3,501)
Equity in earnings of unconsolidated entities (535) (916) (1,098)
Recognized gain on real estate transactions (13,984) (5,906) --
Write-off of loan costs 2,043 -- --
CMSC compensation charge 22,850 -- --
Cumulative effect of accounting change 26,468 -- --
Changes in assets and liabilities, net of
acquisitions and divestitures:
Accounts receivable (24,362) 7,105 (55,993)
Prepaid expenses (5,936) (1,928) (1,371)
Other current assets (9,380) 7,980 (623)
Accounts payable 59,734 (7,130) 28,467
Income taxes payable 838 13,242 190
Accrued expenses 12,431 14,636 2,459
Other liabilities (3,600) 3,600 --
--------- --------- ---------
Net cash provided by operating activities 54,497 91,978 24,390
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (417,215) (297,293) (165,703)
(Increase) decrease in restricted cash and investments -- 4,037 (3,025)
Increase in other assets -- (17,868) (11,163)
Merger costs (26,270) -- --
Investments in affiliates, net 603 1,707 (3,138)
Proceeds from disposals of assets 61,299 457,802 6,747
Investment in notes receivable (1,549) (38,156) (22,500)
Increase in direct financing leases -- (84,295) (3,693)
Payments received on direct financing leases and notes receivable 4,713 3,462 553
Acquisition of USCC contracts, net of cash acquired (9,341) -- --
Cash acquired by CMSC, PMS and JJFMS in sales of contracts (4,754) -- --
--------- --------- ---------
Net cash provided by (used in) investing activities (392,514) 29,396 (201,922)
--------- --------- ---------
(continued)
F-7
71
PRISON REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(continued)
1998 1997 1996
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt $ 20,000 $ -- $ 74,700
Payments on long-term debt (151) (57,194) (24,443)
(Payments on) proceeds from line of credit, net 162,000 66,000 (10,500)
Payment of debt issuance costs (9,485) (2,772) (432)
Proceeds from issuance of common stock 66,148 -- 131,006
Proceeds from exercise of stock options and warrants 2,099 9,236 9,888
Purchase of treasury stock (7,600) (5,329) --
--------- --------- ---------
Net cash provided by financing activities 233,011 9,941 180,219
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (105,006) 131,315 2,687
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 136,147 4,832 2,145
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 31,141 $ 136,147 $ 4,832
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 4,424 $ 6,579 $ 8,979
========= ========= =========
Income taxes $ 44,341 $ 24,351 $ 6,630
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES - Increases (decreases) to cash:
Long-term debt was converted into common stock:
Other assets $ 5 $ 23 $ --
Long-term debt (5,800) (1,700) --
Common stock 18 9 --
Additional paid-in capital 3,633 1,668 --
Treasury stock 51,029 -- --
Retained earnings (48,885) -- --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
(Continued)
F-8
72
PRISON REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(continued)
1998 1997 1996
---------- ----------- ------------
Preferred stock was converted into common stock:
Preferred stock $ (380) $ -- $ --
Common stock 6 -- --
Additional paid-in capital 374 -- --
--------- ----------- ------------
$ -- $ -- $ --
========= =========== ============
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 the Company's
common stock:
Other assets $ 1,450 $ -- $ --
Common stock 38 -- --
Additional paid-in capital 15,892 -- --
Treasury stock (17,380) -- --
--------- ----------- ------------
$ -- $ -- $ --
========= =========== ============
Sales of contracts to CMSC, PMS and JJFMS:
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 and others (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-9
73
PRISON REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION
Prison Realty Corporation (the "Company"), a Maryland corporation, was
formed in September 1998. Corrections Corporation of America, a Tennessee
corporation ("CCA"), merged with and into the Company on December 31, 1998
(the "Merger"), pursuant to an Amended and Restated Agreement and Plan of
Merger by and among CCA, CCA Prison Realty Trust ("Prison Realty") and the
Company, dated as of September 29, 1998 (the "Merger Agreement"). In the
Merger, CCA shareholders received .875 share of common stock of the
Company in exchange for each share of CCA common stock. CCA common stock
had a $1.00 (one dollar) par value and the Company's common stock has a
$.01 (one cent) par value.
The Merger was legally structured as a common control transfer from CCA to
the Company. For accounting purposes, the Merger has been accounted for as
a reverse acquisition of Prison Realty Corporation by CCA. As such, CCA's
assets and liabilities have been carried forward at historical cost; CCA's
historical financial statements are presented as the continuing accounting
entity's historical financial statements; and the equity section of the
balance sheet, earnings per share and the statements of stockholders'
equity 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.
Prior to the Merger, CCA had operated and managed prisons and other
correctional facilities and provided prisoner transportation services for
government agencies. CCA provided a full range of related services to
government agencies, including managing, financing, developing, designing
and constructing new facilities and redesigning and renovating older
facilities.
Prior to the merger transactions and divestitures of contracts and related
net assets discussed in Note 2, CCA had a 50% interest in Corrections
Corporation of Australia PTY LTD ("CC Australia"). CC Australia provides
services similar to CCA in Australia and surrounding countries. CCA's
wholly-owned subsidiary, CCA (UK) Limited, had a 50% interest in UK
Detention Services Limited ("UKDS") and Agecroft Prison Management Limited
("APM"). CCA had accounted for these investments under the equity method.
Assets and liabilities were converted from their functional currency into
the U.S. dollar utilizing the conversion rate in effect at the respective
balance sheet date. Revenue and expense items were converted using the
weighted average rate during the period. The excess of CCA's investment in
these unconsolidated subsidiaries over the underlying equity has been
amortized over a period of twenty-five years. CCA's interests in CCA (UK)
Limited and these unconsolidated subsidiaries were sold in connection with
the merger transactions and divestitures discussed in Note 2.
The accompanying consolidated financial statements present CCA's
historical consolidated results of operations through the date of the
Merger. The accompanying consolidated balance sheet as of December 31,
1998, presents the Company's consolidated financial position subsequent to
the Merger and subsequent to the divestitures of the capital stock of
certain wholly-owned corporate subsidiaries of CCA as well as all of CCA's
management contracts and certain other assets and liabilities as discussed
more fully in Note 2.
F-10
74
2. MERGER TRANSACTIONS
On December 31, 1998, immediately prior to the Merger, CCA sold to a newly
created company, Correctional Management Services Corporation ("CMSC"),
all of the issued and outstanding capital stock of certain wholly-owned
corporate subsidiaries of CCA, certain management contracts and certain
other assets and liabilities, and entered into a trade name use agreement
with CMSC, as described below. In exchange, CCA received an installment
note in the principal amount of $137,000 (the "CMSC Note") and 100% of the
non-voting common stock of CMSC. The non-voting common stock represents a
9.5% economic interest in CMSC valued at the implied fair market value of
$4,750 which is included in Investments in affiliates and others in the
accompanying balance sheets. The CMSC Note is payable over 10 years and
bears interest at a rate of 12% per annum (see Note 6). The sale to CMSC
generated a deferred gain of $63,316. In accordance with the installment
method of gain recognition as specified by the Securities and Exchange
Commission's Staff Accounting Bulletin No. 81, the deferred gain from the
sale of contracts to CMSC will be amortized into income over the six year
period in which principal payments on the CMSC Note will be received. The
Company's investment in CMSC will be accounted for under the cost method
of accounting.
On December 31, 1998, immediately prior to the Merger and in connection
with the transaction described above, CCA entered into a trade name use
agreement with CMSC (the "Trade Name Use Agreement"). Under the Trade Name
Use Agreement, which has a term of ten years, CCA granted to CMSC 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, CMSC will pay a fee equal to (i) 2.75% of
the gross revenues of CMSC for the first three years of the Trade Name Use
Agreement, (ii) 3.25% of CMSC's gross revenues for the following two years
of the Trade Name Use Agreement, and (iii) 3.625% of CMSC's gross revenues
for the remaining term of the Trade Name Use Agreement, provided that
after completion of the Merger the amount of such fee may not exceed (a)
2.75% of the gross revenues of the Company for the first three years of
the Trade Name Use Agreement, (b) 3.5% of the Company's gross revenues for
the following two years of the Trade Name Use Agreement, and (c) 3.875% of
the Company's gross revenues for the remaining term of the Trade Name Use
Agreement.
On December 31, 1998, immediately prior to the Merger, CCA sold to a
newly-created company, Prison Management Services, LLC ("PMS"), certain
management contracts and certain other assets and liabilities relating to
government-owned adult prison facilities. In exchange, CCA received 100%
of the non-voting membership interest in PMS valued at the implied fair
market value of $67,059 which is included in Investments in affiliates and
others in the accompanying balance sheets. This interest obligates PMS to
make distributions to CCA equal to 95% of its net income, as determined in
accordance with generally accepted accounting principles ("GAAP"). The
sale to PMS generated a deferred gain of $35,363.
On December 31, 1998, immediately prior to the Merger, CCA sold to a
newly-created company, Juvenile and Jail Facility Management Services, LLC
("JJFMS"), certain management contracts and certain other assets and
liabilities relating to government-owned jails and juvenile facilities. In
exchange, CCA received 100% of the non-voting membership interest in JJFMS
valued at the implied fair market value of $55,882 which is included in
Investments in affiliates and others in the accompanying balance sheets.
This interest obligates JJFMS to make distributions to CCA equal to 95% of
its net income, as determined in accordance with GAAP. The sale to JJFMS
generated a deferred gain of $18,022.
The deferred gains from the sales of contracts to PMS and JJFMS will be
amortized into income over a five year period which represents the average
remaining lives of the contracts sold plus any contractual renewal options
as specified by the Securities and Exchange Commission's Staff Accounting
Bulletin No. 81. The Company's investments in PMS and JJFMS will be
accounted for under the equity method of accounting.
F-11
75
On January 1, 1999, Prison Realty merged with and into the Company (the
"Prison Realty Merger"). In the Prison Realty Merger, Prison Realty
shareholders received 1.0 share of common stock or Series A Preferred
Stock of the Company in exchange for each Prison Realty common share or
Series A Preferred Share. The Prison Realty Merger was accounted for as a
purchase acquisition of Prison Realty. Subsequent to the Prison Realty
Merger, the Company intends to operate as a REIT and will acquire, develop
and lease properties rather than operate and manage prison facilities. As
such, the Company's results of operations for all periods prior to January
1, 1999 will reflect the operating results of CCA and the results of
operations subsequent to January 1, 1999 will reflect the operating
results of a REIT.
The following unaudited pro forma operating information presents a summary
of consolidated results of combined operations as a REIT of the Company
and Prison Realty for the year ended December 31, 1998 (excluding (i)
CCA's historical operations, (ii) the effects of the CMSC compensation
charge, (iii) the loan costs write off and (iv) the cumulative effect of
accounting change), as if the Prison Realty Merger had occurred as of
January 1, 1998:
Revenues $ 178,907
Operating income $ 141,464
Net income $ 179,763
Net income per share:
Basic $ 1.93
Diluted $ 1.78
The following unaudited pro forma balance sheet information presents a
summary of the combined financial position of the Company and Prison
Realty Trust as if the Prison Realty Merger had occurred as of December
31, 1998:
Current assets $ 76,379
Total assets $ 2,279,268
Current liabilities $ 618,521
Total liabilities $ 1,074,548
Stockholders' Equity $ 1,204,720
On January 1, 1999, immediately after the Prison Realty Merger, all
existing leases between CCA and Prison Realty were cancelled and the
Company entered into a master lease agreement and leases with respect to
each leased property with CMSC (the "CMSC Leases"). The terms of the CMSC
Leases are twelve years which may be extended at fair market rates for
three additional five-year periods upon the mutual agreement of the
Company and CMSC.
Future lease payments expected to be received by the Company under the
CMSC Leases as of January 1, 1999 are as follows:
Years Ending December 31:
1999 $ 250,295
2000 260,307
2001 270,719
2002 281,548
2003 292,810
Thereafter 2,405,204
------------
$ 3,760,883
============
F-12
76
On January 1, 1999, immediately after the Prison Realty Merger, the
Company and CMSC entered into a Right to Purchase Agreement (the "CMSC
Right to Purchase Agreement") pursuant to which CMSC granted to the
Company a right to acquire, and lease back to CMSC at fair market rental
rates, any correctional or detention facility acquired or developed and
owned by CMSC 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 CMSC. Additionally, CMSC granted the Company a right of
first refusal to acquire any CMSC-owned correctional or detention facility
should CMSC receive an acceptable third party offer to acquire any such
facility.
On January 1, 1999, immediately after the Prison Realty Merger, the
Company entered into a services agreement (the "CMSC Services Agreement")
with CMSC pursuant to which CMSC 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 CMSC Services
Agreement. In such capacity, CMSC will 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, governmental relations, and
project marketing. In consideration for the performance of such services
by CMSC, the Company will 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 per
bed for facility preparation services provided by CMSC 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 CMSC if additional
services are requested by the Company.
On January 1, 1999, immediately after the Prison Realty Merger, the
Company entered into a tenant incentive agreement (the "Tenant Incentive
Agreement") with CMSC pursuant to which the Company will pay to CMSC an
incentive fee to induce CMSC to enter into CMSC Leases with respect to
those facilities developed and facilitated by CMSC. The amount of the
incentive fee will be approximately $840 per new bed of each facility
leased by CMSC where CMSC has served as developer and facilitator. The
incentive fees paid to CMSC will be deferred and amortized as a reduction
to rental revenues over the respective lease term.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments in majority-owned affiliates where control does not exist 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 are accounted for under the cost method. All material
intercompany transactions and balances have been eliminated in
consolidation.
Debt issuance costs are amortized on a straight-line basis over the life
of the related debt. Historically, this amortization has been charged to
depreciation and amortization expense.
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. 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.
F-13
77
Investments in direct financing leases represent the portion of the
Company'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.
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") 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.
CCA had maintained contracts with various governmental entities to manage
their facilities for fixed per diem rates or monthly fixed rates. CCA also
maintained contracts with various federal, state and local governmental
entities for the housing of inmates in CCA owned facilities at fixed per
diem rates. These contracts usually contain expiration dates with renewal
options ranging from annual to multi-year renewals. Most of these
contracts have current terms that require renewal every two to five years.
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. 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 2,
CCA sold its management contracts and related net assets on December 31,
1998.
To meet the reporting requirements of SFAS 107, "Disclosures About Fair
Value of Financial Instruments," the Company calculates the fair value of
financial instruments using quoted market prices of similar instruments.
At December 31, 1998, there were no material differences in the book
values of the Company's financial instruments and their related fair
values, except for the Company's convertible subordinated notes (see Note
10) and the forward contract for convertible subordinated notes (see Note
17), which based on the conversion rate on the underlying equity
securities, have an estimated fair market value of approximately $136,636.
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
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.
In accordance with SFAS 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 would utilize estimates of undiscounted cash
flows to determine if an impairment exists.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 130, "Reporting Comprehensive Income," 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, had no significant impact on the
Company's results of operations, as comprehensive income was
F-14
78
equivalent to the Company's reported net income for the years ended
December 31, 1998, 1997 and 1996.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information", 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.
Effective January 1, 1998, the Company adopted the provisions of the
AICPA's Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-up Activities". As a result, the Company recorded a $16,145 charge
as a cumulative effect of accounting change, net of taxes of $10,323, 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
$14,871 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.
Certain reclassifications of 1997 and 1996 amounts have been made to
conform with the 1998 presentation.
4. ACQUISITIONS AND DIVESTITURES
In April 1998, CCA acquired all of the issued and outstanding capital
stock of eight subsidiaries of U.S. Corrections Corporation ("USCC") (the
"USCC Acquisition") for approximately $10,000, less cash acquired. The
transaction has been 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, CCA acquired contracts to manage four currently
operating facilities in Kentucky, each of which was owned by 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. CCA also obtained the right to
enter into contracts to manage two North Carolina facilities owned by
Prison Realty, both of which were under construction as of April 1998.
During 1998, both North Carolina facilities became operational and CCA
entered into contracts to manage those facilities upon completion of the
construction.
On October 2, 1997, the Company exchanged 380 shares of Series B
convertible preferred stock for substantially all of the assets of
American Corrections Transport (primarily consisting of 665 shares of the
Company's common stock) in a tax-free reorganization pursuant to Section
368(a)(l)(C) of the Internal Revenue Code of 1986, as amended.
During the second and fourth quarters of 1996, the Company purchased the
remaining two-thirds of UKDS from its original joint venture partners for
an aggregate total of $4,504. After consideration of several strategic
alternatives related to UKDS, the Company sold 20% of the entity to
Sodexho, S.A. ("Sodexho"), a French conglomerate, in December 1996 and
recognized an after-tax gain of $515. In conjunction with this
transaction, Sodexho was also provided the option to purchase an
additional 30% of UKDS. In the second quarter of 1997, Sodexho exercised
its option to purchase an additional 30% of UKDS, and the Company
recognized an after-tax gain of $777 on the sale.
F-15
79
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
DECEMBER 31,
---------------------------
1998 1997
--------- ----------
Land $ 22,811 $ 13,632
Buildings and improvements 393,610 95,614
Equipment 12,424 19,863
Furniture and fixtures 2,449 2,626
Construction in progress 206,346 152,042
----------- ------------
637,640 283,777
Less accumulated depreciation (10,251) (17,284)
----------- ------------
$ 627,389 $ 266,493
=========== ============
Depreciation expense was $13,644, $9,710, and $7,147 for 1998, 1997 and
1996, respectively.
6. NOTES RECEIVABLE
Notes receivable consists of the following:
DECEMBER 31,
----------------------
1998 1997
--------- ---------
Note receivable from CMSC, principal due in six equal
annual installments beginning December 31, 2003;
interest at 12%, payable annually beginning
December 31, 1999 $137,000 $ --
Notes receivable, principal and interest payments
of $535 monthly through September 2017, interest
at 9.25%, secured by a first mortgage on a facility -- 58,154
Other 1,549 2,186
-------- --------
138,549 60,340
Less current portion in other current assets -- (1,076)
-------- --------
$138,549 $ 59,264
======== ========
Ten percent of the outstanding principal of the $137,000 note receivable
from CMSC is personally guaranteed by the Company's Chief Executive
Officer and Chairman of the Board of Directors who also serves as the
Chief Executive Officer and a member of the Board of Directors of CMSC.
In June 1998, the Company purchased a facility for $3,662 in cash plus the
forgiveness of a note receivable with an outstanding principal balance of
$57,624 at the time of the acquisition.
F-16
80
7. INVESTMENTS IN AFFILIATES AND OTHERS
Investments in affiliates accounted for under the equity method totaled
$122,941 and $6,941 at December 31, 1998 and 1997, respectively.
Investments in entities accounted for under the cost method totaled $4,750
and $0 at December 31, 1998 and 1997, respectively. The investment balance
at December 31, 1998, is the result of the Company's acquisition of
ownership interests in CMSC, PMS and JJFMS on December 31, 1998 as
discussed in Note 2. The $6,941 at December 31, 1997 related to
investments in unconsolidated subsidiaries divested as part of the
transactions discussed in Note 2.
8. INVESTMENTS IN DIRECT FINANCING LEASES
At December 31, 1998, the Company's investments in direct financing leases
represent 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 contract period.
A schedule of future minimum rentals to be received under the direct
financing leases at December 31, 1998, is as follows:
YEAR AMOUNT
---- ------
1999 $ 5,101
2000 5,101
2001 5,101
2002 5,101
2003 5,101
Thereafter 65,394
----------
Total minimum obligation 90,899
Less unearned income (13,090)
----------
Present value of direct financing leases 77,809
Less current portion in other current assets (3,750)
----------
Long-term portion $ 74,059
==========
In May 1998, the Company agreed to pay a governmental agency $3,500 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.
F-17
81
9. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31,
--------------------
1998 1997
-------- ---------
Deferred project development costs $ -- $ 786
Project development costs, less accumulated
amortization of $0 and $513, respectively -- 5,832
Facility start-up costs, less accumulated
amortization of $0 and $5,351, respectively -- 20,459
Debt issuance costs, less accumulated
amortization of $627 and $1,135, respectively 7,028 1,191
Deferred placement fees 954 2,404
Deferred acquisition costs 26,270 --
Other assets -- 769
------- -------
$34,252 $31,441
======= =======
In connection with the Merger and the Prison Realty Merger discussed in
Note 2, the Company incurred $26,270 of acquisition costs which have been
deferred and will be capitalized as costs of the Merger and the Prison
Realty Merger.
In connection with procuring the Company's new $650,000 credit facility
discussed in Note 10, the Company incurred $6,541 of debt issuance costs
prior to December 31, 1998.
10. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------------------
1998 1997
--------- --------
Revolving Credit Facility payable to a group of
banks, principal due September 1999, interest payable
quarterly at the bank's prime rate (7.75% at December
31, 1998) or LIBOR plus 1.25% (6.31% at December 31,
1998). Replaced by new credit facility in January 1999 $ 222,000 $ 70,000
Convertible Subordinated Notes, principal due at
maturity in 2002 with call provisions beginning in
March 2000, interest payable quarterly at 7.5% 50,000 50,000
Convertible Subordinated Notes, principal due at
maturity in 1999 with call provisions beginning in
June 1999, interest payable semi-annually at 8.5% 7,000 7,000
Convertible Subordinated Notes, principal due at
maturity in 2008, interest payable semi-annually at 9.5% 20,000 --
Convertible Subordinated Notes, principal due at maturity
in 1998, interest payable quarterly at 8.5% -- 5,800
Other 833 122
--------- ---------
299,833 132,922
Less current portion (9,576) (5,847)
--------- ---------
$ 290,257 $ 127,075
========= =========
F-18
82
At December 31, 1998, the Company's revolving credit facility provided for
borrowings up to $350,000. The facility bore interest at the bank's prime
rate or LIBOR plus 1.25%. The facility was used for working capital and
letters of credit. Letters of credit totaling $98,713 have been issued.
The unused commitment at December 31, 1998 was $19,287. In connection with
the merger transactions and divestitures discussed in Note 2, PMS and
JJFMS each assumed $5,000 of debt related to the Company's revolving
credit facility. In January 1999, PMS and JJFMS repaid their portions of
the outstanding debt balance. The revolving credit facility was replaced
on January 1, 1999 with a new credit facility discussed below.
On January 1, 1999, the Company completed a new $650,000, secured credit
facility ("New Credit Facility"). The New Credit Facility replaced the
Company's Revolving Credit Facility, which had a maximum commitment level
of $350,000. The New Credit Facility includes up to a maximum of $250,000
in term loans and $400,000 in revolving loans, including a $150,000
subfacility for letters of credit. The term loans require principal
payments throughout the term of the loan with the remaining balance
maturing on January 1, 2003 and the revolving loans maturing on January 1,
2002. Interest rates, unused commitment fees, and letter of credit fees on
the New Credit Facility are subject to change based on the Company's
senior debt rating. The New Credit Facility is secured by mortgages on the
Company's real property.
Borrowings under the New Credit Facility are limited based on a borrowing
base formula which considers, among other things, eligible real estate.
The New Credit Facility contains certain restrictive covenants, the most
restrictive of which include: (a) maintenance of a leverage ratio,
interest coverage ratio, debt service coverage ratio and total
indebtedness ratio, and (b) restrictions on the incurrence of additional
indebtedness.
In December 1998, the Company issued $20,000 of convertible subordinated
notes due in 2008 with interest payable semi-annually at 9.5%.
At December 31, 1998, the Company had a $2,500 letter of credit facility.
Letters of credit totaling $1,553 have been issued to secure the Company's
worker's compensation insurance policy, performance bonds and utility
deposits. The unused commitment at December 31, 1998 was $947. The
facility was replaced in January 1999 in connection with the New Credit
Facility.
The Company does not maintain any significant formal or informal
compensating balance arrangements with financial institutions.
The Convertible Subordinated Notes are convertible into the Company's
common stock at prices ranging from $4.09 to $28.53 per share. The Company
may require conversion under certain conditions after the stock has a
market value of 150% of the conversion price for a specified period. In
1998 and 1997, respectively, Convertible Subordinated Notes with a face
value of $5,800 and $1,700 were converted into 2,880 and 879 shares of
common stock.
The Company capitalized interest of $11,771, $6,263 and $502 in 1998, 1997
and 1996, respectively. Interest (income) expense, net is comprised of the
following for each year:
1998 1997 1996
------------ ----------- ---------
Interest expense $ 7,009 $ 6,633 $ 8,200
Interest income (11,389) (10,752) (3,976)
------------ ------------ ---------
$ (4,380) $ (4,119) $ 4,224
============ ============ =========
F-19
83
Maturities of long-term debt, based on the terms of the New Credit
Facility, for the next five years and thereafter are:
1999 $ 9,576
2000 2,584
2001 1,968
2002 265,228
2003 114
Thereafter 20,363
-----------
$ 299,833
===========
11. RELATIONSHIP WITH CCA PRISON REALTY TRUST
During 1998 and 1997, CCA sold a total of 14 correctional and detention
facilities or expansions of existing facilities to Prison Realty. Of these
14 facilities or expansions of existing facilities, two were sold in 1998
and 12 were sold in 1997. Immediately after the sale of each facility or
expansion, CCA had entered into agreements with Prison Realty to lease the
facilities back to CCA pursuant to long-term, triple net leases which
required CCA to pay all operating expenses, taxes, insurance and other
costs. CCA paid $65,472 and $19,628 to Prison Realty in lease payments
during 1998 and 1997, respectively.
As of December 31, 1998 and 1997, the net property and equipment had been
removed from the balance sheet and the gains realized on the sale
transactions have been deferred and were historically recognized as lease
expense reductions over the terms of the leases.
Subsequent to December 31, 1998, and in conjunction with the Prison Realty
Merger, all of the existing leases were cancelled with the related
deferred gains recorded as a reduction in the basis of Prison Realty's
property, plant and equipment acquired in the Prison Realty Merger
discussed in Note 2.
During 1998, CCA had also provided certain services to Prison Realty
related to facilitating the development and construction of facilities on
behalf of Prison Realty. During 1998, CCA recognized $3,082 of revenues
from Prison Realty for services rendered in connection with the
development of new facilities.
The Chairman of the Board of Directors and Chief Executive Officer of the
Company is also the Chairman of the Board of Trustees of Prison Realty.
12. INCOME TAXES
The provision for income taxes is comprised of the following components:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
--------- ---------- ----------
CURRENT PROVISION
Federal $ 41,904 $ 35,930 $ 5,567
State 7,914 3,540 785
---------- ---------- ---------
49,818 39,470 6,352
---------- ---------- ---------
INCOME TAXES CHARGED TO EQUITY
Federal 4,016 5,679 10,719
State 459 649 1,225
---------- ---------- ---------
4,475 6,328 11,944
---------- ---------- ---------
DEFERRED PROVISION (BENEFIT)
Federal (34,848) (11,360) 1,052
State (4,021) (1,297) 121
---------- ---------- ---------
(38,869) (12,657) 1,173
---------- ---------- ---------
Provision for income taxes $ 15,424 $ 33,141 $ 19,469
========== ========== =========
F-20
84
In addition to the above, the cumulative effect of accounting change for
1998 was reported net of $10,323 of estimated tax benefit. Of the $10,323
total tax benefit related to the cumulative effect of accounting change,
approximately $3,998 related to current tax benefit and approximately
$6,325 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 are as follows:
DECEMBER 31,
-----------------------
1998 1997
--------- ---------
CURRENT DEFERRED TAX ASSETS
Asset reserves and liabilities not yet
deductible for tax $ 2,750 $ 2,546
Deferred revenue 2,300 2,731
Other 796 --
------- --------
Total current deferred tax assets 5,846 5,277
------- --------
CURRENT DEFERRED TAX LIABILITIES
Tax in excess of book amortization -- 6,480
Income item not yet taxable and other -- 26
------- --------
Total current deferred tax liabilities -- 6,506
------- --------
Net current deferred tax assets (liabilities) $ 5,846 $ (1,229)
======= ========
NONCURRENT DEFERRED TAX ASSETS
Deferred gain on real estate transactions and
sales of contracts $44,779 $ 12,684
Other 2,055 2,245
------- --------
Total noncurrent deferred tax assets 46,834 14,929
------- --------
NONCURRENT DEFERRED TAX LIABILITIES
Tax in excess of book depreciation 411 2,443
Income items not yet taxable and other 1,069 2,291
------- --------
Total noncurrent deferred tax liabilities 1,480 4,734
------- --------
Net noncurrent deferred tax assets $45,354 $ 10,195
======= ========
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, is as follows:
1998 1997 1996
-------- ------- -------
Statutory federal rate 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit 4.0 4.0 4.0
CMSC compensation charge 21.0 - -
Deductions not previously benefited (29.4) - -
Other items, net 5.8 (.9) (.3)
----- ---- ----
36.4% 38.1% 38.7%
===== ==== ====
F-21
85
13. CMSC COMPENSATION CHARGE
The Company recorded a $22,850 charge to expense in 1998 for the implied
fair value of 5,000 shares of CMSC voting common stock issued by CMSC to
certain employees of CCA and Prison Realty. The shares were granted to
certain founding shareholders of CMSC in September 1998. The Company nor
CMSC received any proceeds from the issuance of these shares. The fair
value of these common shares was determined at the date of the Merger
based upon the implied value of CMSC derived from $16,000 in cash
investments made by outside investors in December 1998, in return for a
32% ownership interest in CMSC.
14. EARNINGS PER SHARE
The Company has adopted the provisions of SFAS 128, "Earnings Per Share."
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.
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 8.5%
convertible subordinated notes are considered dilutive using the
if-converted method. The following table presents information necessary to
calculate diluted earnings per share for the years ended December 31:
1998 1997 1996
------ -------- -------
Net income $10,836 $53,955 $30,880
Interest expense applicable to convertible
subordinated notes, net of tax 366 700 752
------- ------- -------
Adjusted net income $11,202 $54,655 $31,632
======= ======= =======
Weighted average common shares outstanding 71,380 67,568 62,793
Effect of dilutive options and warrants 3,689 6,369 7,900
Conversion of preferred stock 481 159 --
Conversion of convertible subordinated notes 3,389 4,863 5,467
------- ------- -------
Adjusted diluted common shares outstanding 78,939 78,959 76,160
======= ======= =======
Diluted earnings per share $ .14 $ .69 $ .42
======= ======= =======
F-22
86
15. STOCKHOLDERS' EQUITY
Preferred Stock -
During 1998, the Company authorized 20,000 shares of $.01 (one cent) par
value preferred stock of which 4,300 shares are designated as 8% Series A
Cumulative Preferred Stock. As of December 31, 1998, no $.01 (one cent)
par value 8% Series A Cumulative Preferred Stock was issued or
outstanding.
The Company has authorized 1,000 shares of $1 (one dollar) par value
Series A Preferred Stock. At December 31, 1998 and 1997, no Series A
Preferred Stock was issued or outstanding.
CCA had authorized 400 shares of $1 (one dollar) par value Series B
convertible preferred stock. During 1997, CCA issued approximately 380
shares of Series B convertible preferred stock. The preferred stock had
the same voting rights as CCA's common stock. Dividends were to be paid on
the preferred stock at a rate equal to two times the dividend being paid
on each share of CCA's common stock. Each share of the preferred stock was
convertible into 1.94 shares of CCA's common stock. On October 2, 1998,
pursuant to the terms of an Exchange Agreement by and among CCA, American
Corrections Transport, Inc. ("ACT") and certain shareholders of ACT, and
the charter of CCA, as amended, CCA converted each share of its Series B
convertible preferred stock into 1.94 shares of CCA's common stock. CCA
received no cash proceeds as a result of the transaction.
Stock Offerings -
On June 5, 1996, the Company completed a secondary public offering of
3,238 new shares of its common stock. The net proceeds of $131,812 were
used to develop, acquire and expand correctional and detention facilities.
On November 4, 1998, CCA filed a Registration Statement on Form S-3 to
register up to 2,982 shares of CCA common stock for sale on a continuous
and delayed basis using a "shelf" registration process. During December
1998, CCA sold, in a series of private placements, 2,882 shares of CCA
common stock to institutional investors pursuant to this registration
statement. The net proceeds of approximately $65,393 were utilized by CCA
for general corporate purposes, including the repayment of indebtedness,
financing capital expenditures and working capital.
Stock Split -
On June 5, 1996, the Board of Directors declared a two-for-one stock split
of the Company's common stock to be effective on July 2, 1996. An amount
equal to the par value of the common stock outstanding as of July 2, 1996,
was transferred from additional paid-in capital to the common stock
account. All references to number of shares and to per share data in the
consolidated financial statements have been adjusted for these stock
splits.
Stock Warrants -
CCA had issued stock warrants to certain affiliated and unaffiliated
parties for providing certain financing, consulting and brokerage services
to CCA and to stockholders as a dividend. At December 31, 1997, 1,100
stock warrants were outstanding. All outstanding warrants were exercised
in 1998 for 3,850 shares of common stock with no cash proceeds received by
CCA.
Treasury Stock -
On December 31, 1998 all outstanding treasury stock was retired in
connection with the Merger discussed in Note 2, resulting in a $17,561
reduction to stockholders' equity.
F-23
87
Stock Option Plans -
The Company has incentive and nonqualified stock option plans under which
options may be granted to "key employees" as designated by the Board of
Directors. The options are granted with exercise prices that equal market
value on the date of grant. The options 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 the grant.
The Company's Board of Directors approved a stock repurchase program for
up to an aggregate of 350 shares of the Company's stock for the purpose of
funding the employee stock options, stock ownership and stock award plans.
In September 1997, the Company repurchased 108 shares of the Company's
stock from a member of the Board of Directors of the Company at the market
price pursuant to this program. In March 1998, the Company repurchased 175
shares from the Company's Chief Executive Officer at the market price
pursuant to this program.
Stock option transactions relating to the Company's incentive and
nonqualified stock option plans are summarized below:
1998
---------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- ---------------
Outstanding at beginning of period 2,496 $ 14.75
Granted 467 38.55
Exercised (1,393) 6.21
Canceled (51) 28.23
------ ----------
Outstanding at end of period 1,519 $ 26.08
====== ==========
Available for future grant 2,035 --
====== ==========
Exercisable 1,264 $ 21.47
====== ==========
All options outstanding at December 31, 1998 to purchase CCA common stock,
are to be 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.
1997
-----------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding at beginning of period 3,065 $ 11.38
Granted 397 27.23
Exercised (943) 8.69
Canceled (23) 29.95
------ ----------
Outstanding at end of period 2,496 $ 14.75
====== ==========
Available for future grant 2,452 --
====== ==========
Exercisable 2,045 $ 11.41
====== ==========
F-24
88
1996
--------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
-------- --------------
Outstanding at beginning of period 3,427 $ 4.26
Granted 790 30.93
Exercised (1,135) 3.34
Canceled (17) 26.25
------ ---------
Outstanding at end of period 3,065 $ 11.38
====== =========
Available for future grant 2,581 --
====== =========
Exercisable 2,276 $ 4.64
====== =========
The weighted average fair value of options granted during 1998, 1997 and
1996 was $16.43, $11.59 and $14.03 per option, respectively, based on the
estimated fair value using the Black-Scholes option-pricing model. The
options outstanding at December 31, 1998, have exercise prices between
$1.46 and $40.00 and a weighted average remaining contractual life of 7
years.
During 1995, the Company authorized the issuance of 295 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 $3,670 of awards
over the vesting period.
During 1997, the Company granted 70 stock options to a member of the Board
of Directors of the Company to purchase the Company's common stock. The
options were granted with an exercise price less than the market value on
the date of grant. The options are exercisable immediately. As of December
31, 1998, the Company has expensed the $480 of compensation.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes new financial accounting and reporting
standards for stock-based compensation plans. The Company has adopted the
disclosure-only provisions of SFAS 123 and continues to account 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 1998, 1997 and 1996 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:
1998 1997 1996
--------- --------- --------
Net income - as reported $ 10,836 $ 53,955 $ 30,880
Net income - pro forma 6,769 48,911 25,995
Net income per share - Basic - as reported $ .15 $ .80 $ .49
Net income per share - Basic - pro forma .09 .72 .41
Net income per share - Diluted - as
reported $ .14 $ .69 $ .42
Net income per share - Diluted -
pro forma .09 .63 .35
F-25
89
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:
1998 1997 1996
------- -------- --------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 47.7% 40.4% 49.5%
Risk-free interest rate 4.6% 5.3% 5.9%
Expected life of options 4 YEARS 4 years 4 years
Employee Stock Ownership Plan -
The Company has an Employee Stock Ownership Plan ("ESOP") whereby each
employee of the Company who is at least 18 years of age is eligible for
membership in the plan as of January 1 of their first anniversary year in
which they have completed at least one thousand hours of service.
Benefits, which become 40% vested after four years of service and 100%
vested after five years of service, are paid on death, retirement or
termination. The Board of Directors has discretion in establishing the
amount of the Company's contributions. The Company's contributions to the
plan may be in the form of common stock, cash or other property.
Contributions to the plan amounted to $5,088, $3,723 and $2,086 for the
years ended December 31, 1998, 1997 and 1996, respectively. In connection
with the merger transactions and divestitures discussed in Note 2, the
Company's ESOP will be merged in 1999 with a newly formed 401(k) plan
administered by CMSC, PMS and JJFMS.
16. REVENUES AND EXPENSES
Approximately 96%, 98% and 99% of the Company's revenues for the years
ended December 31, 1998, 1997 and 1996, respectively, relate to amounts
earned from federal, state and local governmental management and
transportation contracts.
The Company had revenues of 18%, 21% and 21% from the federal government
and 65%, 59% and 54% from state governments for the years ended December
31, 1998, 1997 and 1996, respectively. One state government accounted for
revenues of 10%, 13% and 16% for the years ended December 31, 1998, 1997
and 1996, respectively. In 1997, the Company recognized $7,900 of
additional management service revenues. The Company recognized after tax
development fee income of $2,453 in 1997, related to a contract to design,
construct and equip a managed detention facility.
Accounts receivable and other current assets include $3,750 and $81,387
due from federal, state and local governments at December 31, 1998 and
1997, respectively. Accounts payable at December 31, 1998, consist of the
following:
ACCOUNTS
PAYABLE
------------
Trade $ 21,999
Construction 44,665
----------
$ 66,664
==========
F-26
90
Salaries and related benefits represented 61%, 66% and 64% of operating
expenses for the years ended December 31, 1998, 1997 and 1996,
respectively.
17. INTERNATIONAL ALLIANCE
The Company has 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 the Company by acquiring several instruments. In 1994, the
Company sold Sodexho 2,450 shares of common stock at $4.29 per share and a
$7,000 convertible subordinated note bearing interest at 8.5%. Sodexho
also received warrants that were exercised in 1998 for 3,850 shares of
common stock. In consideration of the placement of the aforementioned
securities, the Company paid Sodexho $3,960 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 the Company of raising the various
components of capital and are charged to debt issuance costs or equity as
the respective financings are completed.
In 1995, the Company and Sodexho entered into a forward contract whereby
Sodexho would purchase up to $20,000 of convertible subordinated notes at
any time prior to December 1997. In 1997, the Company and Sodexho extended
the expiration date of this contract to December 1999. When purchased, the
notes will bear interest at LIBOR plus 1.35% and will be convertible into
common shares at a conversion price of $7.80 per share.
In 1996, the Company sold $20,000 of convertible notes to Sodexho pursuant
to their contractual preemptive right. The notes bear interest at 7.5% and
are convertible into common shares at a conversion price of $28.53 per
share.
18. RELATED PARTY TRANSACTIONS
The Company pays legal fees to a law firm of which one of the partners is
a stockholder and had been a member of the CCA Board of Directors. Legal
fees, including fees related to the Company's mergers and acquisitions,
paid to the law firm amounted to $2,994, $1,109 and $683 in 1998, 1997 and
1996, respectively.
The Company paid $258 and $382 in 1998 and 1997, respectively, to a member
of the CCA Board of Directors for consulting services related to various
contractual relationships. The Company paid $1,301 and $911 in 1998 and
1997, respectively, to a company that is majority-owned by a member of the
CCA Board of Directors, for services rendered at one of its facilities.
In 1998, the Company paid $40,754 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.
The Company paid $3,000 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 2.
F-27
91
19. COMMITMENTS AND CONTINGENCIES
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, there are no
pending legal proceedings that would have a material effect on the
consolidated financial position or results of operations of the Company.
As a result of the Merger, the Company assumed certain outstanding
litigation against CCA relating to the Merger. The assumed litigation
consists of a consolidated complaint filed by certain purported
shareholders of CCA. The plaintiffs in the action represented a putative
class of all public holders of CCA common stock. The lawsuit was settled
in November 1998 and finalized in March 1999, with the Company agreeing to
pay certain legal costs, all of which had been fully accrued by the
Company as of December 31, 1998.
Each of CCA's management contracts and the statutes of certain states
require the maintenance of insurance. CCA maintained various insurance
policies including employee health, worker's compensation, automobile
liability and general liability insurance. These policies are fixed
premium policies that had been self-funded by CCA with certain
deductibles. Reserves are provided for estimated incurred claims within
the deductible amounts.
The Company provides a limited guarantee related to a bond issue on the
Eden Detention Center in Eden, Texas. The maximum obligation as of
December 31, 1998 was $21,765. In March 1999, the Company announced its
intentions to purchase the facility for $28,000.
As of December 31, 1998, the Company had invested approximately $11,000 in
certain detention facilities for which the management contracts have been
terminated. The Company is in negotiations with the respective government
entity regarding reimbursement of the Company's investment.
20. EVENTS SUBSEQUENT TO DECEMBER 31, 1998
On January 11, 1999, the Company filed a Registration Statement on Form
S-3 to register an aggregate of $1,500,000 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 Company's Registration
Statement on Form S-3 will be used for general corporate purposes. On
March 3, 1999 and March 15, 1999, the Company issued and sold 1,444 common
shares and 1,250 common shares, respectively, under the Company's
Registration Statement on Form S-3. Net proceeds to the Company from both
share issuances totaled $52,763.
On January 29, 1999, the Company sold $20,000 of convertible subordinated
notes. The notes bear interest at 9.5% and are convertible into common
shares at a conversion price of $28.00 per share.
On March 8, 1999, the Company sold $20,000 of convertible subordinated
notes to Sodexho pursuant to their forward contract. The notes bear
interest at LIBOR plus 1.35% and are convertible into common shares at a
conversion price of $7.80 per share. On March 8, 1999, Sodexho converted
the $7,000 convertible subordinated notes bearing interest at 8.5% into
1,710 common shares at a conversion price of $4.09 per share, the $20,000
convertible notes bearing interest at 7.5% into 701 common shares at a
conversion price of $28.53 per share and the $20,000 convertible
subordinated notes bearing interest at LIBOR plus 1.35% into 2,564 common
shares at a conversion price of $7.80 per share.
F-28
92
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Correctional Management Services Corporation:
We have audited the accompanying consolidated balance sheet of CORRECTIONAL
MANAGEMENT SERVICES CORPORATION (a Tennessee corporation) AND SUBSIDIARIES as of
December 31, 1998, and the related statements of stockholders' equity and cash
flows for the period from September 11, 1998 (inception) through December 31,
1998. These financial statements are the responsibility of Correctional
Management Services Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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 Correctional
Management Services Corporation and Subsidiaries as of December 31, 1998, and
their cash flows for the period from September 11, 1998 (inception) through
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 15, 1999
F-29
93
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,059
Accounts receivable, net of allowances 64,077
Prepaid expenses 4,602
Other current assets 7,103
---------
Total current assets 94,841
PROPERTY AND EQUIPMENT 24,668
OTHER ASSETS:
Investment in contracts 67,795
Other 8,977
---------
Total assets $ 196,281
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,766
Accrued salaries and wages 4,419
Accrued property taxes 4,301
Deferred revenue 3,774
Other accrued expenses 9,670
---------
Total current liabilities 37,930
LONG-TERM DEBT 137,000
---------
Total liabilities 174,930
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - Class A - $0.01 (one cent) par value;
100,000 shares authorized, 9,349 shares issued
and outstanding 93
Common stock - Class B - $0.01 (one cent) par value;
100,000 shares authorized, 981 shares issued and outstanding 10
Additional paid-in capital 25,133
Deferred compensation (3,885)
---------
Total stockholders' equity 21,351
---------
Total liabilities and stockholders' equity $ 196,281
=========
The accompanying notes are an integral part of this statement.
F-30
94
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
COMMON STOCK
-------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
------------------------------- PAID-IN DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION 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
===== === === === ======= ======= =======
The accompanying notes are an integral part of this statement.
F-31
95
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in purchase of contracts and related net assets $ 3,059
---------
Net cash provided by investing activities 3,059
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 16,000
---------
Net cash provided by financing activities 16,000
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,059
CASH AND CASH EQUIVALENTS, AT SEPTEMBER 11, 1998 (INCEPTION) --
---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,059
=========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of management contracts and related net assets
through issuance of long-term debt and common stock:
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 long-term assets (8,376)
Accounts payable 15,766
Accrued salaries and wages 4,419
Accrued property taxes 4,301
Deferred revenue 3,774
Other accrued expenses 9,670
Long-term debt 137,000
Common stock 4,750
---------
$ --
=========
Issuance of stock warrants for financing services:
Other long-term assets $ 601
Additional paid-in capital (601)
---------
$ --
=========
The accompanying notes are an integral part of this statement.
F-32
96
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS)
1. ORGANIZATION AND FORMATION TRANSACTIONS
Correctional Management Services Corporation (the "Company"), a Tennessee
corporation, was formed on September 11, 1998, in anticipation of the
expected merger transactions (the "Merger") between Corrections
Corporation of America ("CCA"), CCA Prison Realty Trust ("Prison Realty")
and Prison Realty Corporation ("New Prison Realty"). The Company intends
to operate and manage prisons and other correctional facilities and
provide prisoner transportation services for governmental agencies.
The Company was formed on September 11, 1998, with a nominal investment
for a minimal number of common shares. On September 22, 1998, the Company
issued 5,000 shares of Class A voting common stock to certain founding
shareholders at par value. Additionally, on September 22, 1998, the
Company issued 850 restricted shares of Class A voting common stock to
certain wardens of CCA facilities at the implied fair value of $3,885.
Immediately prior to the acquisition of management contracts discussed in
Note 2, the Company issued 3,499 shares of Class A voting common stock to
outside investors in consideration of cash proceeds totaling $16,000.
2. ACQUISITION OF MANAGEMENT CONTRACTS
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 CCA, certain management contracts and certain other
related assets and liabilities of CCA, and entered into a trade name use
agreement with CCA, as described below. In exchange, the Company issued an
installment note in the principal amount of $137,000 that bears interest
at 12% per annum and is payable over 10 years (the "CMSC Note") and 981
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 $4,750.
The acquisition of the capital stock, the management contracts and related
assets and liabilities has been accounted for as a purchase transaction
and the aggregate purchase price of $141,750 has been 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 $67,795
has been assigned to the value of the management contracts acquired and
will be amortized over a fifteen year period, which represents the average
remaining lives of the contracts acquired plus any contractual renewal
options.
F-33
97
On December 31, 1998, immediately prior to the Merger, but in connection
with the transactions described above, the Company entered into a trade
name use agreement with 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 will 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 after completion of the Merger the
amount of such fee may not exceed (a) 2.75% of the gross revenues of New
Prison Realty for the first three years of the Trade Name Use Agreement,
(b) 3.5% of New Prison Realty's gross revenues for the following two years
of the Trade Name Use Agreement, and (c) 3.875% of New Prison Realty's
gross revenues for the remaining term of the Trade Name Use Agreement.
On January 1, 1999, the Company entered into a master lease agreement and
leases with respect to each leased property with New Prison Realty (the
"Leases"). The initial terms of the 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 New Prison Realty.
On January 1, 1999, immediately after the Merger, the Company and New
Prison Realty entered into a Right to Purchase Agreement (the "CMSC Right
to Purchase Agreement") pursuant to which the Company granted to New
Prison Realty a 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 New Prison Realty.
Additionally, the Company granted New Prison Realty a right of first
refusal to acquire any Company-owned correctional or detention facility
should the Company receive an acceptable third party offer to acquire any
such facility.
On January 1, 1999, immediately after the Merger, the Company entered into
a services agreement (the "CMSC Services Agreement") with New Prison
Realty pursuant to which the Company will serve as a facilitator of the
construction and development of additional facilities on behalf of New
Prison Realty for a term of five years from the date of the CMSC Services
Agreement. In such capacity, the Company will perform, at the direction of
the New Prison Realty, 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, governmental relations and
project marketing. In consideration for the performance of such services
by the Company, New Prison Realty will 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
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 New Prison Realty if additional
services are requested by New Prison Realty.
On January 1, 1999, immediately after the Merger, the Company entered into
a tenant incentive agreement with New Prison Realty pursuant to which New
Prison Realty will pay to the Company an incentive fee to induce the
Company to enter into CMSC Leases with respect to those facilities
developed and facilitated by the Company. The amount of the incentive fee
will be approximately $840 per new bed of each facility leased by the
Company where the Company has served as developer and facilitator. The
incentive fees received by the Company will be deferred and amortized as
reductions in lease expense over the terms of the respective leases.
F-34
98
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1998, and the Company's
cash flows and activity in stockholders' equity for the period from
September 11, 1998 (inception) through December 31, 1998.
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Debt issuance costs will be amortized on a straight-line basis over the
life of the related debt. This amortization will be charged to interest
expense.
All material intercompany balances have been eliminated in consolidation.
Property and equipment is carried at the allocated estimated fair value.
Betterments, renewals and extraordinary repairs that extend the life of
the asset will be capitalized; other repairs and maintenance will be
expensed. Depreciation will be 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 are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") 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. At December 31, 1998, the Company had no differences
between book and tax bases of its assets and liabilities.
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 will be
recorded based on the per diem rate multiplied by the number of inmates
housed during the respective period. The Company will recognize any
additional management service revenues when earned or awarded by the
respective authorities.
To meet the reporting requirements of SFAS 107, "Disclosures About Fair
Value of Financial Instruments," the Company calculates the fair value of
financial instruments using quoted market prices. At December 31, 1998,
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.
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.
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of," the Company will
continually evaluate 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 would utilize estimates of
undiscounted cash flows to determine if an impairment exists.
F-35
99
Effective September 11, 1998, the Company adopted SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS 131
superseded SFAS 14, "Financial Reporting for Segments of a Business
Enterprises." SFAS 131 establishes standards for the way that public
business enterprises or other enterprises that are required to file
financial statements with the Securities & Exchange Commission (the "SEC")
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 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company will operate in one industry
segment and, accordingly, the adoption of SFAS 131 will have no
significant effect on the Company's disclosures.
4. PROPERTY AND EQUIPMENT
Property and equipment, at estimated fair value on the acquisition date of
December 31, 1998, consist of the following:
Land $ 4,303
Building improvements 10,348
Equipment 6,689
Office furniture and fixtures 2,585
Construction in progress 743
----------
$ 24,668
==========
5. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31,
1998
-------------
Debt issuance costs $ 2,619
Prepaid rent to a government entity 4,844
Other assets 1,514
---------
$ 8,977
=========
6. LONG-TERM DEBT
Long-term debt consists of an installment note payable to New Prison
Realty for $137,000. The note is payable 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 (who is also the Chairman of the Board of Directors
and Chief Executive Officer of New Prison Realty) has personally
guaranteed payment of 10% of the outstanding principal amount.
Maturities of long-term debt for the next five years and thereafter are:
1999 - $0; 2000 - $0; 2001 - $0; 2002 - $0; 2003 - $22,833; and thereafter
- $114,167.
F-36
100
At December 31, 1998, the Company had obtained a revolving credit facility
(the "Old Credit Facility") providing for borrowings up to $30,000. The
facility's terms required interest at LIBOR plus 4.0%. The facility could
be used for working capital and letters of credit. The Company had made no
draws on the revolving credit facility as of December 31, 1998. The
facility was subject to renewal on January 1, 2002.
The Old Credit Facility also required that the Company maintain specific
ratio requirements relating to cash flow. The Company was in compliance
with the covenants at December 31, 1998.
On March 1, 1999, the Company obtained a new revolving credit facility
(the "New Credit Facility") which provides for borrowings up to $100,000
and bears interest at LIBOR plus 2.375%. The New Credit Facility replaced
the $30,000 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 related to the Old
Credit Facility were written off upon replacement of that credit facility.
The Company does not maintain any significant formal or informal
compensating balance arrangements with financial institutions.
7. ADMINISTRATIVE SERVICES AGREEMENTS
On January 1, 1999, the Company entered into administrative service
agreements with two newly formed companies, Prison Management Services,
Inc. and Juvenile and Jail Facility Management Services, Inc., pursuant to
which employees of the Company's administrative departments will perform
administrative services (including, but not limited to, legal, finance,
management information systems and government relations services), as
needed, for each of the two companies. In connection therewith, the
Company will grant 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 will
receive administrative service fees of $250,000 per month from each
company.
8. STOCKHOLDERS' EQUITY
Preferred Stock -
During 1998, the Company authorized 50,000 shares of $0.01 (one cent) par
value preferred stock. At December 31, 1998, no preferred stock was issued
or outstanding.
Common Stock -
On September 22, 1998, the Company issued 5,000 shares of Class A voting
common stock to certain employees of CCA and Prison Realty who were also
founding shareholders of the Company. The Company nor CCA received any
proceeds from the issuance of these shares. However, CCA recorded a
$22,850 expense in 1998 for the implied fair value of the 5,000 common
shares. The fair value of these common shares was determined at the date
of the Merger based upon the fair value of the Company derived from the
$16,000 cash investments in the Company made by outside investors at
December 31, 1998, as discussed in Note 1.
F-37
101
Additionally, on September 22, 1998, the Company issued 850 restricted
shares of Class A voting common stock to certain wardens of 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 intends to expense the implied fair value
(approximately $3,885) of these restricted securities over the respective
vesting period. The implied fair value of these common shares was also
derived from the $16,000 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 3,499 shares of Class A voting
common stock to outside investors immediately prior to the Merger. The net
proceeds of $16,000 will be used for general working capital purposes.
Stock Warrants -
In connection with the Company's Old Credit Facility, on December 31,
1998, the Company issued 547 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 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 $601 utilizing the
Black-Scholes option-pricing model and has recorded the cost as debt
issuance cost within other long term assets on the accompanying balance
sheet. At December 31, 1998, all stock warrants were outstanding.
9. 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. It is
intended that the CCA Employee Stock Ownership Plan will be merged with
the Plan in 1999. As of December 31, 1998, there were no participants in
the Plan and the Company had made no contributions to the Plan.
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, office space and equipment under
long-term operating leases expiring through the year 2011. The majority of
the Company's operating lease commitments relate to facilities to be
leased from New Prison Realty under the Leases discussed in Note 2.
Expected lease commitments for noncancelable leases are as follows:
YEAR AMOUNT
--------- --------------
1999 $ 251,734
2000 261,692
2001 272,104
2002 282,853
2003 293,462
Thereafter 2,405,204
------------
Total $ 3,767,049
============
F-38
102
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, 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 at December
31, 1998.
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.
11. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable are due from
federal, state and local governments at December 31, 1998.
F-39
103
INDEX OF EXHIBITS
Exhibits marked with an * are filed herewith. Other exhibits have
previously been filed with the Commission and are incorporated herein
by reference.
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 Agreement of Sale and Purchase between Prison Realty and CCA
(previously filed as Exhibit 2 to Prison Realty's Registration
Statement on Form S-11 (Commission File no. 333-25727) Amendment
no. 4, filed with the Commission on July 9, 1997 and incorporated
herein by reference).
2.2 Agreement and Plan of Merger, dated as of April 17, 1998, by and
among Prison Realty and USCA Corporation, a wholly-owned Kentucky
subsidiary of Prison Realty, and U.S. Corrections Corporation, a
Kentucky corporation (previously filed as Exhibit 2.2 to 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).
2.3 Amended and Restated Agreement and Plan of Merger, dated as of
September 29, 1998, by and among CCA, 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)(1) 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).
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 Amended and Restated Bylaws of the Company (previously filed as
Exhibit 3.2 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).
4.1 Provisions defining the rights of stockholders are found in
Sections SIXTH through SEVENTH and Article II in the Charter and
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 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).
4.3 Specimen of certificate representing the Company 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).
104
4.4 8.5% Convertible Extendable Subordinated Notes originally due
September 30, 1998, dated as of June 22, 1992, in the aggregate
principal amount of $2.5 million, made payable to Pacific Mutual
Life Insurance Company and PM Group Life Insurance Company
(previously filed as Exhibit 4(f) to CCA's Annual Report on Form
10-K (Commission File no. 0-15719), filed with the Commission on
March 31, 1993 and incorporated herein by reference).
4.5 8.5% Convertible Extendable Subordinated Notes originally due
September 30, 1998, dated as of December 2, 1992, in the
aggregate principal amount of $1.5 million, made payable to
Pacific Mutual Life Insurance Company and PM Group Life Insurance
Company (previously filed as Exhibit 4(g) to CCA's Annual Report
on Form 10-K (Commission File no. 0-15719), filed with the
Commission on March 31, 1993 and incorporated herein by
reference).
4.6 8.5% Convertible Extendable Subordinated Notes originally due
September 30, 1998, dated as of April 29, 1993, in the aggregate
principal amount of $2.5 million, made payable to Pacific Mutual
Life Insurance Company and PM Group Life Insurance Company
(previously filed as Exhibit 4(l) to 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).
4.7 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 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).
4.8 Stock Purchase Warrant for the purchase of CCA Common Stock
issued to Sodexho S.A., predecessor in interest to Sodexho, on
June 23, 1994 (previously filed as Exhibit 2 to 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).
4.9 Form of Amended 8.5% Convertible Extendable Subordinated Notes
originally due September 30, 1998, dated as of June 22, 1992, in
the aggregate principal amount of $2.5 million, made payable to
Cudd & Co. and Atwell & Co. (previously filed as Exhibit 4(r) to
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).
4.10 Form of Amended 8.5% Convertible Extendable Subordinated Notes
originally due September 30, 1998, dated as of December 2, 1992,
in the aggregate principal amount of $1.5 million, made payable
to Cudd & Co. and Atwell & Co. (previously filed as Exhibit 4(s)
to 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).
4.11 Form of Amended 8.5% Convertible Extendable Subordinated Notes
originally due September 30, 1998, dated as of April 29, 1993, in
the aggregate principal amount of $3.5 million, made payable to
Cudd & Co. and Atwell & Co. (previously filed as Exhibit 4(t) to
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).
105
4.12 Form of 7.5% Convertible, Subordinated Note due February 28, 2002
made payable to PMI Mezzanine Fund, L.P. in the aggregate
principal amount of $30.0 million (previously filed as Exhibit
4(u) to 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).
4.13 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 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).
4.14 8.5% Convertible, Extendable, Subordinated Note originally due
September 30, 1998, dated as of June 22, 1992, in the aggregate
principal amount of $104,000, made payable to Atwell & Co.
(previously filed as Exhibit 4(z) to 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).
4.15 8.5% Convertible, Extendable, Subordinated Note originally due
September 30, 1998, dated as of June 22, 1992, in the aggregate
principal amount of $696,000, made payable to Atwell & Co.
(previously filed as Exhibit 4(aa) to 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).
4.16* 7.5% Convertible, Subordinated Note Modification Agreement, dated
as of December 30, 1998, by and between Sodexho and CCA.
4.17* 8.5% Convertible, Subordinated Note Modification Agreement, dated
as of December 30, 1998, by and between Sodexho and CCA.
4.18 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).
4.19 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).
4.20* Floating Rate Convertible Note, due March 8, 2004, made payable
to Sodexho in the aggregate principal amount of $20.0 million.
4.21* 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.
10.1 U.S. Government Lease for Real Property by and between the United
States of America and CCA, dated as of April 10, 1984, relating
to the Houston Processing Center (previously filed as Exhibit
10(xx) to CCA's Annual Report on Form 10-K (Commission
106
File no. 0-15719), filed with the Commission on March 31, 1989
and incorporated herein by reference).
10.2 Letter of Guaranty, dated October 27, 1989, between CCA and
National Australia Bank Limited, relating to the guaranty by CCA
of certain advances made by National Australia Bank Limited to
Corrections Corporation to Australia, Pty. Ltd. (previously filed
as Exhibit 10(eee) to 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).
10.3 Assignment and Assumption Agreement, dated as of March 2, 1990,
by and between CCA and Esmor, Inc., relating to the assignment of
Esmor, Inc.'s leasehold interest in real property located in San
Diego County, California and the assignment of Esmor Inc.'s
contract with the INS for the construction and operation of an
INS Detention Facility (previously filed as Exhibit 10(fff) to
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).
10.4 Standard Transfer Form, dated as of September 8, 1991, between
CCA and Houghton Holdings Limited (formerly John Holland Holdings
Limited) relating to the purchase by CCA of 7,500 shares in
Corrections Corporation of Australia Pty. Ltd. and related
Amended and Restated Letter of Guaranty (previously filed as
Exhibit 10(bbbb) to 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).
10.5 International Joint Venture Agreement, dated as of June 23, 1994,
between CCA and Sodexho S.A., predecessor in interest to Sodexho
(previously filed as Exhibit 1 to 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).
10.6 Securities Purchase Agreement, dated as of June 23, 1994, between
CCA and Sodexho S.A., predecessor in interest to Sodexho,
including form of 8.5% Note, form of Warrant, and form of 8.75%
Notes (previously filed as Exhibit 2 to 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).
10.7 Stockholders Agreement, dated as of June 23, 1994, between CCA
and Sodexho S.A., predecessor in interest to Sodexho (previously
filed as Exhibit 3 to 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).
10.8 Share Exchange Agreement by and among CCA, TransCor America, Inc.
and the Shareholders of TransCor America, Inc., dated as of
December 30, 1994 (previously filed as Exhibit 3 to CCA's Current
Report on Form 8-K (Commission File no. 1-13560), filed with the
Commission on January 13, 1995 and incorporated herein by
reference).
10.9 Stock Purchase Agreement, dated as of March 31, 1995, between CCA
and Chubb Security Holdings Australia Limited A.C.N. 003 590 921
(previously filed as Exhibit 10.140 to 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).
107
10.10 Share Exchange Agreement, dated as of April 25, 1995, among CCA,
Concept Incorporated and the stockholders of Concept Incorporated
(previously filed as Exhibit 2 to CCA's Current Report on Form
8-K (Commission File no. 1-13560), filed with the Commission on
May 11, 1995 and incorporated herein by reference).
10.11 Note Purchase Agreement, dated as of June 22, 1992, among Pacific
Mutual Life Insurance Company, PM Group Life Insurance Company
and CCA, as amended by Amendment No. 1 to the Note Purchase
Agreement, dated as of August 25, 1992, Amendment No. 2 to the
Note Purchase Agreement, dated as of October 29, 1992, Amendment
No. 3 to the Note Purchase Agreement, dated as of April 29, 1993
and Amendment No. 4 to the Note Purchase Agreement, dated as of
April 25, 1995 (previously filed as Exhibit 10.142 to 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).
10.12 Stock Purchase Agreement, dated as of June 9, 1995, between
Sodexho S.A., predecessor to Sodexho, and CCA concerning sale of
shares of Corrections Corporation of Australia Pty. Ltd. A.C.N.
010 921 641 (previously filed as Exhibit 10.143 to 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)
10.13 Stock Purchase Agreement, dated as of June 29, 1995, between
Sodexho S.A., predecessor to Sodexho, and CCA (previously filed
as Exhibit 10.144 to 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).
10.14 Amendment No. 1 to Securities Purchase Agreement, dated as of
July 11, 1995, between Sodexho S.A., predecessor to Sodexho, and
CCA (previously filed as Exhibit 10.145 to 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).
10.15 Purchase Agreement, dated July 17, 1995, between Concept
Incorporated and Landmark Organization Southwest, Inc.
(previously filed as Exhibit 10.148 to 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).
10.16 Purchase Agreement, dated July 17, 1995, between Concept
Incorporated and U.C. Eloy, Inc. (previously filed as Exhibit
10.149 to 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).
10.17 Agreement and Plan of Merger, dated as of August 18, 1995, among
CCA, CMA Acquisition, Inc., CSG Acquisition, Inc., Correction
Management Affiliates, Inc., Correctional Services Group, Inc.,
the shareholders of Correction Management Affiliates, Inc. and
the shareholders of Correctional Services Group, Inc. (previously
filed as Exhibit 1 to CCA's Current Report on Form 8-K
(Commission File no. 1-13560), filed with the Commission on
September 1, 1995 and incorporated herein by reference).
10.18 Shareholders' Agreement, dated as of October 17, 1995, among
Corrections Corporation of Australia Pty. Ltd., CCA, and Sodexho
S.A., predecessor in interest to Sodexho (previously filed as
Exhibit 10.151 to CCA's Annual Report on Form 10-K (Commission
108
File no. 1-13560), filed with the Commission on March 29, 1996
and incorporated herein by reference).
10.19 First Amendment to Stock Purchase Agreement, dated as of October
17, 1995, between Sodexho S.A., predecessor to Sodexho, and CCA
(previously filed as Exhibit 10.152 to 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).
10.20 Note Purchase Agreement, dated as of February 29, 1996, between
CCA and PMI Mezzanine Fund, L.P., including, as Exhibit R-1
thereto, Registration Rights Agreement, dated as of February 29,
1996, by and between CCA and PMI Mezzanine Fund, L.P. (previously
filed as Exhibit 10.155 to 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).
10.21 Guaranty Agreement, dated as of July 10, 1996, among CCA, as
Guarantor, Eden Correctional Facilities Corporation, as the
Issuer, and Liberty Bank and Trust Company of Tulsa, National
Association, as the Trustee, with respect to the Taxable
Detention Facility Revenue Bond, Series 1995 in the aggregate
principal amount of $22,875,000 (previously filed as Exhibit
10.156 to 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).
10.22 Credit Agreement, dated as of September 6, 1996, among CCA, as
Borrower, various Lenders, and First Union National Bank of
Tennessee, as Administrative Agent (previously filed as Exhibit
10.157 to 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).
10.23 Letter of Credit Facility Agreement, dated as of September 6,
1996, among CCA and First Union National Bank of Tennessee and
First Union National Bank of North Carolina (previously filed as
Exhibit 10.158 to 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).
10.24 Intercompany Subordination Agreement, dated as of September 6,
1996, among CCA, five of its wholly owned subsidiaries, including
CCA International, Inc., TransCor America, Inc., Concept
Incorporated, Correction Management Affiliates, Inc., and
Correctional Services Group, Inc. and First Union National Bank
of Tennessee (previously filed as Exhibit 10.159 to 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).
10.25 Unconditional Guaranty Agreement, with Supplement, dated as of
September 6, 1996, in favor of First Union National Bank of
Tennessee among CCA, five of its wholly owned subsidiaries,
including CCA International, Inc., TransCor America, Inc.,
Concept Incorporated, Correction Management Affiliates, Inc., and
Correctional Services Group, Inc. and First Union National Bank
of Tennessee (previously filed as Exhibit 10.160 to 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).
109
10.26 Form of Pledge Agreement, with Supplement, dated as of September
6, 1996 by CCA and five of its wholly owned subsidiaries,
including CCA International, Inc., TransCor America, Inc.,
Concept Incorporated, Correction Management Affiliates, Inc., and
Correctional Services Group, Inc., individually, in favor of
First Union National Bank of Tennessee as Administrative Agent
for various Lenders (previously filed as Exhibit 10.161 to 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).
10.27 Amendment No. 2, dated December 31, 1996, to the Securities
Purchase Agreement, dated as of June 23, 1994, between Sodexho
S.A., predecessor to Sodexho, and CCA (previously filed as
Exhibit 10.162 to 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).
10.28 Purchase Agreement, dated as of December 31, 1996, among CCA,
Corrections Corporation of America (U.K.) Limited and Sodexho
S.A., predecessor to Sodexho, relating to U.K. Detention
Services, Ltd. (previously filed as Exhibit 10.163 to 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).
10.29 Shareholders' Agreement, dated as of December 31, 1996, among
CCA, Corrections Corporation of America (U.K.) Limited and
Sodexho S.A., predecessor to Sodexho, relating to U.K. Detention
Services, Ltd. (previously filed as Exhibit 10.164 to 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).
10.30 Option Agreement, dated as of December 31, 1996, among CCA,
Corrections Corporation of America (U.K.) Limited and Sodexho
S.A., predecessor to Sodexho, relating to U.K. Detention
Services, Ltd. (previously filed as Exhibit 10.165 to 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).
10.31 Note Purchase Agreement, dated as of April 5, 1996, by and among
Sodexho S.A., predecessor to Sodexho, and CCA, relating to the
issuance of 7.5% Convertible, Subordinated Notes in the aggregate
principal amount of $20,000,000 (previously filed as Exhibit 4(w)
to 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).
10.32 Registration Rights Agreement with respect to Note Purchase
Agreement, dated as of April 5, 1996, by and between CCA and
Sodexho S.A., predecessor to Sodexho (previously filed as Exhibit
4(x) to 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).
10.33 1997 Amendment to 1994 Securities Purchase Agreement by and
between CCA and Sodexho, dated December 30, 1997 (previously
filed as Exhibit 4(bb) to CCA's Annual Report on Form 10-K
(Commission File no. 1-13560), filed with the Commission on March
31, 1998 and incorporated herein by reference).
10.34 Exchange Agreement, dated October 2, 1997, among CCA, American
Corrections Transport, Inc., Michael H. Shmerling, L.M. Company,
Tom Loventhal, J. Thomas
110
Martin, Peter Weiss, Kenneth Anchor and Bernard Goldstein
(previously filed as Exhibit 10.192 to 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).
10.35 Stock Repurchase Agreement, dated March 2, 1998, between CCA and
Doctor R. Crants (previously filed as Exhibit 10.193 to 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).
10.36 Form of Employment Agreement between CCA and Doctor R. Crants
(previously filed as Exhibit 10.194 to 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).
10.37 Stock Repurchase Agreement, dated as of September 30, 1997,
between CCA and Thomas W. Beasley (previously filed as Exhibit
10.178 to 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).
10.38 Amendment and Waiver to Credit Agreement, dated July 18, 1997, by
and among CCA, certain Lenders, and First Union National Bank of
Tennessee as Administrative Agent for the Lenders (previously
filed as Exhibit 10.195 to 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).
10.39 Amended and Restated Credit Agreement, dated as of June 24, 1998,
by and among CCA as Borrower, certain subsidiaries of 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 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).
10.40 Option Agreement between Prison Realty and CCA with respect to
the Northeast Ohio Correctional Center (previously filed as
Exhibit 10.1(a) to Prison Realty's Registration Statement on Form
S-11 (Commission File no. 333-25727) Amendment no. 4, filed with
the Commission on July 9, 1997 and incorporated herein by
reference).
10.41 Option Agreement between the Prison Realty and CCA with respect
to the Torrance County Detention Facility (previously filed as
Exhibit 10.1(b) to Prison Realty's Registration Statement on Form
S-11 (Commission File no. 333-25727) Amendment no. 4, filed with
the Commission on July 9, 1997 and incorporated herein by
reference).
10.42 Option Agreement between Prison Realty and CCA with respect to
the Southern Colorado Correctional Facility (previously filed as
Exhibit 10.1(c) to Prison Realty's Registration Statement on Form
S-11 (Commission File no. 333-25727) Amendment no. 4, filed with
the Commission on July 9, 1997 and incorporated herein by
reference).
10.43 Option Agreement between Prison Realty and CCA with respect to
the North Fork Correctional Facility (previously filed as Exhibit
10.1(d) to Prison Realty's Registration Statement on Form S-11
(Commission File no. 333-25727) Amendment no. 4, filed with the
Commission on July 9, 1997 and incorporated herein by reference).
111
10.44 Option Agreement between Prison Realty and CCA with respect to
the Whiteville Correctional Center (previously filed as Exhibit
10.1(e) to Prison Realty's Registration Statement on Form S-11
(Commission File no. 333-25727) Amendment no. 4, filed with the
Commission on July 9, 1997 and incorporated herein by reference).
10.45 Master Agreement to Lease between Prison Realty and CCA
(previously filed as Exhibit 10.6 to Prison Realty's Quarterly
Report on Form 10-Q (Commission File no. 1-13409), filed on
August 25, 1997 and incorporated herein by reference).
10.46 Lease Agreement between Prison Realty and CCA with respect to the
Houston Processing Center (previously filed as Exhibit 10.7 to
Prison Realty's Quarterly Report on Form 10-Q (Commission File
no. 1-13409), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.47 Lease Agreement between Prison Realty and CCA with respect to
the Laredo Processing Center (previously filed as Exhibit 10.8 to
Prison Realty's Quarterly Report on Form 10-Q (Commission File
no. 1-13409), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.48 Lease Agreement between Prison Realty and CCA with respect to the
Bridgeport Pre-Parole Transfer Facility (previously filed as
Exhibit 10.9 to Prison Realty's Quarterly Report on Form 10-Q
(Commission File no. 1-13409), filed with the Commission on
August 25, 1997 and incorporated herein by reference).
10.49 Lease Agreement between Prison Realty and CCA with respect to the
Mineral Wells Pre-Parole Transfer Facility (previously filed as
Exhibit 10.10 to Prison Realty's Quarterly Report on Form 10-Q
(Commission File no. 1-13409), filed with the Commission on
August 25, 1997 and incorporated herein by reference).
10.50 Lease Agreement between Prison Realty and CCA with respect to the
West Tennessee Detention Facility (previously filed as Exhibit
10.11 to Prison Realty's Quarterly Report on Form 10-Q
(Commission File no. 1-13409), filed with the Commission on
August 25, 1997 and incorporated herein by reference).
10.51 Lease Agreement between Prison Realty and CCA with respect to the
Leavenworth Detention Center (previously filed as Exhibit 10.12
to Prison Realty's Quarterly Report on Form 10-Q (Commission File
no. 1-13409), filed with the Commission on August 25, 1997 and
incorporated herein).
10.52 Lease Agreement between Prison Realty and CCA with respect to the
Eloy Detention Center (previously filed as Exhibit 10.13 to
Prison Realty's Quarterly Report on Form 10-Q (Commission File
no. 1-13409), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.53 Lease Agreement between Prison Realty and CCA with respect to the
Central Arizona Detention Center (previously filed as Exhibit
10.14 to Prison Realty's Quarterly Report on Form 10-Q
(Commission File no. 1-13409), filed with the Commission on
August 25, 1997 and incorporated herein by reference).
10.54 Lease Agreement between Prison Realty and CCA with respect to the
T. Don Hutto Correctional Center (previously filed as Exhibit
10.15 to Prison Realty's Quarterly Report
112
on Form 10-Q (Commission File no. 1-13409), filed with the
Commission on August 25, 1997 and incorporated herein by
reference).
10.55 Lease Agreement between Prison Realty and CCA with respect to the
Northeast Ohio Correctional Facility (previously filed as Exhibit
10.5 to Prison Realty's Current Report on Form 8-K (Commission
File no. 1-13409), filed with the Commission on August 4, 1997
and incorporated herein by reference).
10.56 Lease Agreement between Prison Realty and CCA with respect to the
Torrance County Detention Facility (previously filed as Exhibit
10.1 to Prison Realty's Quarterly Report on Form 10-Q (Commission
File no. 1-13049), filed with the Commission on November 13, 1997
and incorporated herein by reference).
10.57 Lease Agreement between Prison Realty and CCA with respect to the
Cimarron Correctional Facility (previously filed as Exhibit 10.29
to Prison Realty's Registration Statement on Form S-11
(Commission File no. 333-43935), filed with the Commission on
January 9, 1998 and incorporated herein by reference).
10.58 Lease Agreement between Prison Realty and CCA with respect to the
Davis Correctional Facility (previously filed as Exhibit 10.30 to
Prison Realty's Registration Statement on Form S-11 (Commission
File no. 333-43935), filed with the Commission on January 9, 1998
and incorporated herein by reference).
10.59 Right to Purchase Agreement between Prison Realty and CCA
(previously filed as Exhibit 10.4 to Prison Realty's Registration
Statement on Form S-11 (Commission File no. 333-25727) Amendment
no. 4, filed with the Commission on July 9, 1997 and incorporated
herein by reference).
10.60 Trade Name Use Agreement between Prison Realty and CCA
(previously filed as Exhibit 10.17 to Prison Realty's Quarterly
Report on Form 10-Q (Commission File no. 1-13409), filed with the
Commission on August 25, 1997 and incorporated herein by
reference).
10.61 Exercise Agreement, dated as of December 11, 1997, by and between
Prison Realty and CCA with respect to the Cimarron Correctional
Facility (previously filed as Exhibit 10(ee) to Prison Realty's
Annual Report on Form 10-K (Commission File no. 1-13049), filed
with the Commission on March 30, 1998 and incorporated herein by
reference).
10.62 Exercise Agreement, dated as of January 5, 1998, by and between
Prison Realty and CCA with respect to the Davis Correctional
Facility (previously filed as Exhibit 10(ff) to Prison Realty's
Annual Report on Form 10-K (Commission File no. 1-13049), filed
with the Commission on March 30, 1998 and incorporated herein by
reference).
10.63 Purchase and Sale Agreement, dated as of November 18, 1997, among
the Holdenville Industrial Authority and CCA (previously filed as
Exhibit 10.174 to 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).
10.64 Exercise Agreement, dated as of January 5, 1998, by and between
Prison Realty and CCA with respect to the Holdenville, Oklahoma
facility (previously filed as Exhibit 10.175 to 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).
113
10.65 Purchase and Sale Agreement, dated as of November 26, 1997, among
the Cushing Municipal Authority and CCA (previously filed as
Exhibit 10.176 to 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).
10.66 Exercise Agreement, dated as of December 11, 1997, by and between
Prison Realty and CCA with respect to the Cushing, Oklahoma
facility (previously filed as Exhibit 10.177 to 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).
10.67 Master Agreement to Lease, dated as of January 1, 1999, by and
between the Company, USCC, Inc. and Operating Company (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).
10.68 Form of Lease Agreement by and between the Company and Operating
Company (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).
10.69 Right to Purchase Agreement, dated as of January 1, 1999, by and
between the Company and Operating Company (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).
10.70 Service Mark and Trade Name Use Agreement, dated as of December
31, 1998, by and between CCA and Operating Company (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).
10.71 Service Mark and Trade Name Use Agreement, dated as of December
31, 1998, by and between Operating Company 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).
10.72 Service Mark and Trade Name Use Agreement, dated as of December
31, 1998, by and between Operating Company 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).
10.73 Promissory Note, dated as of December 31, 1998, executed by
Operating Company made payable to 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).
10.74 Guaranty Agreement, dated as of December 31, 1998, executed and
delivered by Doctor R. Crants to 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).
114
10.75 Assignment Agreement, dated as of December 31, 1998, by and
between 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).
10.76 Assignment Agreement, dated as of December 31, 1998, by and among
Corrections Partners, Inc., Concept Incorporated, TransCor
America, Inc., certain other subsidiaries of CCA, and Operating
Company 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).
10.77 Contribution Agreement, dated as of December 31, 1998, by and
between CCA and Operating Company (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).
10.78 Contribution Agreement, dated as of December 31, 1998, by and
between 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).
10.79 Contribution Agreement, dated as of December 31, 1998, by and
between 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).
10.80 Assignment and Assumption Agreement, dated as of December 31,
1998, by and among 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).
10.81 Assignment and Assumption Agreement, dated as of December 31,
1998, by and among 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).
10.82 Services Agreement, dated as of January 1, 1999, by and between
the Company and Operating Company (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).
10.83 Tenant Incentive Agreement, dated as of January 1, 1999, by and
between the Company and Operating Company (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).
10.84 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,
115
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).
10.85 Agreement in Principle by and among Sodexho, CCA and 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).
10.86* 1998 Amendment to 1994 Securities Purchase Agreement by and
between CCA and Sodexho S.A., dated as of December 30, 1998, by
and between CCA and Sodexho.
10.88 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, CCA, Prison Realty and Operating Company (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).
10.89 Administrative Services Agreement, dated as of January 1, 1999,
by and between Operating Company and Service Company A
(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).
10.90 Administrative Services Agreement, dated as of January 1, 1999,
by and between Operating Company and Service Company B
(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).
10.91 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).
10.92 Employment Agreement, dated as of January 1, 1999, by and between
Doctor R. Crants and Operating Company (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).
10.93 Employment Agreement, dated as of January 1, 1999, by and between
J. Michael Quinlan and the Company (previously filed as Exhibit
10.30 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).
10.94 Employment Agreement by and between D. Robert Crants, III and
Prison Realty (previously filed as Exhibit 10.23 to Prison
Realty's Quarterly Report on Form 10-Q
116
(Commission File no. 1-13049), filed with the Commission on
August 25, 1997 and incorporated herein by reference).
10.95 Employment Agreement by and between Michael W. Devlin and Prison
Realty (previously filed as Exhibit 10.24 to 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).
10.96 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).
10.97 Form of Lockup Agreement by and between the Company and officers
and directors of the Company, Operating Company and the Service
Companies (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).
10.98 Amended and Restated Charter of Operating Company (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).
10.99 Bylaws of Operating Company (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).
10.100 Amended and Restated Charter of Service Company A (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).
10.101 Bylaws of Service Company A (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).
10.102 Amended and Restated Charter of Service Company B (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).
10.103 Bylaws of Service Company B (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).
10.104 Credit Agreement, dated as of January 1, 1999, by and among the
Company and certain of it 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).
117
10.105 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).
10.106 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).
10.107 Preemptive Rights Agreement, dated as of January 1, 1999, by and
between the Company and Operating Company (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).
10.108 REIT Management Agreement, dated as of July 21, 1997, by and
between Prison Realty and Prison Realty Management, Inc.
(previously filed as Exhibit 10(hh) to 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).
10.109 Prison Realty's 1997 Employee Share Incentive Plan (previously
filed as Exhibit 10.25 to 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).
10.110 Prison Realty's Non-Employee Trustees' Share Option Plan, as
amended (previously filed as Exhibit 10.26 to 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).
10.111 Prison Realty's Non-Employee Trustees' Compensation Plan
(previously filed as Exhibit 4.3 to 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).
10.112 CCA's Option Plan, dated as of January 23, 1985, as amended by
First Amendment to 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 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).
10.113 Non-Qualified Stock Option Plan of CCA, dated as of January 16,
1986, and related form of Non-Qualified Stock Option Agreement
(previously filed as Exhibit 10(d) to 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).
10.114 CCA's 1988 Flexible Stock Option Plan (previously filed as
Exhibit A to CCA's definitive Proxy Statement relating to CCA's
1988 Annual Meeting of Stockholders (Commission File no.
0-15719), filed with the Commission on April 29, 1988 and
incorporated herein by reference).
118
10.115 Second Amendment to 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 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).
10.116 Third Amendment to CCA's Stock Option Plan, dated as of March 18,
1988 (previously filed as Exhibit B to CCA's definitive Proxy
Statement relating to 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).
10.117 CCA's 1989 Stock Bonus Plan (previously filed as Exhibit 10(zz)
to 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).
119
10.118 First Amendment to CCA's 1988 Flexible Stock Option Plan, dated
as of June 8, 1989 (previously filed as Exhibit 10(mmm) to 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).
10.119 First Amendment to CCAs Non-Qualified Stock Option Plan, dated as
of June 8, 1989 (previously filed as Exhibit 10(nnn) to 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).
10.120 Amended and Restated Employee Stock Ownership Plan (previously
filed as Exhibit 10(iiii) to 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).
10.121 CCA's Non-Employee Director Stock Option Plan (previously filed
as Exhibit 10(yyyy) to 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).
10.122 First Amendment to CCA's 1991 Flexible Stock Option Plan, dated
as of March 11, 1994 (previously filed as Exhibit 10.102 to 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).
10.123 Amendments to the Amended and Restated CCA Employee Stock
Ownership Plan, dated as of June 3, 1994 (previously filed as
Exhibit 10.109 to 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).
10.124 Amended and Restated CCA 1989 Stock Bonus Plan, dated as of
February 20, 1995 (previously filed as Exhibit 10.138 to 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).
10.125 CCA's 1995 Employee Stock Incentive Plan, effective as of March
20, 1995 (previously filed as Exhibit 4.3 to 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).
10.126 First Amendment to Amended and Restated CCA 1989 Stock Bonus
Plan, dated as of November 3, 1995 (previously filed as Exhibit
10.153 to 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).
10.127 Option Agreement, dated March 31, 1997, by and between CCA and
Joseph F. Johnson, Jr. relating to the grant of an option to
purchase 80,000 shares of CCA Common Stock (previously filed as
Appendix B to CCA's definitive Proxy Statement relating to 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).
10.128 CCA's Non-Employee Directors' Compensation Plan (previously filed
as Appendix A to CCA's definitive Proxy Statement relating to
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).
120
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 Operating Company.
24 Powers of Attorney (included on signature pages).
27.1* Financial Data Schedule (for SEC use only).
27.2* Restated Financial Data Schedule (for SEC use only).