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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-25245
CORRECTIONS CORPORATION OF AMERICA
(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., NASHVILLE, TENNESSEE 37215
(Address and zip code of principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 263-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value per share New York Stock Exchange
8.0% Series A Cumulative Preferred Stock, $.01 par value per share New York Stock Exchange
12.0% Series B Cumulative Preferred Stock, $.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of the registrant's Common Stock held
by non-affiliates was approximately $162,457,302 as of March 30, 2001, 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 30, 2001
was 243,873,470.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders to be held on May 22, 2001, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
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CORRECTIONS CORPORATION OF AMERICA
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Item No. Page
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PART I
1. Business.............................................................................. 4
General Development of Business.................................................... 4
The Company.................................................................... 4
Background and Formation Transactions.............................................. 9
The 1999 Merger................................................................ 9
The 2000 Restructuring and Related Transactions.................................... 13
Developments after the 1999 Merger............................................. 13
The 2000 Restructuring Transactions............................................ 16
Capital Structure Changes.......................................................... 22
Debt Structure................................................................. 22
Equity Structure............................................................... 29
Capital Strategy................................................................... 31
Financial Information About Industry Segments...................................... 32
Narrative Description of Business.................................................. 32
Business Objectives and Strategies ............................................ 32
The Facilities................................................................. 33
Facility Management Contracts.............................................. 38
Operating Procedures....................................................... 39
Facility, Design, Construction and Finance................................. 40
Business Development....................................................... 41
Business Proposals......................................................... 42
Major Customers............................................................ 42
Backlog.................................................................... 42
The State of the Industry.................................................. 43
Government Regulation.............................................................. 44
Environmental Matters.......................................................... 44
Americans with Disabilities Act................................................ 44
Insurance.......................................................................... 45
Employees.......................................................................... 45
Competition........................................................................ 46
Risk Factors....................................................................... 46
The Company is Subject to Risks Inherent in the Corrections and Detention
Industry..................................................................... 46
The Company is Subject to Litigation........................................... 48
The Company is Subject to Tax Related Risks.................................... 49
The Company is Subject to Risks Inherent in Investment in Real Estate
Properties................................................................... 50
The Company is Subject to Refinancing Risk..................................... 51
Foreign Operations................................................................. 52
2. Properties............................................................................ 53
General............................................................................ 53
The Facilities..................................................................... 53
General........................................................................ 53
Facilities Owned and Managed by the Company.................................... 53
Facilities Owned and Leased by the Company..................................... 55
Facilities Under Construction or Development................................... 56
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3 Legal Proceedings..................................................................... 56
Completed Proceedings/Litigation Against the Company and its Subsidiaries.......... 56
Outstanding Proceedings/Litigation Against the Company and its Subsidiaries........ 57
4. Submission of Matters to a Vote of Security Holders................................... 59
4A. Executive Officers and Directors of the Registrant.................................... 60
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters................. 64
Market Price of and Distributions on Capital Stock............................. 64
Common Stock............................................................ 65
Series A Preferred Stock................................................ 65
Series B Preferred Stock................................................ 65
Sale of Unregistered Securities and Use of Proceeds from Sale of Registered
Securities..................................................................... 66
Sale of Unregistered Securities......................................... 66
Use of Proceeds from the Sale of Registered Securities.................. 69
6. Selected Financial Data............................................................... 69
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 72
Overview....................................................................... 72
Liquidity and Capital Resources for the year ended December 31, 2000.... 74
Liquidity and Capital Resources for the year ended December 31, 1999.... 78
Results of Operations................................................... 80
Year ended December 31, 2000 compared with year ended
December 31, 1999..................................................... 80
Year ended December 31, 1999 compared with year ended
December 31, 1998..................................................... 88
Inflation............................................................... 91
7A. Quantitative and Qualitative Disclosures about Market Risk............................ 91
8. Financial Statements and Supplementary Data........................................... 92
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 92
PART III
10. Directors and Executive Officers of the Registrant.................................... 92
11. Executive Compensation................................................................ 92
12. Security Ownership of Certain Beneficial Owners and Management........................ 93
13. Certain Relationships and Related Transactions........................................ 93
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 93
SIGNATURES
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NOTE CONCERNING
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the "Annual Report") filed by Corrections
Corporation of America (formerly Prison Realty Trust, Inc.), a Maryland
corporation (together with its subsidiaries the "Company"), contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Those statements include
statements with respect to the Company's financial condition, results of
operations, business, future profitability, growth strategy and its assumptions
regarding other matters. Words such as "believes," "expects," "anticipates,"
"intends," "estimates," "plans," "seeks" or similar expressions identify
forward-looking statements.
You should be aware that, while the Company believes the expectations reflected
in these forward-looking statements represent reasonable good faith beliefs,
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, and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" set forth herein. Because of
these risks and uncertainties, there can be no assurance that the
forward-looking statements included or incorporated by reference herein will
prove to be accurate. You should not regard the forward-looking statements
included or incorporated by reference herein as a representation by the Company
or any other person that the objectives and plans of the Company will be
achieved. In addition, the Company does not intend to, and is not obligated to,
update these forward-looking statements after the date of this Annual Report.
PART I.
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
THE COMPANY
The Company is a Maryland corporation formerly known as Prison Realty Trust,
Inc. ("New Prison Realty") which commenced operations as Prison Realty
Corporation on January 1, 1999, following the mergers of each of the former
Corrections Corporation of America, a Tennessee corporation ("Old CCA"), on
December 31, 1998 and CCA Prison Realty Trust, a Maryland real estate investment
trust ("Old Prison Realty"), on January 1, 1999 (such mergers referred to
collectively herein as the "1999 Merger").
Prior to the 1999 Merger, Old Prison Realty had been a publicly traded entity
operating as a real estate investment trust, or REIT, primarily in the business
of owning and leasing prison facilities to private prison management companies
and certain government entities. Prior to the 1999 Merger, Old CCA was also a
publicly traded entity primarily in the business of owning, operating and
managing prisons on behalf of government entities (as discussed further herein).
Additionally, Old CCA had been Old Prison Realty's primary tenant.
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Immediately prior to the 1999 Merger, Old CCA sold all of the issued and
outstanding capital stock of certain wholly-owned corporate subsidiaries of Old
CCA, certain management contracts and certain other non-real estate assets
related thereto, to a newly formed entity, Correctional Management Services
Corporation, a privately-held Tennessee corporation ("Operating Company"). Also
immediately prior to the 1999 Merger, Old CCA sold certain management contracts
and other assets and liabilities relating to government owned adult facilities
to Prison Management Services, LLC (subsequently merged with Prison Management
Services, Inc.) and sold certain management contracts and other assets and
liabilities relating to government owned jails and juvenile facilities to
Juvenile and Jail Facility Management Services, LLC (subsequently merged with
Juvenile and Jail Facility Management Services, Inc.).
Effective January 1, 1999, New Prison Realty elected to qualify as a REIT for
federal income tax purposes commencing with its taxable year ended December 31,
1999. Also effective January 1, 1999, New Prison Realty entered into lease
agreements and other agreements with Operating Company, whereby Operating
Company would lease the substantial majority of New Prison Realty's facilities
and Operating Company would provide certain services to New Prison Realty.
After pursuing several strategic alternatives intended to address the liquidity
needs of the Company and Operating Company, the Company entered into a series of
agreements providing for the comprehensive restructuring of the Company (the
"Restructuring"). As a part of this Restructuring, on June 30, 2000, New Prison
Realty entered into an agreement and plan of merger with Operating Company
pursuant to which Operating Company would be merged with and into a wholly-owned
subsidiary of the Company (the "Operating Company Merger"). In connection with
the Operating Company Merger, New Prison Realty amended certain provisions of
its charter to permit, among other things, New Prison Realty's operation as a
taxable subchapter C corporation under the "Corrections Corporation of America"
name. On September 12, 2000, the Company's stockholders approved the Operating
Company Merger. Stockholders also approved amendments to the Company's charter
to permit the Restructuring, including its election not to be taxed as a REIT
for federal income tax purposes commencing with its 2000 taxable year. The
Restructuring also provided for the selection of new senior management of the
Company through the appointment of a new chief executive officer and a new chief
financial officer.
Management of the Company believes that the Restructuring provides a simplified
and more stable corporate and financial structure that will create the most
value for its stockholders by allowing the Company to retain earnings and use
capital for working capital purposes or to pay-down debt. Further, the
Restructuring eliminates potential conflicts of interest, which have harmed the
Company's credibility in the capital markets, including those conflicts arising
out of the landlord-tenant and debtor-creditor relationship that existed between
the Company and Operating Company. The Restructuring also allows for combined
cash flows from operations of the Company and Operating Company to service the
immediate financial and liquidity needs of the combined companies, compared with
the restricted use of cash on a separate company basis. Immediately prior to the
merger date, Operating Company leased from the Company 35 correctional and
detention facilities, with a total design capacity of 37,520 beds.
Prior to the Operating Company Merger, the Company owned 100% of the non-voting
common stock of Operating Company. The non-voting common stock in Operating
Company represented approximately a 9.5% economic interest in Operating Company.
From December 31, 1998 until September 1, 2000, the Company owned 100% of the
non-voting common stock of PMSI and
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JJFMSI, and was entitled to receive 95% of each company's net income, as
defined, as dividends on such shares, while other outside shareholders and the
wardens at the individual facilities owned 100% of the voting common stock of
PMSI and JJFMSI, entitling those voting stockholders to receive the remaining 5%
of each company's net income as dividends on such shares. During September 2000,
wholly-owned subsidiaries of PMSI and JJFMSI entered into separate transactions
with each of PMSI's and JJFMSI's respective non-management, outside shareholders
to reacquire all of the outstanding voting stock of their non-management,
outside shareholders, representing 85% of the outstanding voting stock of each
entity for cash payments.
In connection with the Restructuring, on December 1, 2000, the Company completed
the acquisitions of Prison Management Services, Inc. ("PMSI") and Juvenile and
Jail Facility Management Services, Inc. ("JJFMSI"), both of which were
privately-held service companies which managed certain government-owned prison
and jail facilities under the "Corrections Corporation of America" name
(together the "Service Companies"). PMSI provided adult prison facility
management services to government agencies pursuant to management contracts with
state governmental agencies and authorities in the United States and Puerto
Rico. Immediately prior to the acquisition date, PMSI had contracts to manage 11
correctional and detention facilities with a total design capacity of 13,372
beds, all of which were in operation. JJFMSI provided juvenile and jail facility
management services to government agencies pursuant to management contracts with
federal, state and local government agencies and authorities in the United
States and Puerto Rico and provided adult prison facility management services to
certain international authorities in Australia and the United Kingdom.
Immediately prior to the acquisition date, JJFMSI had contracts to manage 17
correctional and detention facilities with a total design capacity of 9,204
beds.
As a result of the acquisition of Operating Company on October 1, 2000 and the
acquisitions of PMSI and JJFMSI on December 1, 2000, the Company now specializes
in owning, operating and managing prisons and other correctional and detention
facilities and providing prisoner transportation services for governmental
agencies. In addition to providing the fundamental residential services relating
to inmates, each of the Company's facilities offers a large variety of
rehabilitation and educational programs, including basic education, life skills
and employment training and substance abuse treatment. The Company also provides
health care (including medical, dental and psychiatric services), institutional
food services and work and recreational programs.
Currently, the Company is the largest private owner and operator of correctional
and detention facilities. As of March 15, 2001, the Company owned or managed 74
correctional and detention facilities with a total design capacity of
approximately 67,000 beds in 22 states, the District of Columbia, Puerto Rico
and the United Kingdom, of which 72 facilities were operating and two were under
construction. As of December 31, 2000, the Company controlled approximately 52%
of all beds under contract with private operators of correctional and detention
facilities in the United States.
On August 4, 2000, John D. Ferguson was named president and chief executive
officer of the Company and Operating Company. Mr. Ferguson was also appointed to
the boards of directors of the Company and Operating Company. On August 7, 2000,
William F. Andrews was named chairman of the board of directors of the Company.
At the 2000 annual stockholders meeting held on December 13, 2000, the Company's
stockholders elected a newly constituted nine-member board of directors of the
Company, including six independent directors.
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During December 2000, the Company reorganized its internal corporate structure
in order to focus on the four key areas of the Company. Each of these divisions
is headed by an executive vice president who reports directly to Mr. Ferguson:
operations, led by J. Michael Quinlan, the Company's chief operating officer;
finance, led by Irving E. Lingo, Jr., the Company's chief financial officer;
business development, led by William T. Baylor, the Company's chief development
officer; and legal affairs, led by Gus Puryear, the Company's general counsel.
This internal reorganization is intended to streamline operational support for
the correctional and detention facilities, as well as to emphasize quality
assurance and meet or exceed customers' expectations while continuing to
maintain safe and secure facilities.
The following chronology presents a summary of the historical background and
events leading to the current structure of the Company.
Prior to December 31, 1998 - CCA Prison Realty Trust ("Old Prison Realty")
is a publicly traded entity operating as a
REIT whose primary tenant is Old CCA.
- Corrections Corporation of America ("Old CCA")
is also a publicly traded entity in the
business of owning, operating and managing
privatized prisons on behalf of government
entities.
- Prison Realty Corporation is formed as a
separate entity (a corporation formed to
facilitate the 1999 Merger).
- Correctional Management Services Corporation
("Operating Company") is formed as a privately
held entity (shareholders consist of
management receiving founders' shares).
- Prison Management Services, LLC ("PMS LLC") is
formed as a privately held entity (an entity
formed to facilitate the 1999 Merger).
- Juvenile and Jail Facility Management
Services, LLC ("JJFMS LLC") is formed as a
privately held entity (an entity formed to
facilitate the 1999 Merger).
1999 Merger and Related Transactions
December 31, 1998 - Operating Company receives cash investment
from two investors, Sodexho and Baron.
- PMS LLC receives cash investment from an
unrelated investor group.
- JJFMS LLC receives cash investment from an
unrelated investor group.
- Old CCA sells all of its management contracts
and related net assets to each of Operating
Company, PMS LLC, and JJFMS LLC in exchange
for certain consideration including various
ownership interests in each entity and the
$137.0 million CCA Note.
- Old CCA (which now consists primarily of real
estate and related equipment) merges with
Prison Realty Corporation and the merger is
accounted for as a reverse acquisition of
Prison Realty Corporation by Old CCA (first
step of the "1999 Merger").
January 1, 1999 - Prison Realty Corporation acquires Old Prison
Realty (the "Prison Realty Merger" and the
second step of the "1999 Merger").
- All public shareholders of Old CCA and Old
Prison Realty become shareholders of Prison
Realty Corporation.
- Prison Realty Corporation enters into lease
and other agreements with Operating Company.
- Prison Realty Corporation elects REIT status.
- PMS LLC merges with Prison Management
Services, Inc. ("PMSI").
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- JJFMS LLC merges with Juvenile and Jail
Facility Management Services, Inc. ("JJFMSI").
- Operating Company enters into certain
agreements individually with PMSI and JJFMSI.
May 1999 - Prison Realty Corporation changes its name to
Prison Realty Trust, Inc. ("New Prison
Realty").
After the completion of the 1999 Merger and the transactions related thereto,
the structure of New Prison Realty, Operating Company, PMSI and JJFMSI was as
follows:
[FLOW CHART]
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2000 Restructuring and Related Transactions
September 2000 - Subsidiaries of PMSI and JJFMSI individually
acquire all of the outstanding voting stock of
each of PMSI and JJFMSI held by non-management
outside shareholders of each entity.
- New Prison Realty's shareholders approve
amendment to remove restriction that New Prison
Realty qualify as a REIT.
- New Prison Realty's shareholders approve the
Restructuring.
October 1, 2000 - New Prison Realty purchases 100% of the
Operating Company voting common stock owned by
Baron and Sodexho.
- New Prison Realty acquires Operating Company
(the "Operating Company Merger") and begins
operating as an owner, operator and manager of
privatized prisons with certain owned
facilities leased to third parties.
- New Prison Realty assumes the CCA Note, which
is subsequently extinguished.
- Certain lease and other agreements between New
Prison Realty and Operating Company are
cancelled.
- New Prison Realty changes its name to
Corrections Corporation of America (the
"Company").
December 1, 2000 - In separate transactions, the Company acquires
all of the outstanding voting stock of PMSI and
JJFMSI.
As a result of the completion of the Restructuring, the current relationship
between the Company and CCA of Tennessee, Inc., the predecessor to each of
Operating Company, PMSI and JJFMSI, is as follows:
[FLOW CHART]
BACKGROUND AND FORMATION TRANSACTIONS
THE 1999 MERGER
Prior to the 1999 Merger, Old CCA was the largest developer and manager of
private correctional and detention facilities worldwide. Old Prison Realty, a
REIT, was the owner and developer of correctional and detention facilities. Old
Prison Realty leased 17 of its 20 facilities to Old CCA pursuant to long-term
triple net leases.
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During the first quarter of 1998, Old Prison Realty and Old CCA proposed a
strategic combination whereby the companies would be merged to create the
nation's leading company in the private corrections industry. Pursuant to the
terms of an Amended and Restated Agreement and Plan of Merger dated September
29, 1998, which amended and restated an Agreement and Plan of Merger dated April
18, 1998, each of Old CCA and Old Prison Realty agreed to merge with and into
New Prison Realty, with New Prison Realty as the surviving company. The
companies also agreed to complete a series of transactions to enable New Prison
Realty to operate so as to qualify as a REIT for federal income tax purposes
following the 1999 Merger.
In order for New Prison Realty to quality as a REIT, New Prison Realty's income
generally could not include income from the operation and management of
correctional and detention facilities, including those facilities operated and
managed by Old CCA. Accordingly, immediately prior to the 1999 Merger, the
non-real estate assets of Old CCA, including all management contracts, were sold
to Operating Company and to PMSI and JJFMSI. Following the 1999 Merger, a
substantial majority of the correctional and detention facilities acquired by
New Prison Realty in the 1999 Merger were leased to Operating Company.
Additionally, as a result of the 1999 Merger and the merger related
transactions, New Prison Realty obtained an ownership interest in each of the
Operating Company and Service Companies and derived certain economic benefits
from each. In addition to providing juvenile and jail facility management
services to government agencies pursuant to management contracts with federal,
state and local government agencies and authorities in the United States, JJFMSI
also provided correction and detention facility management services to
governments in the United Kingdom (the "U.K.") and Australia through certain of
its subsidiaries formed in connection with an international joint venture with
Sodexho Alliance, S.A., a French conglomerate ("Sodexho"). In connection with
the 1999 Merger, Old CCA's international operations were transferred to JJFMSI,
which succeeded to Old CCA's obligations under the joint venture. As a result of
the 1999 Merger, Sodexho, a significant shareholder of Old CCA, became a
significant stockholder of New Prison Realty with the right to appoint a
director to the board of directors of the Company. Accordingly, Jean-Pierre
Cuny, Senior Vice President of the Sodexho Group, an affiliate of Sodexho,
became a member of the board of directors of New Prison Realty. Because Sodexho
also made a significant investment in Operating Company, Mr. Cuny also became a
director of Operating Company.
The 1999 Merger Agreement was approved and adopted by the shareholders of Old
CCA and Old Prison Realty at special meetings held in December 1998.
Subsequently, on January 1, 1999, the 1999 Merger was completed substantially in
accordance with the 1999 Merger Agreement. Under the terms of the Merger
Agreement: (i) holders of Old Prison Realty common shares and Old Prison Realty
8% Cumulative Preferred Shares, $0.01 par value per share (the "Old Prison
Realty Series A Preferred Shares"), received one share of New Prison Realty
common stock, $0.01 par value per share (the "New Prison Realty Common Stock")
or New Prison Realty 8% Series A Cumulative Preferred Stock, $0.01 par value per
share (the "New Prison Realty Preferred Stock"), for each common share or Old
Prison Realty Series A Preferred Share they owned at January 1, 1999,
respectively; and (ii) holders of shares of Old CCA's common stock, $1.00 par
value per share (the "Old CCA Common Stock"), obtained the right to receive
0.875 share of New Prison Realty Common Stock for each share of Old CCA Common
Stock they owned at December 31, 1998. Approximately 105,272,183 shares of New
Prison Realty Common Stock and 4,300,000 shares of New Prison Realty Preferred
Stock were issued in the 1999 Merger. Following the 1999 Merger, New Prison
Realty's Common Stock began trading on the New York Stock Exchange ("NYSE") on
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January 4, 1999 under the symbol "PZN," and the New Prison Realty Series A
Preferred Stock began trading on the NYSE under the symbol "PZN PrA" on the same
date.
On December 31, 1998, immediately prior to the 1999 Merger, and in connection
with the 1999 Merger, Old CCA sold to Operating Company all of the issued and
outstanding capital stock of certain wholly-owned corporate subsidiaries of Old
CCA, certain management contracts and certain other non-real estate assets
related thereto, and entered into a series of agreements, as described more
fully described below. In exchange, Old CCA received an installment note in the
principal amount of $137.0 million (the "CCA Note") and 100% of the non-voting
common stock of Operating Company. Old CCA's ownership interest in the CCA Note
and the non-voting common stock of Operating Company were transferred to New
Prison Realty as a result of the 1999 Merger.
The non-voting common stock of Operating Company represented approximately a
9.5% economic interest in Operating Company. During 1999, Operating Company paid
no dividends on the shares of its non-voting common stock. The CCA Note was
payable over 10 years at an interest rate of 12% per annum. Interest only was
generally payable for the first four years of the CCA Note, and the principal
was to be amortized over the following six years. The chief executive officer of
New Prison Realty and a member of its board of directors at that time, had
guaranteed payment of 10% of the outstanding principal amount due under the CCA
Note. As a result of Operating Company's liquidity position, Operating Company
was required to defer the first scheduled payment of accrued interest on the CCA
Note, which was due December 31, 1999. During the third quarter of 2000, the
Company forgave all accrued and unpaid interest due under the CCA Note as of
August 31, 2000. The CCA Note, along with the remaining deferred interest, was
assumed by a wholly-owned subsidiary of the Company in connection with the
Operating Company Merger. See "The 2000 Restructuring and Related Transactions."
On December 31, 1998, immediately prior to the 1999 Merger and in connection
with the 1999 Merger, Old CCA sold to Prison Management Services, LLC ("PMS,
LLC") and Juvenile and Jail Facility Management Services, LLC ("JJFMS, LLC"),
two privately-held Delaware limited liability companies formed in connection
with the 1999 Merger, certain management contracts and certain other assets and
liabilities relating to government-owned adult prison facilities and
government-owned jails and juvenile facilities managed by Old CCA. In exchange,
Old CCA received 100% of the non-voting membership interests in PMS, LLC and
JJFMS, LLC, which obligated PMS, LLC and JJFMS, LLC to make distributions to Old
CCA equal to 95% of each company's net income, as defined. New Prison Realty
succeeded to these interests as a result of the 1999 Merger. Immediately
following the 1999 Merger, PMS, LLC merged with PMSI and JJFMS, LLC merged with
JJFMSI.
Under a trade name use agreement with Old CCA resulting from the 1999 Merger
(the "Trade Name Use Agreement"), Operating Company paid a licensing fee to New
Prison Realty for the right to use the name "Corrections Corporation of America"
and derivatives thereof. The Trade Name Use Agreement had a term of 10 years and
the licensing fee paid pursuant to the agreement was based upon the gross
revenue of Operating Company, subject to a limitation based on a percentage of
the gross revenue of New Prison Realty. The Trade Name Use Agreement was
terminated pursuant to the Restructuring. See "The 2000 Restructuring and
Related Transactions."
In connection with the 1999 Merger, New Prison Realty entered into lease
agreements with Operating Company with respect to the correctional and detention
facilities owned by New Prison
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Realty and operated by Operating Company (the "Operating Company Leases"). The
terms of the Operating Company Leases were 12 years, which could be extended at
fair market rates for three additional five-year periods upon the mutual
agreement of New Prison Realty and Operating Company. As a result of Operating
Company's liquidity position, Operating Company was unable to make timely rental
payments to New Prison Realty under the Operating Company Leases. Consequently,
in June 2000, New Prison Realty and Operating Company amended the original terms
of the Operating Company Leases to defer, with interest, rental payments
originally due to New Prison Realty during the period from January 2000 to June
2000 until September 30, 2000, with the exception of certain installment
payments. Pursuant to the terms of this amendment, Operating Company agreed to
pay interest on such deferred rental payments, at an annual rate equal to the
current non-default rate of interest applicable to Operating Company's revolving
credit facility (subject to adjustment if and to the extent that such rate of
interest under such existing revolving credit facility was adjusted) from the
date such payment would have been payable under the original terms of the
Operating Company Leases until the date such payment was actually paid.
Operating Company's obligation to make payments under the Operating Company
Leases was not secured by any of the assets of Operating Company, although the
obligations under the Operating Company Leases were cross-defaulted so that New
Prison Realty could terminate all of the Operating Company Leases if Operating
Company failed to make required lease payments.
On September 29, 2000, New Prison Realty and Operating Company entered into
agreements pursuant to which New Prison Realty forgave all unpaid rental
payments plus accrued interest, due and payable to New Prison Realty through
August 31, 2000, related to the Operating Company Leases. See "The 2000
Restructuring and Related Transactions."
On January 1, 1999, immediately after the 1999 Merger, New Prison Realty entered
into a services agreement (the "Services Agreement") with Operating Company
pursuant to which Operating Company agreed to 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 Services Agreement. In such
capacity, Operating Company agreed to perform, at the direction of New Prison
Realty, such services as were customarily needed in the construction and
development of correctional and detention facilities, including services related
to construction of the facilities, project bidding, project design, and
governmental relations. In consideration for the performance of such services by
Operating Company, New Prison Realty agreed to pay a fee equal to 5% of the
total capital expenditures (excluding the incentive fee discussed below and the
additional 5% fee herein referred to) incurred in connection with the
construction and development of a facility, plus an amount equal to
approximately $560 per bed for facility preparation services provided by
Operating Company prior to the date on which inmates are first received at such
facility. The board of directors of New Prison Realty subsequently authorized
payments of up to an additional 5% of the total capital expenditures (as
determined above) to Operating Company if additional services were requested by
New Prison Realty. In connection with such authorization, New Prison Realty and
Operating Company entered into an amended and restated services agreement (the
"Amended and Restated Services Agreement") authorizing the payment of such
additional amount if additional services were requested by New Prison Realty. As
a result, a majority of New Prison Realty's ongoing development projects were
subject to a fee totaling 10% of capital expenditures. On June 9, 2000,
Operating Company and New Prison Realty amended the Amended and Restated
Services Agreement to defer, with interest, payments to Operating Company by New
Prison Realty pursuant to the Amended and Restated Services Agreement. This
agreement was cancelled in connection with the Restructuring. See "The 2000
Restructuring and Related Transactions."
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On January 1, 1999, immediately after the 1999 Merger, New Prison Realty entered
into a tenant incentive agreement (the "Tenant Incentive Agreement") with
Operating Company pursuant to which New Prison Realty agreed to 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. The amount of the incentive fee was set at $840 per bed for
each facility leased by Operating Company for which Operating Company served as
developer and facilitator. This $840 per bed incentive fee, however, did not
include an allowance for rental payments to be paid by Operating Company. On May
4, 1999, New Prison Realty and Operating Company entered into an amended and
restated tenant incentive agreement (the "Amended and Restated Tenant Incentive
Agreement"), effective as of January 1, 1999, providing for (i) a tenant
incentive fee of up to $4,000 per bed payable with respect to all future
facilities developed and facilitated by Operating Company, as well as certain
other facilities which, although operational on January 1, 1999, had not
achieved full occupancy; and (ii) an $840 per bed allowance for all beds in
operation at the beginning of January 1999, approximately 21,500 beds, that were
not subject to the tenant allowance in the first quarter of 1999. The amount of
the amended tenant incentive fee included an allowance for rental payments to be
paid by Operating Company prior to the facility reaching stabilized occupancy.
The term of the Amended and Restated Tenant Incentive Agreement was four years,
unless extended upon the written agreement of New Prison Realty and Operating
Company. On June 9, 2000, Operating Company and New Prison Realty amended the
Amended and Restated Tenant Incentive Agreement to defer, with interest,
payments to Operating Company by New Prison Realty pursuant to this agreement.
This agreement was cancelled in connection with the Restructuring. See "The 2000
Restructuring and Related Transactions."
On May 4, 1999, New Prison Realty entered into a four year business development
agreement (the "Business Development Agreement") with Operating Company, which
provided that Operating Company would perform, at the direction of New Prison
Realty, services designed to assist New Prison Realty in identifying and
obtaining new business. Pursuant to the agreement, New Prison Realty agreed to
pay to Operating Company a total fee equal to 4.5% of the total capital
expenditures (excluding the amount of the tenant incentive fee and the services
fee discussed above as well as the 4.5% fee) incurred in connection with the
construction and development of each new facility, or the construction and
development of an addition to an existing facility, for which Operating Company
performed business development services. On June 9, 2000, Operating Company and
New Prison Realty amended this agreement to defer, with interest, any payments
to Operating Company by New Prison Realty pursuant to this agreement. This
agreement was cancelled in connection with the Restructuring. See "The 2000
Restructuring and Related Transactions."
THE 2000 RESTRUCTURING AND RELATED TRANSACTIONS
DEVELOPMENTS AFTER THE 1999 MERGER
General. Following the 1999 Merger, Operating Company, PMSI and JJFMSI assumed
the business of operating correctional facilities, with Operating Company being
the lessee of a substantial number of New Prison Realty's facilities. The rates
on the Operating Company Leases were set with the intention that the public
stockholders of New Prison Realty would receive as much of the benefit as
possible from owning and operating the correctional facilities, while at the
same time New Prison Realty would be able to maintain its status as a REIT. This
status as a REIT would enable New Prison Realty to pay no corporate income tax,
but would require it to pay out large amounts of
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dividends to the New Prison Realty stockholders. In fact, the Operating Company
lease rates were set so that Operating Company was projected to lose money for
the first several years of its existence. Both New Prison Realty and Operating
Company believed that Operating Company would have access to adequate debt
financing to fund this deficit until Operating Company became profitable.
After completion of the first quarter of 1999, the first quarter in which
operations were conducted in this new structure, management of New Prison Realty
and management of Operating Company determined that Operating Company had not
performed as well as projected for several reasons: occupancy rates at its
facilities were lower than in 1998; operating expenses were higher as a
percentage of revenue than in 1998; and certain aspects of the Operating Company
Leases, including the obligation of Operating Company to begin making full lease
payments even before a facility accepted inmates, adversely affected Operating
Company. As a result, in May 1999, New Prison Realty and Operating Company
amended certain of the agreements between them to provide Operating Company with
additional cash flow. The objective of these changes was to allow Operating
Company to be able to continue to make its full lease payments, to allow New
Prison Realty to continue to make dividend payments to its stockholders and to
provide time for Operating Company to improve its operations so that it might
ultimately perform as projected and be able to make its full lease payments.
However, after these changes were announced, a chain of events occurred which
adversely affected both New Prison Realty and Operating Company. New Prison
Realty's stock price fell dramatically, resulting in the commencement of
stockholder litigation against New Prison Realty and its directors. These events
made it more difficult for New Prison Realty to raise capital. A lower stock
price meant that New Prison Realty had more restricted access to equity capital,
and the uncertainties caused by the falling stock price, the stockholder
litigation and the results of operations at Operating Company made it much more
difficult for New Prison Realty to obtain debt financing. In addition, the stock
prices of REITs generally suffered in the capital markets during this period as
a result of both general market and REIT-specific factors. During this time, New
Prison Realty was trying to raise approximately $300.0 million of debt financing
through an offering of high-yield notes. Because of these events and the
conditions of the capital markets generally, New Prison Realty was only able to
raise $100.0 million in this financing, and the notes bore interest at a much
higher rate than was expected.
Raising capital was important to New Prison Realty because as a REIT, it had to
pay out 95% of its taxable income as dividends. During the first three quarters
of 1999, New Prison Realty paid out approximately $217.7 million in cash as
dividends. At the same time, New Prison Realty's business strategy was to
develop, finance and own prison facilities. New Prison Realty believed that
providing this construction financing for federal, state and local governments
was an important factor in its success. Building prison facilities is very
expensive; the cost of the average prison facility built by New Prison Realty
over the previous three years had been approximately $43.5 million. In addition
to the need for capital to build prisons, it was very important that both New
Prison Realty and Operating Company have adequate capital to fund their
operations because the business of owning and operating correctional facilities
involves significant issues with respect to public safety. It was essential that
the government customers of New Prison Realty and Operating Company believe that
New Prison Realty and Operating Company have adequate capital resources to
conduct their business. Accordingly, if New Prison Realty was required to pay
out large amounts of cash as dividends and could not raise debt or equity
capital, its business would have suffered.
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During the summer of 1999, New Prison Realty was able to increase its line of
credit facility from $650.0 million to $1.0 billion. However, for the reasons
described above, this financing had higher interest rates and transaction costs
and also imposed other significant requirements on New Prison Realty. One of the
financing requirements was that New Prison Realty raise $100.0 million in new
equity and Operating Company raise $25.0 million in new equity in order for New
Prison Realty to make the distributions in cash that would be necessary to
enable New Prison Realty to qualify as a REIT with respect to its 1999 taxable
year; provided, however, that such requirement did not prohibit New Prison
Realty from making such required distributions in certain combinations of its
securities.
Fortress/Blackstone. In order to address the capital and liquidity constraints
facing New Prison Realty and Operating Company, as well as concerns regarding
the corporate structure and management of New Prison Realty, during the fourth
quarter of 1999, New Prison Realty, Operating Company, PMSI and JJFMSI entered
into a series of agreements concerning a proposed restructuring led by a group
of institutional investors consisting of an affiliate of Fortress Investment
Group LLC and affiliates of The Blackstone Group, together with an affiliate of
Bank of America Corporation ("Fortress/Blackstone"). Under the terms of the
Fortress/Blackstone restructuring, New Prison Realty proposed to:
- complete the combination of the companies and operate as a taxable
subchapter C corporation commencing with New Prison Realty's 1999
taxable year;
- raise up to $350.0 million by selling shares of convertible
preferred stock and warrants to purchase shares of New Prison
Realty's common stock to the Fortress/Blackstone investors in a
private placement and to New Prison Realty's existing common
stockholders in a $75.0 million rights offering;
- obtain a new $1.2 billion credit facility;
- restructure existing management through a newly constituted board of
directors and executive management team; and
- amend New Prison Realty's existing charter and bylaws to accommodate
the Fortress/Blackstone restructuring.
After publicly announcing the proposed Fortress/Blackstone restructuring, during
February 2000, New Prison Realty received an unsolicited proposal from Pacific
Life Insurance Company ("Pacific Life") with respect to a series of
restructuring transactions intended to serve as an alternative to the
restructuring proposed by Fortress/Blackstone. Fortress/Blackstone elected not
to match the terms of the proposal from Pacific Life. Consequently, the
securities purchase agreement was terminated, and the Company and Operating
Company entered into a securities purchase agreement with Pacific Life.
Fortress/Blackstone has commenced litigation against the companies claiming it
is owed compensatory damages of approximately $24.0 million consisting of
various fees and expenses under the terms of the agreement, as described herein
under "Legal Proceedings." The companies dispute any obligation to pay these
fees and to date, the companies have paid none of these fees or expenses.
Pacific Life. The companies' agreement with Pacific Life also contemplated a
restructuring of the companies. Under the terms of the Pacific Life
restructuring, New Prison Realty proposed to:
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- complete the combination of the companies on substantially identical
terms as proposed by Fortress/Blackstone, with New Prison Realty
electing to be taxed as a REIT with respect to its 1999 taxable year
and operating as a taxable subchapter C corporation commencing with
its 2000 taxable year;
- raise up to $200.0 million in a common stock rights offering to
existing stockholders, backstopped 100% by Pacific Life, which would
purchase shares of New Prison Realty series B convertible preferred
stock in satisfaction of this commitment;
- issue shares of convertible preferred stock in satisfaction of its
remaining 1999 REIT distribution requirements;
- refinance or renew $1.0 billion of New Prison Realty's senior
secured debt;
- restructure existing management through a newly constituted board of
directors and executive management team; and
- amend New Prison Realty's existing charter and bylaws to accommodate
the Pacific Life restructuring.
Following the execution of the Pacific Life securities purchase agreement, New
Prison Realty began taking the steps necessary to fulfill the conditions to
Pacific Life's obligations under the agreement, including the refinancing or
renewal of New Prison Realty's $1.0 billion senior secured bank credit facility.
As part of this process, New Prison Realty consulted with Pacific Life as to the
terms of the renewal of the bank credit facility that would be satisfactory to
Pacific Life. After New Prison Realty obtained the June 2000 Waiver and
Amendment (as hereinafter defined) to its Amended Bank Credit Facility (as
hereinafter defined) as described below, Pacific Life advised New Prison Realty
that it required certain information before it could reach a definitive
conclusion as to whether the June 2000 Waiver and Amendment satisfied the
condition contained in the securities purchase agreement. Based on the
preliminary review, however, Pacific Life indicated that it had significant
concerns with respect to a number of terms. As a result of Pacific Life's
statements, it was unclear to New Prison Realty whether the June 2000 Waiver and
Amendment to the Amended Bank Credit Facility would satisfy the condition
contained in the securities purchase agreement that the renewal of the senior
credit facility would be in a form reasonably acceptable to Pacific Life. Also,
given the requirements of the June 2000 Waiver and Amendment that a proxy
statement be filed with the SEC by July 1, 2000 with respect to a restructuring
of New Prison Realty, on June 30, 2000, the boards of directors of New Prison
Realty, Operating Company, PMSI and JJFMSI approved the execution of an
agreement with Pacific Life mutually terminating the securities purchase
agreement with Pacific Life, and the boards of New Prison Realty and Operating
Company approved the Restructuring. Under the terms of the Pacific Life
securities purchase agreement and the mutual termination, the companies are not
liable for any fees or material expenses as the result of the termination of the
Pacific Life securities purchase agreement and the completion of the
Restructuring.
THE 2000 RESTRUCTURING TRANSACTIONS
June 2000 Waiver and Amendment
In order to address New Prison Realty's liquidity and capital constraints,
immediately after terminating the securities purchase agreement with Pacific
Life, on June 30, 2000, the boards of directors of New Prison Realty, Operating
Company, PMSI and JJFMSI approved a series of agreements providing for the
comprehensive Restructuring of the Company. Following the approval
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of the requisite senior lenders under the Amended Bank Credit Facility, the
Company, certain of its wholly-owned subsidiaries, various lenders and Lehman
Commercial Paper, Inc. ("Lehman"), as administrative agent, executed the June
2000 Waiver and Amendment, dated as of June 9, 2000, to the provisions of the
amended and restated credit agreement governing the Amended Bank Credit Facility
(the "Amended and Restated Credit Agreement"). Upon effectiveness, the June 2000
Waiver and Amendment waived or addressed all then existing events of default
under the provisions of the Amended and Restated Credit Agreement that resulted
from: (i) the financial condition of the Company and Operating Company; (ii) the
transactions undertaken by the Company and Operating Company in an attempt to
resolve the liquidity issues of the Company and Operating Company; and (iii)
previously announced restructuring transactions. The June 2000 Waiver and
Amendment also contained certain amendments to the Amended and Restated Credit
Agreement, including the replacement of existing financial covenants contained
in the Amended and Restated Credit Agreement applicable to the Company with new
financial ratios following completion of the Restructuring. As a result of the
June 2000 Waiver and Amendment, the Company began monthly interest payments on
outstanding amounts under the Amended Bank Credit Facility beginning July 2000.
In obtaining the June 2000 Waiver and Amendment, the Company agreed to complete
certain transactions which were incorporated as covenants in the June 2000
Waiver and Amendment. Pursuant to these requirements, the Company was obligated
to complete the Restructuring, including: (i) the Operating Company Merger; (ii)
the amendment of its charter to remove the requirements that it elect to be
taxed as a REIT commencing with its 2000 taxable year; (iii) the restructuring
of management; and (iv) the distribution of shares of Series B Cumulative
Convertible Preferred Stock, $0.01 par value per share (the "Series B Preferred
Stock"), in satisfaction of the Company's remaining 1999 REIT distribution
requirement. The June 2000 Waiver and Amendment also amended the terms of the
Amended and Restated Credit Agreement to permit (i) the amendment of the
Operating Company Leases and the other contractual arrangements between the
Company and Operating Company, and (ii) the merger of each of PMSI and JJFMSI
with the Company, upon terms and conditions specified in the June 2000 Waiver
and Amendment.
The June 2000 Waiver and Amendment prohibited: (i) the Company from settling its
then outstanding stockholder litigation for cash amounts not otherwise fully
covered by the Company's existing directors' and officers' liability insurance
policies; (ii) the declaration and payment of dividends with respect to the
Company's currently outstanding Series A Preferred Stock prior to the receipt of
net cash proceeds of at least $100.0 million from the issuance of additional
shares of common or preferred stock; and (iii) Operating Company from amending
or refinancing its revolving credit facility on terms and conditions less
favorable than Operating Company's then existing revolving credit facility. The
June 2000 Waiver and Amendment also required the Company to complete the
securitization of lease payments (or other similar transaction) with respect to
the Company's Agecroft facility located in Salford, England on or prior to
February 28, 2001, although such deadline was extended (as described herein).
As a result of the June 2000 Waiver and Amendment, the Company is generally
required to use the net cash proceeds received by the Company from certain
transactions, including the following transactions, to repay outstanding
indebtedness under the Amended Bank Credit Facility: (i) any disposition of real
estate assets; (ii) the securitization of lease payments (or other similar
transaction) with respect to the Company's Agecroft facility; and (iii) the
sale-leaseback of the Company's headquarters. Under the terms of the June 2000
Waiver and Amendment, the Company is also
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required to apply a designated portion of its "excess cash flow," as such term
is defined in the June 2000 Waiver and Amendment, to the prepayment of
outstanding indebtedness under the Amended Bank Credit Facility.
The Operating Company Merger
Effective October 1, 2000, New Prison Realty and Operating Company completed the
Operating Company Merger in accordance with an agreement and plan of merger. In
connection with the completion of the Operating Company Merger, New Prison
Realty amended its charter to, among other things,
- remove provisions relating to its qualification as a REIT for
federal income tax purposes commencing with its 2000 taxable year,
- change its name to "Corrections Corporation of America" and
- increase the amount of its authorized capital stock.
Following the completion of the Restructuring, Operating Company ceased to
exist, and the Company and its wholly-owned subsidiary began operating
collectively under the "Corrections Corporation of America" name. Pursuant to
the terms of the agreement and plan of merger, the Company issued approximately
7.5 million shares of its common stock to the holders of Operating Company's
voting common stock at the time of the completion of the Operating Company
Merger. Following the Operating Company Merger, the Company's common stock
continued trading on the NYSE, but under the symbol "CXW," while the symbol for
the Company's Series A Preferred stock was changed to "CXW PrA," and the
Company's Series B Preferred stock was changed to "CXW PrB."
On October 1, 2000, immediately prior to the completion of the Operating Company
Merger, the Company purchased all of the shares of Operating Company's voting
common stock held by the Baron Asset Fund ("Baron") and Sodexho, the holders of
approximately 34% of the outstanding common stock of Operating Company, for an
aggregate of $16.0 million in non-cash consideration, consisting of an aggregate
of approximately 11.3 million shares of the Company's common stock. In addition,
the Company issued to Baron warrants to purchase approximately 1.4 million
shares of the Company's common stock at an exercise price of $0.01 per share and
warrants to purchase approximately 0.7 million shares of the Company's common
stock at an exercise price of $1.41 per share in consideration for Baron's
consent to the Operating Company Merger. The warrants issued to Baron were
valued at approximately $2.2 million. In addition, in the Operating Company
Merger the Company assumed the obligation to issue up to 0.8 million shares of
its common stock, at an exercise price of $3.33 per share, pursuant to the
exercise of warrants to purchase common stock previously issued by Operating
Company.
Also on October 1, 2000, immediately prior to the Operating Company Merger, the
Company purchased an aggregate of 100,000 shares of Operating Company's voting
common stock for $200,000 cash from D. Robert Crants, III and Michael W. Devlin,
former executive officers and directors of the Company, pursuant to the terms of
severance agreements between the Company and Messrs. Crants, III and Devlin. The
cash proceeds from the purchase of the shares of Operating Company's voting
common stock from Messrs. Crants, III and Devlin were used to immediately repay
a like portion of amounts outstanding under loans previously granted to Messrs.
Crants, III and
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Devlin by the Company. The Company also purchased 300,000 shares of Operating
Company's voting common stock held by Doctor R. Crants, the former chief
executive officer of the Company and Operating Company, for $600,000 cash. Under
the original terms of the severance agreements between the Company and each of
Messrs. Crants, III and Devlin, Operating Company was to make a $300,000 payment
for the purchase of a portion of the shares of Operating Company's voting common
stock originally held by Messrs. Crants, III and Devlin on December 31, 1999.
However, as a result of restrictions on Operating Company's ability to purchase
these shares, the rights and obligations were assigned to and assumed by Doctor
R. Crants. In connection with this assignment, Mr. Crants received a loan in the
aggregate principal amount of $600,000 from PMSI, the proceeds of which were
used to purchase the 300,000 shares of Operating Company's voting common stock
owned by Messrs. Crants, III and Devlin. The cash proceeds from the purchase by
the Company of the shares of Operating Company's voting common stock from Mr.
Crants were used to immediately repay the $600,000 loan previously granted to
Mr. Crants by PMSI.
The Operating Company Merger was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed based upon the fair value at the date of
acquisition. The excess of the aggregate purchase price over the assets
purchased and liabilities assumed was reflected as goodwill. The Operating
Company Merger was structured as a tax-free transaction for the Operating
Company stockholders that received shares of the Company's common stock in
connection with the merger.
As a result of the Restructuring, the $137.0 million CCA Note was assumed by the
Company's wholly-owned subsidiary in the Operating Company Merger. The CCA Note
has since been extinguished.
As a result of the Restructuring, all existing Operating Company Leases, the
Trade Name Use Agreement, the Business Development Agreement, the Services
Agreement and the Tenant Incentive Agreement were cancelled. In addition, all
outstanding shares of Operating Company's non-voting common stock, all of which
shares were owned by the Company, were cancelled in the Operating Company
Merger.
The Service Company Mergers
From December 31, 1998 until September 1, 2000, the Company owned 100% of the
non-voting common stock of PMSI and JJFMSI, and was entitled to receive 95% of
each company's net income, as defined, as dividends on such shares, while other
outside shareholders and the wardens at the individual facilities owned 100% of
the voting common stock of PMSI and JJFMSI, entitling those voting stockholders
to receive the remaining 5% of each company's net income as dividends on such
shares. During September 2000, wholly-owned subsidiaries of PMSI and JJFMSI
entered into separate transactions with each of PMSI's and JJFMSI's respective
non-management, outside shareholders to reacquire all of the outstanding voting
stock of their non-management, outside shareholders, representing 85% of the
outstanding voting stock of each entity for cash payments.
The June 2000 Waiver and Amendment permitted the merger of each of PMSI and
JJFMSI with the Company, upon terms and conditions specified in the June 2000
Waiver and Amendment. On December 1, 2000, the Company completed the
acquisitions of PMSI and JJFMSI, two privately-held service companies which
managed certain government-owned prison and jail facilities under the
"Corrections Corporation of America" name. PMSI provided adult prison facility
management
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services to government agencies pursuant to management contracts with state
governmental agencies and authorities in the United States and Puerto Rico.
Immediately prior to the acquisition date, PMSI had contracts to manage 11
correctional and detention facilities with a total design capacity of 13,372
beds, all of which were in operation. JJFMSI provided juvenile and jail facility
management services to government agencies pursuant to management contracts with
federal, state and local governmental agencies and authorities in the United
States and Puerto Rico and provided adult prison facility management services to
certain international authorities in Australia and the United Kingdom.
Immediately prior to the acquisition date, JJFMSI had contracts to manage 17
correctional and detention facilities with a total design capacity of 9,204
beds.
As a result of the acquisitions of PMSI and JJFMSI on December 1, 2000, all
shares of PMSI and JJFMSI common stock held by the Company and certain
subsidiaries of PMSI and JJFMSI were cancelled. In connection with the
acquisition of PMSI, the Company issued approximately 1.3 million shares of its
common stock valued at approximately $0.6 million to the wardens of the
correctional and detention facilities operated by PMSI who were the remaining
shareholders of PMSI. Shares of the Company's common stock owned by the PMSI
wardens are subject to vesting and forfeiture provisions under a restricted
stock plan. In connection with the acquisition of JJFMSI, the Company issued
approximately 1.6 million shares of its common stock valued at approximately
$0.7 million to the wardens of the correctional and detention facilities
operated by JJFMSI who were the remaining shareholders of JJFMSI. Shares of the
Company's common stock owned by the JJFMSI wardens are subject to vesting and
forfeiture provisions under a restricted stock plan.
Management Changes
On August 4, 2000, John D. Ferguson was named president and chief executive
officer of New Prison Realty and Operating Company. Mr. Ferguson was also
appointed to the boards of directors of New Prison Realty and Operating Company.
Following completion of the Restructuring, Mr. Ferguson continues to serve as
the Company's chief executive officer and president, as well as vice-chairman of
the board of directors. Mr. Ferguson had most recently served as the
commissioner of finance for the State of Tennessee from June 1996 to July 2000.
As commissioner of finance, Mr. Ferguson served as the state's chief corporate
officer and was responsible for directing the preparation and implementation of
the state's $17.2 billion budget. From 1990 until February 1995, Mr. Ferguson
served as the chairman and chief executive officer of Community Bancshares,
Inc., the parent corporation of The Community Bank of Germantown (Tennessee).
On August 7, 2000, William F. Andrews was named chairman of the board of
directors of the Company. Mr. Andrews has been a principal of Kohlberg &
Company, a private equity firm specializing in middle market investing, since
1995. Mr. Andrews served as a director of JJFMSI from its formation in 1998 to
July 2000 and served as a member of the board of directors of Old CCA from 1986
to May 1998.
During December 2000, the Company reorganized its internal corporate structure
in order to focus on the four key areas of the Company: operations, finance,
business development, and legal affairs. Each of these divisions is headed by an
executive vice president who reports directly to Mr. Ferguson.
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Operations. J. Michael Quinlan will continue serving the Company as the chief
operating officer, after serving as president of New Prison Realty since
December 1999. Mr. Quinlan was also the president and chief operating officer of
the Operating Company and a member of its board of directors since June 1999.
From January 1999 until May 1999, Mr. Quinlan served as a member of the board of
trustees of New Prison Realty and as vice-chairman of its board of trustees.
From April 1997 until January 1999, Mr. Quinlan served as a member of the board
of trustees and as chief executive officer of Old Prison Realty. From July 1987
to December 1992, Mr. Quinlan served as the Director of the Federal Bureau of
Prisons, where he was responsible for the total operations and administration of
a federal agency with an annual budget of more than $2 billion, more than 26,000
employees and 75 facilities.
Finance. On December 6, 2000, Irving E. Lingo, Jr. was named chief financial
officer of the Company. Most recently, Mr. Lingo was chief financial officer for
Bradley Real Estate, Inc., a NYSE listed REIT headquartered in Chicago,
Illinois, where he was responsible for financial accounting and reporting,
including SEC compliance, capital markets, and mergers and acquisitions. Prior
to joining Bradley Real Estate, Mr. Lingo held positions as chief financial
officer, chief operating officer and vice president, finance for several public
and private companies, including Lingerfelt Industrial Properties, CSX
Corporation, and Goodman Segar Hogan, Inc. In addition, he was previously an
Audit Manager at Ernst & Young LLP.
Business Development. On January 17, 2001, William T. Baylor was named the chief
development officer of the Company. As chief development officer, Mr. Baylor
will manage the Company's business relationships with local, state and federal
customers, spearhead new business opportunities and develop marketing
strategies. Most recently, Mr. Baylor served as government sales manager for
Herman Miller for Healthcare in Nashville, Tennessee. In that role, he managed
the company's relationship with 372 medical centers and more than 1500 clinics
within the federal government. From 1995 to 1999, he served as national accounts
sales team leader for Milcare, the largest privately owned hospital group in the
nation.
Legal Affairs. On January 22, 2001, Gus Puryear joined the Company as general
counsel. He will be responsible for overseeing customer contracts, inmate
litigation and assist the Company in addressing policy issues. Most recently,
Mr. Puryear served as legislative director and counsel for U.S. Senator Bill
Frist, where he worked on legislation and other policy matters. During that
time, he also served as a debate advisor to Vice President Richard B. Cheney. In
addition, Mr. Puryear worked as counsel on the special investigation of campaign
finance abuses during the 1996 elections, which was chaired by U.S. Senator Fred
Thompson.
This internal reorganization is intended to streamline operational support for
the Company's correctional and detention facilities, as well as to emphasize
quality assurance and meet or exceed customers' expectations while continuing to
maintain safe and secure facilities.
At the 2000 annual stockholders meeting held on December 13, 2000, the Company's
stockholders elected a newly constituted nine-member board of directors of the
Company, including six independent directors. Since the Company's charter does
not divide the directors into classes, under Maryland law all directors are to
be elected annually, at the Company's annual meeting of stockholders, for a
one-year term and until the next annual meeting of stockholders.
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CAPITAL STRUCTURE CHANGES
DEBT STRUCTURE
As of December 31, 2000, the Company had $1.2 billion of outstanding
indebtedness, consisting of $382.5 million and $589.7 million due January 1,
2002 and December 31, 2002, respectively, outstanding under the Amended Bank
Credit Facility, $100.0 million of 12% Senior Notes due 2006, $41.1 million of
10% Convertible Subordinated Notes due 2008, $30.0 million of 8% Convertible
Subordinated Notes due 2003, $7.6 million outstanding under a revolving credit
facility due 2002, which was assumed from Operating Company in connection with
the Operating Company Merger, and $1.6 million of other debt.
Changes to the Bank Credit Facility. In August 1999, the Company amended and
restated its original bank credit facility to increase the amount available to
the Company from $650.0 million to $1.0 billion (the "Amended Bank Credit
Facility"). The Amended Bank Credit Facility consists of up to $600.0 million of
term loans, which mature December 31, 2002, and up to $400.0 million in
revolving loans, which mature January 1, 2002. The Amended Bank Credit Facility
bears interest at variable rates of interest based on a spread over the base
rate or LIBOR (as elected by the Company), which spread is determined by
reference to the Company's credit rating. Prior to the June 2000 Waiver and
Amendment, the spread for the revolving loans ranged from 0.5% to 2.25% for base
rate loans and from 2.0% to 3.75% for LIBOR rate loans. Prior to the June 2000
Waiver and Amendment, the spread for the term loans ranged from 2.25% to 2.5%
for base rate loans and from 3.75% to 4.0% for LIBOR rate loans. The Amended
Bank Credit Facility, similar to the original bank credit facility, is secured
by mortgages on the Company's real property.
During the first quarter of 2000, the ratings on the Company's bank
indebtedness, senior unsecured indebtedness and Series A Preferred Stock were
lowered. As a result of these reductions, the interest rate applicable to
outstanding amounts under the Amended Bank Credit Facility for revolving loans
was increased by 0.5%, to 1.5% over the base rate and to 3.0% over the LIBOR
rate; the spread for term loans remained unchanged at 2.5% for base rate loans
and 4.0% for LIBOR rate loans. The rating on the Company's indebtedness was also
lowered during the second quarter of 2000, although no interest rate increase
was attributable to this rating adjustment.
Following the approval of the requisite senior lenders under the Amended Bank
Credit Facility, the Company, certain of its wholly-owned subsidiaries, various
lenders and Lehman, as administrative agent, executed the June 2000 Waiver and
Amendment, dated as of June 9, 2000, to the provisions of the Amended and
Restated Credit Agreement. Upon effectiveness, the June 2000 Waiver and
Amendment waived or addressed all then existing events of default under the
provisions of the Amended and Restated Credit Agreement that resulted from: (i)
the financial condition of the Company and Operating Company; (ii) the
transactions undertaken by the Company and Operating Company in an attempt to
resolve the liquidity issues of the Company and Operating Company; and (iii)
previously announced restructuring transactions. As a result of the then
existing defaults, the Company was subject to the default rate of interest, or
2.0% higher than the rates discussed above, effective from January 25, 2000
until June 9, 2000. The June 2000 Waiver and Amendment also contained certain
amendments to the Amended and Restated Credit Agreement, including the
replacement of existing financial covenants contained in the Amended and
Restated Credit Agreement applicable to the Company with new financial ratios
following completion of the Restructuring. As a result of the June 2000 Waiver
and Amendment, the Company began monthly
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interest payments on outstanding amounts under the Amended Bank Credit Facility
beginning July 2000.
The June 2000 Waiver and Amendment prohibited: (i) the Company from settling its
then outstanding stockholder litigation for cash amounts not otherwise fully
covered by the Company's existing directors' and officers' liability insurance
policies; (ii) the declaration and payment of dividends with respect to the
Company's currently outstanding Series A Preferred Stock prior to the receipt of
net cash proceeds of at least $100.0 million from the issuance of additional
shares of common or preferred stock; and (iii) Operating Company from amending
or refinancing its revolving credit facility on terms and conditions less
favorable than Operating Company's then existing revolving credit facility. The
June 2000 Waiver and Amendment also required the Company to complete the
securitization of lease payments (or other similar transaction) with respect to
the Company's Agecroft facility located in Salford, England on or prior to
February 28, 2001, although such deadline was extended (as described herein).
As a result of the June 2000 Waiver and Amendment, the Company is generally
required to use the net cash proceeds received by the Company from certain
transactions, including the following transactions, to repay outstanding
indebtedness under the Amended Bank Credit Facility:
- any disposition of real estate assets;
- the securitization of lease payments (or other similar transaction)
with respect to the Company's Agecroft facility; and
- the sale-leaseback of the Company's headquarters.
Under the terms of the June 2000 Waiver and Amendment, the Company is also
required to apply a designated portion of its "excess cash flow," as such term
is defined in the June 2000 Waiver and Amendment, to the prepayment of
outstanding indebtedness under the Amended Bank Credit Facility.
As a result of the June 2000 Waiver and Amendment, the interest rate spreads
applicable to outstanding borrowings under the Amended Bank Credit Facility were
increased by 0.5%. As a result, the spread for the revolving loans ranges from
1.0% to 2.75% for base rate loans and from 2.5% to 4.25% for LIBOR rate loans.
The resulting spread for the term loans ranges from 2.75% to 3.0% for base rate
loans and from 4.25% to 4.5% for LIBOR rate loans. Based on the Company's
current credit rating, the spread for revolving loans is 2.75% for base rate
loans and 4.25% for LIBOR rate loans, while the spread for term loans is 3.0%
for base rate loans and 4.5% for LIBOR rate loans.
During the third and fourth quarters of 2000, the Company was not in compliance
with certain applicable financial covenants contained in the Company's Amended
and Restated Credit Agreement, including (i) debt service coverage ratio; (ii)
interest coverage ratio; (iii) leverage ratio; and (iv) net worth. In November
2000, the Company obtained the consent of the requisite percentage of the senior
lenders (the "November 2000 Consent and Amendment") to replace previously
existing financial covenants with amended financial covenants, each defined in
the November 2000 Consent and Amendment:
- total leverage ratio;
- interest coverage ratio;
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- fixed charge coverage ratio;
- ratio of total indebtedness to total capitalization;
- minimum EBIDTA; and
- total beds occupied ratio.
The November 2000 Consent and Amendment further provided that the Company will
be required to use commercially reasonable efforts to complete a "capital
raising event" on or before June 30, 2001. A "capital raising event" is defined
in the November 2000 Consent and Amendment as any combination of the following
transactions, which together would result in net cash proceeds to the Company of
$100.0 million:
- an offering of the Company's common stock through the distribution
of rights to the Company's existing stockholders;
- any other offering of the Company's common stock or certain types of
the Company's preferred stock;
- issuances by the Company of unsecured, subordinated indebtedness
providing for in-kind payments of principal and interest until
repayment of the Amended Credit Facility;
- certain types of asset sales by the Company, including the
sale-leaseback of the Company's headquarters, but excluding the
securitization of lease payments (or other similar transaction) with
respect to the Salford, England facility.
The November 2000 Consent and Amendment also contains limitations upon the use
of proceeds obtained from the completion of such "capital raising events." The
requirements relating to "capital raising events" contained in the November 2000
Consent and Amendment replaced the requirement contained in the Amended and
Restated Credit Agreement that the Company use commercially reasonable efforts
to consummate a rights offering on or before December 31, 2000.
As a result of the November 2000 Consent and Amendment, the current interest
rate applicable to the Company's Amended Bank Credit Facility remains unchanged.
This applicable rate, however, is subject to (i) an increase of 25 basis points
(0.25%) from the current interest rate on July 1, 2001 if the Company has not
prepaid $100.0 million of the outstanding loans under the Amended Bank Credit
Facility, and (ii) an increase of 50 basis points (0.50%) from the current
interest rate on October 1, 2001 if the Company has not prepaid an aggregate of
$200.0 million of the loans under the Amended Bank Credit Facility.
The maturities of the loans under the Amended Bank Credit Facility remain
unchanged as a result of the November 2000 Consent and Amendment. No event of
default was declared due to the amendment of the financial covenants obtained in
connection with the November 2000 Consent and Amendment.
In March 2001, the Company obtained an amendment to the Amended Bank Credit
Facility which included the following amendments: (i) changed the date the
securitization of lease payments (or other similar transaction) with respect to
the Company's Agecroft facility must by consummated from February 28, 2001 to
March 31, 2001; (ii) modified the calculation of EBITDA used in calculating the
total leverage ratio, to take into effect any loss of EBITDA that may result
from certain asset dispositions, and (iii) modified the minimum EBITDA covenant
to permit a reduction by the amount of EBITDA that certain asset dispositions
had generated.
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The securitization of lease payments (or other similar transaction) with respect
to the Company's Agecroft facility did not close by the required date. However,
the covenant allows for a 30-day grace period during which the lenders under the
Amended Bank Credit Facility could not exercise their rights to declare an event
of default. On April 10, 2001, prior to the expiration of the grace period, the
Company consummated the Agecroft transaction through the sale of all the issued
and outstanding capital stock of Agecroft Properties, Inc., a wholly-owned
subsidiary of the Company, and used the net proceeds to pay-down the Amended
Bank Credit Facility, thereby fulfilling the Company's covenant requirements
with respect to the Agecroft transaction.
The Amended Bank Credit Facility also contains a covenant requiring the Company
to provide the lenders with audited financial statements within 90 days of the
Company's fiscal year-end, subject to an additional five-day grace period. Due
to the Company's attempts to close the securitization of the Company's Salford,
England facility, the Company did not provide the audited financial statements
within the required time period. However, the Company has obtained a waiver from
the lenders under the Amended Bank Credit Facility of this financial reporting
requirement.
The revolving loan portion of the Amended Bank Credit Facility of $382.5 million
matures on January 1, 2002. As part of management's plans to improve the
Company's financial position and address the January 1, 2002 maturity of
portions of the debt under the Amended Bank Credit Facility, management has
committed to a plan of disposal for certain long-lived assets. These assets are
being actively marketed for sale and are classified as held for sale in the
accompanying consolidated balance sheet at December 31, 2000. Anticipated
proceeds from these asset sales are to be applied as loan repayments. The
Company believes that utilizing such proceeds to pay-down debt will improve its
leverage ratios and overall financial position, improving its ability to
refinance or renew maturing indebtedness, including primarily the Company's
revolving loans under the Amended Bank Credit Facility.
The Company believes it will be able to demonstrate commercially reasonable
efforts regarding the $100.0 million capital raising event on or before June 30,
2001, primarily by attempting to sell certain assets, as discussed above.
Subsequent to year-end, the Company completed the sale of a facility located in
North Carolina for approximately $25 million. The Company is currently
evaluating and would also consider a distribution of rights to purchase common
or preferred stock to the Company's existing stockholders, or an equity
investment in the Company from an outside investor. The Company expects to use
the net proceeds from these transactions to pay-down debt under the Amended Bank
Credit Facility.
The Company believes that it is currently in compliance with the terms of the
debt covenants contained in the Amended Bank Credit Facility. Further, the
Company believes its operating plans and related projections are achievable, and
will allow the Company to remain in compliance with its debt covenants during
2001. However, there can be no assurance that the cash flow projections will
reflect actual results and there can be no assurance that the Company will
remain in compliance with its debt covenants during 2001. Further, even if the
Company is successful in selling assets, there can be no assurance that it will
be able to refinance or renew its debt obligations maturing January 1, 2002 on
commercially reasonable or any other terms.
If the Company were to be in default under the Amended Bank Credit Facility, and
if the senior lenders under the Amended Bank Credit Facility elected to exercise
their rights to accelerate the Company's obligations under the Amended Bank
Credit Facility, such events could result in the
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acceleration of all or a portion of the outstanding principal amount of the
Company's senior notes or the Company's convertible subordinated notes, which
would have a material adverse effect on the Company's liquidity and financial
position. The Company does not have sufficient working capital to satisfy its
debt obligations in the event of an acceleration of all or a substantial portion
of the Company's outstanding indebtedness.
Changes to the $40 Million Convertible Subordinated Notes. During the first and
second quarters of 2000, certain existing or potential events of default arose
under the provisions of the note purchase agreement relating to the $40.0
Million Convertible Subordinated Notes as a result of the Company's financial
condition and a "change of control" arising from the Company's execution of
certain securities purchase agreements with respect to the proposed
restructuring. This "change of control" gave rise to the right of the holders of
such notes, MDP Ventures IV LLC ("MDP"), to require the Company to repurchase
the notes at a price of 105% of the aggregate principal amount of such notes
within 45 days after the provision of written notice by such holders to the
Company. In addition, the Company's defaults under the provisions of the note
purchase agreement gave rise to the right of the holders of such notes to
require the Company to pay an applicable default rate of interest of 20.0%. In
addition to the default rate of interest, as a result of the events of default,
the Company was obligated, under the original terms of the $40.0 Million
Convertible Subordinated Notes, to pay the holders of the notes contingent
interest sufficient to permit the holders to receive a 15.0% rate of return,
excluding the effect of the default rate of interest, on the $40.0 million
principal amount, unless the holders of the notes elect to convert the notes
into the Company's common stock under the terms of the note purchase agreement.
Such contingent interest was retroactive to the date of issuance of the notes.
In order to address the events of default discussed above, on June 30, 2000, the
Company and MDP executed a waiver and amendment to the provisions of the note
purchase agreement governing the notes. This waiver and amendment provided for a
waiver of all existing events of default under the provisions of the note
purchase agreement. In addition, the waiver and amendment to the note purchase
agreement amended the economic terms of the notes to increase the applicable
interest rate of the notes by 0.5% per annum from 9.5% to 10.0%, and adjusted
the conversion price of the notes to a price equal to 125% of the average high
and low sales price of the Company's common stock on the NYSE for a period of 20
trading days immediately following the earlier of (i) October 31, 2000 or (ii)
the closing date of the Operating Company Merger. In addition, the waiver and
amendment to the note purchase agreement provided for the replacement of
financial ratios applicable to the Company. The conversion price for the notes
has been established at $1.19, subject to adjustment in the future upon the
occurrence of certain events, including the payment of dividends and the
issuance of stock at below market prices by the Company. Under the terms of the
waiver and amendment, the distribution of the Company's Series B Preferred Stock
during the fourth quarter of 2000 did not cause an adjustment to the conversion
price of the notes. In addition, the Company does not believe that the
distribution of shares of the Company's common stock in connection with the
settlement of all outstanding stockholder litigation against the Company, as
described below, will cause an adjustment to the conversion price of the notes.
MDP, however, has indicated its belief that such an adjustment is required. The
Company and MDP are currently in discussions concerning this matter. At an
adjusted conversion price of $1.19, the $40.0 Million Convertible Subordinated
Notes are convertible into approximately 33.6 million shares of the Company's
common stock.
In connection with the waiver and amendment to the note purchase agreement, the
Company issued additional convertible subordinated notes containing
substantially similar terms in the aggregate
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principal amount of $1.1 million, which amount represented all interest owed at
the default rate of interest through June 30, 2000. These additional notes are
currently convertible, at an adjusted conversion price of $1.19, into an
additional 0.9 million shares of the Company's common stock. After giving
consideration to the issuance of these additional notes, the Company has made
all required interest payments under the $40.0 Million Convertible Subordinated
Notes.
The terms of a registration rights agreement with holders of the $40.0 Million
Convertible Subordinated Notes also require the Company to use its best efforts
to register the shares of the Company's common stock into which the notes are
convertible. Management intends to take the necessary actions to achieve
compliance with this covenant.
The waiver obtained from the lenders under the Amended Bank Credit Facility with
respect to the financial reporting requirement previously discussed, also cured
the resulting cross-default under the $40.0 Million Convertible Subordinated
Notes.
The Company currently believes it is in compliance with all covenants under the
provisions of the $40.0 Million Convertible Subordinated Notes, as amended.
There can no assurance, however, that the Company will be able to remain in
compliance with all covenants under the provisions of the $40.0 Million
Convertible Subordinated Notes.
Changes to the $30 Million Convertible Subordinated Notes. Certain existing or
potential events of default arose under the provisions of the note purchase
agreement relating to the Company's $30.0 Million Convertible Subordinated Notes
as a result of the Company's financial condition and as a result of the
Restructuring. However, on June 30, 2000, the Company and PMI Mezzanine Fund,
L.P. ("PMI"), the holder of the notes, executed a waiver and amendment to the
provisions of the note purchase agreement governing the notes. This waiver and
amendment provided for a waiver of all existing events of default under the
revisions of the note purchase agreement. In addition, the waiver and amendment
to the note purchase agreement amended the economic terms of the notes to
increase the applicable interest rate of the notes by 0.5% per annum, from 7.5%
to 8.0%, and adjusted the conversion price of the notes to a price equal to 125%
of the average closing price of the Company's common stock on the NYSE for a
period of 30 trading days immediately following the earlier of (i) October 31,
2000 or (ii) the closing date of the Operating Company Merger. In addition, the
waiver and amendment to the note purchase agreement provided for the replacement
of financial ratios applicable to the Company.
The conversion price for the notes has been established at $1.07, subject to
adjustment in the future upon the occurrence of certain events, including the
payment of dividends and the issuance of stock at below market prices by the
Company. Under the terms of the waiver and amendment, the distribution of the
Company's Series B Preferred Stock during the fourth quarter of 2000 did not
cause an adjustment to the conversion price of the notes. However, the
distribution of shares of the Company's common stock in connection with the
settlement of all outstanding stockholder litigation against the Company, as
described below, will cause an adjustment to the conversion price of the notes
in an amount to be determined at the time shares of the Company's common stock
are distributed pursuant to the settlement. However, the ultimate adjustment to
the conversion ratio will depend on the number of shares of the Company's common
stock outstanding on the date of issuance of the shares pursuant to the
stockholder litigation settlement. In addition, if, as currently contemplated,
all of the shares are not issued simultaneously, multiple adjustments to the
conversion ratio will be required. At an adjusted conversion price of $1.07, the
$30.0 Million Convertible
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Subordinated Notes are convertible into approximately 28.0 million shares of the
Company's common stock.
At December 31, 2000, the Company was in default under the note purchase
agreement governing the $30.0 Million Convertible Subordinated Notes. The
default related to the Company's failure to comply with the total leverage ratio
financial covenant. However, in March 2001, the Company and PMI executed a
waiver and amendment to the provisions of the note purchase agreement governing
the notes. This waiver and amendment provided for a waiver of all existing
events of default under the provisions of the note purchase agreement and
amended the financial covenants applicable to the Company.
The Company has made all required interest payments under the $30.0 Million
Convertible Subordinated Notes. The Company currently believes it is in
compliance with all covenants under the provisions of the $30.0 Million
Convertible Subordinated Notes. There can be no assurance, however, that the
Company will be able to remain in compliance with all of the covenants under the
provisions of the $30.0 Million Convertible Subordinated Notes.
The provisions of the Company's debt agreements related to the Amended Bank
Credit Facility, the $40.0 Million Convertible Subordinated Notes, the $30.0
Million Convertible Subordinated Notes and the Senior Notes contain certain
cross-default provisions. Any events of default under the Amended Bank Credit
Facility also result in an event of default under the Company's $40.0 Million
Convertible Subordinated Notes. Any events of default under the Amended Bank
Credit Facility that results in the lenders' acceleration of amounts outstanding
thereunder also result in an event of default under the Company's $30.0 Million
Convertible Subordinated Notes and the Senior Notes. Additionally, any events of
default under the $40.0 Million Convertible Subordinated Notes, the $30.0
Million Convertible Subordinated Notes and the Senior Notes also result in an
event of default under the Amended Bank Credit Facility.
If the Company were to be in default under the Amended Bank Credit Facility, and
if the lenders under the Amended Bank Credit Facility elected to exercise their
rights to accelerate the Company's obligations under the Amended Bank Credit
Facility, such events could result in the acceleration of all or a portion of
the Company's $40.0 Million Convertible Subordinated Notes, the $30.0 Million
Convertible Subordinated Notes and the Senior Notes which would have a material
adverse effect on the Company's liquidity and financial position. Additionally,
under the Company's $40.0 Million Convertible Subordinated Notes, even if the
lenders under the Amended Bank Credit Facility did not exercise their
acceleration rights, the holders of the $40.0 Million Convertible Subordinated
Notes could require the Company to repurchase such notes. The Company does not
have sufficient working capital to satisfy its debt obligations in the event of
an acceleration of all or a substantial portion of the Company's outstanding
indebtedness.
Assumption of the Operating Company Revolving Credit Facility. On April 27,
2000, Operating Company obtained a waiver of events of default under its $100.0
million revolving credit facility with a group of lenders led by Foothill
Capital Corporation ("Foothill Capital") relating to: (i) the amendment of
certain contractual arrangements between the Company and Operating Company; (ii)
Operating Company's violation of a net worth covenant contained in the revolving
credit facility; and (iii) the execution of the Agreement and Plan of Merger
with respect to the Operating Company Merger. On June 30, 2000, the terms of the
initial waiver were amended to provide that the waiver
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would remain in effect, subject to certain other events of termination, until
the earlier of (i) September 15, 2000 or (ii) the completion of the Operating
Company Merger.
On September 15, 2000, Operating Company terminated its revolving credit
facility with Foothill Capital and simultaneously entered into a new $50.0
million revolving credit facility with Lehman (the "Operating Company Revolving
Credit Facility"). This facility, which bears interest at an applicable prime
rate, plus 2.25%, is secured by the accounts receivable and all other assets of
Operating Company. This facility, which matures on December 31, 2002, was
assumed by a wholly-owned subsidiary of the Company in connection with the
Operating Company Merger on October 1, 2000.
EQUITY STRUCTURE
Common Stock. In connection with the Restructuring and related transactions, the
Company engaged in a series of transactions which resulted in the issuance by
the Company of additional shares of common stock and securities convertible into
shares of common stock.
- On October 1, 2000, the Company issued approximately 18.8 million
shares of its common stock in connection with the Operating Company
Merger, including 11.3 million shares to Baron and Sodexho, the
holders of approximately 34% of the outstanding common stock of
Operating Company. In addition, the Company issued warrants to Baron
to purchase approximately 1.4 million shares of the Company's common
stock at an exercise price of $0.01 per share and warrants to
purchase approximately 0.7 million shares of the Company's common
stock at an exercise price of $1.41 per share in consideration for
Baron's consent to the Operating Company Merger. Further, the
Company assumed the obligation to issue up to approximately 0.8
million shares of its common stock, at a per share price of $3.33,
pursuant to the exercise of warrants to purchase common stock
previously issued by Operating Company.
- On December 1, 2000, the Company issued approximately 2.9 million
shares of its common stock to the wardens of the facilities operated
by the Service Companies in connection with the acquisitions of PMSI
and JJFMSI.
- During October and December 2000, the Company issued approximately
95.1 million shares of common stock pursuant to the conversion of
the Company's Series B Preferred Stock into shares of common stock,
as further discussed below.
- In February 2001, the Company received court approval, which became
final in March 2001, of the revised terms of the definitive
settlement agreements regarding the "global" settlement of all
outstanding stockholder litigation against the Company and certain
of its existing and former directors and executive officers.
Pursuant to the terms of the settlement, the Company will issue to
the plaintiffs:
- an aggregate of 46.9 million shares of common stock; and
- a subordinated promissory note in the aggregate principal
amount of $29.0 million.
The promissory note will be due January 2, 2009, and will accrue
interest at a rate of 8.0% per annum. Pursuant to the terms of the
settlement, the note and accrued interest may be extinguished if the
Company's common stock meets or exceeds a "termination price" equal
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to $1.63 per share for fifteen consecutive trading days prior to the
maturity date of the note. Additionally, to the extent the Company's
common stock price does not meet the termination price, the note
will be reduced by the amount that the shares of common stock issued
to the plaintiffs appreciate in value over $0.49 per common share,
based on the average trading price of the common stock prior to the
maturity of the note.
- On December 13, 2000, the Company's stockholders approved a reverse
stock split of the Company's common stock at a ratio to be
determined by the board of directors of not less than one-for-ten
and not to exceed one-for-twenty. The reverse stock split is
expected to encourage greater interest in the Company's common stock
by the financial community and the investing public, and is expected
to satisfy a condition of continued listing of the common stock on
the NYSE. The Company currently expects to complete the reverse
stock split during the second quarter of 2001.
Preferred Stock. In connection with the June 2000 Waiver and Amendment, the
Company is prohibited from declaring or paying any dividends with respect to the
Company's currently outstanding Series A Preferred Stock until such time as the
Company has raised at least $100 million in equity. Dividends with respect to
the Series A Preferred Stock will continue to accrue under the terms of the
Company's charter until such time as payment of such dividends is permitted
under the terms of the Amended Bank Credit Facility. Under the terms of the
Company's charter, in the event dividends are unpaid and in arrears for six or
more quarterly periods, the holders of the Series A Preferred Stock will have
the right to vote for the election of two additional directors to the Company's
board of directors. No assurance can be given as to if and when the Company will
commence the payment of cash dividends on its shares of Series A Preferred
Stock.
In order to satisfy the REIT distribution requirements with respect to its 1999
taxable year, the Company issued approximately 7.5 million shares of a newly
created Series B Preferred Stock to shareholders of the Company's common stock,
as a stock dividend. The Series B Preferred Stock was distributed to common
stockholders of record on September 14, 2000, in the amount of five shares of
Series B Preferred Stock for every 100 shares of common stock held by the
stockholder. The Series B Preferred Stock was convertible into shares of common
stock during two separate conversion periods during the fourth quarter of 2000,
the last of which expired on December 20, 2000, at a conversion price based on
the average closing price of the Company's common stock on the NYSE during the
10 trading days prior to the first day of each applicable conversion period,
subject to a floor of $1.00. During the two conversion periods, approximately
4.2 million shares of Series B Preferred Stock were converted into approximately
95.1 million shares of common stock. The shares of Series B Preferred Stock
currently outstanding, as well as any additional shares issued as dividends, are
not and will not be convertible into shares of the Company's common stock.
The shares of Series B Preferred Stock issued by the Company provide for
cumulative dividends payable at a rate 12% per year of the stock's stated value
of $24.46. The dividends are payable quarterly in arrears, in additional shares
of Series B Preferred Stock through the third quarter of 2003, and in cash
thereafter.
On December 13, 2000, the Company's board of directors declared a paid-in-kind
dividend on the shares of Series B Preferred Stock for the period from September
22, 2000 (the original date of issuance) through December 31, 2000, payable on
January 2, 2001, to the holders of record of the Company's Series B Preferred
Stock on December 22, 2000. As a result of the board's declaration, the holders
of the Company's Series B Preferred Stock were entitled to receive approximately
3.3
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shares of Series B Preferred Stock for every 100 shares of Series B Preferred
Stock held by them on the record date. The number of shares to be issued as the
dividend was based on a dividend rate of 12% per annum of the stock's stated
value ($24.46 per share). Approximately 0.1 million shares of Series B Preferred
Stock were issued on January 2, 2001 as a result of this dividend.
On March 9, 2001, the Company's board of directors declared a paid-in-kind
dividend on the shares of Series B Preferred Stock for the first quarter of
2001, payable on April 2, 2001 the holders of record of the Company's Series B
Preferred Stock on March 19, 2001. As a result of this declaration, the holders
of the Company's Series B Preferred Stock are entitled to receive 3.0 shares of
Series B Preferred Stock for every 100 shares of Series B Preferred Stock held
by them on the record date. The number of shares to be issued as the dividend is
based on a dividend rate of 12.0% per annum of the stock's stated value
($24.46). Approximately 0.1 million shares of Series B Preferred Stock were
issued on April 2, 2001 as a result of this dividend.
CAPITAL STRATEGY
As a result of the Company's current financial condition, including: (i) the
revolving loans under the Amended and Restated Credit Agreement maturing January
1, 2002; (ii) the requirement under the November 2000 Consent and Amendment to
use commercially reasonable efforts to complete any combination of certain
transactions, as defined therein, which together result in net cash proceeds of
at least $100.0 million; and (iii) the Company's highly leveraged capital
structure, the Company's management is evaluating the Company's current capital
structure, including the consideration of various potential transactions that
could improve the Company's financial position.
As of December 31, 2000, the Company was holding for sale numerous assets,
including fifteen parcels of land, three correctional facilities leased to
governmental agencies, one correctional facility leased to a private operator
and investments in two direct financing leases, with an aggregate book value of
$163.5 million. The Company may also elect to sell additional assets. The
Company expects to use the net proceeds from such sales to repay outstanding
indebtedness. The Company's management believes that utilizing sales proceeds to
pay down debt will improve the Company's leverage ratios and overall financial
position, improving its ability to refinance or renew maturing indebtedness,
including primarily the Company's revolving loans under the Amended and Restated
Credit Agreement maturing January 1, 2002, on more favorable terms. In November
and December 2000, the Company completed the sale of its 50% interest in two
international subsidiaries for an aggregate sales price of approximately $6.4
million. In March 2001, the Company sold a facility located in North Carolina
for a sales price of approximately $25 million. The net proceeds were used to
pay-down the Amended Bank Credit Facility. In April 2001, the Company sold its
interest in its Agecroft facility located in Salford, England, for approximately
$65.7 million through the sale of all of the issued and outstanding capital
stock of Agecroft Properties, Inc., a wholly-owned subsidiary of the Company.
The net proceeds were used to pay-down the Amended Bank Credit Facility. There
can be no assurance that the Company will sell any additional assets, or that,
if the Company does sell any additional assets, that the proceeds ultimately
received will achieve expected levels. Further, even if the Company is
successful in selling assets at expected levels, there can be no assurance that
it will be able to refinance or renew its debt obligations when they come due on
reasonable or any other terms.
The Company believes it will be able to demonstrate commercially reasonable
efforts regarding the $100.0 million capital raising event on or before June 30,
2001, primarily by attempting to sell
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certain assets, as discussed above. The Company is currently evaluating and
would also consider a distribution of rights to purchase common or preferred
stock to the Company's existing stockholders, or an equity investment in the
Company from an outside investor. No assurance can be given that, even if the
Company is successful in selling assets, that it will be able to refinance or
renew its debt obligations maturing January 1, 2002 on commercially reasonable
or any other terms.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is currently engaged primarily in the business of owning, operating
and managing correctional and detention facilities, as well as providing
prisoner transportation services for government agencies. A portion of the
Company's facilities are leased to both private prison managers and government
agencies. The Company assesses and measures operating results on an individual
facility basis for each of its facilities without differentiation, based on each
facilities' contribution to EBITDA. Since each of the facilities exhibit similar
economic characteristics and offer similar degrees of risk and opportunities for
growth, the facilities have been aggregated and reported as one operating
segment. The Company's prisoner transportation subsidiary exhibits different
economic characteristics compared with the economic characteristics of the
facilities. However, since the financial results of this subsidiary do not
exceed the materiality thresholds under Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information," the financial results are not separately reported. The financial
statements and supplementary data required by Regulation S-X are included in
this report on Form 10-K commencing on page F-1.
NARRATIVE DESCRIPTION OF BUSINESS
BUSINESS OBJECTIVES AND STRATEGIES
General. The Company specializes in owning, operating and managing prisons and
other correctional facilities and providing prisoner transportation services for
governmental agencies. In addition to providing the fundamental residential
services relating to inmates, each of the Company's facilities offers a large
variety of rehabilitation and educational programs, including basic education,
life skills and employment training and substance abuse treatment. The Company
also provides health care (including medical, dental and psychiatric services),
institutional food services and work and recreational programs.
Business Objectives. Management believes the Restructuring enables the Company
to streamline the corporate structure and operational support to all its
facilities, emphasizing quality assurance and exceeding customers' expectations
while continuing to maintain safe and secure facilities. The Company's primary
business objectives are to provide quality corrections services, increase
revenue and control operating costs, while maintaining its position as the
largest owner, operator and manager of privatized correctional and detention
facilities. The Company expects to achieve these objectives by the following:
- Quality Corrections Services. The Company has reorganized its
operations group to help ensure continued delivery of quality
corrections services and more efficiently manage day-to-day
operations and security. The revised organization also expands two
divisions, quality assurance, and human resources. The Company's
quality assurance division will provide oversight and establish
checkpoints for examining the Company's performance; and then
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human resources division will formalize the Company's commitment to
employee recruitment and retention. Management has completed a
systematic facility-by-facility review in order to establish
projections and benchmarks for facility performance. The Company
believes that a renewed focus on the day-to-day management of the
facilities, quality assurance and its employees will ensure
continued delivery of quality corrections services.
- Increasing Occupancy Rates. The Company's new business development
group is focusing on renewing and enhancing contracts as well as
obtaining new business. The new structure establishes a dedicated
team whose primary focus is to increase facility occupancy rates and
maximize opportunities to provide new services to our customers.
During 2000, the Company was awarded a contract with the Federal
Bureau of Prisons (the "BOP") to house approximately 3,316 federal
detainees at the Company's California City, California and Milan,
New Mexico facilities, the largest contract award in the Company's
history. Total revenue over the life of these contracts is projected
to approximate $760.0 million.
- Cost Reduction Efforts. An important component of the Company's
strategy is to position itself as a cost effective, high quality
provider of prison management services in all its markets. The
Company will continue to focus on improving operating performance
and efficiency through the following key operating initiatives: (i)
standardization of supply and service purchasing practices and
usage; (ii) improvement of inmate management, resource consumption
and reporting procedures; and (iii) improvement in employee
productivity.
- Expanded Scope of Services The Company intends to continue to
implement a wide variety of specialized services that address the
unique needs of various segments of the inmate population. Because
the facilities operated by the Company differ with respect to
security levels, ages, genders and cultures of inmates, the Company
focuses on the particular needs of an inmate population and tailors
its service based on local conditions and its ability to provide
such services on a cost-effective basis.
Business Strategy. The Company believes that it is well positioned to take
advantage of opportunities in the privatized corrections industry. The Company
currently is able to benefit from every type of private sector/public sector
partnership with respect to correctional and detention facilities, including:
(i) facilities owned and managed by the Company; (ii) facilities owned by the
Company and managed by other private operators; (iii) facilities owned by the
Company and managed by government entities; and (iv) facilities owned by
government entities and managed by the Company.
The Company's principal business strategies are to fill vacant beds currently in
the Company's inventory and increase revenue by obtaining additional management
contracts. Substantially all of the Company's income is expected to be derived
from contracts with government entities for the provision of correctional and
detention facility management and related services.
THE FACILITIES
The facilities managed 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
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external patrol. Multi-security facilities are facilities with various areas
encompassing either minimum, medium or maximum security. Non-secure facilities
are juvenile facilities having open housing that inhibit movement by their
design. Secure facilities are juvenile facilities having cells, rooms, or
dormitories, a secure perimeter and some form of external patrol.
The facilities owned, under development and/or managed by the Company can also
be classified according to their primary function. The primary functional
categories are:
- Correctional Facilities. Correctional facilities house and provide
contractually agreed upon programs and services to sentenced adult
prisoners or sentenced adult federal prisoners who are in the
custody of the BOP, typically prisoners on whom a sentence in excess
of one year has been imposed.
- Detention Facilities. Detention facilities house and provide
contractually agreed upon programs and services to prisoners being
detained by the U.S. Immigration and Naturalization Service (the
"INS"), prisoners who are awaiting trial who have been charged with
violations of federal criminal law who are in the custody of the
U.S. Marshals Service (the "USMS") or state criminal law, and
prisoners who have been convicted of crimes and on whom a sentence
of one year or less has been imposed.
- Juvenile Facilities. Juvenile facilities house and provide
contractually agreed upon programs and services to juveniles,
typically defined by applicable federal or state law as being
persons below the age of 18, who have been determined to be
delinquents by a juvenile court and who have been committed for an
indeterminate period of time but who typically remain confined for a
period of six months or less.
- Leased Facilities. Leased facilities are facilities that are owned
but not managed by the Company.
The following table sets forth all of the facilities owned and/or managed by the
Company at December 31, 2000 and includes certain information regarding each
facility, including the term of the primary management contract related to such
facility, or, in the case of facilities owned by the Company but leased to
another operator, the term of such lease.
PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (1) LEVEL TYPE (2) TERM OPTION
------------- -------- ------------ ----- ---------- ---- ------
Central Arizona Detention Center USMS 2,304 Multi Detention November (3) 1 year
Florence, Arizona 2001
Eloy Detention Center BOP, INS 1,500 Medium Detention February (7) 1 year
Eloy, Arizona 2002
Florence Correctional Center State of Hawaii 1,600 Medium Correctional June 2001 -
Florence, Arizona
California Correctional Center BOP 2,304 Medium Correctional September (7) 1 year
California City, California 2003
Leo Chesney Correctional Center (3) Cornell 240 Minimum Leased February (2) 5 year
Live Oak, California Corrections 2002
San Diego Correctional Facility INS 1,232 Minimum/ Detention December (3) 1 year
San Diego, California Medium 2001
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PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (1) LEVEL TYPE (2) TERM OPTION
------------- -------- --------- ----- ---------- ---- ------
Bent County Correctional Facility State of 700 Medium Correctional June 2001 (2) 1 -year
Las Animas, Colorado Colorado
Huerfano County Correctional State of 752 Medium Correctional June 2001 (2) 1 year
Center Colorado
Walensburg, Colorado
Kit Carson Correctional Center State of 768 Medium Correctional June 2001 (2) 1 year
Burlington, Colorado Colorado
Bay Correctional Facility State of 750 Medium Correctional June 2002 (2) 2 year
Panama City, Florida Florida
Bay County Jail and Annex Bay County 677 Multi Detention September -
Panama City, Florida 2001
Citrus County Detention Facility Citrus County 400 Multi Detention September (1) 5 year
Lecanto, Florida 2005
Gadsden Correctional Institution State of 896 Minimum/ Correctional June 2001 (2) 2 year
Quincy, Florida Florida Medium
Hernando County Jail Hernando County 302 Multi Detention October -
Brooksville, Florida 2010
Lake City Correctional Facility State of 350 Secure Correctional June 2001 -
Lake City, Florida Florida
Okeechobee Juvenile Offender State of 96 Secure Juvenile December -
Correctional Center Florida 2002
Okeechobee, Florida
Coffee Correctional Facility State of 1,524 Medium Correctional June 2001 (17)1 year
Nicholls, Georgia Georgia
Wheeler Correctional Facility State of 1,524 Medium Correctional June 2001 (17)1 year
Alamo, Georgia Georgia
Idaho Correctional Center State of Idaho 1,250 Minimum/ Correctional June 2003 -
Boise, Idaho Medium
Marion County Jail Marion County, 670 Multi Detention November -
Indianapolis, Indiana Indiana 2005
Southwest Indiana Regional Youth SWIRYV 196 Non- Juvenile July 2004 -
Village secure/Secure
Vincennes, Indiana
Leavenworth Detention Center USMS 483 Maximum Detention December (2) 1 year
Leavenworth, Kansas 2001
Lee Adjustment Center State of 756 Minimum/ Correctional May 2001 (4) 2 year
Beattyville, Kentucky Kentucky Medium
Marion Adjustment Center State of 856 Minimum Correctional December (1) 2 year
St. Mary, Kentucky Kentucky 2001
Otter Creek Correctional Center State of 656 Minimum/ Correctional February -
Wheelwright, Kentucky Indiana Medium 2004
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PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (1) LEVEL TYPE (2) TERM OPTION
------------- -------- ------------ ----- --------- ---- ------
Winn Correctional Center Medium/
Winnfield, Louisiana State of Louisiana 1,538 Maximum Correctional March 2003 -
Prairie Correctional Facility December
Appleton, Minnesota State of Wisconsin 1,338 Medium Correctional 2001 -
Delta Correctional Facility State of Minimum/ September
Greenwood, Mississippi Mississippi 1,016 Medium Correctional 2001 -
Tallahatchie County Correctional Facility December
Tutweiler, Mississippi State of Wisconsin 1,104 Medium Correctional 2001 -
Wilkinson County Correctional Facility State of December
Woodville, Mississippi Mississippi 900 Medium Correctional 2001 (1) 2 year
Crossroads Correctional Center August
Shelby, Montana State of Montana 512 Multi Correctional 2003 (8) 2 year
Southern Nevada Women's Correctional
Center (4)
Las Vegas, Nevada State of Nevada 500 Multi Correctional June 2015 -
Elizabeth Detention Center January
Elizabeth, New Jersey INS 300 Minimum Detention 2002 (3) 1 year
Cibola County Corrections Center October
Milan, New Mexico BOP 1,072 Multi Correctional 2003 (7) 1 year
New Mexico Women's Correctional Facility State of New
Grants, New Mexico Mexico 596 Multi Correctional June 2001 (4) 1 year
Torrance County Detention Facility District of September
Estancia, New Mexico Columbia 910 Multi Detention 2001 1 year
Mountain View Correctional Facility (3) (5) State of North November See
Spruce Pine, North Carolina Carolina 528 Medium Leased 2008 Note 5
Pamlico Correctional Facility (3) State of North September (2) 10
Bayboro, North Carolina Carolina 528 Medium Leased 2008 year
Northeast Ohio Correctional Center District of September
Youngstown, Ohio Columbia 2,016 Medium Correctional 2001 1 year
Queensgate Correctional Facility (3) Hamilton County, February
Cincinnati, Ohio Ohio 850 Medium Leased 2003 (3) 1 year
Cimarron Correctional Facility
Cushing, Oklahoma State of Oklahoma 960 Medium Correctional June 2002 (3) 1 year
David L. Moss Criminal Justice Center Tulsa County, August
Tulsa, Oklahoma Oklahoma 1,440 Multi Detention 2002 (2) 1 year
Davis Correctional Facility
Holdenville, Oklahoma State of Oklahoma 960 Medium Correctional June 2002 (1) 2 year
Diamondback Correctional Facility
Watonga, Oklahoma State of Hawaii 2,160 Medium Correctional June 2001 -
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PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (1) LEVEL TYPE (2) TERM OPTION
------------- -------- ------------ ----- --------- ---- ------
North Fork Correctional Facility December
Sayre, Oklahoma State of Wisconsin 1,440 Medium Correctional 2001 (2) 1 year
Guayama Correctional Center Commonwealth of December
Guayama, Puerto Rico Puerto Rico 1,000 Medium Correctional 2001 -
Ponce Adult Correctional Center Commonwealth of February
Ponce, Puerto Rico Puerto Rico 1,000 Medium Correctional 2002 (1) 5 year
Ponce-Jovenes y Adultos Commonwealth of February
Ponce, Puerto Rico Puerto Rico 500 Multi Correctional 2002 (1) 5 year
Silverdale Facilities September
Chattanooga, Tennessee Hamilton County 576 Multi Juvenile 2004 (3) 4 year
South Central Correctional Center February
Clifton, Tennessee State of Tennessee 1,506 Medium Correctional 2002 -
West Tennessee Detention Facility December
Mason, Tennessee State of Wisconsin 600 Multi Correctional 2001 -
Shelby Training Center Shelby County,
Memphis, Tennessee Tennessee 200 Secure Juvenile April 2015 -
Tall Trees
Memphis, Tennessee State of Tennessee 63 Non-secure Juvenile June 2001 -
Metro-Davidson County Detention Facility Davidson County,
Nashville, Tennessee Tennessee 1,092 Multi Detention May 2002 -
Whiteville Correctional Facility December
Whiteville, Tennessee State of Wisconsin 1,536 Medium Correctional 2001 (2) 1 year
Hardeman County Correctional Facility
Whiteville, Tennessee State of Tennessee 2,016 Medium Correctional June 2002 (6) 3 year
Bartlett State Jail Minimum/ August
Bartlett, Texas State of Texas 962 Medium Correctional 2003 -
Bridgeport Pre-Parole Transfer Facility August
Bridgeport, Texas State of Texas 200 Medium Correctional 2001 -
Brownfield Intermediate Sanction Facility Minimum/ August
Brownfield, Texas State of Texas 200 Medium Correctional 2001 -
Community Education Partners (6) Community August
Dallas, Texas Education Partners - Non-secure Leased 2008 (3) 5 year
Eden Detention Center
Eden, Texas BOP, INS 1,225 Minimum Correctional Indefinite -
Community Education Partners (6) Community
Houston, Texas Education Partners - Non-secure Leased June 2008 (3) 5 year
Houston Processing Center
Houston, Texas INS 411 Medium Detention July 2001 -
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PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (1) LEVEL TYPE (2) TERM OPTION
------------- -------- ------------ ----- --------- ---- ------
Laredo Processing Center Minimum/ September
Laredo, Texas INS 258 Medium Detention 2002 (3) 1 year
Webb County Detention Center February
Laredo, Texas USMS 480 Medium Detention 2001 (2) 1 year
Liberty County Jail/Juvenile Center Liberty County, November
Liberty, Texas Texas 380 Multi Detention 2001 (1) 2 year
Mineral Wells Pre-Parole Transfer Facility August
Mineral Wells, Texas State of Texas 2,103 Minimum Correctional 2001 -
T. Don Hutto Correctional Center January
Taylor, Texas State of Texas 480 Medium Correctional 2003 2 year
Sanders Estes Unit Minimum/ August
Venus, Texas State of Texas 1,000 Medium Correctional 2001 (1) 2 year
Lawrenceville Correctional Center Commonwealth of
Lawrenceville, Virginia Virginia 1,500 Medium Correctional March 2003 -
D.C. Correctional Treatment
Facility (3) District of
Washington D.C. Columbia 866 Medium Correctional March 2017 -
HMP Forrest Bank (Agecroft) (3) (7) U.K. Detention January
Salford, England Services Limited 800 Medium Correctional 2025 -
- --------------------
(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 revenue generated by each facility is based on a per diem or monthly
rate per inmate housed at the facility paid by the corresponding contracting
government entity. The ability of the Company or another private operator to
satisfy its financial obligations under its leases with the Company is based
in part on the revenue generated by the facilities, which in turn depends on
the design capacity of each facility.
(2) The Company manages numerous facilities that have more than a single
function (i.e., housing both long-term sentenced adult prisoners and
pre-trial detainees). The primary functional categories into which facility
types are identified was determined by the relative size of prisoner
populations in a particular facility on December 31, 2000. If, for example,
a 1,000-bed facility housed 900 adult prisoners with sentences in excess of
one year and 100 pre-trial detainees, the primary functional category to
which it would be assigned would be that of correction facilities and not
detention facilities. It should be understood that the primary functional
category to which multi-user facilities are assigned may change from time to
time.
(3) This facility is held for sale as of December 31, 2000.
(4) The State of Nevada has contracted with the Company to manage and operate
the facility.
(5) The facility was sold on March 16, 2001.
(6) This alternative educational facility is currently configured to accommodate
900 at-risk juveniles and may be expanded to accommodate a total of 1,400
at-risk juveniles. The Company believes that design capacity does not
generally apply to educational facilities, and therefore, the aggregate
design capacity of the Company's facilities referred to in this Annual
Report does not include the total number of at-risk juveniles which can be
accommodated at this facility.
(7) The Company sold its interest in this facility on April 10, 2001.
Facility Management Contracts
The Company is compensated on the basis of the number of inmates held in each of
its facilities. Contracts may vary to provide fixed per diem rates or monthly
fixed rates. Of the 65 domestic facilities in operation and managed by the
Company, 64 of the facility management contracts provide that the Company will
be compensated at an inmate per diem rate based upon actual or minimum
guaranteed occupancy levels, with one management contract based on a monthly
fixed
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rate. Occupancy rates for a particular facility are typically low when first
opened or when expansions are first available. However, beyond the start-up
period, which typically ranges from 90 to 180 days, the occupancy rate tends to
stabilize. For 2000, the average occupancy, based on rated capacity, was 84.8%
for all facilities operated by the Company, Operating Company, PMSI and JJFMSI
on a combined basis for the twelve months ended December 31, 2000. The occupancy
rate at December 31, 2000 was 86.5%.
The Company's contracts generally require the Company to operate each facility
in accordance with all applicable laws and regulations. The Company is required
by its contracts to maintain certain levels of insurance coverage for general
liability, workers' compensation, vehicle liability and property loss or damage.
The Company is also required to indemnify the contracting agencies for claims
and costs arising out of the Company's operations and, in certain cases, to
maintain performance bonds.
The Company's facility contracts are short term in nature. Terms of federal
contracts generally range from one to five years, and contain multiple renewal
options. The terms of local and state contracts may be for longer periods with
additional renewal options. Most facility contracts also contain clauses which
allow the government agency to terminate a contract without cause. The Company's
facility contracts are generally subject to annual or bi-annual legislative
appropriation of funds. A failure by a governmental agency to receive
appropriations could result in termination of the contract by such agency or a
reduction in the management fee payable to the Company. During 2000, the Company
renewed approximately 95% of the contracts scheduled for renewal during the
year. No assurance can be given that government agencies will not terminate or
renew a contract with the Company in the future.
Operating Procedures
Pursuant to the terms of its management contracts, the Company is responsible
for the overall operation of its facilities, including staff recruitment,
general administration of the facilities, facility maintenance, security and
supervision of the offenders. The Company also provides a variety of
rehabilitative and educational programs at its facilities. Inmates at most
facilities managed by the Company may receive basic education through academic
programs designed to improve inmate literacy levels and the opportunity to
acquire General Education Development ("GED") certificates. The Company also
offers vocational training to inmates who lack marketable job skills. In
addition, the Company offers life skills transition planning programs that
provide inmates job search skills, health education, financial responsibility
training, parenting and other skills associated with becoming productive
citizens. At several of its facilities, the Company also offers counseling,
education and/or treatment to inmates with alcohol and drug abuse problems
through its LifeLine program.
The Company operates each facility in accordance with Company-wide policies and
procedures and the standards and guidelines established by the American
Correctional Association ("ACA") Commission on Accreditation. The ACA is an
independent organization comprised of professionals in the corrections industry
that establish guidelines of standards by which a correctional institution may
gain accreditation. The ACA standards, which the ACA believes safeguard the
life, health and safety of offenders and personnel, are the basis of the
accreditation process and define policies and procedures for operating programs.
The ACA standards, which are the industry's most widely accepted correctional
standards, describe specific objectives to be accomplished and cover such
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areas as administration, personnel and staff training, security, medical and
health care, food services, inmate supervision and physical plant requirements.
The Company has sought and received ACA accreditation for 46 of the facilities
it currently manages with an average rating of 99.3% in 2000 and intends to
apply for ACA accreditation for all of its facilities once they become eligible.
The accreditation process is usually completed 18 to 24 months after a facility
is opened.
The Company devotes considerable resources to assuring compliance with
contractual and other requirements and to maintaining the highest level of
quality assurance at each facility through a system of formal reporting,
corporate oversight, site reviews and inspection by on-site facility
administrators.
Under its management contracts, the Company usually provides the contracting
government agency with the services, personnel and material necessary for the
operation, maintenance and security of the facility and the custody of inmates.
The Company offers full logistical support to the facilities it manages,
including security, health care services, transportation, building and ground
maintenance, education, treatment and counseling services and institutional food
services. Except for certain aspects of food and medical services, which are
generally subcontracted, all of the facilities' support services are provided by
the Company's personnel.
The operations department, in conjunction with the legal department, supervises
compliance of each facility with operational standards contained in the various
management contracts as well as those of professional and government agencies.
The responsibilities include developing specific policies and procedures
manuals, monitoring all management contracts, ensuring compliance with
applicable labor and affirmative action standards, training and administration
of personnel, purchasing supplies and developing educational, vocational,
counseling and life skills inmate programs. The Company provides meals for
inmates at the facilities it operates in accordance with regulatory, client and
nutritional requirements. These catering responsibilities include hiring and
training staff, monitoring food operations, purchasing food and supplies, and
maintaining equipment, as well as adhering to all applicable safety and
nutritional standards and codes.
Facility, Design, Construction and Finance
In addition to its facility management services, the Company also provides
consultation to various government agencies with respect to the design and
construction of new correctional and detention facilities and the redesign and
renovation of older facilities. However, the Company's business objectives
currently do not focus on the design and construction of new correctional and
detention facilities. Since its inception the Company has designed and
constructed 41 of its 44 domestic operating corrections facilities for various
federal, state and local government agencies.
Pursuant to the Company's design, build and manage contracts, the Company is
responsible for overall project development and completion. Typically, the
Company develops the conceptual design for a project, then hires architects,
engineers and construction companies to complete the development. When designing
a particular facility, the Company utilizes, with appropriate modifications,
prototype designs the Company has used in developing other projects. Management
of the Company believes that the use of such prototype designs allows it to
reduce cost overruns and construction delays. The Company's facilities are
designed to maximize staffing efficiencies by increasing the area of vision
under surveillance by correctional officers and utilizing additional electronic
surveillance systems.
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Historically, government entities have used various methods of construction
financing to develop new correctional facilities, including, but not limited to
the following: (i) one-time general revenue appropriation 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 or certificates of participation secured by
an annual lease payment that is subject to annual or bi-annual legislative
appropriation of funds. In certain circumstances, the Company has provided
certain credit enhancements for such financings in the form of a (i) letter of
credit; (ii) guaranty or (iii) other similar agreements. Generally, when the
project is financed using direct government appropriations or proceeds from the
sale of bonds or other obligations issued prior to the award of the project, or
by the Company directly, the financing is in place when the construction or
renovation contract is executed. If the project is financed using
project-specified tax-exempt bonds or other obligations, the construction
contract is generally subject to the sale of such bonds or obligations. In most
circumstances, substantial expenditures for construction will not be made on
such a project until the tax-exempt bonds or other obligations are sold. If such
bonds or obligations are not sold, construction and management of the facility
may either be delayed until alternate financing is procured or development of
the project will be entirely suspended. When the Company is awarded a facility
managed contract, appropriations for the first annual or bi-annual period of the
contract's term have generally already been approved, and the contract is
subject to government appropriations for subsequent annual or bi-annual periods.
Business Development
The Company believes that it is an industry leader in promoting the benefits of
privatization of prisons and other correctional and detention facilities. As of
December 31, 2000, the Company controlled approximately 52% of all beds under
contract with private operators of correctional and detention facilities in the
United States. Marketing efforts are conducted and coordinated by the Company's
business development department and senior management with the aid, where
appropriate, of certain independent consultants.
Under the direction of the Company's business development department and senior
management, the Company markets its services to government agencies responsible
for federal, state and local correctional facilities in the United States.
Recently, the industry has experienced greater opportunities at the federal
level, as needs are increasing within the BOP, the USMS and the INS. These
contracts generally offer longer, more favorable contract terms. For example,
many federal contracts contain "take-or-pay" clauses which guarantee the Company
a certain percentage of management revenue, regardless of occupancy levels.
The various avenues for developing business include: (i) maintaining existing
customer relationships and continuing to fill existing beds within the Company's
facilities; (ii) enhancing the terms of existing contracts; and (iii)
establishing relationships with new customers who have either previously not
outsourced their corrections management needs or have utilized other private
enterprises.
The Company generally receives inquiries from or on behalf of government
agencies that are considering privatization of certain facilities or that have
already decided to contract with private enterprise. When it receives such an
inquiry, the Company determines whether there is an existing need for the
Company's services and whether the legal and political climate in which the
inquiring party operates is conducive to serious consideration of privatization.
Based on the findings, an initial cost analysis is conducted to further
determine project feasibility.
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The Company pursues its business opportunities primarily through Request for
Proposals ("RFP") or Request for Qualifications ("RFQ"). RFPs and RFQs are
issued by government agencies and are solicited for bid.
Generally, government agencies responsible for correctional and detention
services procure goods and services through RFPs and RFQs. Most of the Company's
activities in the area of securing new business are in the form of responding to
RFPs. As part of the Company's process of responding to RFPs, management meets
with appropriate personnel from the agency making the request to best determine
the agency's needs. If the project fits within the Company's strategy, the
Company submits a written response to the RFP. A typical RFP requires bidders to
provide detailed information, including, but not limited to, the service to be
provided by the bidder, its experience and qualifications, and the price at
which the bidder is willing to provide the services (which services may include
the renovation, improvement or expansion of an existing facility or the
planning, design and construction of a new facility). Based on the proposals
received in response to an RFP, the agency will award a contract to the
successful bidder. In addition to issuing formal RFPs, local jurisdictions may
issue an RFQ. In the RFQ process, the requesting agency selects a firm believed
to be most qualified to provide the requested services and then negotiates the
terms of the contract with that firm, including the price at which its services
are to be provided.
Business Proposals
At March 15, 2001, the Company was pursuing five prospective contracts with a
total of approximately 4,300 beds for which written responses to RFPs and other
solicitations have been submitted. The Company is also pursuing additional
prospects for which it has not submitted proposals. Further, the Company is
pursuing other projects for which it has not yet submitted, and may not submit,
a response to an RFP. No assurance can be given that the Company will receive
additional awards with respect to proposals submitted.
Major Customers
The Company's customers consist of local, state and federal correctional and
detention authorities. For the year ended December 31, 2000, the federal
correctional and detention authorities represent approximately 23.0% of total
management revenue produced by all facilities (for all facilities operated by
the Company, Operating Company, PMSI and JJFMSI on a combined basis for the
twelve months ended December 31, 2000). Federal correctional and detention
authorities consist of the BOP, the USMS and the INS. The federal correctional
and detention authorities were the only single customer of the Company that
accounted for 10.0% or more of the Company's management revenue in 2000.
Backlog
Most of the Company's contracts provide for the Company to be compensated on a
per diem/per capita basis, which fluctuates daily. However, certain contracts
provide for a minimum utilization over the term of such contracts. The Company's
backlog reflects estimated minimum revenue over the term of such contracts,
subject to certain performance provisions and the appropriation of funds, using
current per diem/per capita rates, and disregarding any renewals of such
contracts and adjustments to such rates as a result of inflation. As of December
31, 2000, the Company's backlog,
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determined as described above, was $490.7 million, of which $254.5 million is
expected to be recognized during the year ending December 31, 2001.
The State of the Industry
While the Company believes that governments will continue to privatize
correctional and detention facilities, the Company believes the rapid growth
experienced in the United States private corrections industry during the late
1980's and early 1990's is moderating. This moderation correlates with decreased
year-on-year rates of growth in the nation's prisoner population. According to
statistics recently released by the United States Department of Justice, Bureau
of Justice Statistics ("BJS"), between December 31, 1990 and June 30, 2000, the
jail and prison population rose at an average annual rate of 5.6%. Between June
30, 1999 and June 30, 2000, however, the prisoner population increased by 3.0%.
Notwithstanding the lower growth rate in the prisoner population, the pressure
on government to control correctional costs and to improve correctional services
is expected to continue. The recent BJS report estimates a prisoner population
of approximately 1.9 million on June 30, 2000. The report estimates that the
prisoner population will reach approximately 2.1 million by the close of 2005.
Although the BJS report indicates a more moderate prisoner population increase,
management sees the trend of increasing privatization of the corrections
industry continuing, in large part because of the general shortage of beds
available in the United States correctional and detention facilities, especially
in the federal prison system. However, the procurement of new contracts is
expected to become more competitive. Private corrections managers will be forced
to contain rising operating costs, including medical, and improve operational
performance. According to reports issued by the BJS, the number of inmates
housed in the United States federal and state prisons and local jail facilities
increased from 1,148,702 at December 31, 1990 to 1,869,169 at December 31, 1999,
an average annual growth rate of 5.7%. As of December 31, 1999, the BJS reported
that one in every 137 residents in the United States and its territories were
incarcerated as compared to 149 in 1998. Further, at December 31, 1999, at least
22 states and the federal prison system reported operating at 100% or more of
their highest capacity, down from 33 in 1998. Of those operating at 100% or more
of their highest capacity, the federal prison system had the highest at 32%
above capacity. The sentenced federal prison population (up 10.2%) grew at over
four times the rate of the sentenced state prison population during 1999 (up
2.5%). Industry reports indicated that inmates convicted of violent crimes
generally serve approximately 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, which may result in additional overcrowding in the United
States correctional and detention facilities. Additional factors such as the
state of the economy, age of the general population, government spending and
public policy significantly influence federal and state corrections policy and
incarceration rates.
In an attempt to address the fiscal pressure resulting from rising incarceration
costs, government agencies responsible for correctional and detention facilities
are increasingly privatizing such facilities. According to the Private Adult
Correctional Facility Census (the "Census") prepared by Dr. Charles W. Thomas, a
former director of and current consultant to, the Company, the design capacity
of privately managed adult correctional and detention facilities worldwide has
increased dramatically since the first privatized facility was opened by Old CCA
in 1984. The majority of this growth has occurred since 1989, as the number of
privately managed adult correctional and detention facilities in operation or
under construction worldwide increased from 26 facilities with a
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design capacity of 10,973 beds in 1989 to 182 facilities with a design capacity
of 141,613 beds in 2000. The majority of all private prison management contracts
are in the United States. According to the Census, at December 31, 2000, 153 of
the 182 private correctional facilities were in the United States, with the
remaining 29 divided between Australia, the United Kingdom, South Africa, the
Netherlands Antilles, Scotland and New Zealand. According to the Census, the
aggregate capacity of private facilities in operation or under construction
decreased from 145,610 beds at December 31, 1999, to 141,613 beds at December
31, 2000, a decrease of 2.7%.
The Census reports that at December 31, 2000, 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 BOP, the INS and 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 have incentives to keep costs down and to improve the
quality of services. Various industry studies have shown that cost savings from
privately operated prisons may be in the range of 10-15%.
GOVERNMENT REGULATION
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. As an owner of correctional and detention
facilities, the Company has been subject to these laws, rules, ordinances and
regulations. In addition, the Company is also subject to these laws, ordinances
and regulations as the result of the Company's, and its subsidiaries', operation
and management of correctional and detention facilities. The cost of complying
with environmental laws could materially adversely affect the Company's
financial condition and results of operations.
Phase I environmental assessments have been obtained on substantially all of the
facilities currently owned by the Company. The purpose of a Phase I
environmental assessment is to identify potential environmental contamination
that is made apparent from historical reviews of such facilities, review of
certain public records, visual investigations of the sites and surrounding
properties, toxic substances and underground storage tanks. The Phase I
environmental assessment reports do not reveal any environmental contamination
that the Company believes would have a material adverse effect on the Company's
business, assets, results of operations or liquidity, nor is the Company aware
of any such liability. Nevertheless, it is possible that these reports do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. In addition, environmental
conditions on properties owned by the Company may affect the operation or
expansion of facilities located on the properties.
AMERICANS WITH DISABILITIES ACT
The Company's properties and those correctional and detention facilities
operated and managed by the Company, are subject to the Americans with
Disabilities Act of 1990, as amended (the "ADA"). The ADA has separate
compliance requirements for "public accommodations" and "commercial facilities"
but generally requires that public facilities such as correctional and detention
facilities be
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made accessible to people with disabilities. These requirements became effective
in 1992. Compliance with the ADA requirements could require removal of access
barriers and other modifications or capital improvements at the facilities.
However, the Company does not believe that such costs will be material because
it believes that relatively few modifications are necessary to comply with the
ADA. Noncompliance could result in imposition of fines or an award of damages to
private litigants.
INSURANCE
The Company maintains a general liability insurance policy of $5.0 million for
each facility it operates, as well as insurance in amounts it deems adequate to
cover property and casualty risks, workers' compensation and directors and
officers liability. In addition, each lease between the Company and third-party
lessees 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.
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.
EMPLOYEES
As of December 31, 2000, the Company employed 15,255 full-time employees and 286
part-time employees. Of such employees, 197 were employed at the Company's
corporate offices and 15,344 were employed at the Company's facilities and in
its inmate transportation business. The Company employed personnel in the
following areas: clerical and administrative, including facility
administrators/wardens, security, food service, medical, transportation and
scheduling, maintenance, teachers, counselors and other support services.
Each of the correctional and detention facilities currently operated by the
Company is managed as a separate operational unit by the facility administrator
or warden. All of these facilities follow a standardized code of policies and
procedures.
The Company has not experienced a strike or work stoppage at any of its
facilities. In February 1996, the Company reached an agreement with a union to
represent non-security personnel at its Shelby Training Center. This agreement
was renewed in March 1999. In October 1998, the Company entered into an
agreement with a union to represent resident supervisors at the Shelby Training
Center. In March 1997, the Company assumed management of the D.C. Correctional
Treatment Facility and the Company agreed to recognize organized labor in
representing certain employees at this facility. In December 1998, the Company
finalized an agreement with the union to represent correctional officers and
other support services staff at the facility. In December 1999, the Company
reached an
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agreement with a union to represent the detention officers and other support
services staff at the Elizabeth Detention Center. In January 2001, the Company
reached an agreement with a union to represent certain professional and
non-professional employees at the Northeast Ohio Correctional Center. The
Company has also agreed to recognize organized labor in representing certain
support services staff at the Northeast Ohio Correctional Center. The Company is
currently negotiating with organized labor representing employees of the Guayama
Correctional Facility in Guayama, Puerto Rico. In the opinion of the management
of the Company, overall employee relations are generally considered good.
COMPETITION
The Company's correctional and detention facilities operated and managed by the
Company, as well as those facilities owned by the Company and managed by other
operators, are subject to competition for inmates from other private prison
managers. The Company competes primarily on the basis of the quality and range
of services offered, its experience in the operation and management of
correctional and detention facilities and its reputation. The Company competes
with a number of companies, including but not limited to Wackenhut Corrections
Corporation, Correctional Services Corporation, and Cornell Corrections
Corporation. The Company may also compete in some markets with small local
companies. Other potential competitors may in the future enter into businesses
competitive with the Company without a substantial capital investment or prior
experience. Competition by other companies may adversely affect the number of
inmates at the Company's facilities, which could have a material adverse effect
the operating revenue of the Company's facilities. In addition, revenue of the
facilities will be affected by a number of factors, including the demand for
inmate beds, general economic conditions and the age of the general population.
The Company will also be subject to competition for the acquisition of
correctional and detention facilities with other purchasers of correctional and
detention facilities.
RISK FACTORS
As the owner and operator of correctional and detention facilities, the Company
is subject to certain risks and uncertainties associated with, among other
things, the corrections and detention industry and pending or threatened
litigation involving the Company. In addition, as a result of the Company's
operation so as to preserve its ability to qualify as a REIT for the year ended
December 31, 1999, the Company is also currently subject to certain tax related
risks. The Company is also subject to risks and uncertainties associated with
the demands placed on the Company's capital and liquidity associated with its
current capital structure. These risks and uncertainties set forth below could
cause the Company's actual results to differ materially from those indicated in
the forward-looking statements contained herein and elsewhere.
THE COMPANY IS SUBJECT TO RISKS INHERENT IN THE CORRECTIONS AND DETENTION
INDUSTRY
General. As of March 15, 2001, the Company owned or managed 74 correctional
and detention facilities with a total design capacity of approximately 67,000
beds in 22 states, the District of Columbia, Puerto Rico and the United Kingdom.
Accordingly, the Company is subject to the operating risks generally inherent in
the corrections and detention industry, including those set forth below.
The Company is Subject to the 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
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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. The non-renewal or termination of any of these contracts could
materially adversely affect the Company's financial condition, results of
operation and liquidity, including the Company's ability to secure new facility
management contracts from others.
There also exists the risk that a facility owned by the Company but not managed,
may not be the subject of a contract between a private manager and a government
entity while it is leased to a private prison manager since the Company's leases
with its lessees generally extend for periods substantially longer than the
contracts with government entities. Accordingly, if a private prison manager's
contract with a government entity to operate a Company facility is terminated,
or otherwise not renewed, or if such government entity is unable to supply a
facility with a sufficient number of inmates, such event may adversely affect
the ability of the contracting private prison manager to make the required
rental or other payments to the Company.
The Company is Dependent 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, or the termination of a contract, could have
an adverse effect on the Company's cash flow and financial condition.
Public Resistance to Privatization of Correctional and Detention Facilities
Could Result in the Company's Inability to Obtain New Contracts or the Loss of
Existing Contracts. The operation of correctional and detention facilities by
private entities has not achieved complete acceptance by either governments or
the public. The movement toward privatization of correctional and detention
facilities has also encountered resistance from certain groups, such as labor
unions and others that believe that correctional and detention facility
operations should only be conducted by governmental agencies. Moreover, negative
publicity about an escape, riot or other disturbance at a privately managed
facility may result in publicity adverse to the Company, and the private
corrections industry in general. Any of these occurrences or continued trends
may make it more difficult for a private prison manager to renew or maintain
existing contracts or to obtain new contracts or sites on which to operate new
facilities or for the Company to develop or purchase facilities and lease them
to government or private entities, any or all of which could have a material
adverse effect on the Company's business.
The Company's Ability to Secure New Contracts to Develop and Manage Correctional
and Detention Facilities Depends on Many Factors Outside the Control of the
Company. The Company's growth is generally dependent upon the Company's ability
to obtain new contracts to develop and manage new correctional and detention
facilities. This depends on a number of factors the Company cannot control,
including crime rates and sentencing patterns in various jurisdictions and
acceptance of privatization. While the Company believes that governments will
continue to privatize correctional and detention facilities, the Company
believes the rapid growth experienced in the United States private corrections
industry during the late 1980's and early 1990's is moderating. Certain
jurisdictions recently have required successful bidders to make a significant
capital investment in connection with the financing of a particular project, a
trend that will require the Company to have sufficient capital resources to
compete effectively. The Company may not be able to obtain these capital
resources when needed. Additionally, the success of a private prison manager
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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.
Failure to Comply with Unique and Increased Governmental Regulation Could Result
in Material Penalties or Non-Renewal or Termination of Facility Management
Contracts. The industry in which the Company operates is subject to extensive
federal, state and local regulations, including education, health care and
safety regulations, which are administered by many regulatory authorities. Some
of the regulations are unique to the correctional industry, and the combination
of regulations the Company faces is unique. Facility management contracts
typically include reporting requirements, supervision and on-site monitoring by
representatives of the contracting governmental agencies. Corrections officers
and juvenile care workers are customarily required to meet certain training
standards and, in some instances, facility personnel are required to be licensed
and subject to background investigation. Certain jurisdictions also require the
Company to award subcontracts on a competitive basis or to subcontract with
businesses owned by members of minority groups. The Company's facilities are
also subject to operational and financial audits by the governmental agencies
with which the Company has contracts. The Company may not always successfully
comply with these regulations, and failure to comply can result in material
penalties or non-renewal or termination of facility management contracts.
In addition, private prison managers are increasingly subject to government
legislation and regulation attempting to restrict the ability of private prison
managers to house certain types of inmates. Legislation has been enacted in
several states, and has previously been proposed in the United States House of
Representatives, containing such restrictions. Although the Company does not
believe that existing legislation will have a material adverse effect on the
Company, there can be no assurance that future legislation would not have such
an effect.
THE COMPANY IS SUBJECT TO LITIGATION
Legal Proceedings Associated with Owning and Managing Correctional and Detention
Facilities. The Company's ownership and management of correctional and detention
facilities, and the provision of inmate transportation services, 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 or
managed 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, 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. See "Legal Proceedings" for outstanding litigation against the Company
associated with owning and managing correctional and detention facilities.
Legal Proceedings Associated with Corporate Operations. In addition to
litigation associated with owning and managing correctional and detention
facilities, the Company is also subject to litigation in the ordinary course of
business. See "Legal Proceedings" for outstanding litigation against the Company
associated with corporate operations.
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THE COMPANY IS SUBJECT TO TAX RELATED RISKS
Prior to the 1999 Merger, Old CCA operated as a taxable subchapter C corporation
for federal income tax purposes since its inception, and, therefore, generated
accumulated earnings and profits (the "Accumulated Earnings and Profits") to the
extent its taxable income, subject to certain adjustments, was not distributed
to its shareholders. To preserve its ability to qualify as a REIT for the year
ended December 31, 1999, the Company was required to distribute all of Old CCA's
Accumulated Earnings and Profits before the end of 1999. If in the future the
IRS makes adjustments increasing Old CCA's earnings and profits, the Company may
be required to make additional distributions equal to the amount of the
increase.
Under previous terms of the Company's charter, the Company was required to
operate so as to preserve its ability to elect to be taxed as a REIT for the
year ended December 31, 1999. The Company, as a REIT, could not complete any
taxable year with Accumulated Earnings and Profits. For the year ended December
31, 1999, the Company made approximately $217.7 million of distributions related
to its common stock and Series A Preferred Stock. The Company met the above
described distribution requirements by designating approximately $152.5 million
of the total distributions in 1999 as distributions of its Accumulated Earnings
and Profits. In addition to distributing its Accumulated Earnings and Profits,
the Company, in order to qualify for taxation as a REIT with respect to its 1999
taxable year, was required to distribute 95% of its taxable income for 1999. The
Company believes that this distribution requirement has been substantially
satisfied by its distribution of shares of the Company's Series B Preferred
Stock. The Company's failure to distribute 95% of its taxable income for 1999 or
the failure of the Company to comply with other requirements for REIT
qualification under the Code with respect to its taxable year ended December 31,
1999 could have a material adverse impact on the Company's combined and
consolidated financial position, results of operations and cash flows.
The Company's election of REIT status for its taxable year ended December 31,
1999 is subject to review by the IRS generally for a period of three years from
the date of filing of its 1999 tax return. Should the IRS review the Company's
election to be taxed as a REIT for the 1999 taxable year and reach a conclusion
disallowing the Company's dividends paid deduction, the Company would be subject
to income taxes and interest on its 1999 taxable income and possibly subject to
fines and/or penalties. Income taxes, penalties and interest for the year ended
December 31, 1999 could exceed $83.5 million, which would have an adverse impact
on the Company's combined and consolidated financial position, results of
operations and cash flows.
In connection with the 1999 Merger, the Company assumed the tax obligations of
Old CCA resulting from disputes with federal and state taxing authorities
related to tax returns filed by Old CCA in 1998 and prior taxable years. The IRS
is currently conducting audits of Old CCA's federal tax returns for the taxable
years ended December 31, 1998 and 1997, and the Company's federal tax return for
the taxable year ended December 31, 1999. The Company has received the IRS's
preliminary findings related to the taxable year ended December 31, 1997 and is
currently appealing those findings. The Company currently is unable to predict
the ultimate outcome of the IRS's audits of Old CCA's 1998 and 1997 federal tax
returns, the Company's 1999 federal tax return or the ultimate outcome of audits
of other tax returns of the Company or Old CCA by the IRS or by other taxing
authorities; however, it is possible that such audits will result in claims
against the Company in excess of reserves currently recorded by the Company. In
addition, to the extent that IRS audit adjustments increase the Accumulated
Earnings and Profits of Old CCA, the Company would be
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required to make timely distribution of the Accumulated Earnings and Profits of
Old CCA to stockholders. Such results could have a material adverse impact on
the Company's financial position, results of operations and cash flows.
THE COMPANY IS SUBJECT TO RISKS INHERENT IN INVESTMENT IN REAL ESTATE PROPERTIES
The Company is Subject to General Real Estate Risks. 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 is limited. Investments in
correctional and detention facilities, in particular, subject the Company to
risks involving potential exposure to environmental liability and uninsured
loss. The operating costs of the Company may be affected by the obligation to
pay for the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of complying with future legislation. In
addition, although the Company maintains insurance for many types of losses,
there are certain types of losses, such as losses from earthquakes, which may be
either uninsurable or for which it may not be economically feasible to obtain
insurance coverage, in light of the substantial costs associated with such
insurance. As a result, the Company could lose both its capital invested in, and
anticipated profits from, one or more of the facilities owned by the Company.
Further, it is possible that the Company experience losses which exceed the
limits of insurance coverage or for which the Company may be uninsured. See
"Business -- Insurance."
The Company May be Unable to Sell Assets or Receive Sales Proceeds at Expected
Levels. As of December 31, 2000, the Company was holding for sale numerous
assets, including fifteen parcels of land, three correctional facilities leased
to governmental agencies, one correctional facility leased to a private
operator, and investments in two direct financing leases, with an aggregate book
value of approximately $163.5 million. The Company may also elect to sell
additional assets. The Company expects to use the net proceeds from such sales
to repay outstanding indebtedness. The Company's ability to refinance or renew
certain indebtedness could be adversely affected if the Company is not able to
sell a sufficient number of assets, or if the proceeds received from such sales
do not achieve expected levels. In March 2001, the Company sold a facility
located in North Carolina for a net sales price of approximately $25 million.
The net proceeds were used to pay-down the Amended Bank Credit Facility. In
April 2001, the Company sold its interest in a facility located in Salford,
England, for approximately $65.7 million through the sale of all of the issued
and outstanding capital stock of Agecroft Properties, Inc., a wholly-owned
subsidiary of the Company. The net proceeds were used to pay-down the Amended
Bank Credit Facility.
Options to Purchase and Reversions Could Adversely Affect the Company's
Investments. Eleven 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. Three of such facilities are held for sale as of December
31, 2000. If any of these options are exercised, there exists the risk that the
Company will not recoup its full investment from the applicable facility or that
it will be otherwise unable to invest the proceeds from the sale of the facility
in one or more properties that yield as much revenue as the property acquired by
the government entity. In addition, ownership of two of the facilities currently
owned by the Company will, upon the expiration of a specified time period,
revert to the respective
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government agency contracting with the Company. Also, one facility under
development will have its ownership revert back to a government agency under its
contract. See "Properties -- The Facilities" herein for a description of the
terms and conditions of these options to purchase and reversions.
THE COMPANY IS SUBJECT TO REFINANCING RISK
A Significant Portion of the Company's Indebtedness Matures January 1, 2002. The
Company's Amended Bank Credit Facility currently consists of a $400.0 million
revolving loan which matures January 1, 2002, and $600.0 million in term loans
which mature December 31, 2002. The Amended 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. As a result of the June
2000 Waiver and Amendment, the Company is generally required to use the net cash
proceeds received by the Company from certain transactions, including the
following transactions, to repay outstanding indebtedness under the Amended Bank
Credit Facility: (i) any disposition of real estate assets; (ii) the
securitization of lease payments (or other similar transaction) with respect to
the Company's Agecroft facility; and (iii) the sale-leaseback of the Company's
headquarters. The Company has satisfied the requirement with respect to the
Agecroft transaction as discussed herein. Under the terms of the June 2000
Waiver and Amendment, the Company is also required to apply a designated portion
of its "excess cash flow," as such term is defined in the June 2000 Waiver and
Amendment, to the prepayment of outstanding indebtedness under the Amended Bank
Credit Facility. The Company believes that it will be able to refinance or renew
the Amended Bank Credit Facility upon maturity; however, there can be no
assurance that the Company will be able to refinance or renew such indebtedness
on commercially reasonable or any other terms. The Company does not have
sufficient working capital to satisfy its obligations in the event the Company
is unable to refinance or renew the Amended Bank Credit Facility upon maturity.
The Company is Restricted in its Ability to Incur Additional Debt. The Amended
Bank Credit Facility also contains restrictions upon the Company's ability to
incur additional debt and requires the Company to maintain certain specified
financial ratios. These provisions may also restrict the Company's ability to
obtain additional debt capital or limit its ability to engage in certain
transactions. These restrictions may inhibit the Company's ability to fund
capital expenditures or operating expenses when required. The incurrence of
additional indebtedness, and the potential issuance of additional debt
securities, may result in increased interest expense for the Company.
Additionally, the incurrence of additional indebtedness may result in an
increased risk of default, and increase the Company's exposure to the risks
associated with debt financing and access to debt markets to fund future growth
at an acceptable cost.
The Company's Indebtedness is Subject to a Risk of Cross-Default. Subject to the
waivers and amendments discussed herein, the Company currently believes that it
is in compliance with the financial and other covenants under its Amended Bank
Credit Facility and under the terms of its other indebtedness. If the Company
were to be in default under the Amended Bank Credit Facility, and if the senior
lenders under the Amended Bank Credit Facility elected to exercise their rights
to accelerate the Company's obligations under the Amended Bank Credit Facility,
such events could result in the acceleration of all or a portion of the
outstanding principal amount of the Company's 12% senior notes or the Company's
aggregate $70.0 million convertible subordinated notes, which would have a
material adverse effect on the Company's liquidity and financial position. The
Company's 12% senior notes and the Company's $30.0 million
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convertible subordinated notes generally contain cross-default provisions which
allow the holders of these notes to accelerate this debt and seek remedies if
the Company has a payment default under the Amended Bank Credit Facility or if
the obligations under the Amended Bank Credit Facility are accelerated. The
Company's $40.0 million convertible subordinated notes contain a cross-default
provision which allows the holders of the notes to accelerate this debt and seek
remedies if the Company has a payment default under the Amended Bank Credit
Facility or if the obligations thereunder are subject to acceleration (whether
or not such obligations are actually accelerated). Moreover, the terms of the
Amended Bank Credit Facility provide that the Company's obligations under the
Amended Bank Credit Facility may be accelerated if the Company's obligations
under the 12% senior notes or the Company's convertible subordinated notes are
subject to acceleration or have been accelerated. The Company does not have
sufficient working capital to satisfy its debt obligations in the event of an
acceleration of all or a significant portion of the Company's outstanding
indebtedness.
Because Portions of the Company's Indebtedness Have Floating Rates, a General
Increase in Interest Rates Will Adversely Affect Cash Flows. The Company's
Amended Bank Credit Facility bears interest at a variable rate. To the extent
the Company's exposure to increases in interest rates is not eliminated through
interest rate protection or cap agreements, such increases will adversely affect
the Company's cash flows. In accordance with terms of the Amended Bank Credit
Facility, the Company has entered into certain swap arrangements guaranteeing
that it will not pay an index rate greater than 6.51% on outstanding balances of
at least (i) $325.0 million through December 31, 2001 and (ii) $200.0 million
through December 31, 2002. There can be no assurance that these interest rate
protection provisions will be effective, or that once the interest rate
protection agreement expires, the Company will enter into additional interest
rate protection agreements.
FOREIGN OPERATIONS
The Company, through a wholly-owned subsidiary, has constructed the HMP Forrest
Bank Prison, an 800 bed medium security facility located in Salford, England
known as the Agecroft facility. The facility, which became operational in
January 2000, is subject to a 25-year lease with Agecroft Prison Management,
Ltd. ("APM"). This lease is accounted for as a direct financing lease, and was
classified as held for sale as of December 31, 2000. APM is a special purpose
entity acting as the contracting entity for a 25-year prison management contract
with an agency of the U.K. government. APM is a joint venture of a wholly-owned
subsidiary of the Company and Sodexho. APM is managing the operation of the
prison for the U.K. government. As of December 31, 2000, the Company has a note
receivable and certain other short-term receivables from APM denominated in
British pounds. Additionally, the direct financing lease held for sale is also
denominated in British pounds. Transaction gains and losses that arise from
exchange rate fluctuations on these assets are included in the results of
operations as incurred. On April 10, 2001, the Company sold its interest in the
Agecroft facility, as previously described herein.
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ITEM 2. PROPERTIES.
GENERAL
At December 31, 2000, the Company owned 48 real estate properties in 16 states,
the District of Columbia, Puerto Rico and the United Kingdom, with a total
aggregate net book value of $1.8 billion, including six properties held for
sale. On March 16, 2001, the Company sold one of these facilities. On April 10,
2001, the Company sold another of its facilities. Real estate properties include
44 correctional and detention facilities, two corporate office buildings and two
correctional and detention facilities under construction. Each of the Company's
owned facilities have been pledged to secure borrowings under the Company's
existing bank credit facility. At December 31, 2000, the Company leased six
facilities to government agencies and three facilities to private operators. The
Company operates 35 facilities previously leased by the Operating Company.
THE FACILITIES
GENERAL
Information regarding each facility owned by the Company as of December 31, 2000
is set forth below, grouped by those facilities owned and managed by the
Company, followed by those facilities owned and leased to other governmental and
private operators. The Company owns two facilities under direct financing leases
which are managed by the Company. Those two facilities are included in the table
below with those facilities managed by the Company. The terms of the Company's
leases and/or other contractual arrangements are described herein under
"Business - Narrative Description of Business - Facilities."
FACILITIES OWNED AND MANAGED BY THE COMPANY
STATE CITY FACILITY NAME
--------------------- -------------------- ---------------------------------------------
Arizona Eloy Eloy Detention Center
Florence Central Arizona Detention Center
Florence Florence Correctional Center
California California City California Correctional Center
San Diego San Diego Correctional Facility (1)
Colorado Burlington Kit Carson Correctional Center
Las Animas Bent County Correctional Facility
Walsenburg Huerfano County Correctional Center (2)
District of Columbia Washington, D.C. D.C. Correctional Treatment Facility (3) (4)
Georgia Alamo Wheeler Correctional Facility (5)
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STATE CITY FACILITY NAME
--------------------- ---------------------- ---------------------------------------------
Nicholls Coffee Correctional Facility (5)
Kansas Leavenworth Leavenworth Detention Center
Kentucky Beattyville Lee Adjustment Center
St. Mary Marion Adjustment Center
Wheelwright Otter Creek Correctional Center
Minnesota Appleton Prairie Correctional Facility
Mississippi Tutwiler Tallahatchie County Correctional Facility
(6)
Montana Shelby Crossroads Correctional Center (7)
Nevada Las Vegas Southern Nevada Women's Correctional
Facility
New Mexico Estancia Torrance County Detention Facility
Grants New Mexico Women's Correctional Facility
Milan Cibola County Corrections Center
Ohio Youngstown Northeast Ohio Correctional Center
Oklahoma Cushing Cimarron Correctional Facility (8)
Holdenville Davis Correctional Facility (8)
Sayre North Fork Correctional Facility
Watonga Diamondback Correctional Facility
Tennessee Mason West Tennessee Detention Facility
Memphis Shelby Training Center (9)
Whiteville Whiteville Correctional Facility
Texas Bridgeport Bridgeport Pre-Parole Transfer Facility
Eden Eden Detention Center
Houston Houston Processing Center
Laredo Laredo Processing Center
Laredo Webb County Detention Center
Mineral Wells Mineral Wells Pre-Parole Transfer Facility
Taylor T. Don Hutto Correctional Center
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FACILITIES OWNED AND LEASED BY THE COMPANY
DOMESTIC
STATE CITY FACILITY NAME
--------------------- ---------------------- ---------------------------------------------
California Live Oak Leo Chesney Correctional Center (3)
North Carolina Bayboro Pamlico Correctional Facility (3) (10)
Spruce Pine Mountain View Correctional Facility (3) (11)
Ohio Cincinnati Queensgate Correctional Facility (3)
Texas Dallas Community Education Partners- Dallas
County - School for Accelerated Learning
Houston Community Education Partners- Southeast
Houston - School for Accelerated Learning
INTERNATIONAL
COUNTRY CITY FACILITY NAME
--------------------- ---------------------- ---------------------------------------------
England Salford HMP Forrest Bank (Agecroft) (3) (11)
---------------------
(1) The facility is subject to a ground lease with the County of San Diego
whereby the initial lease term is 18 years from the commencement of the
contract, as defined. The County has the right to buyout all, or
designated portions of, the premises at various times prior to the
expiration of the term.
(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) Held for sale as of December 31, 2000.
(4) Ownership of the facility automatically reverts to the District of
Columbia upon expiration of the lease term.
(5) 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 the Company and the GDOC.
(6) The facility is subject to a purchase option held by the Tallahatchie
County Correctional Authority which grants Tallahatchie County
Correctional Authority the right to purchase the facility at any time
during the lease at a price determined by a formula set forth in the
lease agreement.
(7) 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 the Company.
(8) 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.
(9) Upon the conclusion of the thirty-year lease between the Company and
Shelby County, Tennessee, the facility will become the property of
Shelby County. Prior to such time, (a) if the County terminates the
lease without cause, the Company may purchase the property for $150,000;
(b) if the State fails to fund the contract, then the Company may
purchase the property for $150,000; (c) if the Company terminates the
lease without cause, then the Company shall purchase the property for
its fair market value as agreed to by the County and the Company; (d) if
the Company breaches the lease contract, then the Company may purchase
the property for its fair market value as agreed to by the County and
the Company; and (e) if the County breaches the lease contract, then the
Company may purchase the property for $150,000.
(10) The State of North Carolina has an option to purchase the facility at
the end of the sixth year of the lease and at the end of each year of
the lease thereafter at a purchase price equal to depreciated book
value.
(11) Sold subsequent to year-end.
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FACILITIES UNDER CONSTRUCTION OR DEVELOPMENT
In addition to owning and/or managing the facilities listed in the preceding
table, the Company is currently in the process of developing or constructing two
facilities, for which no opening date has been established. Set forth below is a
brief description of each of the facilities currently under development or
construction by the Company.
McRae Correctional Facility. The McRae Correctional Facility is located on 70
acres in McRae, Georgia. The 297,550 square foot medium security facility has a
design capacity of 1,524 beds and is substantially complete. Management is
actively pursuing contracts to fill this facility.
Stewart County Detention Center. The Stewart County Detention Center is located
in Stewart County, Georgia. The 297,550 square foot medium security facility
will have a design capacity of 1,524. This project is approximately 75%
complete. At this time, there are no plans to complete this project until demand
for beds increases.
ITEM 3. LEGAL PROCEEDINGS
COMPLETED PROCEEDINGS/LITIGATION AGAINST THE COMPANY AND ITS SUBSIDIARIES
During the first quarter of 2001, the Company obtained final court approval of
the settlements of the following outstanding consolidated federal and state
class action and derivative stockholder lawsuits brought against the Company and
certain of its former directors and executive officers: (i) In re: Prison Realty
Securities Litigation; (ii) In re: Old CCA Securities Litigation; (iii) John
Neiger, on behalf of himself and all others similarly situated v. Doctor Crants,
Robert Crants and Prison Realty Trust, Inc.; (iv) Dasburg, S.A., on behalf of
itself and all others similarly situated v. Corrections Corporation of America,
Doctor R. Crants, Thomas W. Beasley, Charles A. Blanchette, and David L. Myers;
(v) Wanstrath v. Crants, et al.; and (vi) Bernstein v. Prison Realty Trust, Inc.
The final terms of the settlement agreements provide for the "global" settlement
of all such outstanding stockholder litigation against the Company brought as
the result of, among other things, agreements entered into by the Company and
Operating Company in May 1999 to increase payments made by the Company to
Operating Company under the terms of certain agreements, as well as transactions
relating to the restructuring of the Company led by Fortress/Blackstone and
Pacific Life Insurance Company. Pursuant to the terms of the settlements, the
Company will issue or pay to the plaintiffs in the actions: (i) an aggregate of
46.9 million shares of the Company's common stock; (ii) a subordinated
promissory note in the aggregate principal amount of $29.0 million; and (iii)
approximately $47.5 million in cash payable solely from the proceeds of certain
insurance policies.
It is expected that the promissory note will be due January 2, 2009, and will
accrue interest at a rate of 8.0% per annum. Pursuant to the terms of the
settlement, the note and accrued interest may be extinguished if the Company's
common stock meets or exceeds a "termination price" equal to $1.63 per share for
fifteen consecutive trading days prior to the maturity date of the note.
Additionally, to the extent the Company's common stock price does not meet the
termination price, the note will be reduced by the amount that the shares of
common stock issued to the plaintiffs appreciate in excess of $0.49 per common
share, based on the average trading price of the stock prior to the maturity of
the note.
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In 1997, Hardeman County Correctional Facilities Corporation, a non-profit
corporation described in Revenue Ruling 63-20 ("HCCFC"), issued two series of
correctional facilities revenue bonds in the total principal amount of
approximately $72.7 million, the proceeds of which were used to construct a
correctional facility in Hardeman County, Tennessee. The bonds were intended to
be tax exempt. Old CCA was chosen as manager of the facility and, in connection
therewith, entered into a debt services deficit agreement pursuant to which Old
CCA agreed to pay the debt service on the bonds in the event, and to the extent,
of any shortfall. The IRS examined the bonds in connection with its municipal
bond audit program. By letter dated January 9, 2001, the IRS notified HCCFC that
it closed the examination with no change to the position that interest received
by the bondholders is exempt from federal income tax.
OUTSTANDING PROCEEDINGS/LITIGATION AGAINST THE COMPANY AND ITS SUBSIDIARIES
On June 9, 2000, a complaint captioned Prison Acquisition Company, L.L.C. v.
Prison Realty Trust, Inc., Correction Corporation of America, Prison Management
Services, Inc. and Juvenile and Jail Facility Management Services, Inc. was
filed in federal court in the United States District Court for the Southern
District of New York to recover fees allegedly owed the plaintiff as a result of
the termination of a securities purchase agreement by and among the parties
related to a proposed restructuring of the Company led by Fortress/Blackstone.
The complaint alleges that the defendants failed to pay amounts allegedly due
under the securities purchase agreement and asks for compensatory damages of
approximately $24.0 million consisting of various fees, expenses and other
relief the court may deem appropriate. The Company is contesting this action
vigorously. The Company has recorded an accrual reflecting management's best
estimate of the ultimate outcome of this matter based on consultation with legal
counsel.
On September 14, 1998, a complaint captioned Thomas Horn, Ferman Heaton, Ricky
Estes, and Charles Combs, individually and on behalf of the U.S. Corrections
Corporation Employee Stock Ownership Plan and its participants v. Robert B.
McQueen, Milton Thompson, the U.S. Corrections Corporation Employee Stock
Ownership Plan, U.S. Corrections Corporation, and Corrections Corporation of
America was filed in the U.S. District Court for the Western District of
Kentucky alleging numerous violations of the Employee Retirement Income Security
Act ("ERISA"), including but not limited to a failure to manage the assets of
the U.S. Corrections Corporation Employee Stock Ownership Plan (the "ESOP") in
the sole interest of the participants, purchasing assets without undertaking
adequate investigation of the investment, overpayment for employer securities,
failure to resolve conflicts of interest, lending money between the ESOP and
employer, allowing the ESOP to borrow money other than for the acquisition of
employer securities, failure to make adequate, independent and reasoned
investigation into the prudence and advisability of certain transaction, and
otherwise. The plaintiffs are seeking damages in excess of $30.0 million plus
prejudgement interest and attorneys' fees. The Company's insurance carrier has
indicated that it did not receive timely notice of these claims and, as a
result, is currently contesting its coverage obligations in this suit. The
Company is currently contesting this issue with the carrier. The Company has
recorded an accrual reflecting management's best estimate of the ultimate
outcome of this matter based on consultation with legal counsel.
Commencing in late 1997 and through 1998, Old CCA became subject to
approximately sixteen separate suits in federal district court in the state of
South Carolina claiming the abuse and mistreatment of certain juveniles housed
in the Columbia Training Center, a South Carolina juvenile detention facility
formerly operated by Old CCA. The Company is aware that six additional
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plaintiffs may file suit with respect to this matter. These suits claim
unspecified compensatory and punitive damages, as well as certain costs provided
for by statute. One of these suits, captioned William Pacetti v. Corrections
Corporation of America, went to trial in late November 2000, and in December
2000 the jury returned a verdict awarding the plaintiff in the action $125,000
in compensatory damages, $3.0 million in punitive damages, and attorneys' fees.
The Company is currently challenging this verdict with post-judgement motions,
and a final judgement has not been entered in this case. The Company's insurance
carrier has indicated to the Company that its coverage does not extend to
punitive damages such as those awarded in Pacetti. The Company is currently
contesting this issue with the carrier. The Company has recorded an accrual
reflecting management's best estimate of the ultimate outcome of this matter
based on consultation with legal counsel.
In February 2000, a complaint was filed in federal court in the United States
District Court for the Western District of Texas against the Company's inmate
transportation subsidiary, TransCor. The lawsuit, captioned Cheryl Schoenfeld v.
TransCor America, Inc., et al., names as defendants TransCor and its directors.
The lawsuit alleges that two former employees of TransCor sexually assaulted
plaintiff Schoenfeld during her transportation to a facility in Texas in late
1999. An additional individual, Annette Jones, has also joined the suit as a
plaintiff, alleging that she was also mistreated by the two former employees
during the same trip. Discovery and case preparation are on-going. Both former
employees are subject to pending criminal charges in Houston, Harris County,
Texas. Plaintiff Schoenfeld has previously submitted a settlement demand
exceeding $20.0 million. The Company, its wholly-owned subsidiary (the parent
corporation of TransCor and successor by merger to Operating Company) and
TransCor are defending this action vigorously. It is expected that a portion of
any liabilities resulting from this litigation will be covered by liability
insurance. The Company's and TransCor's insurance carrier, however, has
indicated that it did not receive proper notice of this claim, and as a result,
may challenge its coverage of any resulting liability of TransCor. In addition,
the insurance carrier asserts it will not be responsible for punitive damages.
The Company and TransCor are currently contesting this issue with the carrier.
In the event any resulting liability is not covered by insurance proceeds and is
in excess of the amount accrued by the Company, such liability would have a
material adverse effect upon the business or financial position of TransCor and,
potentially, the Company and its other subsidiaries.
The Company has received an invoice dated, October 25, 2000, from Merrill Lynch
for $8.1 million. Prior to their termination, Merrill Lynch served as a
financial advisor to the Company and its board of directors in connection with
the Restructuring. Merrill Lynch claims that the merger between Operating
Company and the Company constitutes a "restructuring transaction," which Merrill
Lynch further contends would trigger certain fees under engagement letters
allegedly entered into between Merrill Lynch and the Company and Merrill Lynch
and Operating Company management, respectively. The Company denies the validity
of these claims. Merrill Lynch has not initiated legal action or threatened
litigation. If Merrill Lynch initiated legal action on the basis of these
claims, the Company would contest those claims. The Company has recorded an
accrual reflecting management's best estimate of the ultimate outcome of this
matter based on consultation with legal counsel. However, in the event Merrill
Lynch were to prevail on its claims and the resulting liability were to be in
excess of the amount accrued by the Company, such liability could have a
material adverse effect upon the business or financial position of the Company.
With the exception of certain insurance contingencies discussed above, the
Company believes it has adequate insurance coverage related to the litigation
matters discussed. Should the Company's
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insurance carriers fail to provide adequate insurance coverage, the resolution
of the matters discussed above could result in a material adverse effect on the
business and financial position of the Company and its subsidiaries.
In addition to the above legal matters, the nature of the Company's business
results in claims and litigation alleging that the Company is liable for damages
arising from the conduct of its employees or others. In the opinion of
management, other than the outstanding litigation discussed above, there are no
pending legal proceedings that would have a material effect on the consolidated
financial position or results of operations of the Company for which the Company
has not established adequate reserves.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2000 Annual Meeting of Stockholders was held on December 13, 2000.
A total of 143,715,637 shares of the Company's common stock, constituting a
quorum of those shares entitled to vote, were represented at the meeting by
stockholders either present in person or by proxy. At such meeting the following
nine nominees for election as directors of the Company were elected without
opposition, no nominee for director receiving less than 134,711,118 votes, or
93.7% of the shares represented at the meeting: William F. Andrews, John D.
Ferguson, Jean-Pierre Cuny, Joseph V. Russell, Lucius E. Burch, III, John D.
Correnti, C. Michael Jacobi, John R. Prann, Jr., and Henri L. Wedell. The
stockholders also approved and/or ratified the following proposals presented to
them pursuant to the vote totals indicated next to each item:
VOTE (# OF SHARES)
----------------------------------------------------
PROPOSAL FOR AGAINST ABSTAINED
---------------- ------------- ----------------
Approval of an amendment to the Company's charter to
effect a reverse stock split of the Company's common
stock at a ratio to be determined in the discretion of
the Board of Directors of the Company, provided that
such ratio shall not be less than one-for-ten and shall
not exceed one-for-twenty, and to effect a related
reduction of the stated capital of the Company. 136,706,697 6,659,266 348,564
Approval of an amendment to the Company's 1997
Employee Share Incentive Plan and the adoption
of the Company's 2000 Stock Incentive Plan. 82,449,474 19,916,917 1,704,852
Ratification of the action of the Board of
Directors in selecting the firm of Arthur
Andersen LLP to be the independent auditors of
the Company for the fiscal year ending December
31, 2000. 137,360,500 1,516,060 4,838,070
The Company will hold its 2001 Annual Meeting of Stockholders on May 22, 2001.
At the 2001 Annual Meeting, the Company's common stockholders of record on April
16, 2001 will be asked to elect nine directors to serve on the Company's board
of directors and to ratify the board of directors' appointment of the Company's
independent auditors for the year ended December 31, 2001. It is anticipated
that the Company will file definitive proxy materials with the Commission and
distribute such materials to the holders of its common stock on or before April
30, 2001 in connection with the 2001 Annual Meeting.
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ITEM 4A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The Company's board of directors has determined that the following officers are
executive officers of the Company within the meaning of Rule 3b-7 under the
Securities Exchange Act:
President, Chief Executive Officer and Vice Chairman of the Board of
Directors - John D. Ferguson, age 55, has held this position since
August 2000. Prior to joining the Company, Mr. Ferguson served as the
commissioner of finance for the State of Tennessee from June 1996 to
July 2000. As commissioner of finance, Mr. Ferguson served as the
state's chief corporate officer and was responsible for directing the
preparation and implementation of the State's $17.2 billion budget. From
1990 to February 1995, Mr. Ferguson served as the chairman and chief
executive officer of Community Bancshares, Inc., the parent corporation
of The Community Bank of Germantown (Tennessee). Mr. Ferguson is a
former member of the State of Tennessee Board of Education and served on
the Governor's Commission on Practical Government for the State of
Tennessee. Mr. Ferguson graduated from Mississippi State University in
1967.
Executive Vice President and Chief Operating Officer - J. Michael
Quinlan, age 59, has held this position since August 2000. Mr. Quinlan
served as the president of the Company from December 1999 to August 2000
and as the president and chief operating officer of Operating Company
and as a member of Operating Company's board of directors from June 1999
through the completion of the Restructuring. From January 1999 until May
1999, Mr. Quinlan served as a member of the board of directors of the
Company and as vice-chairman of the Company's board of directors. Prior
to the completion of the 1999 Merger, Mr. Quinlan served as a member of
the board of trustees and as chief executive officer of Old Prison
Realty. From July 1987 to December 1992, Mr. Quinlan served as the
director of the Federal Bureau of Prisons. In such capacity, Mr. Quinlan
was responsible for the total operations and administration of a federal
agency with an annual budget of more than $2 billion, more than 26,000
employees and 75 facilities. In 1988, Mr. Quinlan received the
Presidential Distinguished Rank Award, which is the highest award given
by the United States government to civil servants for service to the
United States. In 1992, he received the National Public Service Award of
the National Academy of Public Administration and the American Society
of Public Administration, awarded annually to the top three public
administrators in the United States. Mr. Quinlan is a 1963 graduate of
Fairfield University with a B.S.S. in History, and he received a J.D.
from Fordham University Law School in 1966. He also received an L.L.M.
from the George Washington University School of Law in 1970.
Executive Vice President and Chief Financial Officer - Irving E. Lingo,
Jr. age 49, has held this position since December 2000. Prior to joining
the Company, Mr. Lingo was chief financial officer for Bradley Real
Estate, Inc., a NYSE listed REIT headquartered in Chicago, Illinois,
where he was responsible for financial accounting and reporting,
including SEC compliance, capital markets, and mergers and acquisitions.
Prior to joining Bradley Real Estate, Mr. Lingo held positions as chief
financial officer, chief operating officer and vice president, finance
for several public and private companies, including Lingerfelt
Industrial Properties, CSX Corporation, and Goodman Segar Hogan, Inc. In
addition, he was previously an audit manager at Ernst & Young LLP. Mr.
Lingo graduated summa cum laude
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from Old Dominion University where he received a Bachelor of Science
degree in Business Administration.
Executive Vice President and Chief Development Officer - William T.
Baylor, age 48, has held this position since January 2001. Prior to
joining the Company, Mr. Baylor served as government sales manager for
Herman Miller for Healthcare in Nashville, Tennessee. In that role, he
managed the company's relationship with 372 medical centers and more
than 1,500 clinics within the federal government. From 1995 to 1999, he
served as national accounts sales team leader for Milcare, the largest
privately owned hospital group in the nation. Prior to joining Milcare
in 1985, Mr. Baylor served as district manager for Cheeseborough Ponds'
Hospital Products Division in New Orleans, Louisiana. Mr. Baylor is a
Lieutenant Colonel in the U.S. Army Reserve with 25 years of command
experience in professional development, organizational planning, and
human resources. He graduated from the University of Tennessee at
Knoxville in 1975 with a Bachelor of Science degree in Marketing and
Transportation.
General Counsel - Gus Puryear, age 32, has held this position since
January 2001. Prior to joining the Company, Mr. Puryear served as
legislative director and counsel for U.S. Senator Bill Frist, where he
worked on legislation and other policy matters. During that time, he
also served as a debate advisor to Vice President Richard B. Cheney. In
addition, Mr. Puryear worked as counsel on the special investigation of
campaign finance abuses during the 1996 elections conducted by the U.S.
Senate Committee on Governmental Affairs, which was chaired by U.S.
Senator Fred Thompson. Prior to his career on Capitol Hill, Mr. Puryear
practiced law with Farris, Warfield & Kanaday, PLC in Nashville in the
commercial litigation section. Mr. Puryear was also a law clerk for the
Honorable Rhesa Hawkins Barksdale, U.S. Circuit Judge for the Fifth
Circuit in Jackson, Mississippi. Mr. Puryear graduated from Emory
University with a major in Political Science in 1990 and received his
J.D. from the University of North Carolina in 1993.
Vice President, Finance - David M. Garfinkle, age 33, has held this
position since February 2001. Prior to joining the Company, Mr.
Garfinkle was the vice president and controller for Bradley Real Estate,
Inc. since 1996. Prior to joining Bradley Real Estate, Mr. Garfinkle was
a senior audit manager at KPMG Peat Marwick LLP. Mr. Garfinkle graduated
summa cum laude from St. Bonaventure University in 1989 with a B.B.A.
degree.
Vice President, Treasurer - Todd Mullenger, age 42, has held this
position since January 2001, after serving as the vice president,
finance since August 2000. Mr. Mullenger served as the vice president of
finance of Old CCA from August 1998 until the completion of the 1999
Merger. Mr. Mullenger also served as vice president, finance of
Operating Company from January 1, 1999 through the completion of the
Restructuring. From September 1996 to July 1998, Mr. Mullenger served as
assistant vice president-finance of Service Merchandise Company, Inc., a
publicly traded retailer headquartered in Nashville, Tennessee. Prior to
September 1996, Mr. Mullenger served as an audit manager with Arthur
Andersen LLP. Mr. Mullenger graduated from the University of Iowa in
1981 with a B.B.A. degree. He also received an M.B.A. from Middle State
Tennessee State University.
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CERTAIN INFORMATION CONCERNING THE BOARD OF DIRECTORS
GENERAL
The Company's Charter provides that the Board of Directors shall consist of the
number of directors determined from time to time by resolution of the Board of
Directors, in accordance with the Company's Bylaws, provided that the number of
directors may be no less than the minimum number required by Maryland law. By
resolution of the Board of Directors, the Company's Board of Directors currently
consists of the nine directors identified below. The Company's Charter does not
divide the directors into classes. Accordingly, under Maryland law, all
directors are to be elected annually, at the Company's annual meeting of
stockholders, for a one-year term and until the next annual meeting of
stockholders. The Company's Charter also requires that at least two members of
the Board of Directors must be "independent directors." For purposes of the
Company's Charter, an "independent director" is defined to be an individual who:
(i) is not an officer or employee of the Company; (ii) is not the beneficial
owner of more than 5% of any class of equity securities of the Company or an
officer, employee or "affiliate" of such security holder, as defined under
federal securities laws; or (iii) does not have an economic relationship with
the Company that requires disclosure under federal securities laws. Under the
terms of a series of definitive agreements relating to the settlement of all
outstanding stockholder litigation against the Company, a majority of the
Company's Board of Directors must be comprised of independent directors.
The Company's Board of Directors currently consists of the following nine
directors: William F. Andrews, Chairman, John D. Ferguson, Vice-Chairman, Lucius
E. Burch, III, John D. Correnti, Jean-Pierre Cuny, C. Michael Jacobi, John R.
Prann, Jr., Joseph V. Russell and Henri L. Wedell. Each of these directors was
elected at the Company's 2000 annual meeting of stockholders, which was held on
December 13, 2000.
Information regarding each director, with the exception of John D. Ferguson, is
set forth below. Directors' ages are given as of the date of this Annual Report.
William F. Andrews, age 69, currently serves as a director of the Company and as
the chairman of the board of directors, positions he has held since August 2000.
Mr. Andrews also serves as a member of the executive committee of the board of
directors. Mr. Andrews has been a principal of Kohlberg & Company, a private
equity firm specializing in middle market investing, since 1995. Mr. Andrews
served as a director of JJFMSI from its formation in 1998 to July 2000 and
served as a member of the board of directors of Old CCA from 1986 to May 1998.
Mr. Andrews has served as the chairman of Scovill Fasteners Inc., a
manufacturing company, from 1995 to present and has served as the chairman of
Northwestern Steel and Wire Company, a manufacturing company, from 1998 to
present. From 1995 to 1998, he served as chairman of Schrader-Bridgeport
International, Inc. From January 1992 through December 1994, he was chairman,
president and chief executive officer of Amdura Corporation and chairman of
Utica Corporation, both of which are manufacturing companies. From April 1990
through January 1992, Mr. Andrews served as the president and chief executive
officer of UNR Industries, Inc., a diversified steel processor. From September
1989 to March 1990, Mr. Andrews was president of Massey Investment Company, a
private investment company. Mr. Andrews serves as chairman of the board of
directors of Northwestern Steel and Wire Company and as a director of Johnson
Controls Inc., Katy Industries, Inc., Black Box Corporation, Trex Corporation
and Navistar International Corporation. Mr. Andrews is a graduate of the
University of Maryland and received a Masters of Business Administration from
Seton Hall University.
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Lucius E. Burch, III, age 59, currently serves as an independent director of the
Company and as a member of the audit committee of the board of directors of the
Company, positions he has held since December 2000. Mr. Burch also serves as a
member of the executive committee of the board of directors of the Company. Mr.
Burch currently serves as chairman and chief executive officer of Burch
Investment Group, a private venture capital firm located in Nashville,
Tennessee, formerly known as Massey Burch Investment Group, Inc., a position he
has held since October 1989. Mr. Burch served as a member of the board of
directors of Old CCA from May 1998 through the completion of the 1999 Merger,
and as the chairman of the board of directors of Operating Company from January
1999 through the completion of the Restructuring. Mr. Burch currently serves on
the board of directors of Capital Management, Innovative Solutions in
Healthcare, MCT and United Asset Coverage, Inc Mr. Burch graduated from the
University of North Carolina where he received a B.A. degree in 1963.
John D. Correnti, age 53, currently serves as an independent director of the
Company and as a member of the compensation committee of the board of directors
of the Company, positions he has held since December 2000. Mr. Correnti
currently serves as the chairman of the board of directors and as the chief
executive officer of Birmingham Steel Corporation, a publicly-traded steel
manufacturing company. Mr. Correnti has held these positions since December
1999. Mr. Correnti served as the president, chief executive officer and vice
chairman of Nucor Corporation, a mini mill manufacturer of steel products, from
1996 to 1999 and as its president and chief operating officer from 1991 to 1996.
Mr. Correnti also serves as a director of Harnishchfeger Industries and Navistar
International Corporation. Mr. Correnti holds a B.S. degree in civil engineering
from Clarkson University.
Jean-Pierre Cuny, age 46, currently serves as a director of the Company, a
position he has held since the merger of Old Prison Realty with and into the
Company on January 1, 1999. Mr. Cuny also previously served as a director of
Operating Company prior to the completion of the Restructuring and as a director
of Old CCA prior to the 1999 Merger. Mr. Cuny serves as the senior vice
president of The Sodexho Group, a French-based, leading supplier of catering and
various other services to institutions and an affiliate of Sodexho Alliance,
S.A. ("Sodexho"). From February 1982 to June 1987, he served as vice president
in charge of development for the Aluminum Semi-Fabricated Productions Division
of Pechiney, a diversified integrated producer of aluminum and other materials.
Mr. Cuny graduated from Ecole Polytechnique in Paris in 1977 and from Stanford
University Engineering School in 1978.
C. Michael Jacobi, age 59, currently serves as an independent director of the
Company and as the chairman of the audit committee of the board of directors of
the Company, positions he has held since December 2000. Mr. Jacobi currently
serves as a member of the board of directors of Webster Financial Corporation, a
publicly-held bank with approximately $12.0 billion in assets headquartered in
Waterbury, Connecticut. Mr. Jacobi also currently serves as chairman of the
board of directors of Innotek, Inc., a privately-held company located in
Garrett, Indiana engaged in the manufacture of electronic pet containment
systems. Mr. Jacobi served as the president and chief executive officer of Timex
Corporation from December 1993 to August 1999 and as a member of its board of
directors from 1992 to 2000. Prior to 1993, Mr. Jacobi held several senior
positions in finance, manufacturing, marketing and sales with Timex. Mr. Jacobi
also has served as the chairman of the board of directors of Timex Watches
Limited, a publicly-held company based in Bombay, India, and as the chairman and
chief executive officer of Beepware Paging Products, L.L.C., a company jointly
owned by Timex Corporation and Motorola. Mr. Jacobi is a certified public
accountant and holds a B.S. degree from the University of Connecticut.
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John R. Prann, Jr., age 50, currently serves as an independent director of the
Company and as a member of the compensation committee of the board of directors
of the Company, positions he has held since December 2000. Mr. Prann served as
the president and chief executive officer of Katy Industries, Inc. ("Katy"), a
publicly-traded manufacturer and distributor of consumer electric corded
products and maintenance cleaning products, among other product lines, from 1993
to February 2001. From 1991 to 1995, Mr. Prann served as the president and chief
executive officer of CRL, Inc., an equity and real estate investment company
which held a 25% interest in Katy. From 1990 to 1991, Mr. Prann served as the
president and chief executive officer of Profile Gear Corporation, and from 1988
through 1990 Mr. Prann served as a partner with the accounting firm of Deloitte
& Touche. Mr. Prann graduated from the University of California, Riverside in
1974 and obtained his M.B.A. from the University of Chicago in 1979.
Joseph V. Russell, age 60, currently serves as an independent director of the
Company, a position he has held since the 1999 Merger. Mr. Russell also serves
as the chairman of the compensation committee of the board of directors of the
Company and as a member of the executive committee of the board of directors of
the Company. Prior to the 1999 Merger, Mr. Russell served as an independent
trustee of Old Prison Realty. Mr. Russell is the president and chief financial
officer of Elan-Polo, Inc., a Nashville-based, privately-held, world-wide
producer and distributor of footwear. Mr. Russell is also the vice president of
and a principal in RCR Building Corporation, a Nashville-based, privately-held
builder and developer of commercial and industrial properties. He also serves on
the boards of directors of Community Care Corp., the Footwear Distributors of
America Association and US Auto Insurance Company. Mr. Russell graduated from
the University of Tennessee in 1963 with a B.S. in Finance.
Henri L. Wedell, age 59, currently serves as an independent director of the
Company and as a member of the audit committee of the board of directors of the
Company, positions he has held since December 2000. Mr. Wedell currently is a
private investor in Memphis, Tennessee and also serves on the Board of
Equalization of Shelby County, Tennessee. Prior to Mr. Wedell's retirement in
1999, he served as the senior vice president of sales of The Robinson Humphrey
Co., a wholly owned subsidiary of Smith-Barney, Inc., an investment banking
company with which he was employed for over 24 years. From 1990 to 1996, he
served as a member of the board of directors of Community Bancshares, Inc., the
parent corporation to The Community Bank of Germantown. Mr. Wedell graduated
from the Tulane University Business School, where he received a B.B.A. in 1963.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
MARKET PRICE OF AND DISTRIBUTIONS ON CAPITAL STOCK
The Common Stock is traded on the NYSE under the symbol "CXW," the Series A
Preferred Stock is traded on the NYSE under the symbol "CXW PrA," and the Series
B Preferred Stock is traded on the NYSE under the symbol "CXW PrB." On March 30,
2001, the last reported sale price per share of Common Stock was $0.80 and there
were 1,466 registered holders and approximately 25,000 beneficial holders,
respectively, of Common Stock.
The Common Stock and Series A Preferred Stock began trading on the NYSE on
January 4, 1999, under the symbol "PZN" and "PZN PrA," respectively, the first
trading day following completion of
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the 1999 Merger. The Series B Preferred Stock began trading on the NYSE
September 13, 2000. The following table sets forth, for the fiscal quarters
indicated, (i) the range of high and low sales prices of the Common Stock, the
Series A Preferred Stock, and the Series B Preferred Stock on the NYSE, and (ii)
the amount of cash distributions or dividends paid per share:
COMMON STOCK
SALES PRICE PER SHARE CASH
----------------------------
HIGH LOW DISTRIBUTION
------------ ------------ --------------------
FISCAL YEAR 2000
First Quarter $ 6.25 $ 2.75 $ 0.00
Second Quarter $ 4.00 $ 2.00 $ 0.00
Third Quarter $ 3.25 $ 0.63 $ 0.00
Fourth Quarter $ 1.19 $ 0.19 $ 0.00
FISCAL YEAR 1999
First Quarter $ 24.38 $ 16.63 $ 0.60
Second Quarter $ 22.38 $ 9.25 $ 0.60
Third Quarter $ 14.18 $ 9.00 $ 0.60
Fourth Quarter $ 11.69 $ 4.50 $ 0.00
SERIES A PREFERRED STOCK
SALES PRICE PER SHARE CASH
----------------------------
HIGH LOW DISTRIBUTION
------------ ------------ --------------------
FISCAL YEAR 2000
First Quarter $ 14.00 $ 8.44 $ 0.50
Second Quarter $ 11.88 $ 8.00 $ 0.00
Third Quarter $ 8.50 $ 5.81 $ 0.00
Fourth Quarter $ 7.31 $ 2.88 $ 0.00
FISCAL YEAR 1999
First Quarter $ 20.63 $ 17.38 $ 0.50
Second Quarter $ 19.00 $ 14.00 $ 0.50
Third Quarter $ 16.19 $ 14.56 $ 0.50
Fourth Quarter $ 15.75 $ 12.06 $ 0.50
SERIES B PREFERRED STOCK
SALES PRICE PER SHARE CASH
----------------------------
HIGH LOW DISTRIBUTION
------------ ------------ --------------------
FISCAL YEAR 2000
Third Quarter $ 23.00 $ 15.00 $ 0.00
Fourth Quarter $ 18.75 $ 6.00 $ 0.00
Pursuant to the terms of the Amended Bank Credit Facility, the Company is
restricted from declaring or paying cash dividends with respect to outstanding
shares of its common stock. Moreover, even if such restriction is ultimately
removed, the Company does not intend to pay dividends with respect to shares of
its common stock in the future.
The Company's board of directors has not declared a dividend on the Series A
Preferred Stock since the first quarter of 2000. In connection with the June
2000 Waiver and Amendment, the Company is prohibited from declaring or paying
any dividends with respect to the Series A Preferred Stock until such time as
the Company has raised at least $100.0 million in equity. Dividends with respect
to the Series A Preferred Stock will continue to accrue under the terms of the
Company's charter until such
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time as payment of such dividends is permitted under the terms of the June 2000
Waiver and Amendment. Quarterly dividends of $0.50 per share for the second,
third and fourth quarters of 2000 have been accrued as of December 31, 2000.
Under the terms of the Company's charter, in the event dividends are unpaid and
in arrears for six or more quarterly periods the holders of the Series A
Preferred Stock will have the right to vote for the election of two additional
directors to the Company's board of directors. No assurance can be given as to
if and when the Company will commence the payment of cash dividends on its
shares of Series A Preferred Stock.
On September 22, 2000, the Company issued approximately 5.9 million shares of
its Series B Preferred Stock in order to satisfy its remaining 1999 REIT
distribution requirement. The distribution was made to the Company's common
stockholders of record on September 14, 2000, who received five shares of Series
B Preferred Stock for every 100 shares of the Company's Common Stock held on the
record date. The Company paid its common stockholders approximately $15,000 in
cash in lieu of issuing fractional shares of Series B Preferred Stock. On
November 13, 2000, the Company issued approximately 1.6 million additional
shares of Series B Preferred Stock in furtherance of meeting its 1999 REIT
distribution requirements. This distribution was made to the Company's common
stockholders of record on November 6, 2000, who received one share of Series B
Preferred Stock for every 100 shares of the Company's Common Stock held on the
record date. The Company also paid its common stockholders approximately $15,000
in cash in lieu of issuing fractional shares of Series B Preferred Stock in the
second distribution.
The shares of Series B Preferred Stock issued by the Company provide for
cumulative dividends payable at a rate of 12% per year of the stock's stated
value of $24.46. The dividends are payable quarterly in arrears, in additional
shares of Series B Preferred Stock through the third quarter of 2003, and in
cash thereafter. The shares of the Series B Preferred Stock are callable by the
Company, at a price per share equal to the stated value of $24.46, plus any
accrued dividends, at any time after six months following the later of (i) three
years following the date of issuance or (ii) the 91st day following the
redemption of the Company's 12.0% senior notes, due 2006.
On December 13, 2000, the Company's stockholders approved a reverse stock split
of the Company's common stock at a ratio to be determined by the board of
directors of not less than one-for-ten and not to exceed one-for-twenty. The
reverse stock split is expected to encourage greater interest in the Company's
common stock by the financial community and the investing public, and is
expected to satisfy a condition of continued listing of the common stock on the
NYSE. The Company currently expects to complete the reverse stock split during
the second quarter of 2001.
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 the Company and Old CCA, its predecessor by merger, within the
past three years. Old Prison Realty, predecessor by merger to the Company, did
not issue unregistered securities during the period from January 1, 1998 until
completion of the 1999 Merger. Unless otherwise indicated, all securities were
issued and sold in private placements pursuant to the exemption from the
registration requirements of the Securities Act, 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
issuances of shares of Old CCA common stock prior to completion of the 1999
Merger are reflected on an as-converted basis. In the 1999 Merger, each
outstanding share of Old CCA common stock
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was converted into the right to receive 0.875 share of the Company's Common
Stock, pursuant to an effective Registration Statement on Form S-4 (Reg. no.
333-65017), filed with the Commission on September 30, 1998 and declared
effective by the Commission on October 16, 1998 (the "Registration Statement on
Form S-4").
OLD CCA
On October 15, 1998, Old CCA issued 43,750 shares of Old CCA common stock to a
director, in consideration of a purchase price of $756,250 paid to Old CCA.
These shares were purchased pursuant to an agreement between Old CCA and the
director, and such sale received prior approval by the board of directors of Old
CCA.
On September 18, 1998, Old CCA exercised its right, pursuant to the terms of an
exchange agreement, dated as of October 2, 1997, by and between Old CCA,
American Corrections Transport, Inc. ("ACT") and the majority stockholders of
ACT (the "Exchange Agreement"), to convert all outstanding shares of Old CCA
series B convertible preferred stock, $1.00 par value per share (the "Old CCA
Preferred Stock"), previously issued to the stockholders of ACT into shares of
Old CCA common stock. On October 2, 1998, Old CCA converted each outstanding
share of Old CCA Preferred Stock into 1.94 shares of Old CCA common stock. As a
result of this conversion, Old CCA issued an aggregate of 639,030 shares of Old
CCA common stock, including 322,432 shares of Old CCA common stock to be held in
escrow, without registration under the Securities Act in reliance upon Section
3(a)(9) of the Securities Act. The Company received no cash proceeds from the
exchange of the Old CCA Preferred Stock.
THE COMPANY
Initial Shares of Common Stock. The Company was formed as a Maryland corporation
in September 1998, with one stockholder being issued 100 shares of common stock
in consideration of $1,000. Upon completion of the 1999 Merger, these shares of
the Company's Common Stock were repurchased by the Company.
Sodexho Convertible Subordinated Notes. In connection with the 1999 Merger, the
Company assumed: (i) the $7.0 million 8.5% convertible subordinated notes, due
November 7, 1999, originally issued to Sodexho by Old CCA on June 23, 1994 (the
"1994 Sodexho Convertible Notes"), which, upon assumption, were convertible into
1,709,699 shares of the Company's Common Stock at a conversion price of $4.09
per share; and (ii) the $20.0 million 7.5% convertible subordinated notes, due
April 5, 2002, originally issued to Sodexho by Old CCA on April 5, 1996 (the
"1996 Sodexho Convertible Notes"), which, upon assumption, were convertible into
701,135 shares of the Company's Common Stock at a conversion price of $28.53 per
share. The Company also assumed Old CCA's obligations under a forward contract
between Old CCA and Sodexho (the "Sodexho Forward Contract"), in which Old CCA
had agreed to sell to Sodexho up to $20.0 million of convertible subordinated
notes, bearing interest at LIBOR plus 1.35%, at any time prior to December 1999
(the "Sodexho Floating Rate Convertible Notes"), which, upon assumption, were
convertible into 2,564,103 shares of the Company's Common Stock at a conversion
price of $7.80 per share. The Company received no cash proceeds from the
assumption of these notes and the assumption of Old CCA's obligations under the
Sodexho Forward Contract.
On March 8, 1999, the Company, in satisfaction of its obligations under the
Sodexho Forward Contract, issued $20.0 million in Sodexho Floating Rate
Convertible Notes, due March 8, 2004, in
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consideration of cash proceeds of $20.0 million. Immediately after issuance of
the Sodexho Floating Rate Convertible Notes, the Company, pursuant to Sodexho's
exercise of its conversion option, converted the 1994 Sodexho Convertible Notes,
the 1996 Sodexho Convertible Notes and the Sodexho Floating Rate Convertible
Notes into an aggregate of 4,974,937 shares of the Company's Common Stock. The
Company received no proceeds from the issuance of these shares of the Company's
Common Stock to Sodexho.
MDP Convertible Subordinated Notes. Pursuant to the terms of a note purchase
agreement, dated as of December 31, 1998, by and between the Company and MDP,
the Company issued the $40.0 Million Convertible Subordinated Notes. 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. See "Business--Capital Structure Changes" for a
description of the conversion rate applicable to the $40.0 Million Convertible
Subordinated Notes.
In connection with the waiver and amendment to the note purchase agreement
governing the $40.0 Million Convertible Subordinated Notes, on June 30, 2000 the
Company also issued, on a pro-rata basis to the holders of the $40.0 Million
Convertible Subordinated Notes, additional convertible subordinated notes in the
aggregate principal amount of $1.1 million, which amount represented all accrued
but unpaid interest upon the $40.0 Million Convertible Subordinated Notes, at an
applicable default rate of interest, through June 30, 2000. The terms of these
additional notes, including the interest rate and the maturity date of such
notes, are substantially similar to the terms of the $40.0 Million Convertible
Subordinated Notes.
PMI Convertible Notes. Pursuant to the terms of the note purchase agreement,
dated as of December 31, 1998, by and between the Company and PMI, the Company
issued the $30.0 Million Convertible Subordinated Notes which replaced a
convertible subordinated note previously issued by Old CCA on February 29, 1996.
The Company received no cash proceeds from the issuance of the $30.0 Million
Convertible Subordinated Notes. See "Business--Capital Structure Changes" for a
description of the conversion ratio applicable to the $30.0 Million Convertible
Subordinated Notes.
Issuance and Conversion of Series B Preferred Stock. On September 22, 2000, the
Company issued an aggregate of approximately 5.9 million shares of its Series B
Preferred Stock as a taxable dividend, exempt from registration under the
Securities Act, on shares of its Common Stock in connection with the Company's
election to be taxed as a REIT for federal income tax purposes with respect to
its 1999 taxable year. On November 13, 2000, the Company issued an additional
1.6 million shares of its Series B Preferred Stock as a taxable dividend, exempt
from registration under the Securities Act, in further satisfaction of its 1999
REIT distribution requirements. An aggregate of 4.2 million shares of Series B
Preferred Stock were converted into approximately 95.0 million shares of the
Company's Common Stock during the following two conversion periods: (i) October
2, 2000 through October 12, 2000; and (ii) December 7, 2000 through December 20,
2000. In addition, pursuant to the terms of the Series B Preferred Stock, on
January 2, 2001 the Company issued an aggregate of approximately 0.1 million
shares of Series B Preferred Stock as a paid-in-kind dividend on outstanding
shares of Series B Preferred Stock with respect to the fourth quarter of 2000.
The Company will also issue an additional 0.1 million shares of Series B
Preferred Stock on April 2, 2001 as a paid-in-kind dividend on outstanding
shares of Series B Preferred Stock with respect to the first quarter of 2001.
Assumption of Operating Company Warrants. As a result of the Restructuring,
effective October 1, 2000 the Company assumed the obligation of Operating
Company to issue shares of Operating
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Company's Class A common stock upon the exercise of certain common stock
purchase warrants, dated as of December 31, 1998, previously issued by Operating
Company. As a result of this assumption, the Company became obligated to issue,
upon exercise of the warrants, an aggregate of: (i) approximately 0.5 million
shares of the Company's Common Stock to G.E. Capital Corporation and (ii) an
aggregate of approximately 0.3 million shares of the Company's Common Stock to
Bank of America. The warrants, which have an exercise price of $3.33 per share,
expire December 31, 2008.
Service Company Mergers. Effective December 1, 2000, the Company completed a
series of mergers with each of PMSI and JJFMSI (the "Service Company Mergers").
Pursuant to the terms of an agreement and plan of merger, dated as of November
17, 2000, by and among the Company, its wholly-owned subsidiary, and each of
PMSI and JJFMSI, PMSI and JJFMSI merged with and into the wholly-owned
subsidiary. The Company issued an aggregate of 2.9 million shares of its Common
Stock to the employee shareholders of PMSI and JJFMSI at the time of the
completion of the Service Company Mergers.
Issuances to Directors. On January 6, 1999, the Company issued a total of 1,410
shares of Common Stock to eight non-employee directors of the Company. These
shares were issued to these directors in satisfaction of Old Prison Realty's
obligations under the Old Prison Realty Non-Employee Trustees' Compensation
Plan, under which these individuals, previously trustees of Old Prison Realty,
opted to receive Old Prison Realty common shares in lieu of certain trustees'
fees. On January 29, 1999, the Company issued approximately 0.1 million shares
of Common Stock to a former director of Old CCA in satisfaction of its
obligations under the Old CCA Non-Employee Directors' Stock Option Plan, which
was assumed by the Company in the Merger. In addition, on October 2, 2000, the
Company issued 31,111 shares of Common Stock to a director of the Company in
connection with such director's service on the Special Committee of the
Company's Board of Directors. These shares of Common Stock were valued based on
market prices of the Common Stock on the NYSE. The Company received no cash
proceeds from the issuance of these shares of Common Stock.
USE OF PROCEEDS FROM THE SALE OF REGISTERED SECURITIES
A description of the initial registration statement filed under the Securities
Act by the Company, and a description of the application of the proceeds from
the issuance of registered securities pursuant to such registration statement,
is contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (Commission File no. 0-25245), as filed with the
Commission on March 30, 2000.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended December 31,
2000, were derived from the audited consolidated financial statements of the
Company and its predecessors and the related notes thereto included elsewhere in
this Annual Report. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" for a discussion of the factors
that affect the comparability of the following financial data.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY, INC.)
SELECTED HISTORICAL FINANCIAL INFORMATION
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
STATEMENT OF OPERATIONS: 2000 1999 1998 1997 1996
------------- ----------- ----------- ---------- ----------
Revenue $ 310,278 $ 278,833 $ 662,059 $ 462,249 $ 292,513
------------- ----------- ----------- ---------- ----------
Expenses:
Operating 214,872 - 496,522 330,470 211,208
General and administrative 21,241 24,125 28,628 16,025 12,607
Lease 2,443 - 58,018 18,684 2,786
Depreciation and amortization 59,799 44,062 14,363 13,378 11,339
Licensing fees to Operating Company 501 - - - -
Administrative service fee to
Operating Company 900 - - - -
Write-off of amounts under lease
arrangements 11,920 65,677 - - -
Impairment losses 527,919 76,433 - - -
Old CCA compensation charge - - 22,850 - -
------------- ----------- ----------- ---------- ----------
839,595 210,297 620,381 378,557 237,940
------------- ----------- ----------- ---------- ----------
Operating income (loss) (529,317) 68,536 41,678 83,692 54,573
Equity (earnings) loss and
amortization of deferred
gain 11,638 (3,608) - - -
Interest expense (income), net 131,545 45,036 (2,770) (3,404) 4,224
Other income (3,099) - - - -
Strategic investor fees 24,222 - - - -
Unrealized foreign currency
transaction loss 8,147 - - - -
Loss on sales of assets 1,733 1,995 - - -
Stockholder litigation settlements 75,406 - - - -
Write-off of loan costs - 14,567 2,043 - -
------------- ----------- ----------- ---------- ----------
Income (loss) before income taxes,
minority interest and cumulative
effect of accounting change (778,909) 10,546 42,405 87,096 50,349
(Provision) benefit for income taxes 48,002 (83,200) (15,424) (33,141) (19,469)
------------- ----------- ----------- ---------- ----------
Income (loss) before minority
interest and cumulative effect of
accounting change (730,907) (72,654) 26,981 53,955 30,880
Minority interest in net loss of
PMSI and JJFMSI 125 - - - -
------------- ----------- ----------- ---------- ----------
Income (loss) before cumulative
effect of accounting change (730,782) (72,654) 26,981 53,955 30,880
Cumulative effect of accounting
change, net of taxes - - (16,145) - -
------------- ----------- ----------- ---------- ----------
Net income (loss) (730,782) (72,654) 10,836 53,955 30,880
Distributions to preferred
stockholders (13,526) (8,600) - - -
------------- ----------- ----------- ---------- ----------
Net income (loss) available to common
stockholders $ (744,308) $ (81,254) $ 10,836 $ 53,955 $ 30,880
============= =========== =========== ========== ==========
(continued)
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY, INC.)
SELECTED HISTORICAL FINANCIAL INFORMATION
(in thousands, except per share data)
(continued)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ----------- ----------- ---------- ----------
Basic net income (loss) available to common
stockholders per common share:
Before cumulative effect of accounting
change $ (5.67) $ (0.71) $ 0.38 $ 0.80 $ 0.49
Cumulative effect of accounting change - - (0.23) - -
------------- ----------- ----------- ---------- ----------
$ (5.67) $ (0.71) $ 0.15 $ 0.80 $ 0.49
============= =========== =========== ========== ==========
Diluted net income (loss) available to common
stockholders per common share:
Before cumulative effect of accounting
change $ (5.67) $ (0.71) $ 0.34 $ 0.69 $ 0.42
Cumulative effect of accounting change - - (0.20) - -
------------- ----------- ----------- ---------- ----------
$ (5.67) $ (0.71) $ 0.14 $ 0.69 $ 0.42
============= =========== =========== ========== ==========
Weighted average common shares outstanding:
Basic 131,324 115,097 71,380 67,568 62,793
Diluted 131,324 115,097 78,939 78,939 76,160
BALANCE SHEET DATA:
Total assets $ 2,176,992 $ 2,716,644 $ 1,090,437 $ 697,940 $ 468,888
Long-term debt, less current portion $ 1,137,976 $ 1,092,907 $ 290,257 $ 127,075 $ 117,535
Total liabilities excluding deferred gains $ 1,488,977 $ 1,209,528 $ 395,999 $ 214,112 $ 187,136
Stockholders' equity $ 688,015 $ 1,401,071 $ 451,986 $ 348,076 $ 281,752
Prior to the 1999 Merger, Old CCA operated as a taxable corporation and managed
prisons and other correctional and detention facilities and provided prisoner
transportation services for governmental agencies. The 1999 Merger was accounted
for as a reverse acquisition of the Company by Old CCA and as an acquisition of
Old Prison Realty by the Company. As such, the provisions of reverse acquisition
accounting prescribe that Old CCA's historical financial statements be presented
as the Company's historical financial statements prior to January 1, 1999.
In connection with the 1999 Merger, the Company elected to change its tax status
from a taxable corporation to a REIT effective with the filing of its 1999
federal income tax return. As a REIT, the Company was dependent on Operating
Company, as a lessee, for a significant source of its income. As a result of the
Restructuring in 2000, including the acquisition of Operating Company on October
1, 2000 and the acquisitions of PMSI and JJFMSI on December 1, 2000, the Company
now specializes in owning, operating and managing prisons and other correctional
facilities and providing prisoner transportation services for governmental
agencies. In connection with the Restructuring, the Company also amended its
charter to remove provisions requiring the Company to elect to qualify and be
taxed as a REIT. Therefore, the 2000 results of operations reflect the operation
of the Company as a taxable corporation.
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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.
OVERVIEW
The Company was formed in September 1998 as Prison Realty Corporation and
commenced operations on January 1, 1999, following the mergers of the former
Corrections Corporation of America, a Tennessee corporation ("Old CCA"), on
December 31, 1998 and CCA Prison Realty Trust, a Maryland real estate investment
trust ("Old Prison Realty"), on January 1, 1999 with and into the Company
(collectively, the "1999 Merger"). As more fully discussed in Note 3 to the
accompanying financial statements, effective October 1, 2000, the Company
completed a series of previously announced restructuring transactions
(collectively, the "Restructuring"). As part of the Restructuring, the Company's
primary tenant, Corrections Corporation of America, a privately-held Tennessee
corporation formerly known as Correctional Management Services Corporation
("Operating Company"), was merged with and into a wholly-owned subsidiary of the
Company on October 1, 2000 (the "Operating Company Merger"). In connection with
the Restructuring and the Operating Company Merger, the Company amended its
charter to, among other things, remove provisions relating to the Company's
operation and qualification as a real estate investment trust, or REIT, for
federal income tax purposes commencing with its 2000 taxable year and change its
name to "Corrections Corporation of America." As more fully discussed in Note 3
to the accompanying financial statements, effective December 1, 2000, each of
Prison Management Services, Inc. ("PMSI") and Juvenile and Jail Facility
Management Services, Inc. ("JJFMSI"), two privately-held service companies which
managed certain government-owned prison and jail facilities under the
"Corrections Corporation of America" name (collectively the "Service
Companies"), merged with and into a wholly-owned subsidiary of the Company.
This Annual Report on Form 10-K contains various financial information related
to the Company and, prior to their acquisition, the Service Companies. The
Company's results of operations for all periods prior to January 1, 1999 reflect
the operating results of Old CCA as a prison management company, while the
results of operations for 1999 reflect the operating results of the Company as a
REIT. Management believes the comparison between 1999 and prior years is not
meaningful because the prior years' financial condition, results of operations,
and cash flows reflect the operations of Old CCA and the 1999 financial
condition, results of operations and cash flows reflect the operations of the
Company as a REIT.
Further, management believes the comparison between 2000 and prior years is not
meaningful because the 2000 financial condition, results of operations and cash
flows reflect the operation of the Company as a subchapter C corporation, and
which, for the period January 1, 2000 through September 30, 2000, included real
estate activities between the Company and Operating Company during a period of
severe liquidity problems, and as of October 1, 2000, also includes the
operations of the correctional and detention facilities previously leased to and
managed by Operating Company. In addition, the Company's financial condition,
results of operations and cash flows as of and for the year ended December 31,
2000 also include the operations of the Service Companies as of December 1, 2000
(acquisition date) on a consolidated basis. For the period January 1, 2000
through August 31, 2000, the investments in the Service Companies were accounted
for and presented under the equity method of accounting. For the period from
September 1, 2000 through November 30, 2000,
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the investments in the Service Companies were accounted for on a combined basis
with the results of operations of the Company due to the repurchase by the
wholly-owned subsidiaries of the Service Companies of the non-management,
outside stockholders' equity interest in the Service Companies during September
2000.
Prior to the Operating Company Merger, the Company had accounted for its 9.5%
non-voting interest in Operating Company under the cost method of accounting. As
such, the Company had not recognized any income or loss related to its stock
ownership investment in Operating Company during the period from January 1, 1999
through September 30, 2000. However, in connection with the Operating Company
Merger, the financial statements of the Company have been restated to recognize
the Company's 9.5% pro-rata share of Operating Company's losses on a retroactive
basis for the period from January 1, 1999 through September 30, 2000 under the
equity method of accounting, in accordance with APB 18, "The Equity Method of
Accounting for Investments in Common Stock."
The Operating Company Merger was accounted for using the purchase method of
accounting as prescribed by APB 16. Accordingly, the aggregate purchase price of
$75.3 million was allocated to the assets purchased and liabilities assumed
(identifiable intangibles included a workforce asset of approximately $1.6
million, a contract acquisition costs asset of approximately $1.5 million and a
contract values liability of approximately $26.1 million) based upon the
estimated fair value at the date of acquisition. The aggregate purchase price
consisted of the value of the Company's common stock and warrants issued in the
transaction, the Company's net carrying amount of the CCA Note as of the date of
acquisition (which has been extinguished), the Company's net carrying amount of
deferred gains and receivables/payables between the Company and Operating
Company as of the date of acquisition, and capitalized merger costs. The excess
of the aggregate purchase price over the assets purchased and liabilities
assumed of $87.0 million was reflected as goodwill.
Since the 1999 Merger and through September 30, 2000, the Company had
specialized in acquiring, developing and owning correctional and detention
facilities. Operating Company has been a private prison management company that
operated and managed the substantial majority of facilities owned by the
Company. As a result of the 1999 Merger and certain contractual relationships
existing between the Company and Operating Company, the Company was dependent on
Operating Company for a significant source of its income. In addition, the
Company was obligated to pay Operating Company for services rendered to the
Company in the development of its correctional and detention facilities. As a
result of liquidity issues facing Operating Company and the Company, the parties
amended the contractual agreements between the Company and Operating Company
during 2000. For a more complete description of the historical contractual
relationships and of these amendments, see Note 5 to the accompanying financial
statements.
As required by its governing instruments, the Company operated and has elected
to be taxed as a real estate investment trust, or REIT, for federal income tax
purposes with respect to its taxable year ended December 31, 1999. In connection
with the completion of the Restructuring, on September 12, 2000, the Company's
stockholders approved an amendment to the Company's charter to remove the
requirements that the Company elect to be taxed and qualify as a REIT for
federal income tax purposes commencing with the Company's 2000 taxable year. As
such, the Company operated and is taxed as a subchapter C corporation with
respect to its taxable year ended December 31, 2000 and thereafter.
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As the result of the Operating Company Merger on October 1, 2000 and the
acquisitions of PMSI and JJFMSI on December 1, 2000, the Company now specializes
in owning, operating and managing prisons and other correctional facilities and
providing prisoner transportation services for governmental agencies. In
addition to providing the fundamental residential services relating to inmates,
each of the Company's facilities offers a large variety of rehabilitation and
educational programs, including basic education, life skills and employment
training and substance abuse treatment. The Company also provides health care
(including medical, dental and psychiatric services), institutional food
services and work and recreational programs.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2000
The Company incurred a net loss of $730.8 million for the year ended December
31, 2000, used net cash of $46.6 million in operating activities and had a net
working capital deficiency of $36.8 million at December 31, 2000. Included in
the $730.8 million net loss for the year ended December 31, 2000, is a $527.9
million non-cash impairment loss associated with the reduction of the carrying
values of certain long lived assets to their estimated fair values in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS
121"). Contributing to the net loss and net working capital deficiency is an
accrual at December 31, 2000 of $75.4 million related to the settlement of the
Company's stockholder litigation (which is expected to be satisfied through the
issuance of 46.9 million shares of common stock and the issuance of a $29.0
million note payable due in 2009), strategic investor and merger related charges
of $24.2 million, and $11.9 million of amounts written-off under lease
arrangements.
The Company's principal capital requirements are for working capital, capital
expenditures and debt maturities. The Company has financed, and intends to
continue to finance, these requirements with existing cash balances, net cash
provided by operations and borrowings under a revolving credit facility with a
$50.0 million capacity which was assumed by a wholly-owned subsidiary of the
Company in connection with the Operating Company Merger (the "Operating Company
Revolving Credit Facility"). As of December 31, 2000, the Company's liquidity
was provided by cash on hand of approximately $20.9 million and $42.4 million
available under the Operating Company Revolving Credit Facility.
The revolving loans under the Amended Bank Credit Facility mature on January 1,
2002. At December 31, 2000, borrowings outstanding under the revolving loans of
the Amended Bank Credit Facility totaled $382.5 million.
As a result of the Company's current financial condition, including: (i) the
revolving loans under the Amended Bank Credit Facility maturing January 1, 2002;
(ii) the requirement under the November 2000 Consent and Amendment to use
commercially reasonable efforts to complete any combination of certain
transactions, as defined therein, which together result in net cash proceeds of
at least $100.0 million; (iii) the Company's negative working capital position;
and (iv) the Company's highly leveraged capital structure, the Company's
management is evaluating the Company's current capital structure, including the
consideration of various potential transactions that could improve the Company's
financial position. During the third quarter of 2000, the Company named a new
president and chief executive officer, followed by a new chief financial officer
in the fourth quarter. At the Company's 2000 annual meeting of stockholders held
during the fourth quarter of 2000, the Company's stockholders elected a newly
constituted nine-member board of directors of the
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Company, including six independent directors.
Following the completion of the Operating Company Merger and the acquisitions of
PMSI and JJFMSI, during the fourth quarter of 2000, the Company's new management
conducted strategic assessments; developed a strategic operating plan to improve
the Company's financial position; developed revised projections for 2001; and
evaluated the utilization of existing facilities, projects under development,
excess land parcels, and identified certain of these non-strategic assets for
sale. As a result of these assessments, the Company recorded non-cash impairment
losses totaling $508.7 million.
During the fourth quarter of 2000, the Company obtained a consent and amendment
to its Amended Bank Credit Facility to replace existing financial covenants.
During the first quarter of 2001, the Company also obtained amendments to the
Amended Bank Credit Facility to modify the financial covenants to take into
consideration any loss of EBITDA that may result from certain asset dispositions
during 2001 and subsequent periods and to permit the issuance of indebtedness in
partial satisfaction of its obligations in the stockholder litigation
settlement. Also, during the first quarter of 2001, the Company amended the
provisions to the note purchase agreement governing its $30.0 million
convertible subordinated notes, to replace previously existing financial
covenants in order to remove existing defaults and attempt to remain in
compliance during 2001 and subsequent periods.
The Company believes that its operating plans and related projections are
achievable, and would allow the Company to maintain compliance with its debt
covenants during 2001. However, there can be no assurance that the Company will
be able to maintain compliance with its debt covenants or that, if the Company
defaults under any of its debt covenants, the Company will be able to obtain
additional waivers or amendments. Additionally, the Company also has certain
non-financial covenants which must be met in order to remain in compliance with
its debt agreements. The Company's Amended Bank Credit Facility contains a
non-financial covenant requiring the Company to consummate the securitization of
lease payments (or other similar transaction) with respect to the Company's
Agecroft facility located in Salford, England by March 31, 2001. The Agecroft
transaction did not close by the required date. However, the covenant allows for
a 30-day grace period during which the lenders under the Amended Bank Credit
Facility could not exercise their rights to declare an event of default. On
April 10, 2001, prior to the expiration of the grace period, the Company
consummated the Agecroft transaction through the sale of all of the issued and
outstanding capital stock of Agecroft Properties, Inc., a wholly-owned
subsidiary of the Company, thereby fulfilling the Company's covenant
requirements with respect to the Agecroft transaction.
The Amended Bank Credit Facility also contains a non-financial covenant
requiring the Company to provide the lenders with audited financial statements
within 90 days of the Company's fiscal year-end, subject to an additional
five-day grace period. Due to the Company's attempts to close the securitization
discussed above, the Company did not provide the audited financial statements
within the required time period. However, the Company has obtained a waiver from
the lenders under the Amended Bank Credit Facility of this financial reporting
requirement. This waiver also cured the resulting cross-default under the
Company's $40.0 million convertible notes.
Additional non-financial covenants, among others, include a requirement to use
commercially reasonable efforts to (i) raise $100.0 million through equity or
asset sales (excluding the securitization of lease payments or other similar
transaction with respect to the Salford, England facility) on or before June 30,
2001, and (ii) register shares into which the $40.0 million convertible
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notes are convertible. The Company believes it will be able to demonstrate
commercially reasonable efforts regarding the $100.0 million capital raising
event on or before June 30, 2001, primarily by attempting to sell certain
assets, as discussed above. Subsequent to year-end, the Company completed the
sale of a facility located in North Carolina for approximately $25 million. The
Company is currently evaluating and would also consider a distribution of rights
to purchase common or preferred stock to the Company's existing stockholders, or
an equity investment in the Company from an outside investor. The Company
expects to use the net proceeds from these transactions to pay-down debt under
the Amended Bank Credit Facility. Management also intends to take the necessary
actions to achieve compliance with the covenant regarding the registration of
shares.
The revolving loan portion of the Amended Bank Credit Facility of $382.5 million
matures on January 1, 2002. As part of management's plans to improve the
Company's financial position and address the January 1, 2002 maturity of
portions of the debt under the Amended Bank Credit Facility, management has
committed to a plan of disposal for certain long-lived assets. These assets are
being actively marketed for sale and are classified as held for sale in the
accompanying consolidated balance sheet at December 31, 2000. Anticipated
proceeds from these asset sales are to be applied as loan repayments. The
Company believes that utilizing such proceeds to pay-down debt will improve its
leverage ratios and overall financial position, improving its ability to
refinance or renew maturing indebtedness, including primarily the Company's
revolving loans under the Amended Bank Credit Facility.
While management has developed strategic operating plans to deal with the
uncertainties facing the Company and to remain in compliance with its debt
covenants, there can be no assurance that the cash flow projections will reflect
actual results and there can be no assurance that the Company will remain in
compliance with its debt covenants during 2001. Further, even if the Company is
successful in selling assets, there can be no assurance that it will be able to
refinance or renew its debt obligations maturing January 1, 2002.
Due to certain cross-default provisions contained in certain of the Company's
debt instruments, if the Company were to be in default under the Amended Bank
Credit Facility and if the lenders under the Amended Bank Credit Facility
elected to exercise their rights to accelerate the Company's obligations under
the Amended Bank Credit Facility, such events could result in the acceleration
of all or a portion of the outstanding principal amount of the Company's $100.0
million senior notes or the Company's aggregate $70.0 million convertible
subordinated notes, which would have a material adverse effect on the Company's
liquidity and financial position. Additionally, under the Company's $40.0
million convertible subordinated notes, even if the lenders under the Amended
Bank Credit Facility did not elect to exercise their acceleration rights, the
holders of the $40.0 million convertible subordinated notes could require the
Company to repurchase such notes. The Company does not have sufficient working
capital to satisfy its debt obligations in the event of an acceleration of all
or a substantial portion of the Company's outstanding indebtedness.
The Company is prohibited from declaring or paying any dividends with respect to
the Company's currently outstanding Series A Preferred Stock until such time as
the Company has raised at least $100.0 million in equity. Dividends with respect
to the Series A Preferred Stock will continue to accrue under the terms of the
Company's charter until such time as payment of such dividends is permitted
under the terms of the June 2000 Waiver and Amendment. Under the terms of the
Company's charter, in the event dividends are unpaid and in arrears for six or
more quarterly periods
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the holders of the Series A Preferred Stock will have the right to vote for the
election of two additional directors to the Company's board of directors. No
assurance can be given as to if and when the Company will commence the payment
of cash dividends on its shares of Series A Preferred Stock.
As more fully discussed below, at the Company's 2000 annual meeting of
stockholders, the holders of the Company's common stock approved a reverse stock
split of the Company's common stock at a ratio to be determined by the board of
directors of the Company of not less than one-for-ten and not to exceed
one-for-twenty. Management expects that the reverse stock split will be effected
during the second quarter of 2001.
The Company believes that cash flows provided by operating activities combined
with borrowings under the Operating Company Revolving Credit Facility will be
sufficient to meet its requirements for working capital, capital expenditures
and debt maturities for at least a year.
OPERATING ACTIVITIES
The Company's net cash used in operating activities for the year ended December
31, 2000, was $46.6 million. This represents the net loss for the year plus
depreciation and amortization, changes in various components of working capital
and adjustments for various non-cash charges, including primarily those
discussed above, included in the statement of operations.
INVESTING ACTIVITIES
The Company's cash flow used in investing activities was $38.5 million for the
year ended December 31, 2000. Additions to property and equipment totaling $78.7
million in 2000 were primarily related to expenditures associated with two,
1,524 bed medium security prisons under construction in Georgia. In connection
with the Operating Company Merger and the acquisitions of PMSI and JJFMSI, the
Company acquired approximately $6.9 million in cash. These uses of cash were
partially offset by the reduction of restricted cash that had been used as
collateral for an irrevocable letter of credit issued in connection with the
construction of a facility.
FINANCING ACTIVITIES
The Company's cash flow used in financing activities was $0.6 million for the
year ended December 31, 2000. Net proceeds from the issuance of debt totaled
$29.1 million and were used primarily to fund additions to property and
equipment and working capital needs, partially offset by $11.3 million used to
pay debt issuance costs.
On March 22, 2000, the Board of Directors of the Company declared a quarterly
dividend on the Company's Series A Preferred Stock of $0.50 per share to
preferred stockholders of record on March 31, 2000. These dividends totaling
$2.2 million were paid on April 17, 2000. The Company's board of directors has
not declared a dividend on the Series A Preferred Stock for the quarters ended
June 30, 2000, September 30, 2000 and December 31, 2000. During the first
quarter of 2000, the Company also paid the accrued distributions as of December
31, 1999, on the Company's Series A Preferred Stock, totaling $2.2 million.
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The combined and consolidated statement of cash flows for the year ended
December 31, 2000 includes certain transactions by PMSI and JJFMSI prior to
their acquisition on December 1, 2000. In September 2000, a wholly-owned
subsidiary of PMSI purchased 85% of the outstanding voting common stock of PMSI
for total cash consideration of $8.3 million. Also in September 2000, a
wholly-owned subsidiary of JJFMSI purchased 85% of the outstanding common stock
of JJFMSI for total cash consideration of $5.1 million. These transactions are
included in "Purchase of treasury stock" in the combined and consolidated
statement of cash flows for 2000.
AMENDMENTS TO OPERATING COMPANY LEASES AND OTHER AGREEMENTS
In an effort to address the liquidity needs of Operating Company prior to the
completion of the Restructuring, and as permitted by the terms of the June 2000
Waiver and Amendment to the Company's Amended Bank Credit Facility, the Company
and Operating Company amended the terms of the Operating Company Leases in June
2000. As a result of this amendment, lease payments under the Operating Company
Leases were due and payable on June 30 and December 31 of each year, instead of
monthly. In addition, the Company and Operating Company agreed to defer, with
interest, and with the exception of certain scheduled payments, the first
semi-annual rental payment under the revised terms of the Operating Company
Leases, due June 30, 2000, until September 30, 2000.
As of September 29, 2000, the Company forgave all unpaid amounts due and payable
to the Company through August 31, 2000 related to the Operating Company Leases,
including unpaid interest, as further described in Note 5 to the financial
statements.
In connection with the amendments to the Operating Company Leases, deferring a
substantial portion of the rental payments due to the Company thereunder, the
terms of the June 2000 Waiver and Amendment to the Company's Amended Bank Credit
Facility also conditioned the effectiveness of the June 2000 Waiver and
Amendment upon the deferral of the Company's payment of fees to Operating
Company which would otherwise be payable pursuant to the terms of the Amended
and Restated Tenant Incentive Agreement, the Business Development Agreement and
the Amended and Restated Services Agreement, each as further described in Note 5
to the financial statements. The Company and Operating Company deferred, with
interest, the payment of such amounts. The terms of Operating Company's
revolving credit facility, as amended pursuant to the terms of a waiver obtained
from the lenders under the revolving credit facility, permitted the deferral of
these payments. In connection with the Restructuring, the Operating Company
Leases were cancelled, as more fully described in Note 5 to the financial
statements.
During 2000, the Company has recognized rental income, net of reserves, from
Operating Company based on the actual cash payments received. In addition, the
Company continued to record its obligations to Operating Company under the
various agreements discussed above through the effective date of the Operating
Company Merger.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 1999
In 1999, substantially all of the Company's revenue was derived from: (i) rents
received under triple net leases of correctional and detention facilities,
including the Operating Company Leases; (ii) dividends from investments in the
non-voting stock of certain subsidiaries; (iii) interest income on the CCA Note;
and (iv) license fees earned under the Trade Name Use Agreement. Operating
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Company leased 34 of the Company's 43 operating facilities pursuant to the
Operating Company Leases. The Company, therefore, was dependent for its rental
revenue upon Operating Company's ability to make the lease payments required
under the Operating Company Leases for such facilities.
Operating Company incurred a net loss of $202.9 million for the year ended
December 31, 1999, had a net working capital deficiency and a net capital
deficiency at December 31, 1999, and was in default under its revolving credit
facility at December 31, 1999. Operating Company's default under its revolving
credit facility related to, among other things, its failure to comply with
certain financial covenants. In addition, Operating Company was in default under
the CCA Note as a result of Operating Company's failure to pay the first
scheduled interest payment under the terms of the CCA Note. Operating Company
also did not make certain scheduled lease payments to the Company pursuant to
the terms of the Operating Company Leases. The Company did not provide Operating
Company with a notice of nonpayment of lease payments due under the Operating
Company Leases, and thus Operating Company was not in default under the terms of
the Operating Company Leases at December 31, 1999.
The financial condition of the Company at December 31, 1999, the inability of
Operating Company to make certain of its payment obligations to the Company, and
the actions taken by the Company and Operating Company in attempts to resolve
liquidity issues of the Company and Operating Company resulted in a series of
default issues under certain of the Company's debt agreements. The Company
obtained waivers of these default events in 2000.
Due to Operating Company's liquidity position and its inability to make required
payments to the Company under the terms of the Operating Company Leases and the
CCA Note, Operating Company's independent auditors included an explanatory
paragraph in its report to Operating Company's consolidated financial statements
for the year ended December 31, 1999 that expressed substantial doubt as to
Operating Company's ability to continue as a going concern. Accordingly, as the
result of the Company's financial dependence on Operating Company and the
Company's resulting liquidity position, as well as concerns with respect to the
Company's noncompliance with, and resulting defaults under, certain provisions
and covenants contained in its indebtedness and potential liability arising as a
result of shareholder and other litigation commenced against the Company, the
Company's independent auditors included an explanatory paragraph in its report
to the Company's consolidated financial states for the year ended December 31,
1999 that expressed substantial doubt as to the Company's ability to continue as
a going concern.
In 1999, the Company's growth strategy included acquiring, developing and
expanding correctional and detention facilities as well as other properties.
Because the Company was required to distribute to its stockholders at least 95%
of its taxable income to qualify as a REIT for 1999, the Company relied
primarily upon the availability of debt or equity capital to fund the
construction and acquisitions of and improvements to correctional and detention
facilities. However, due to the financial condition of the Company and Operating
Company and the decline in the Company's stock price, the ability of the Company
to fund this growth strategy was substantially diminished.
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company's cash flows provided by operating activities was $79.5 million for
1999 and represents net income plus depreciation and amortization and changes in
the various components of working capital. The Company's cash flows used in
investing activities was $447.6 million for 1999
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and primarily represents acquisitions of real estate properties and payments
made under lease arrangements. The Company's cash flows provided by financing
activities was $421.4 million for 1999 and primarily represents proceeds from
the issuance of common stock, issuance of long-term debt, borrowings under the
bank credit facility and the $100.0 million senior notes, payments of debt
issuance costs and payments of dividends on shares of the Company's preferred
and common stock.
On December 31, 1998, immediately prior to the 1999 Merger, and in connection
with the 1999 Merger, Old CCA sold to Operating Company all of the issued and
outstanding capital stock of certain wholly-owned corporate subsidiaries of Old
CCA, certain management contracts and certain other non-real estate assets
related thereto, and entered into a series of agreements, as more fully
described herein. In exchange, Old CCA received an installment note in the
principal amount of $137.0 million (the "CCA Note") and 100% of the non-voting
common stock of Operating Company. Old CCA's ownership interest in the CCA Note
and the non-voting common stock of Operating Company were transferred to New
Prison Realty as a result of the 1999 Merger.
The non-voting common stock of Operating Company represented a 9.5% economic
interest in Operating Company. During 1999, Operating Company paid no dividends
on the shares of its non-voting common stock. The CCA Note was payable over 10
years at an interest rate of 12% per annum. Interest only was generally payable
for the first four years of the CCA Note, and the principal was to be amortized
over the following six years. The former chief executive officer of New Prison
Realty and a member of its board of directors at that time, had guaranteed
payment of 10% of the outstanding principal amount due under the CCA Note. As a
result of Operating Company's liquidity position, Operating Company was required
to defer the first scheduled payment of accrued interest on the CCA Note, which
was due December 31, 1999. During the third quarter of 2000, the Company forgave
all accrued and unpaid interest due under the CCA Note as of August 31, 2000.
The CCA Note, along with the remaining deferred interest, was assumed by a
wholly-owned subsidiary of the Company in connection with the Operating Company
Merger.
RESULTS OF OPERATIONS
The accompanying combined and consolidated financial statements present the
financial statements of the Company as of and for the year ended December 31,
2000, which as of October 1, 2000 also includes the operations of the
correctional and detention facilities previously leased and managed by Operating
Company, combined with the financial statements of PMSI and JJFMSI for the
period September 1, 2000 through November 30, 2000. The accompanying
consolidated financial statements as of and for the year ended December 31, 1999
have not been combined with the financial statements of PMSI and JJFMSI. See
Note 4 to the financial statements for a complete description of the combined
financial statements and combining statement of operations presenting the
individual financial statements of the Company, PMSI and JJFMSI.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
MANAGEMENT REVENUE
Management revenue consists of revenue earned by the Company from the operation
and management of adult and juvenile correctional and detention facilities for
the year ended December 31, 2000, totaling $182.5 million, which beginning as of
October 1, 2000 and December 1, 2000, includes management revenue previously
earned by Operating Company and the Service
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Companies, respectively. Also included is the management revenue earned by PMSI
and JJFMSI from the operation and management of adult prison and jails and
juvenile detention facilities on a combined basis for the period September 1,
2000 through November 30, 2000, totaling $79.3 million.
RENTAL REVENUE
Net rental revenue was $40.9 million and $270.1 million for the years ended
December 31, 2000 and 1999, respectively, and was generated from leasing
correctional and detention facilities to Operating Company, governmental
agencies and other private operators. For the year ended December 31, 2000, the
Company reserved $213.3 million of the $244.3 million of gross rental revenue
due from Operating Company through September 30, 2000 due to the uncertainty
regarding the collectibility of the payments.
For the year ended December 31, 1999, rental revenue was $270.1 million and was
generated primarily from leasing correctional and detention facilities to
Operating Company, as well as governmental and private operators. During 1999,
the Company began leasing five new facilities in addition to the 37 facilities
leased at the beginning of the year. The Company recorded no reserves for the
year ended December 31, 1999 as all rental revenue was collected from lessees,
including Operating Company. During September 2000, the Company forgave all
unpaid rental payments due from Operating Company as of August 31, 2000
(totaling $190.8 million). The forgiveness did not impact the Company's
financial statements at that time as the amounts forgiven had been previously
reserved. The remaining $22.5 million in unpaid rentals from Operating Company
was fully reserved in September 2000. The Operating Company Leases were
cancelled in the Operating Company Merger.
LICENSING FEES FROM AFFILIATES
Licensing fees from affiliates were $7.6 million and $8.7 million for the years
ended December 31, 2000 and 1999, respectively. Licensing fees were earned as a
result of a service mark and trade name use agreement (the "Trade Name Use
Agreement") between the Company and Operating Company, which granted Operating
Company the right to use the name "Corrections Corporation of America" and
derivatives thereof subject to specified terms and conditions therein. The
licensing fee was based upon gross rental revenue of Operating Company, subject
to a limitation based on the gross revenue of the Company. All licensing fees
were collected from Operating Company. The decrease in licensing fees in 2000
compared with 1999 is due to the cancellation of the Trade Name Use Agreement in
connection with the Operating Company Merger.
OPERATING EXPENSES
Operating expenses include the operating expenses of PMSI and JJFMSI on a
combined basis for the period September 1, 2000 through November 30, 2000,
totaling $63.7 million. Also included are the operating expenses incurred by the
Company for the year ended December 31, 2000, totaling $151.2 million, which
beginning as of October 1, 2000 and December 1, 2000, includes the operating
expenses incurred by Operating Company and the Service Companies, respectively.
Operating expenses consist of those expenses incurred in the operation and
management of prisons and other correctional facilities. Also included in
operating expenses are the Company's realized losses on foreign currency
transactions of $0.6 million for the year ended December 31, 2000. This loss
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resulted from a detrimental fluctuation in the foreign currency exchange rate
upon the collection of certain receivables denominated in British pounds. See
"Unrealized foreign currency transaction loss" for further discussion of these
receivables.
GENERAL AND ADMINISTRATIVE
For the year ended December 31, 2000 and 1999, general and administrative
expenses were $21.2 million and $24.1 million, respectively. General and
administrative expenses incurred by PMSI and JJFMSI on a combined basis for the
period September 1, 2000 through November 30, 2000 totaled $0.6 million. General
and administrative expenses incurred by the Company for the year ended December
31, 2000 totaled $20.6 million, which beginning as of October 1, 2000 and
December 1, 2000, includes the general and administrative expenses incurred by
Operating Company and the Service Companies, respectively. General and
administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses. Effective October
1, 2000, as a result of the Operating Company Merger, corporate management
salaries and benefits also contain the former corporate employees of Operating
Company. Also included in 2000 are $2.0 million in severance payments to the
Company's former chief executive officer and secretary and $1.3 million in
severance payments to various other company employees.
During 1999, the Company was a party to various litigation matters, including
stockholder litigation and other legal matters, some of which have been settled.
The Company incurred legal expenses of $6.3 million during 1999 in relation to
these matters. Also included in 1999 are $3.9 million of expenses incurred by
the Company for consulting and legal advisory services in connection with the
proposed restructuring. In addition, as a result of the Company's failure to
declare, prior to December 31, 1999, and the failure to distribute, prior to
January 31, 2000, dividends sufficient to distribute 95% of its taxable income
for 1999, the Company was subject to excise taxes, of which $7.1 million was
accrued as of December 31, 1999.
LEASE EXPENSE
Lease expense consists of property, office and operating equipment leased by the
Company, PMSI and JJFMSI in operating and managing prisons and other
correctional facilities. Lease expense incurred by PMSI and JJFMSI on a combined
basis for the period September 1, 2000 through November 30, 2000 totaled $0.8
million. Lease expense incurred by the Company for the year ended December 31,
2000 totaled $1.6 million, which beginning as of October 1, 2000 and December 1,
2000, includes lease expense previously incurred by Operating Company and the
Service Companies, respectively.
DEPRECIATION AND AMORTIZATION
For the year ended December 31, 2000 and 1999, depreciation and amortization
expense was $59.8 million and $44.1 million, respectively. The increase is a
result of a greater number of correctional and detention facilities in service
during 2000 compared with 1999. Also included is the depreciation and
amortization expense for PMSI and JJFMSI from the operation and management of
adult prisons and jails and juvenile detention facilities on a combined basis
for the period September 1, 2000 through November, 30, 2000, totaling $3.9
million.
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LICENSE FEES TO OPERATING COMPANY
Licensing fees to Operating Company were recognized under the terms of a Trade
Name Use Agreement between Operating Company and each of PMSI and JJFMSI, which
were assumed as a result of the Operating Company Merger. Under the terms of the
Trade Name Use Agreement, PMSI and JJFMSI were required to pay to Operating
Company 2.0% of gross management revenue for the use of the Company name and
derivatives thereof. PMSI and JJFMSI incurred expenses of $0.5 million under
this agreement for the month of September 2000. The October and November
expenses incurred under this agreement were eliminated in combination,
subsequent to the Operating Company Merger. The Trade Name Use Agreement was
cancelled upon the acquisitions of PMSI and JJFMSI.
ADMINISTRATIVE SERVICES FEE TO OPERATING COMPANY
Operating Company and each of PMSI and JJFMSI entered into an Administrative
Services Agreement whereby Operating Company would charge a fee to manage and
provide general and administrative services to each of PMSI and JJFMSI. The
Company assumed this agreement as a result of the Operating Company Merger. PMSI
and JJFMSI recognized expense of $0.9 million under this agreement for the month
of September 2000. The October and November expenses incurred under this
agreement were eliminated in combination, subsequent to the Operating Company
Merger. The Administrative Services Agreement was cancelled upon the
acquisitions of PMSI and JJFMSI.
WRITE-OFF OF AMOUNTS UNDER LEASE ARRANGEMENTS
During 2000, the Company opened or expanded five facilities that were operated
and leased by Operating Company prior to the Operating Company Merger. Based on
Operating Company's financial condition, as well as the proposed merger with
Operating Company and the proposed termination of the Operating Company Leases
in connection therewith, the Company wrote-off the accrued tenant incentive fees
due Operating Company in connection with opening or expanding the five
facilities, totaling $11.9 million for the year ended December 31, 2000.
For the year ended December 1999, the Company had paid tenant incentive fees of
$68.6 million, with $2.9 million of those fees amortized against rental
revenues. During the fourth quarter of 1999, the Company undertook a plan that
contemplated merging with Operating Company and thereby eliminating the
Operating Company Leases or amending the Operating Company Leases to
significantly reduce the lease payments to be paid by Operating Company to the
Company. Consequently, the Company determined that the remaining deferred tenant
incentive fees at December 31, 1999 were not realizable and wrote-off fees
totaling $65.7 million.
IMPAIRMENT LOSSES
SFAS 121 requires impairment losses to be recognized for long-lived assets used
in operations when indications of impairment are present and the estimate of
undiscounted future cash flows is not sufficient to recover asset carrying
amounts. Under terms of the June 2000 Waiver and Amendment, the Company was
obligated to complete the Restructuring, including the Operating Company Merger,
and complete the restructuring of management through the appointment of a new
chief executive officer and a new chief financial officer. The Restructuring
also permitted the acquisitions
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of PMSI and JJFMSI. During the third quarter of 2000, the Company named a new
president and chief executive officer, followed by the appointment of a new
chief financial officer during the fourth quarter. At the Company's 2000 annual
meeting of stockholders held during the fourth quarter of 2000, the Company's
stockholders elected a newly constituted nine-member board of directors of the
Company, including six independent directors.
Following the completion of the Operating Company Merger and the acquisitions of
PMSI and JJFMSI, during the fourth quarter of 2000, after considering the
Company's financial condition, the Company's new management developed a
strategic operating plan to improve the Company's financial position, and
developed revised projections for 2001 to evaluate various potential
transactions. Management also conducted strategic assessments and evaluated the
Company's assets for impairment. Further, the Company evaluated the utilization
of existing facilities, projects under development, excess land parcels, and
identified certain of these non-strategic assets for sale.
In accordance with SFAS 121, the Company estimated the undiscounted net cash
flows for each of its properties and compared the sum of those undiscounted net
cash flows to the Company's investment in each property. Through its analyses,
the Company determined that eight of its correctional and detention facilities
and the long-lived assets of the transportation business had been impaired. For
these properties, the Company reduced the carrying values of the underlying
assets to their estimated fair values, as determined based on anticipated future
cash flows discounted at rates commensurate with the risks involved. The
resulting impairment loss totaled $420.5 million.
During the fourth quarter of 2000, as part of the strategic assessment, the
Company's management committed to a plan of disposal for certain long-lived
assets of the Company. In accordance with SFAS 121, the Company recorded losses
on these assets based on the difference between the carrying value and the
estimated net realizable value of the assets. The Company estimated the net
realizable values of certain facilities and direct financing leases held for
sale based on outstanding offers to purchase, appraisals, as well as utilizing
various financial models, including discounted cash flow analyses, less
estimated costs to sell each asset. The resulting impairment loss for these
assets totaled $86.1 million.
Included in property and equipment were costs associated with the development of
potential facilities. Based on the Company's strategic assessment during the
fourth quarter of 2000, management decided to abandon further development of
these projects and expense any amounts previously capitalized. The resulting
expense totaled $2.1 million.
During the third quarter of 2000, the Company's management determined either not
to pursue further development or to reconsider the use of certain parcels of
property in California, Maryland and the District of Columbia. Accordingly, the
Company reduced the carrying values of the land to their estimated net
realizable value, resulting in an impairment loss totaling $19.2 million.
In December 1999, based on the poor financial position of the Operating Company,
the Company determined that three of its correctional and detention facilities
located in the state of Kentucky and leased to Operating Company were impaired.
In accordance with SFAS 121, the Company reduced the carrying values of the
underlying assets to their estimated fair values, as determined based on
anticipated future cash flows discounted at rates commensurate with the risks
involved. The resulting impairment loss totaled $76.4 million.
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EQUITY IN EARNINGS AND AMORTIZATION OF DEFERRED GAINS, NET
For the year ended December 31, 2000, equity in losses and amortization of
deferred gains, net was $11.6 million, compared with equity in earnings and
amortization of deferred gains, net, of $3.6 million in 1999. For the year ended
December 31, 2000, the Company recognized equity in losses of PMSI and JJFMSI of
approximately $12,000 and $870,000, respectively through August 31, 2000. In
addition the Company recognized equity in losses of Operating Company of
approximately $20.6 million. For 2000, the amortization of the deferred gain on
the sales of contracts to PMSI and JJFMSI was approximately $6.5 million and
$3.3 million, respectively.
For the year ended December 31, 1999, the Company recognized twelve months of
equity in earnings of PMSI and JJFMSI of $4.7 million and $7.5 million,
respectively, and received distributions from PMSI and JJFMSI of $11.0 million
and $10.6 million, respectively. In addition, the Company recognized equity in
losses of Operating Company of $19.3 million. For 1999, the amortization of the
deferred gain on the sales of contracts to PMSI and JJFMSI was $7.1 million and
$3.6 million, respectively.
Prior to the Operating Company Merger, the Company had accounted for its 9.5%
non-voting interest in Operating Company under the cost method of accounting. As
such, the Company had not recognized any income or loss related to its stock
ownership investment in Operating Company during the period from January 1, 1999
through September 30, 2000. However, in connection with the Operating Company
Merger, the financial statements of the Company have been restated to recognize
the Company's 9.5% pro-rata share of Operating Company's losses on a retroactive
basis for the period from January 1, 1999 through September 30, 2000 under the
equity method of accounting, in accordance with APB 18, "The Equity Method of
Accounting for Investments in Common Stock" ("APB 18").
INTEREST EXPENSE, NET
Interest expense, net, is reported net of interest income and capitalized
interest for the years ended December 31, 2000 and 1999. Gross interest expense
was $145.0 million and $51.9 million for the years ended December 31, 2000 and
1999, respectively. Gross interest expense is based on outstanding convertible
subordinated notes payable balances, borrowings under the Company's Amended Bank
Credit Facility, the Operating Company Revolving Credit Facility, the Company's
senior notes, and amortization of loan costs and unused facility fees. Interest
expense is reported net of capitalized interest on construction in progress of
$8.3 million and $37.7 million for the years ended December 31, 2000 and 1999,
respectively. The increase in gross interest expense relates to (i) higher
average debt balances outstanding, primarily related to the Amended Bank Credit
Facility; (ii) increased interest rates due to rising market rates, and
increases in contractual rates associated with the Amended Bank Credit Facility
due to modifications to the facility agreement in August 1999, the June 2000
Waiver and Amendment and reductions to the Company's credit rating; (iii)
increased interest rates due to the accrual of default interest on the Company's
Amended Bank Credit Facility and default and contingent interest on the $40
million convertible notes during 2000; and the assumption of the Operating
Company Revolving Credit Facility in connection with the Operating Company
Merger.
Gross interest income was $13.5 million and $6.9 million for the years ended
December 31, 2000 and 1999, respectively. Gross interest income is earned on
cash used to collateralize letters of credit
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for certain construction projects, direct financing leases and investments of
cash and cash equivalents.
The increase in gross interest income in 2000 compared with 1999 is primarily
due to interest earned on the direct financing lease with Agecroft Prison
Management, Ltd. ("APM"). During January 2000, the Company completed
construction, at a cost of approximately $89.4 million, of an 800-bed
medium-security prison in Salford, England and entered into a 25-year direct
financing lease with APM. This asset is included in "assets held for sale" on
the accompanying combined and consolidated balance sheet at December 31, 2000.
On April 10, 2001, the Company sold its interest in this facility. Interest
accrued on the CCA Note through August 31, 2000 by the Company (totaling $27.4
million) was forgiven. This forgiveness did not impact the Company's financial
statements at that time as the amounts forgiven had been fully reserved. The
remaining $1.4 million accrued and reserved for the month of September was
eliminated through purchase price accounting as a result of the Operating
Company Merger. During the fourth quarter of 1999, the Company reserved the
$16.4 million of interest accrued under the terms of the CCA Note for the year
ended December 31, 1999.
OTHER INCOME
Other income for the year ended December 31, 2000 totaled $3.1 million. In
September 2000, the Company received approximately $4.5 million in final
settlement of amounts held in escrow related to the 1998 acquisition of the
outstanding capital stock of U.S. Corrections Corporation. The $3.1 million
represents the proceeds, net of miscellaneous receivables arising from claims
against the escrow.
STRATEGIC INVESTOR FEES
During the fourth quarter of 1999, the Company, Operating Company, PMSI and
JJFMSI entered into a series of agreements concerning a proposed restructuring
led by a group of institutional investors consisting of an affiliate of Fortress
Investment Group LLC and affiliates of The Blackstone Group
("Fortress/Blackstone"). In April 2000, the securities purchase agreement by and
among the parties was terminated when Fortress/Blackstone elected not to match
the terms of a subsequent proposal by Pacific Life Insurance Company ("Pacific
Life"). In June 2000, the securities purchase agreement by and among Pacific
Life and the Company, Operating Company, PMSI and JJFMSI was mutually terminated
by the parties after Pacific Life was unwilling to confirm that the June 2000
Waiver and Amendment satisfied the terms of the agreement with Pacific Life. In
connection with the proposed restructuring transactions with Fortress/Blackstone
and Pacific Life and the completion of the Restructuring, including the
Operating Company Merger, the Company terminated the services of one of its
financial advisors during the third quarter of 2000. Under the terms of the
Company's agreements with the above parties, the Company may still be obligated
to pay certain fees and expenses. The Company is subject to certain existing and
potential litigation as further described in Note 21 to the financial
statements. For the year ended December 31, 2000, the Company has allocated
expenses of approximately $24.2 million of fees in the event of an adverse
decision with the current litigation and in connection with the termination of
the aforementioned agreements.
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UNREALIZED FOREIGN CURRENCY TRANSACTION LOSS
In connection with the construction and development of the Company's Agecroft
facility, located in Salford, England, during the first quarter of 2000, the
Company entered into a 25-year property lease. The Company has been accounting
for the lease as a direct financing lease and recorded a receivable equal to the
discounted cash flows to be received by the Company over the lease term. The
Company also has extended a working capital loan to the operator of this
facility. These assets, along with various other short-term receivables, are
denominated in British pounds; consequently, the Company adjusts these
receivables to the current exchange rate at each balance sheet date, and
recognizes the currency gain or loss in its current period earnings. Due to
negative fluctuations in foreign currency exchange rates between the British
pound and the U.S. dollar, the Company recognized net unrealized foreign
currency transaction losses of $8.1 million for the year ended December 31,
2000. On April 10, 2001 the Company sold its interest in the Agecroft facility.
LOSS ON SALES OF ASSETS
The Company incurred a loss on sales of assets during 2000 and 1999, of
approximately $1.7 million and $2.0 million, respectively. During the fourth
quarter of 2000, JJFMSI sold its 50% interest in CCA Australia resulting in a
$3.6 million loss. This loss was offset by a gain of $0.6 million resulting from
the sale of a correctional facility located in Kentucky, a gain of $1.6 million
on the sale of JJFMSI's 50% interest in U.K. Detention Services Limited ("UKDS")
and a loss of $0.3 million resulting from the abandonment of a project under
development.
For the year ended December 31, 1999, the Company incurred a loss of $1.6
million as a result of a settlement with the State of South Carolina for
property previously owned by Old CCA. Under the settlement, the Company, as the
successor to Old CCA, will receive $6.5 million in three installments by June
30, 2001 for the transferred assets. The net proceeds were approximately $1.6
million less than the surrendered assets' depreciated book value. The Company
received $3.5 million of the proceeds during 1999 and $1.5 million during 2000.
As of December 31, 2000, the Company has a receivable of $1.5 million related to
this settlement. In addition, the Company incurred a loss of $0.4 million
resulting from a sale of a newly constructed facility in Florida. The Company
completed construction on the facility in May 1999. In accordance with the terms
of the management contract between Old CCA and Polk County, Florida, Polk County
exercised an option to purchase the facility. The Company received net proceeds
of $40.5 million.
STOCKHOLDER LITIGATION SETTLEMENTS
In February 2001, the Company received court approval of the revised terms of
the definitive settlement agreements regarding the settlement of all outstanding
stockholder litigation against the Company and certain of its existing and
former directors and executive officers. Pursuant to the terms of the
settlement, the Company will issue to the plaintiffs an aggregate of 46.9
million shares of common stock, and a subordinated promissory note in the
aggregate principal amount of $29.0 million.
As of December 31, 2000, the Company has accrued the estimated obligation of the
contingency associated with the stockholder litigation, amounting to
approximately $75.4 million.
As further discussed in Note 21 to the financial statements, the ultimate
liability relating to the $29.0
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million promissory note and related interest will be determined on the future
issuance date and thereafter, based upon fluctuations in the Company's common
stock price. If the promissory note is issued under the current terms, in
accordance with Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended, the Company will
reflect in earnings, the change in the estimated fair value of the promissory
note from quarter to quarter.
WRITE-OFF OF LOAN COSTS
As a result of the amendment to the original bank credit facility on August 4,
1999, the Company wrote-off loan costs of approximately $9.0 million during the
year ended December 31, 1999. Additionally, the Company paid approximately $5.6
million to a financial advisor for a potential debt transaction, which was
written-off when the transaction was abandoned.
INCOME TAXES
Prior to 1999, Old CCA, the Company's predecessor by merger, operated as a
taxable subchapter C corporation. The Company elected to change its tax status
from a taxable corporation to a REIT effective with the filing of its 1999
federal income tax return. As of December 31, 1998, the Company's balance sheet
reflected $83.2 million in net deferred tax assets. In accordance with the
provisions of SFAS 109, the Company provided a provision for these deferred tax
assets, excluding any estimated tax liabilities required for prior tax periods,
upon completion of the 1999 Merger and the election to be taxed as a REIT. As
such, the Company's results of operations reflect a provision for income taxes
of $83.2 million for the year ended December 31, 1999. However, due to New
Prison Realty's tax status as a REIT, New Prison Realty recorded no income tax
provision or benefit related to operations for the year ended December 31, 1999.
In connection with the Restructuring, on September 12, 2000, the Company's
stockholders approved an amendment to the Company's charter to remove provisions
requiring the Company to elect to qualify and be taxed as a REIT for federal
income tax purposes effective January 1, 2000. As a result of the amendment to
the Company's charter, the Company will be taxed as a taxable subchapter C
corporation beginning with its taxable year ended December 31, 2000. In
accordance with the provisions of SFAS 109, the Company is required to establish
current and deferred tax assets and liabilities in its financial statements in
the period in which a change of tax status occurs. As such, the Company's
benefit for income taxes for the year ended December 31, 2000 includes the
provision associated with establishing the deferred tax assets and liabilities
in connection with the change in tax status during the third quarter of 2000,
net of a valuation allowance applied to certain deferred tax assets.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
MANAGEMENT AND OTHER REVENUE
For the year ended December 31, 1998, management and other revenue totaled
$662.1 million and was generated from the operation and management of adult
correctional and detention facilities and prisoner transportation services.
During 1998, Old CCA opened 10 new facilities, assumed management of eight
facilities and expanded seven existing facilities to increase their design
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capacity. In addition, Old CCA expanded the prisoner transportation customer
base and increased compensated mileage by 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. Since the Company leased
facilities to Operating Company and other operators during 1999, rather than
operating the facilities, the Company did not generate management revenue during
1999.
OPERATING EXPENSES
For the year ended December 31, 1998, operating expenses totaled $496.5 million.
Operating expenses consist of those expenses incurred in operating and managing
prisons and other correctional facilities. During 1998, Old CCA adopted
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. Also included in operating expenses were charges related
to the termination of five contractual relationships, totaling approximately
$2.0 million related to transition costs and deferred contract costs. Old CCA
also incurred $1.0 million of non-recurring operating expenses related to the
1999 Merger.
In 1998, Old CCA was subject to a class action lawsuit at one of its facilities
regarding the alleged violation of inmate rights, which was settled subsequent
to year end. Old CCA was also subject to two wrongful death lawsuits at one of
its facilities. The Company assumed these lawsuits in the 1999 Merger. Old CCA
recognized $2.1 million of expenses in 1998 related to these lawsuits.
Since Operating Company, rather than the Company, operated the correctional and
detention facilities leased by the Company during 1999, the Company did not
incur operating expenses during 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expenses $28.6 million for the year ended December
31, 1998. General and administrative expenses consist primarily of corporate
management salaries and benefits, professional fees and other administrative
expenses.
During 1998, Old CCA incurred $1.3 million in the fourth quarter for advertising
and employee relations initiatives aimed at raising the public awareness of Old
CCA and the industry. In addition, in connection with the 1999 Merger, Old CCA
became subject to a purported class action lawsuit attempting to enjoin the 1999
Merger and seeking unspecified monetary damages. The lawsuit was settled in
principle in November 1998 with the formal settlement being completed in March
1999. Accordingly, Old CCA recognized $3.2 million of expenses in 1998 to cover
legal fees and the settlement obligation.
LEASE EXPENSE
Lease expense totaled $58.0 million for the year ended December 31, 1998. Old
CCA had entered into leases with Old Prison Realty in July 1997 for the initial
nine facilities that Old CCA had sold to Old Prison Realty. Throughout 1997 and
1998, Old CCA sold an additional four facilities and one expansion to Old Prison
Realty and immediately after these sales, leased the facilities back pursuant
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to long-term, triple net leases. As a result of the acquisition of U.S.
Corrections Corporation, Old CCA entered into long-term leases for four
additional facilities with Old Prison Realty.
DEPRECIATION AND AMORTIZATION
For the year ended December 31, 1998, depreciation and amortization expense was
$14.4 million. The Company generally uses the straight-line depreciation method
over 50 and five-year lives for buildings and machinery and equipment,
respectively.
OLD CCA COMPENSATION CHARGE
Old CCA recorded a $22.9 million charge in 1998 for the implied fair value of
five million shares of Operating Company voting common stock issued by Operating
Company to certain employees of Old CCA and Old Prison Realty. The shares were
granted to certain founding shareholders of Operating Company in September 1998.
Neither Old 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 1999 Merger based upon the implied value of Operating Company, derived
from $16.0 million in cash investments made by outside investors as of December
31, 1998, as consideration for a 32% ownership interest in Operating Company.
INTEREST EXPENSE, NET
Interest expense, net is reported net of interest income and capitalized
interest for the years ended December 31, 1999 and 1998. Gross interest expense
was $8.6 million for the year ended December 31, 1998. Gross interest expense is
based on borrowings under Old CCA's bank credit facility, including amortization
of loan costs and unused fees. Interest expense is reported net of capitalized
interest on construction in progress of $11.8 million for the year ended
December 31, 1998.
Gross interest income was $11.4 million for the year ended December 31, 1998.
Interest income was earned on the cash proceeds that Old CCA realized in 1997
when it sold twelve facilities to Old Prison Realty.
WRITE-OFF OF LOAN COSTS
During 1998, Old CCA expanded its credit facility from $170.0 million to $350.0
million and incurred debt issuance costs that were being amortized over the term
of the loan. The credit facility matured at the earlier of the date of the
completion of the 1999 Merger, or September 1999. Accordingly, upon consummation
of the 1999 Merger the credit facility was terminated and the related
unamortized debt issuance costs were written-off.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES
As previously discussed, Old CCA adopted the provisions of SOP 98-5 in 1998. As
a result, Old CCA recorded a $16.1 million charge as a cumulative effect of
accounting change, net of taxes of $10.3 million, on periods through December
31, 1997.
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INFLATION
The Company does not believe that inflation has had or will have a direct
adverse effect on its operations. Many of the Company's management contracts
include provisions for inflationary indexing, which mitigates an adverse impact
of inflation on net income. However, a substantial increase in personnel costs
or medical expenses could have an adverse impact on the Company's results of
operations in the future to the extent that wages or medical expenses increase
at a faster pace than the per diem or fixed rates received by the Company for
its management services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
The Company's primary market risk exposure is to changes in U.S. interest rates
and fluctuations in foreign currency exchange rates between the U.S. dollar and
the British pound. The Company is exposed to market risk related to its Amended
Bank Credit Facility and certain other indebtedness as discussed in Note 14 to
the financial statements. The interest on the Amended Bank Credit Facility and
such other indebtedness is subject to fluctuations in the market. If the
interest rate for the Company's outstanding indebtedness under the Amended Bank
Credit Facility was 100 basis points higher or lower in 2000, the Company's
interest expense, net of amounts capitalized, would have been increased or
decreased by approximately $12.4 million.
As of December 31, 2000, the Company had outstanding $100.0 million of its 12.0%
senior notes with a fixed interest rate of 12.0%, $41.1 million of convertible
subordinated notes with a fixed interest rate of 10.0%, $30.0 million of
convertible subordinated notes with a fixed interest rate of 8.0%, $107.5
million of Series A Preferred Stock with a fixed dividend rate of 8.0% and $80.6
million of Series B Preferred Stock with a fixed dividend rate of 12.0%. Because
the interest and dividend rates with respect to these instruments are fixed, a
hypothetical 10.0% increase or decrease in market interest rates would not have
a material impact on the Company.
The Amended Bank Credit Facility required the Company to hedge $325.0 million of
its floating rate debt on or before August 16, 1999. The Company has entered
into certain swap arrangements guaranteeing that it will not pay an index rate
greater than 6.51% on outstanding balances of at least (a) $325.0 million
through December 31, 2001 and (b) $200.0 million through December 31, 2002.
There is no balance sheet effect related to these arrangements, and the monthly
income effect of these arrangements is recognized in interest expense. Despite
the change in market interest rates, the Company will pay the fixed rate as set
on the required balance.
Additionally, the Company may, from time to time, invest its cash in a variety
of short-term financial instruments. These instruments generally consist of
highly liquid investments with original maturities at the date of purchase
between three and twelve months. While these investments are subject to interest
rate risk and will decline in value if market interest rates increase, a
hypothetical 10% increase or decrease in market interest rates would not
materially affect the value of these investments.
The Company's exposure to foreign currency exchange rate risk relates to its
construction, development and leasing of the HMP Forrest Bank facility located
in Salford, England, which was held for sale by the Company as of December 31,
2000. The Company entered into a 25-year lease and recognized a direct financing
lease receivable equal to the discounted cash flows expected to be
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received by the Company over the lease term. The Company also has extended a
working capital loan to the operator of this facility. Such payments to the
Company are denominated in British pounds rather than the U.S. dollar. As a
result, the Company bears the risk of fluctuations in the relative exchange rate
between the British pound and the U.S. dollar. At December 31, 2000, the
receivables due the Company and denominated in British pounds totaled 58.2
million British pounds. A hypothetical 10% increase in the relative exchange
rate would have resulted in an additional $8.7 million increase in value of
these receivables and an unrealized foreign currency transaction gain, and a
hypothetical 10% decrease in the relative exchange rate would have resulted in
an additional $8.7 million decrease in value of these receivables and an
unrealized foreign currency transaction loss.
The Company sold its interest in this facility on April 10, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X are
included in this Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item 10 is hereby incorporated by reference
from the text appearing under Part I, Item 4A, under the caption "Executive
Officers and Directors of the Registrant" in this Report, and will appear in,
and is hereby incorporated by reference from, the information under the headings
"Proposal 1. Election of Directors-Certain Information Concerning the Board of
Directors," "-Certain Information Concerning Executive Officers Who Are Not
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders, which will be filed with the Commission pursuant to Regulation 14A
no later than April 30, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will appear in, and is hereby
incorporated by reference from, the information under the headings "Proposal 1.
Election of Directors-Compensation of the Company's Board of Directors,"
"-Employment Agreements and Change of Control Provisions," "Executive
Compensation," "Compensation Committee Interlocks and Insider Participation" and
"Performance Graph" in the Company's definitive Proxy Statement for the 2001
Annual Meeting of Stockholders, which will be filed with the Commission pursuant
to Regulation 14A no later than April 30, 2001.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 will appear in, and is hereby
incorporated by reference from, the information under the heading "Ownership of
the Company's Securities" in the Company's definitive Proxy Statement for the
2001 Annual Meeting of Stockholders, which will be filed with the Commission
pursuant to Regulation 14A no later than April 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 will appear in, and is hereby
incorporated by reference from, the information under the heading "Certain
Relationships and Related Transactions" in the Company's definitive Proxy
Statement for the 2001 Annual Meeting of Stockholders, which will be filed with
the Commission pursuant to Regulation 14A no later than April 30, 2001.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
The Financial Statements as set forth under Item 8 of this Annual
Report on Form 10-K have been filed herewith, beginning on Page
F-1 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) Reports on Form 8-K:
The following Forms 8-K were filed during the period October 1, 2000
through December 31, 2000:
(1) Filed October 2, 2000 (earliest event September 29, 2000)
reporting in Item 2., the merger of the Company with its primary
tenant, Old CCA, pursuant to the terms of an Agreement and Plan
of Merger, dated June 30, 2000, by and among the Company, a
wholly-owned subsidiary of the Company, and Old CCA, and the
completion of certain related transactions in connection with
the Restructuring.
(2) Filed October 30, 2000 (earliest event October 25, 2000)
reporting in Item 5., the issuance of approximately 1.6 million
additional shares of Series B Preferred Stock in connection with
the Company's election to be taxed and qualify as a REIT with
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respect to its 1999 taxable year.
(3) Filed November 28, 2000 (earliest event November 17, 2000)
reporting in Item 5., amendments to the Company's Amended Bank
Credit Facility, replacing the previously existing financial
covenants.
(4) Filed December 19, 2000 (earliest event December 14, 2000)
reporting in Item 5., the execution of a Memorandum of
Understanding with the plaintiffs in the Company's outstanding
stockholder litigation providing for an amendment to the terms
of the previously announced settlements.
The following Form 8-K was filed subsequent to December 31, 2000:
(1) Filed February 16, 2001 (earliest event February 13, 2001)
reporting in Item 5., final court approvals of revised terms of
the definitive agreements with respect to the settlement of a
series of class action and derivative lawsuits brought against
the Company by current and former stockholders of the Company
and its predecessors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORRECTIONS CORPORATION OF AMERICA
Date: April 16, 2001 By: /s/John D. Ferguson
-------------------
John D. Ferguson, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ John D. Ferguson April 16, 2001
- --------------------------------------------------------------- ---------------------
John D. Ferguson, President and Chief Executive Officer April 16, 2001
/s/ Irving E. Lingo, Jr. April 16, 2001
- --------------------------------------------------------------- ---------------------
Irving E. Lingo Jr., Chief Financial Officer April 16, 2001
/s/ William F. Andrews April 16, 2001
- --------------------------------------------------------------- ---------------------
William F. Andrews, Chairman of the Board and Director April 16, 2001
/s/ Jean-Pierre Cuny April 16, 2001
- --------------------------------------------------------------- ---------------------
Jean-Pierre Cuny, Director April 16, 2001
/s/ Joseph V. Russell April 16, 2001
- --------------------------------------------------------------- ---------------------
Joseph V. Russell, Director April 16, 2001
/s/ Lucius E. Burch, III April 16, 2001
- --------------------------------------------------------------- ---------------------
Lucius E. Burch, III, Director April 16, 2001
/s/ John D. Correnti April 16, 2001
- --------------------------------------------------------------- ---------------------
John D. Correnti, Director April 16, 2001
/s/ C. Michael Jacobi April 16, 2001
- --------------------------------------------------------------- ---------------------
C. Michael Jacobi, Director April 16, 2001
/s/ John R. Prann, Sr. April 16, 2001
- --------------------------------------------------------------- ---------------------
John R. Prann, Sr., Director April 16, 2001
/s/ Henri L. Wedell April 16, 2001
- --------------------------------------------------------------- ---------------------
Henri L. Wedell, Director April 16, 2001
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INDEX OF EXHIBITS
Exhibits marked with an * are filed herewith. Other exhibits have previously
been filed with the Securities and Exchange Commission (the "Commission") and
are incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
September 29, 1998, by and among Corrections Corporation of
America, a Tennessee corporation ("Old CCA"), CCA Prison Realty
Trust, a Maryland real estate investment trust ("Old Prison
Realty"), and Prison Realty Corporation, a Maryland corporation
currently known as Corrections Corporation of America (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 this reference) (as directed by Item 601(b)(2) of Regulation
S-K, certain schedules and exhibits to this document were omitted
from that filing, and the Company has agreed to furnish
supplementally a copy of any omitted schedule or exhibit to the
Commission upon request).
2.2 Agreement and Plan of Merger, dated as of December 26, 1999, by
and among the Company, CCA Acquisition Sub, Inc., a Tennessee
corporation currently known as CCA of Tennessee, Inc. ("CCA of
Tennessee"), PMSI Acquisition Sub, Inc., a Tennessee corporation
("PMSI Acquisition Sub"), JJFMSI Acquisition Sub, Inc. a
Tennessee corporation ("JJFMSI Acquisition Sub"), and Corrections
Corporation of America, a Tennessee corporation formerly known as
Correctional Management Services Corporation ("Operating
Company"), Prison Management Services, Inc., a Tennessee
corporation ("PMSI"), and Juvenile and Jail Facility Management
Services, Inc. ("JJFMSI") (previously filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on December 28, 1999 and
incorporated herein by this reference) (as directed by Item
601(b)(2) of Regulation S-K, certain schedules and exhibits to
this document were omitted from that filing, and the Company has
agreed to furnish supplementally a copy of any omitted schedule
or exhibit to the Commission upon request).
2.3 Mutual Written Consent, dated as of June 30, 2000, to Terminate
Agreement and Plan of Merger, dated as of December 26, 1999, by
and among the Company, CCA of Tennessee, PMSI Acquisition Sub,
JJFMSI Acquisition Sub, and Operating Company, PMSI and JJFMSI
(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 July 3, 2000 and incorporated herein by this
reference).
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2.4 Agreement and Plan of Merger, dated as of June 30, 2000, by and
among the Company, CCA of Tennessee, and Operating Company
(previously filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K (Commission File no. 0-25245) filed with the
Commission on July 3, 2000 and incorporated herein by this
reference) (as directed by Item 601(b)(2) of Regulation S-K,
certain schedules and exhibits to this document were omitted from
this filing, and the Company has agreed to furnish supplementally
a copy of any omitted schedule or exhibit to the Commission upon
request).
2.5* Agreement and Plan of Merger, dated as of November 17, 2000, by
and among the Company, CCA of Tennessee, and PMSI (as directed by
Item 601(b)(2) of Regulation S-K, certain schedules and exhibits
to this document have been omitted, and the Company agrees to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request).
2.6* Agreement and Plan of Merger, dated as of November 17, 2000, by
and among the Company, CCA of Tennessee, and JJFMSI (as directed
by Item 601(b)(2) of Regulation S-K, certain schedules and
exhibits to this document have been omitted, and the Company has
agreed to furnish supplementally a copy of any omitted schedule
or exhibit to the Commission upon request).
3.1* Amended and Restated Charter of the Company.
3.2* Second Amended and Restated Bylaws of the Company.
4.1 Provisions defining the rights of stockholders of the Company
are found in Article V of the Amended and Restated Charter of
the Company (included as Exhibit 3.1 hereto) and Article II of
the Second Amended and Restated Bylaws of the Company (included
as Exhibit 3.2 hereto).
4.2 Specimen of certificate representing the Company's Common Stock
(previously filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-4 (Commission File no. 333-65017), filed with
the Commission on September 30, 1998 and incorporated herein by
this reference).
4.3 Specimen of certificate representing the Company's 8.0% Series A
Preferred Stock (previously filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-4 (Commission File no.
333-65017), filed with the Commission on September 30, 1998 and
incorporated herein by this reference).
4.4 Specimen of certificate representing the shares of the Company's
Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock") (previously filed as Exhibit 4.1 to the
Company's Registration Statement on Form 8-A (Commission File no.
001-16109), filed with the Commission on September 27, 2000 and
incorporated herein by this reference).
4.5 Indenture, dated as of June 10, 1999, by and between the Company
and State Street Bank and Trust Company, as trustee, relating to
the issuance of debt securities
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(previously filed as Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ending June 30,
1999 (Commission File No. 0-25245), filed with the Commission on
August 17, 1999 and incorporated herein by this reference).
4.6 First Supplemental Indenture, by and between the Company and
State Street Bank and Trust Company, as trustee, dated as of June
11, 1999, relating to the $100.0 million aggregate principal
amount of the Company's 12% Senior Notes due 2006 (previously
filed as Exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the quarterly period ending June 30, 1999 (Commission
File No. 0-25245), filed with the Commission on August 17, 1999
and incorporated herein by this reference).
4.7 Prison Realty Trust, Inc. Dividend Reinvestment and Stock
Purchase Plan (previously filed as Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ending
March 31, 1999 (Commission File No. 0-25245), filed with the
Commission on May 14, 1999 and incorporated herein by this
reference).
10.1 Amended and Restated Credit Agreement, dated as of August 4,
1999, by and among the Company, as Borrower, certain subsidiaries
of the Company, as Guarantor, the several lenders from time to
time party thereto, Lehman Commercial Paper Inc. ("Lehman"), as
Administrative Agent, Societe Generale, as Documentation Agent,
The Bank of Nova Scotia, as Syndication Agent, SouthTrust Bank,
N.A., as Co-Agent, and Lehman Brothers Inc., as Advisor, Lead
Arranger, and as Book Manager (previously filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999 (Commission File no. 0-25245), as
filed with the Commission on August 17, 1999 and incorporated
herein by this reference).
10.2 Waiver and Amendment, dated as of June 9, 2000, by and among the
Company, as Borrower, certain of the Company's subsidiaries as
Subsidiary Guarantors, certain of the Company's lenders, and
Lehman, as Administrative Agent (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 June 13, 2000 and
incorporated herein by this reference).
10.3 Consent and Amendment, dated as of November 17, 2000, by and
among the Company, certain of the Company's subsidiaries as
Subsidiary Guarantors, certain of the Company's lenders, and
Lehman, as Administrative Agent (the "November 17, 2000 Consent
and Amendment") (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 November 28, 2000 and
incorporated herein by this reference).
10.4* Consent and Amendment, dated as of January 10, 2001, by and
among the Company, certain of the Company's subsidiaries as
Subsidiary Guarantors, certain of the Company's lenders, and
Lehman, as Administrative Agent.
10.5* Amendment, dated as of March 13, 2001, by and among the Company,
certain of the Company's subsidiaries as Subsidiary Guarantors,
certain of the Company's lenders, and Lehman, as Administrative
Agent.
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10.6* Loan and Security Agreement, dated as of September 15, 2000, by
and among Operating Company, as Borrower, certain of Operating
Company's subsidiaries as Subsidiary Guarantors, certain lenders
and Lehman, as Agent, with Consent and First Amendment, dated as
of November 30, 2000, attached thereto.
10.7 Note Purchase Agreement, dated as of January 1, 1999, by and
between the Company and PMI Mezzanine Fund, L.P., including, as
Exhibit R-1 thereto, Registration Rights Agreement, dated as of
January 1, 1999, by and between the Company 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
this reference).
10.8 7.5% Convertible, Subordinated Note, due February 28, 2005, made
payable to PMI Mezzanine Fund, L.P. in the aggregate principal
amount of $30.0 million (previously filed as Exhibit 4.6 to the
Company's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by this reference).
10.9 Waiver and Amendment, dated as of June 30, 2000, by and between
the Company and PMI Mezzanine Fund, L.P., with form of
replacement note attached thereto as Exhibit B (previously filed
as Exhibit 10.5 to the Company's Current Report on Form 8-K
(File no. 0-25245), filed with the Commission on July 3, 2000
and incorporated herein by this reference).
10.10* Waiver and Amendment, dated as of March 5, 2001, by and between
the Company and PMI Mezzanine Fund, L.P., including, as an
exhibit thereto, Amendment to Registration Rights Agreement.
10.11 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 this reference).
10.12 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 this reference).
10.13 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 this
reference).
10.14 Notes from the Company made payable to MDP Ventures IV LLC, and
certain other purchasers, dated as of January 29, 1999, in the
aggregate principal amount of $20.0 million (previously filed as
Exhibit 4.21 to the Company's Annual Report on Form 10-K
(Commission File no. 0-25245), filed with the Commission on March
30, 1999
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and incorporated herein by this reference).
10.15 Form of Waiver and Amendment, dated as of June 30, 2000, by and
between the Company and MDP Ventures IV LLC, with form of
replacement note and PIK note attached thereto as Exhibit B and
D, respectively (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 July 3, 2000 and
incorporated herein by this reference).
10.16 Securities Purchase Agreement, dated as of December 26, 1999, by
and between the Company, Operating Company, PMSI, and JJFMSI, on
the one hand, and Prison Acquisition Company, L.L.C., on the
other hand, including: (i) as Exhibit A thereto, Agreement and
Plan of Merger, dated as of December 26, 1999, by and among the
Company, CCA of Tennessee, PMSI Acquisition Sub, JJFMSI
Acquisition Sub, Operating Company, PMSI and JJFMSI; (ii) as
Exhibit B thereto, the Form of Articles of Amendment and
Restatement of the Company; (iii) as Exhibit C thereto, the
Amended and Restated Bylaws of the Company; (iv) as Exhibit D
thereto, the Form of Articles Supplementary for Series B
Cumulative Convertible Preferred Stock; (v) as Exhibit E thereto,
the Form of Warrant; (vi) as Exhibit F thereto, the Form of
Articles Supplementary for Series C Cumulative Convertible
Preferred Stock; (vii) as Exhibit G thereto, the Form of
Registration Rights Agreement; and (viii) as Exhibit H thereto,
the Financing Commitment Letter (previously filed as Exhibit 10.1
to the Company's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on December 28,1999 and
incorporated herein by this reference).
10.17 First Amendment to Securities Purchase Agreement, dated as of
February 28, 2000, by and among the Company, Operating Company,
PMSI and JJFMSI, on the one hand, and Prison Acquisition Company,
L.L.C., on the other hand (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 March 1, 2000 and
incorporated herein by this reference).
10.18 Securities Purchase Agreement, effective as of April 16, 2000, by
and among the Company, Operating Company, PMSI and JJFMSI, on the
one hand, and Pacific Life Insurance Company, on the other hand
("Pacific Life"), with the following exhibits attached: (i) as
Exhibit A thereto, Agreement and Plan of Merger, dated as of
December 26, 1999, by and among the Company, CCA of Tennessee,
PMSI Acquisition Sub, JJFMSI Acquisition Sub, Operating Company,
PMSI and JJFMSI; (ii) as Exhibit B thereto, the Form of Articles
of Amendment and Restatement of the Company; (iii) as Exhibit C
thereto, the Amended and Restated Bylaws of the Company; (iv) as
Exhibit D thereto, the Form of Articles Supplementary for Series
C Cumulative Convertible Preferred Stock (filed therewith); (v)
as Exhibit E thereto, the Form of Articles Supplementary for
Series B Cumulative Convertible Preferred Stock; (vi) as Exhibit
F thereto, the Form of Warrant; and (vii) as Exhibit G thereto,
the Form of Registration Rights Agreement (the Securities
Purchase Agreement, together with items (ii), (iii), (iv), (v),
(vi) and (vii), have been 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 April 18, 2000 and
incorporated herein by this
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reference, with item (i) having been previously filed as Exhibit
2.1 to the Company's Current Report on Form 8-K (Commission File
no. 0-25245), filed with the Commission on December 28, 1999 and
incorporated herein by this reference).
10.19 Mutual Termination and Release Agreement, dated as of June 30,
2000, by and among the Company, Operating Company, PMSI and
JJFMSI, on the one hand, and Pacific Life, on the other hand
(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 July 3, 2000 and incorporated herein by this
reference).
10.20 Stock Purchase Agreement, dated as of June 30, 2000, by and
between the Company and Baron Asset Fund, and all series thereof,
on behalf of itself and one or more mutual funds managed by it,
or its affiliates (collectively, "Baron") (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 July
3, 2000 and incorporated herein by this reference).
10.21 Stock Purchase Agreement, dated as of September 11, 2000, by and
between the Company and Sodexho Alliance, S.A. ("Sodexho")
(previously filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K (File no. 0-25245), filed with the Commission on
September 12, 2000 and incorporated herein by this reference).
10.22 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 this reference).
10.23 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 this reference).
10.24 First Amendment to Master Agreement to Lease, dated as of
December 31, 1999, by and between the Company and Operating
Company (previously filed as Exhibit 10.67 to the Company's
Annual Report on Form 10-K (Commission File no. 0-25245), filed
with the Commission on March 30, 2000 and incorporated herein by
this reference).
10.25 Master Amendment to Lease Agreements, dated as of December 31,
1999, by and between the Company and Operating Company
(previously filed as Exhibit 10.68 to the Company's Annual
Report on Form 10-K (Commission File no. 0-25245), filed with
the Commission on March 30, 2000 and incorporated herein by this
reference).
10.26 Second Master Amendment to Lease Agreements, dated as of June 9,
2000, 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 June 13, 2000 and incorporated herein by this
reference).
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10.27* Termination Agreement With Respect to Master Agreement to Lease
and Lease Agreements, dated as of September 29, 2000, by and
between the Company, Operating Company and CCA of Tennessee.
10.28* Master Agreement to Lease, dated as of December 31, 2000, by and
between the Company, as landlord, and CCA of Tennessee, as
tenant.
10.29 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 this reference).
10.30* Amended and Restated Services Agreement, dated as of March 5,
1999, by and between the Company and Operating Company.
10.31 Amendment Number One to Amended and Restated Services Agreement,
dated as of June 9, 2000, by and between the Company and
Operating Company (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 June 13, 2000 and
incorporated herein by this reference).
10.32* Termination Agreement With Respect to Amended and Restated
Services Agreement, dated as of September 29, 2000, by and
between the Company, Operating Company and CCA of Tennessee.
10.33 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 this reference).
10.34 Amended and Restated Tenant Incentive Agreement, by and between
the Company and Operating Company (previously filed as Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999 (Commission File no.
0-25245), filed with the Commission on May 14, 1999 and
incorporated herein by this reference).
10.35 Amendment Number One to Amended and Restated Tenant Incentive
Agreement, dated as of June 9, 2000, 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 June 13, 2000 and
incorporated herein by this reference).
10.36* Termination Agreement With Respect to Amended and Tenant
Incentive Agreement, dated as of September 29, 2000, by and
between the Company, Operating Company and CCA of Tennessee.
10.37 Business Development Agreement, by and between the Company and
Operating Company (previously filed as Exhibit 10.2 to the
Company's Quarterly Report on
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Form 10-Q for the quarterly period ended March 31, 1999
(Commission File no. 0-25245), filed with the Commission on May
14, 1999 and incorporated herein by this reference).
10.38 Amendment Number One to Business Development Agreement, dated as
of June 9, 2000, by and between the Company 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 June 13, 2000 and incorporated herein by this
reference).
10.39* Termination Agreement With Respect to Business Development
Agreement, dated as of September 29, 2000, by and between the
Company, Operating Company and CCA of Tennessee.
10.40 Administrative Services Agreement, dated as of January 1, 1999,
by and between Operating Company and PMSI (previously filed as
Exhibit 10.26 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by this reference).
10.41* Amendment Number One to Administrative Services Agreement, dated
as of September 29, 2000, by and between the Company and PMSI.
10.42 Administrative Services Agreement, dated as of January 1, 1999,
by and between Operating Company and JJFMSI (previously filed as
Exhibit 10.27 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by this reference).
10.43* Amendment Number One to Administrative Services Agreement, dated
as of September 29, 2000, by and between the Company and JJFMSI.
10.44 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 this reference).
10.45 Service Mark and Trade Name Use Agreement, dated as of December
31, 1998, by and between Old 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 this
reference).
10.46 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
this reference).
10.47 Service Mark and Trade Name Use Agreement, dated as of December
31, 1998, by and between Operating Company and Juvenile and Jail
Facility Management
103
104
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 this reference).
10.48* Termination Agreement With Respect to Service Mark and Trade Name
Use Agreement, dated as of September 29, 2000, by and between the
Company, Operating Company, PMSI, JJFMSI and CCA of Tennessee.
10.49 Promissory Note, dated as of December 31, 1998, executed by
Operating Company made payable to Old CCA in the principal amount
of $137.0 million (previously filed as Exhibit 10.7 to the
Company's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by this reference).
10.50 Guaranty Agreement, dated as of December 31, 1998, executed and
delivered by Doctor R. Crants to Old CCA (previously filed as
Exhibit 10.8 to the Company's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by this reference).
10.51 Old Prison Realty's 1997 Employee Share Incentive Plan
(previously filed as Exhibit 10.25 to Old Prison Realty's
Quarterly Report on Form 10-Q (Commission File no. 1-13049),
filed with the Commission on August 25, 1997 and incorporated
herein by this reference).
10.52 First Amendment to Old Prison Realty's 1997 Employee Share
Incentive Plan (previously filed as Appendix B to the Company's
definitive Proxy Statement relating to the Company's 2000 Annual
Meeting of Stockholders (Commission File no. 0-25245), filed with
the Commission on November 20, 2000 and incorporated herein by
this reference).
10.53 Old Prison Realty's Non-Employee Trustees' Share Option Plan, as
amended (previously filed as Exhibit 10.26 to Old Prison
Realty's Quarterly Report on Form 10-Q (Commission File no.
1-13049), filed with the Commission on August 25, 1997 and
incorporated herein by this reference).
10.54 Old Prison Realty's Non-Employee Trustees' Compensation Plan
(previously filed as Exhibit 4.3 to Old Prison Realty's
Registration Statement on Form S-8 (Commission File no.
333-58339), filed with the Commission on July 1, 1998 and
incorporated herein by this reference).
10.55 Non-Qualified Stock Option Plan of Old CCA, dated as of January
16, 1986, and related form of Non-Qualified Stock Option
Agreement (previously filed as Exhibit 10(d) to Old CCA's
Registration Statement on Form S-1 (Commission File no. 33-8052),
filed with the Commission on August 15, 1986 and incorporated
herein by this reference).
10.56 Old CCA's 1989 Stock Bonus Plan (previously filed as Exhibit
10(zz) to Old CCA's Annual Report on Form 10-K (Commission File
no. 0-15719), filed with the
104
105
Commission on March 30, 1990 and incorporated herein by this
reference).
10.57 First Amendment to Old CCA's Non-Qualified Stock Option Plan,
dated as of June 8, 1989 (previously filed as Exhibit 10(nnn) to
Old CCA's Annual Report on Form 10-K (Commission File no.
0-15719), filed with the Commission on March 30, 1990 and
incorporated herein by this reference).
10.58 Old CCA's Non-Employee Director Stock Option Plan (previously
filed as Exhibit 10(yyyy) to Old CCA's Annual Report on Form
10-K (Commission File no. 0-15719), filed with the Commission on
March 31, 1994 and incorporated herein by this reference).
10.59 First Amendment to Old CCA's 1991 Flexible Stock Option Plan,
dated as of March 11, 1994 (previously filed as Exhibit 10.102
to Old CCA's Annual Report on Form 10-K (Commission File no.
1-13049), filed with the Commission on March 31, 1995 and
incorporated herein by this reference).
10.60 Amended and Restated Old CCA 1989 Stock Bonus Plan, dated as of
February 20, 1995 (previously filed as Exhibit 10.138 to Old
CCA's Annual Report on Form 10-K (Commission File no. 1-13560),
filed with the Commission on March 31, 1995 and incorporated
herein by this reference).
10.61 Old CCA's 1995 Employee Stock Incentive Plan, effective as of
March 20, 1995 (previously filed as Exhibit 4.3 to Old CCA's
Registration Statement on Form S-8 (Commission File no.
33-61173), filed with the Commission on July 20, 1995 and
incorporated herein by this reference).
10.62 First Amendment to Amended and Restated Old CCA 1989 Stock Bonus
Plan, dated as of November 3, 1995 (previously filed as Exhibit
10.153 to Old CCA's Annual Report on Form 10-K (Commission File
no. 1-13560), filed with the Commission on March 29, 1996 and
incorporated herein by this reference).
10.63 Option Agreement, dated as of March 31, 1997, by and between Old
CCA and Joseph F. Johnson, Jr. relating to the grant of an option
to purchase 80,000 shares of Old CCA Common Stock (previously
filed as Appendix B to Old CCA's definitive Proxy Statement
relating to Old CCA's 1998 Annual Meeting of Shareholders
(Commission File no. 0-15719), filed with the Commission on March
31, 1998 and incorporated herein by this reference).
10.64 Old CCA's Non-Employee Directors' Compensation Plan (previously
filed as Appendix A to Old CCA's definitive Proxy Statement
relating to Old CCA's 1998 Annual Meeting of Shareholders
(Commission File no. 0-15719), filed with the Commission on March
31, 1998 and incorporated herein by this reference).
10.65 The Company's 2000 Stock Incentive Plan (previously filed as
Appendix C to the Company's definitive Proxy Statement relating
to the Company's 2000 Annual Meeting of Stockholders (Commission
File no. 0-25245), filed with the Commission on November 20, 2000
and incorporated herein by this reference).
105
106
10.66 Employment Agreement, dated as of August 4, 2000, by and between
the Company and John D. Ferguson, with form of option agreement
included as Exhibit A thereto (previously filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (File no.
0-25245), filed with the Commission on August 14, 2000 and
incorporated herein by this reference).
10.67* Employment Agreement, dated as of December 6, 2000, by and
between the Company and Irving E. Lingo, Jr.
10.68* Employment Agreement, dated as of August 3, 1999, by and between
Operating Company and J. Michael Quinlan.
10.69 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 this reference).
10.70* Amendment Number One to Employment Agreement with Doctor R.
Crants, dated as of June 29, 2000, by and between the Company
and Doctor R. Crants.
10.71 Severance Agreement, dated as of December 31, 1999, by and among
D. Robert Crants, III, the Company and Operating Company
(previously filed as Exhibit 10.69 to the Company's Annual Report
on Form 10-K (Commission File no. 0-25245), filed with the
Commission on March 30, 2000 and incorporated herein by this
reference).
10.72 Severance Agreement, dated as of December 31, 1999, by and among
Michael W. Devlin, the Company and Operating Company (previously
filed as Exhibit 10.70 to the Company's Annual Report on Form
10-K (Commission File no. 0-25245), filed with the Commission on
March 30, 2000 and incorporated herein by this reference).
10.73 Stock Acquisition Agreement, dated as of September 11, 2000, by
and among the Company, Operating Company, PMSI, JJFMSI,
Corrections Corporation of America (U.K.) Limited, a company
incorporated in England and Wales ("CCA UK"), and Sodexho
(previously filed as Exhibit 10.2 to the Company's Current Report
on Form 8-K (File no. 0-25245), filed with the Commission on
September 12, 2000 and incorporated herein by this reference).
10.74* Amendment Number One to Stock Acquisition Agreement, dated as of
November 13, 2000, by and among the Company, CCA of Tennessee,
PMSI, JJFMSI, CCA UK and Sodexho.
10.75 Option Agreement, dated as of September 11, 2000, by and between
JJFMSI and Sodexho (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 September 12, 2000 and
incorporated herein by this reference).
106
107
10.76* Amendment Number One to Option Agreement, dated as of November
13, 2000, by and between JJFMSI and Sodexho.
10.77* Indemnity Agreement, dated as of September 29, 2000, by and
between the Company and PMSI.
10.78* Indemnity Agreement, dated as of September 29, 2000, by and
between the Company and JJFMSI.
10.79 Memorandum of Understanding, dated as of December 14, 2000, by
and among attorneys for the Company and the plaintiffs in the
outstanding stockholder litigation against the Company and
certain of its existing and former directors and officers (the
"Plaintiffs") (previously filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K (File no. 0-25245), filed with the
Commission on December 19, 2000 and incorporated herein by this
reference).
10.80* Stock Purchase Agreement, dated as of April 10, 2001, by and
among the Company; Abbey National Treasury Services plc, a public
limited company incorporated in England and Wales and registered
with company number 2338548; and Agecroft Properties (No. 2)
Limited, a private limited company incorporated in England and
Wales and registered with company number 4167343 ("API 2"),
relating to the Company's sale of all of the issued and
outstanding capital stock of Agecroft Properties, Inc., a
Tennessee corporation and wholly-owned subsidiary of the Company
("API"), to API 2.
21* Subsidiaries of the Company.
23.1* Consent of Arthur Andersen LLP.
24 Powers of Attorney (included on signature pages).
99.1 Letter to the Board of Directors of the Company, dated as of
February 22, 2000, from Pacific Life (previously filed as Exhibit
99.1 to the Company's Current Report on Form 8-K (Commission File
no. 0-25245), filed with the Commission on March 1, 2000 and
incorporated herein by this reference).
99.2 Press release, dated as of June 30, 2000, relating to the mutual
termination of the Pacific Life securities purchase agreement and
the proposed restructuring of the Company (the "Restructuring")
(previously filed as Exhibit 99.1 to the Company's Current Report
on Form 8-K (File no. 0-25245) filed with the Commission on July
3, 2000 and incorporated herein by this reference).
99.3 Press release, dated as of July 31, 2000, regarding the
termination of Doctor R. Crants as the Chief Executive Officer of
the Company (previously filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K (File no. 0-25245) filed with the
Commission on July 31, 2000 and incorporated herein by this
reference).
107
108
99.4 Press release, dated as of August 24, 2000, regarding execution
of the Memorandum of Understanding (previously filed as Exhibit
99.1 to the Company's Current Report on Form 8-K (File no.
0-25245) filed with the Commission on August 29, 2000 and
incorporated herein by this reference).
99.5 Press release, dated as of September 5, 2000, announcing the
declaration of a dividend payable in shares of the Company's
Series B Preferred Stock in connection with the Company's
election to be taxed and to qualify as a REIT with respect to its
1999 taxable year (previously filed as (i) Exhibit 99.1 to the
Company's Registration Statement on Form 8-A (File no. 001-16109)
filed with the Commission on September 8, 2000 and (ii) Exhibit
99.1 to the Company's Current Report on Form 8-K (File no.
0-25245) filed with the Commission on September 11, 2000 and
incorporated herein by this reference).
99.6 Press release, dated as of September 25, 2000, announcing the
distribution of a dividend payable in shares of the Company's
Series B Preferred Stock in connection with the Company's
election to be taxed and qualify as a REIT with respect to its
1999 taxable year (previously filed as (i) Exhibit 99.1 to the
Company's Current Report on Form 8-K (File no. 0-25245) filed
with the Commission on September 26, 2000 and (ii) Exhibit 99.2
to the Company's Amended Registration Statement on Form 8-A (File
no. 001-16109) filed with the Commission on September 27, 2000
and incorporated herein by this reference).
99.7 Press release, dated as of October 2, 2000, announcing the
completion of the merger of Operating Company with and into a
wholly owned subsidiary of the Company (previously filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K (File
no. 0-25245) filed with the Commission on October 3, 2000 and
incorporated herein by this reference).
99.8 Press release, dated as of October 2, 2000, announcing the
conversion price of the Series B Preferred Stock during the
initial conversion period (previously filed as Exhibit 99.2 to
the Company's Current Report on Form 8-K (File no. 0-25245) filed
with the Commission on October 3, 2000 and incorporated herein by
this reference).
99.9 Press release, dated as of October 2, 2000, announcing an
adjustment to the conversion price of the Series B Preferred
Stock during the initial conversion period (previously filed as
Exhibit 99.3 to the Company's Current Report on Form 8-K (File
no. 0-25245) filed with the Commission on October 3, 2000 and
incorporated herein by this reference).
99.10 Press release, dated as of October 25, 2000, announcing the
distribution of additional shares of Series B Preferred Stock
(previously filed as Exhibit 99.1 to the Company's Current Report
on Form 8-K (File no. 0-25245) filed with the Commission on
October 30, 2000 and incorporated herein by this reference).
108
109
99.11 Press release, dated as of October 26, 2000, announcing the
settlement of outstanding stockholder litigation against the
Company and certain of its existing and former directors and
executive officers (previously filed as Exhibit 99.2 to the
Company's Current Report on Form 8-K (File no. 0-25245) filed
with the Commission on October 30, 2000 and incorporated herein
by this reference).
99.12 Press release, dated as of November 21, 2000, announcing the
effectiveness of a the November 17, 2000 Consent and Amendment
(previously filed as Exhibit 99.1 to the Company's Current Report
on Form 8-K (File no. 0-25245) filed with the Commission on
November 28, 2000 and incorporated herein by this reference).
99.13 Press release, dated as of December 15, 2000, announcing the
execution of the Memorandum of Understanding, dated as of
December 14, 2000, by and among attorneys for the Company and the
Plaintiffs (previously filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K (File no. 0-25245) filed with the
Commission on December 19, 2000 and incorporated herein by this
reference).
99.14 Final Judgment and Order of Dismissal with Prejudice, Civil
Action No. 3:99-0458, issued by the United States District Court
for the Middle District of Tennessee (previously filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K (File
no. 0-25245) filed with the Commission on February 16, 2001 and
incorporated herein by this reference).
99.15 Final Judgment and Order of Dismissal with Prejudice, Civil
Action No. 98-239-III, issued by the Chancery Court of Davidson
County for the Twentieth Judicial District (previously filed as
Exhibit 99.2 to the Company's Current Report on Form 8-K (File
no. 0-25245) filed with the Commission on February 16, 2001 and
incorporated herein by this reference).
99.16 Final Judgment and Order of Dismissal with Prejudice, Civil
Action No. 99-1719-III, issued by the Chancery Court of Davidson
County for the Twentieth Judicial District (previously filed as
Exhibit 99.3 to the Company's Current Report on Form 8-K (File
no. 0-25245) filed with the Commission on February 16, 2001 and
incorporated herein by this reference).
99.17 Company press release, dated February 13, 2001, announcing final
court approvals of the definitive settlement agreements
(previously filed as Exhibit 99.4 to the Company's Current Report
on Form 8-K (File no. 0-25245) filed with the Commission on
February 16, 2001 and incorporated herein by this reference).
99.18* Press release, dated as of April 10, 2001, regarding the
Company's sale of all of the issued and outstanding capital stock
of API.
109
110
INDEX TO FINANCIAL STATEMENTS
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS OF CORRECTIONS CORPORATION OF
AMERICA AND SUBSIDIARIES (FORMERLY PRISON REALTY TRUST, INC.)
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Combined and Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 F-4
Combined and Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998 F-10
Notes to the Combined and Consolidated Financial Statements F-12
F-1
111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corrections Corporation of America (formerly Prison Realty Trust, Inc):
We have audited the accompanying consolidated balance sheets of CORRECTIONS
CORPORATION OF AMERICA (formerly Prison Realty Trust, Inc.) (a Maryland
corporation) AND SUBSIDIARIES as of December 31, 2000 and 1999, and the related
combined and consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Notes 2 and 14, the Company has $1,152.6 million of debt
outstanding, of which $14.6 million is contractually due in 2001 and $382.5
million matures on January 1, 2002. Although management has developed plans for
addressing the January 1, 2002 debt maturity as discussed in Notes 2 and 14,
there can be no assurance that management's plans will be successful and there
can be no assurance that the Company will be able to refinance or renew its debt
obligations maturing on January 1, 2002.
In our opinion, the combined and consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Corrections Corporation of America (formerly Prison Realty Trust, Inc.) and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
As further explained in Note 4 to the combined and consolidated financial
statements, the Company has given retroactive effect to a change in accounting
for one of its investments from the cost method to the equity method based upon
a change in control which occurred in 2000.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
April 16, 2001
F-2
112
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(in thousands, except per share data)
ASSETS 2000 1999
- ----------------------------------------------------------------------------------- ----------- -----------
Cash and cash equivalents $ 20,889 $ 84,493
Restricted cash 9,209 24,409
Accounts receivable, net of allowance of $1,486 for 2000 132,306 5,105
Receivable from affiliates -- 29,891
Income tax receivable 32,662 --
Prepaid expenses and other current assets 18,726 5,801
Assets held for sale under contract 24,895 --
----------- -----------
Total current assets 238,687 149,699
Property and equipment, net 1,615,130 2,208,496
Notes receivable from Operating Company -- 122,472
Other notes receivable 6,703 6,759
Investment in direct financing leases 23,808 70,255
Assets held for sale 138,622 --
Goodwill 109,006 --
Investment in affiliates -- 113,482
Other assets 45,036 45,481
----------- -----------
Total assets $ 2,176,992 $ 2,716,644
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 243,312 $ 67,595
Payable to Operating Company -- 3,316
Income taxes payable 8,437 5,476
Distributions payable 9,156 2,150
Current portion of long-term debt 14,594 6,084
----------- -----------
Total current liabilities 275,499 84,621
Long-term debt, net of current portion 1,137,976 1,092,907
Deferred tax liabilities 56,450 32,000
Deferred gains on sales of contracts -- 106,045
Other liabilities 19,052 --
----------- -----------
Total liabilities 1,488,977 1,315,573
----------- -----------
Commitments and contingencies
Preferred stock - $0.01 par value; 50,000 shares authorized:
Series A - 4,300 shares issued and outstanding; stated at liquidation preference of
$25.00 per share 107,500 107,500
Series B - 3,297 shares issued and outstanding at December 31, 2000; stated at
liquidation preference of $24.46 per share 80,642 --
Common stock - $0.01 par value; 400,000 and 300,000 shares authorized; 235,395 and
118,406 shares issued; and 235,383 and 118,394 shares outstanding at December 31,
2000 and 1999, respectively 2,354 1,184
Additional paid-in capital 1,299,390 1,347,318
Deferred compensation (2,723) (91)
Retained deficit (798,906) (54,598)
Treasury stock, 12 shares, at cost (242) (242)
----------- -----------
Total stockholders' equity 688,015 1,401,071
----------- -----------
Total liabilities and stockholders' equity $ 2,176,992 $ 2,716,644
=========== ===========
The accompanying notes are an integral part of these combined and
consolidated financial statements.
F-3
113
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except per share amounts)
2000 1999 1998
--------- --------- ---------
REVENUE:
Management and other $ 261,774 $ -- $ 662,059
Rental 40,938 270,134 --
Licensing fees from affiliates 7,566 8,699 --
--------- --------- ---------
310,278 278,833 662,059
--------- --------- ---------
EXPENSES:
Operating 214,872 -- 496,522
General and administrative 21,241 24,125 28,628
Lease 2,443 -- 58,018
Depreciation and amortization 59,799 44,062 14,363
Licensing fees to Operating Company 501 -- --
Administrative service fee to Operating Company 900 -- --
Write-off of amounts under lease arrangements 11,920 65,677 --
Impairment losses 527,919 76,433 --
Old CCA compensation charge -- -- 22,850
--------- --------- ---------
839,595 210,297 620,381
--------- --------- ---------
OPERATING INCOME (LOSS) (529,317) 68,536 41,678
--------- --------- ---------
OTHER (INCOME) EXPENSE:
Equity (earnings) loss and amortization of deferred
gain, net 11,638 (3,608) --
Interest (income) expense, net 131,545 45,036 (2,770)
Other income (3,099) -- --
Strategic investor fees 24,222 -- --
Unrealized foreign currency transaction loss 8,147 -- --
Loss on sales of assets 1,733 1,995 --
Stockholder litigation settlements 75,406 -- --
Write-off of loan costs -- 14,567 2,043
--------- --------- ---------
249,592 57,990 (727)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (778,909) 10,546 42,405
(Provision) benefit for income taxes 48,002 (83,200) (15,424)
--------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (730,907) (72,654) 26,981
Minority interest in net loss of PMSI and JJFMSI 125 -- --
--------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (730,782) (72,654) 26,981
Cumulative effect of accounting change, net of taxes -- -- (16,145)
--------- --------- ---------
NET INCOME (LOSS) (730,782) (72,654) 10,836
Distributions to preferred stockholders (13,526) (8,600) --
--------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $(744,308) $ (81,254) $ 10,836
========= ========= =========
(Continued)
F-4
114
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands, except per share amounts)
(Continued)
2000 1999 1998
----------- ----------- ----------
BASIC NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS PER COMMON
SHARE:
Before cumulative effect of accounting change $ (5.67) $ (0.71) $ 0.38
Cumulative effect of accounting change -- -- (0.23)
----------- ----------- ----------
$ (5.67) $ (0.71) $ 0.15
=========== =========== ==========
DILUTED NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS PER COMMON
SHARE:
Before cumulative effect of accounting change $ (5.67) $ (0.71) $ 0.34
Cumulative effect of accounting change -- -- (0.20)
----------- ----------- ----------
$ (5.67) $ (0.71) $ 0.14
=========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC 131,324 115,097 71,380
=========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, DILUTED 131,324 115,097 78,939
=========== =========== ==========
The accompanying notes are an integral part of these combined and
consolidated financial statements.
F-5
115
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands)
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(730,782) $ (72,654) $ 10,836
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 59,799 44,062 14,363
Amortization of debt issuance costs 15,684 7,901 1,610
Deferred and other non-cash income taxes (13,767) 83,200 (40,719)
Equity in (earnings) losses and amortization of deferred
gain 11,638 (3,608) (535)
Write-off of amounts under lease agreement 11,920 65,677 --
Write-off of loan costs -- 14,567 2,043
Foreign currency transaction loss 8,147 -- --
Other non-cash items 3,595 3,679 757
Loss on disposals of assets 1,733 1,995 1,083
Gain on real estate transactions -- -- (13,984)
Asset impairment 527,919 76,433 --
Old CCA compensation charge -- -- 22,850
Cumulative effect of accounting change -- -- 26,468
Minority interest (125) -- --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, prepaid expenses and other assets (4,728) (2,732) (39,678)
Receivable from affiliates 28,864 (28,608) --
Income tax receivable (32,662) (9,490) 838
Accounts payable and accrued expenses 66,039 (32,302) 68,565
Payable to Operating Company (2,325) (68,623) --
Other liabilities 2,488 -- --
--------- --------- ---------
Net cash provided by (used in) operating activities (46,563) 79,497 54,497
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment, net (78,663) (528,935) (417,215)
(Increase) decrease in restricted cash 15,200 (7,221) --
Payments received on investments in affiliates 6,686 21,668 603
Issuance of note receivable (529) (6,117) (1,549)
Proceeds from sale of assets and businesses 6,400 43,959 61,299
Merger costs -- -- (26,270)
Increase in other assets -- 3,536 --
Cash acquired (used) in acquisitions 6,938 21,894 (9,341)
Cash acquired by Operating Company, PMSI and JJFMSI in
sales of contracts -- -- (4,754)
Payments received on direct financing leases and notes
receivable 5,517 3,643 4,713
--------- --------- ---------
Net cash used in investing activities (38,451) (447,573) (392,514)
--------- --------- ---------
(Continued)
F-6
116
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands)
(Continued)
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt, net 29,089 566,558 181,849
Payment of debt issuance costs (11,316) (59,619) (9,485)
Proceeds from issuance of common stock -- 131,977 66,148
Proceeds from exercise of stock options and warrants -- 166 2,099
Preferred stock issuance costs (403) -- --
Payment of dividends (4,586) (217,654) --
Cash paid for fractional shares (11) -- --
Purchase of treasury stock (13,356) -- (7,600)
--------- --------- ---------
Net cash provided by (used in) financing activities (583) 421,428 233,011
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (85,597) 53,352 (105,006)
CASH AND CASH EQUIVALENTS, beginning of year 106,486 31,141 136,147
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 20,889 $ 84,493 $ 31,141
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized of $8,330, $37,700 and
$11,800 in 2000, 1999 and 1998, respectively) $ 132,798 $ 28,022 $ 4,424
========= ========= =========
Income taxes $ 2,453 $ 9,490 $ 44,341
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company completed construction of a facility and entered into
a direct financing lease:
Investment in direct financing lease $ (89,426) $ -- $ --
Property and equipment 89,426 -- --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
The Company committed to a plan of disposal for certain long-lived
assets:
Assets held for sale $(163,517) $ -- $ --
Investment in direct financing lease 85,722 -- --
Property and equipment 77,795 -- --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
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
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
(Continued)
F-7
117
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands)
(Continued)
2000 1999 1998
--------- ------------ --------
The Company issued debt to satisfy accrued default rate interest on
a convertible note and to satisfy a payable for professional
services:
Short-term debt $ 2,014 $ -- $ --
Accounts payable and accrued expenses (2,014) -- --
--------- ------------ --------
$ -- $ -- $ --
========= ============ ========
Long-term debt was converted into common stock:
Other assets $ -- $ 1,161 $ 5
Long-term debt -- (47,000) (5,800)
Common stock -- 50 18
Additional paid-in capital -- 45,789 3,633
Treasury stock, at cost -- -- 51,029
Retained earnings -- -- (48,885)
--------- ------------ --------
$ -- $ -- $ --
========= ============ ========
The Company issued a preferred stock dividend to satisfy the REIT
distribution requirements:
Preferred stock - Series B $ 183,872 $ -- $ --
Additional paid-in capital (183,872) -- --
--------- ------------ --------
$ -- $ -- $ --
========= ============ ========
Preferred stock was converted into common stock:
Preferred stock - Series A $ -- $ -- $ (380)
Preferred stock - Series B (105,471) -- --
Common stock 951 -- 6
Additional paid-in capital 104,520 -- 374
--------- ------------ --------
$ -- $ -- $ --
========= ============ ========
The Company acquired the assets and liabilities of Operating Company, PMSI
and JJFMSI for stock:
Accounts receivable $(133,667) $ -- $ --
Receivable from affiliate 9,027 -- --
Income tax receivable (3,781) -- --
Prepaid expenses and other current assets (903) -- --
Property and equipment, net (38,475) -- --
Notes receivable 100,756 -- --
Goodwill (110,596) -- --
Investment in affiliates 102,308 -- --
Deferred tax assets 37,246 -- --
Other assets (11,767) -- --
Accounts payable and accrued expenses 103,769 -- --
Payable to Operating Company (18,765) -- --
Distributions payable 31 -- --
Note payable to JJFMSI 4,000 -- --
Short-term debt 23,876 -- --
Deferred tax liabilities 2,600 -- --
Deferred gains on sales of contracts (96,258) -- --
Other liabilities 25,525 -- --
Common stock 217 -- --
Additional paid-in capital 29,789 -- --
Deferred compensation (2,884) -- --
--------- ------------ --------
$ 22,048 $ -- $ --
========= ============ ========
(Continued)
F - 8
118
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands)
(Continued)
2000 1999 1998
------------- ----------- ---------
Stock warrants were exercised for shares of Old CCA's common stock:
Other assets $ -- $ -- $ 1,450
Common stock -- -- 38
Additional paid-in capital -- -- 15,892
Treasury stock, at cost -- -- (17,380)
------------- ----------- ---------
$ -- $ -- $ --
============= =========== =========
The Company acquired treasury stock and issued common stock in
connection with the exercise of stock options:
Additional paid-in capital $ -- $ 242 $ --
Treasury stock, at cost -- (242) --
------------- ----------- ---------
$ -- $ -- $ --
============= =========== =========
The Company acquired Old Prison Realty's assets and liabilities for
stock:
Restricted cash $ -- $ (17,188) $ --
Property and equipment, net -- (1,223,370) --
Other assets -- 22,422 --
Accounts payable and accrued expenses -- 23,351 --
Deferred gains on sales of contracts -- (125,751) --
Long-term debt -- 279,600 --
Distributions payable -- 2,150 --
Common stock -- 253 --
Preferred stock -- 107,500 --
Additional paid-in capital -- 952,927 --
------------- ----------- ---------
$ -- $ 21,894 $ --
============= =========== =========
Sales of contracts to Old CCA, PMSI and JJFMSI:
Accounts receivable $ -- $ -- $ 105,695
Prepaid expenses -- -- 5,935
Deferred tax assets -- -- 2,960
Other current assets -- -- 14,865
Property and equipment, net -- -- 63,083
Notes receivable -- -- (135,854)
Investment in affiliates -- -- (120,916)
Other assets -- -- 10,124
Accounts payable and accrued expenses -- -- (57,347)
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 combined and
consolidated financial statements.
F - 9
119
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands)
PREFERRED STOCK
--------------------------------------------------------
SERIES A SERIES B
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 -- $ -- 380 $ 380
----- -------- ---- -----
Conversion of preferred stock -- -- (380) (380)
Stock options and warrants
exercised -- -- -- --
Stock repurchased -- -- -- --
Income tax benefits of
incentive stock option
exercises -- -- -- --
Conversion of long-term debt -- -- -- --
Retirement of treasury stock -- -- -- --
Operating Company stock
issued to Old CCA
employees -- -- -- --
Issuance of common stock -- -- -- --
Compensation expense
related to deferred stock
awards and stock options -- -- -- --
Net income -- -- -- --
----- -------- ---- -----
BALANCE, DECEMBER 31, 1998 -- -- -- --
----- -------- ---- -----
Acquisition of Old Prison
Realty 4,300 107,500 -- --
Effect of election of
status as a real estate
investment trust -- -- -- --
Issuance of common stock -- -- -- --
Issuance of restricted stock -- -- -- --
Stock options exercised -- -- -- --
Conversion of long-term debt -- -- -- --
Shares issued to trustees -- -- -- --
Compensation expense
related to deferred stock
awards and stock options -- -- -- --
Net loss -- -- -- --
Distributions to stockholders -- -- -- --
----- -------- ---- -----
BALANCE, DECEMBER 31, 1999 4,300 $107,500 -- $ --
----- -------- ---- -----
COMMON STOCK
-----------------------------------------------------------
ISSUED TREASURY STOCK
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- ---------
BALANCE, DECEMBER 31, 1997 70,201 $ 702 (829) $(40,842)
-------- ------- ------ --------
Conversion of preferred stock 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
Operating Company stock
issued to Old CCA
employees -- -- -- --
Issuance of common stock 2,926 29 -- --
Compensation expense
related to deferred stock
awards and stock options -- -- -- --
Net income -- -- -- --
-------- ------- ------ --------
BALANCE, DECEMBER 31, 1998 79,956 800 -- --
-------- ------- ------ --------
Acquisition of Old Prison
Realty 25,316 253 -- --
Effect of election of
status as a real estate
investment trust -- -- -- --
Issuance of common stock 7,981 79 -- --
Issuance of restricted stock 23 -- -- --
Stock options exercised 146 2 (12) (242)
Conversion of long-term debt 4,975 50 -- --
Shares issued to trustees 9 -- -- --
Compensation expense
related to deferred stock
awards and stock options -- -- -- --
Net loss -- -- -- --
Distributions to stockholders -- -- -- --
-------- ------- ------ --------
BALANCE, DECEMBER 31, 1999 118,406 $ 1,184 (12) $ (242)
-------- ------- ------ --------
ADDITIONAL RETAINED TOTAL
PAID-IN DEFERRED EARNINGS STOCKHOLDERS'
CAPITAL COMPENSATION (DEFICIT) EQUITY
----------- ------------ ----------- ------------
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) -- -- --
Operating Company stock
issued to Old CCA
employees 22,850 -- -- 22,850
Issuance of common stock 66,119 -- -- 66,148
Compensation expense
related to deferred stock
awards and stock options 757 -- -- 757
Net income -- -- 10,836 10,836
----------- ----- -------- -----------
BALANCE, DECEMBER 31, 1998 398,493 -- 52,693 451,986
----------- ----- -------- -----------
Acquisition of Old Prison
Realty 952,927 -- -- 1,060,680
Effect of election of
status as a real estate
investment trust 52,693 -- (52,693) --
Issuance of common stock 131,898 -- -- 131,977
Issuance of restricted stock 468 (293) -- 175
Stock options exercised 406 -- -- 166
Conversion of long-term debt 45,789 -- -- 45,839
Shares issued to trustees 125 -- -- 125
Compensation expense
related to deferred stock
awards and stock options 229 202 -- 431
Net loss (83,200) -- 10,546 (72,654)
Distributions to stockholders (152,510) -- (65,144) (217,654)
----------- ----- -------- -----------
BALANCE, DECEMBER 31, 1999 $ 1,347,318 $ (91) $(54,598) $ 1,401,071
----------- ----- -------- -----------
(Continued)
F - 10
120
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in thousands)
(Continued)
PREFERRED STOCK
------------------------------------------------------------
SERIES A SERIES B
------------------------ ---------------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- ---------
BALANCE, DECEMBER 31, 1999 4,300 $107,500 -- $ --
----- -------- ------ ---------
Acquisition of
Operating Company -- -- -- --
Acquisition of PMSI -- -- -- --
Acquisition of JJFMSI -- -- -- --
Distribution to common
stockholders -- -- 7,517 183,872
Conversion of series B
preferred stock into
common stock, net -- -- (4,312) (105,482)
Compensation expense
related to deferred
stock awards and
stock options -- -- -- --
Forfeiture of
restricted stock -- -- -- --
Shares issued to -- -- -- --
trustees
Dividends on preferred
stock -- -- 92 2,252
Net loss -- -- -- --
----- -------- ------ ---------
BALANCE, DECEMBER 31, 2000 4,300 $107,500 3,297 $ 80,642
===== ======== ====== =========
COMMON STOCK
-------------------------------------------------------
ISSUED TREASURY STOCK
------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 118,406 $1,184 (12) $(242)
------- ------ --- -----
Acquisition of
Operating Company 18,831 188 -- --
Acquisition of PMSI 1,279 13 -- --
Acquisition of JJFMSI 1,599 16 -- --
Distribution to common
stockholders -- -- -- --
Conversion of series B
preferred stock into
common stock, net 95,051 951 -- --
Compensation expense
related to deferred
stock awards and
stock options 176 2 -- --
Forfeiture of
restricted stock -- -- -- --
Shares issued to
trustees 53 -- -- --
Dividends on preferred
stock -- -- -- --
Net loss -- -- -- --
------- ------ --- -----
BALANCE, DECEMBER 31, 2000 235,395 $2,354 (12) $(242)
======= ====== === =====
ADDITIONAL RETAINED TOTAL
PAID-IN DEFERRED EARNINGS STOCKHOLDERS'
CAPITAL COMPENSATION (DEFICIT) EQUITY
----------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1999 $ 1,347,318 $ (91) $ (54,598) $ 1,401,071
----------- ------- --------- -----------
Acquisition of
Operating Company 28,580 (1,646) -- 27,122
Acquisition of PMSI 537 (550) -- --
Acquisition of JJFMSI 672 (688) -- --
Distribution to common
stockholders (184,275) -- -- (403)
Conversion of series B
preferred stock into
common stock, net 104,520 -- -- (11)
Compensation expense
related to deferred
stock awards and
stock options 2,043 171 -- 2,216
Forfeiture of
restricted stock (81) 81 -- --
Shares issued to 76 -- -- 76
trustees
Dividends on preferred
stock -- -- (13,526) (11,274)
Net loss -- -- (730,782) (730,782)
----------- ------- --------- -----------
BALANCE, DECEMBER 31, 2000 $ 1,299,390 $(2,723) $(798,906) $ 688,015
=========== ======= ========= ===========
The accompanying notes are an integral part of these combined and
consolidated financial statements.
F-11
121
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND OPERATIONS
BACKGROUND AND FORMATION TRANSACTIONS
Corrections Corporation of America (together with its subsidiaries, the
"Company"), a Maryland corporation formerly known as Prison Realty Trust,
Inc. ("New Prison Realty"), commenced operations as Prison Realty
Corporation on January 1, 1999, following the mergers of each of the
former Corrections Corporation of America, a Tennessee corporation ("Old
CCA"), on December 31, 1998 and CCA Prison Realty Trust, a Maryland real
estate investment trust ("Old Prison Realty"), on January 1, 1999 (such
mergers referred to collectively herein as the "1999 Merger").
Prior to the 1999 Merger, Old Prison Realty had been a publicly traded
entity operating as a real estate investment trust, or REIT, primarily in
the business of owning and leasing prison facilities to private prison
management companies and certain government entities. Prior to the 1999
Merger, Old CCA was also a publicly traded entity primarily in the
business of owning, operating and managing prisons on behalf of
government entities (as discussed further herein). Additionally, Old CCA
had been Old Prison Realty's primary tenant.
Immediately prior to the 1999 Merger, Old CCA sold all of the issued and
outstanding capital stock of certain wholly-owned corporate subsidiaries
of Old CCA, certain management contracts and certain other non-real
estate assets related thereto, to a newly formed entity, Correctional
Management Services Corporation, a privately-held Tennessee corporation
("Operating Company"). Also immediately prior to the 1999 Merger, Old CCA
sold certain management contracts and other assets and liabilities
relating to government owned adult facilities to Prison Management
Services, LLC (subsequently merged with Prison Management Services, Inc.)
and sold certain management contracts and other assets and liabilities
relating to government owned jails and juvenile facilities to Juvenile
and Jail Facility Management Services, LLC (subsequently merged with
Juvenile and Jail Facility Management Services, Inc.). Refer to Note 3
for a more detailed discussion of these transactions occurring
immediately prior to the 1999 Merger.
Effective January 1, 1999, New Prison Realty elected to qualify as a REIT
for federal income tax purposes commencing with its taxable year ended
December 31, 1999. Also effective January 1, 1999, New Prison Realty
entered into lease agreements and other agreements with Operating
Company, whereby Operating Company would lease the substantial majority
of New Prison Realty's facilities and Operating Company would provide
certain services to New Prison Realty. Refer to Note 5 for a more
complete discussion of New Prison Realty's historical relationship with
Operating Company.
During 2000, the Company completed a comprehensive restructuring (the
"Restructuring"). As part of the Restructuring, Operating Company was
merged with and into a wholly-owned subsidiary of the Company on October
1, 2000 (the "Operating Company Merger"). Immediately prior to the
Operating Company Merger, Operating Company leased from New Prison Realty
35 correctional and detention facilities, with a total design capacity of
37,520 beds. Also in connection with the
F - 12
122
Restructuring, the Company amended its charter to, among other things,
remove provisions relating to the Company's operation and qualification
as a REIT for federal income tax purposes commencing with its 2000
taxable year and change its name to "Corrections Corporation of America."
From December 31, 1998 until September 1, 2000, the Company owned 100% of
the non-voting common stock of Prison Management Services, Inc. ("PMSI")
and Juvenile and Jail Facility Management Services, Inc. ("JJFMSI"), both
of which were privately-held service companies which managed certain
government-owned prison and jail facilities under the "Corrections
Corporation of America" name (together the "Service Companies"). The
Company was entitled to receive 95% of each company's net income, as
defined, as dividends on such shares, while other outside shareholders
and the wardens at the individual facilities owned 100% of the voting
common stock of PMSI and JJFMSI, entitling those voting stockholders to
receive the remaining 5% of each company's net income as dividends on
such shares. During September 2000, wholly-owned subsidiaries of PMSI and
JJFMSI entered into separate transactions with each of PMSI's and
JJFMSI's respective non-management, outside shareholders to reacquire all
of the outstanding voting stock of their non-management, outside
shareholders, representing 85% of the outstanding voting stock of each
entity for cash payments of $8.3 million and $5.1 million, respectively.
On December 1, 2000, the Company completed the acquisitions of PMSI and
JJFMSI. PMSI provided adult prison facility management services to
government agencies pursuant to management contracts with state
governmental agencies and authorities in the United States and Puerto
Rico. Immediately prior to the acquisition date, PMSI had contracts to
manage 11 correctional and detention facilities with a total design
capacity of 13,372 beds, all of which were in operation. JJFMSI provided
juvenile and jail facility management services to government agencies
pursuant to management contracts with federal, state and local government
agencies and authorities in the United States and Puerto Rico and
provided adult prison facility management services to certain
international authorities in Australia and the United Kingdom.
Immediately prior to the acquisition date, JJFMSI had contracts to manage
17 correctional and detention facilities with a total design capacity of
9,204 beds.
OPERATIONS
Prior to the 1999 Merger, Old CCA operated and managed prisons and other
correctional and detention facilities and provided prisoner
transportation services for governmental agencies. Old CCA also provided
a full range of related services to governmental agencies, including
managing, financing, developing, designing and constructing new
correctional and detention facilities and redesigning and renovating
older facilities. Following the completion of the 1999 Merger and through
September 30, 2000, New Prison Realty specialized in acquiring,
developing, owning and leasing correctional and detention facilities.
Following the completion of the 1999 Merger and through September 30,
2000, Operating Company was a separately owned private prison management
company that operated, managed and leased the substantial majority of
facilities owned by New Prison Realty. As a result of the 1999 Merger and
certain contractual relationships existing between New Prison Realty and
Operating Company, New Prison Realty was dependent on Operating Company
for a significant source of its income. In addition, New Prison Realty
paid Operating Company for services rendered to New Prison Realty in the
development of its correctional and detention facilities. As a result of
liquidity issues facing Operating Company and New Prison Realty, the
parties amended certain of the contractual agreements between New Prison
Realty and Operating Company during 2000. For a more complete description
of these amendments, see Note 5.
F - 13
123
As a result of the acquisition of Operating Company on October 1, 2000
and the acquisitions of PMSI and JJFMSI on December 1, 2000, the Company
now specializes in owning, operating and managing prisons and other
correctional facilities and providing prisoner transportation services
for governmental agencies. In addition to providing the fundamental
residential services relating to inmates, each of the Company's
facilities offers a large variety of rehabilitation and educational
programs, including basic education, life skills and employment training
and substance abuse treatment. The Company also provides health care
(including medical, dental and psychiatric services), institutional food
services and work and recreational programs.
As of March 15, 2001, the Company owned or managed 74 correctional and
detention facilities with a total design capacity of approximately 67,000
beds in 22 states, the District of Columbia, Puerto Rico and the United
Kingdom, of which 72 facilities were operating and two were under
construction.
2. FINANCIAL CONDITION
After completion of the first quarter of 1999, the first quarter in which
operations were conducted in the structure after the 1999 Merger,
management of the Company and management of Operating Company determined
that Operating Company had not performed as well as projected for several
reasons: occupancy rates at its facilities were lower than in 1998;
operating expenses were higher as a percentage of revenue than in 1998;
and certain aspects of the Operating Company Leases adversely affected
Operating Company. As a result, in May 1999, the Company and Operating
Company amended certain of the agreements between them to provide
Operating Company with additional cash flow. See Note 5 for further
discussion of these amendments. The objective of these changes was to
allow Operating Company to be able to continue to make its full lease
payments, to allow the Company to continue to make dividend payments to
its stockholders and to provide time for Operating Company to improve its
operations so that it might ultimately perform as projected and be able
to make its full lease payments to the Company.
However, after these changes were announced, a chain of events occurred
which adversely affected both the Company and Operating Company. The
Company's stock price fell dramatically, resulting in the commencement of
stockholder litigation against the Company and its former directors and
officers. These events made it more difficult to raise capital. A lower
stock price meant that the Company had more restricted access to equity
capital, and the uncertainties caused by the falling stock price made it
much more difficult to obtain debt financing. As described in Note 21,
the Company has accrued the estimated maximum obligation of the
contingency associated with the stockholder litigation. Also see Note 21
for further discussion of the stockholder lawsuits, and the settlements
reached with the plaintiffs during the first quarter of 2001.
In order to address its liquidity constraints, during the summer of 1999,
the Company increased its line of credit facility from $650.0 million to
$1.0 billion. One of the financing requirements in connection with this
increase required that the Company raise $100.0 million in equity and
Operating Company raise $25.0 million in equity in order for the Company
to make the distributions in cash that would be necessary to enable the
Company to qualify as a REIT with respect to its 1999 taxable year. See
Note 14 for a further discussion of the Company's Amended Bank Credit
Facility.
In a further attempt to address the capital and liquidity constraints
facing the Company and Operating Company, as well as concerns regarding
the corporate structure and management of the Company, management elected
to pursue strategic alternatives for the Company, including a
restructuring led by a group of institutional investors consisting of an
affiliate of Fortress
F - 14
124
Investment Group LLC and affiliates of The Blackstone Group
("Fortress/Blackstone"). Shortly after announcing the proposal led by
Fortress/Blackstone, the Company received an unsolicited proposal from
Pacific Life Insurance Company ("Pacific Life"). Fortress/Blackstone
elected not to match the terms of the proposal from Pacific Life.
Consequently, the securities purchase agreement was terminated, and the
Company entered into an agreement with Pacific Life. The Pacific Life
securities purchase agreement was mutually terminated by the parties
after Pacific Life was unwilling to confirm that the June 2000 Waiver and
Amendment satisfied the terms of the agreement with Pacific Life. The
Company also terminated the services of one of its financial advisors.
See Note 21 for further information regarding the Company's potential
obligations under its previous agreements with Fortress/Blackstone,
Pacific Life, and the Company's financial advisor.
Consequently, the Company determined to pursue a comprehensive
restructuring without a third-party equity investment, and approved a
series of agreements providing for the comprehensive restructuring of the
Company. As further discussed in Note 14, the Restructuring included
obtaining amendments to, and a waiver of existing defaults under, the
Company's Amended Bank Credit Facility (the "June 2000 Waiver and
Amendment") that resulted from the financial condition of the Company and
Operating Company, the transactions undertaken by the Company and
Operating Company in an attempt to resolve the liquidity issues of the
Company and Operating Company, and the previously announced restructuring
transactions. In obtaining the June 2000 Waiver and Amendment, the
Company agreed to complete certain transactions which were incorporated
as covenants to the June 2000 Waiver and Amendment. Pursuant to these
requirements, the Company was obligated to complete the Restructuring,
including the Operating Company Merger, as further discussed in Note 3;
the amendment of its charter to remove the requirements that it elect to
be taxed as a REIT commencing with its 2000 taxable year, as further
discussed in Note 15; the restructuring of management; and the
distribution of shares of Series B Cumulative Convertible Preferred Stock
$0.01 par value per share (the "Series B Preferred Stock") in
satisfaction of the Company's remaining 1999 REIT distribution
requirement, as further discussed in Notes 13 and 18. As further
discussed in Note 3, the June 2000 Waiver and Amendment also permitted
the acquisitions of PMSI and JJFMSI. The Restructuring provides for a
simplified corporate and financial structure while eliminating conflicts
arising out of the landlord-tenant and debtor-creditor relationship that
existed between the Company and Operating Company.
In order to address existing and potential events of default under the
Company's convertible subordinated notes resulting from the Company's
financial condition and as a result of the proposed restructurings,
during the second quarter of 2000, the Company obtained waivers and
amendments to the provisions of the note purchase agreements governing
the notes, as further discussed in Note 14. As further discussed in Note
14, in order to address existing and potential events of default under
the Operating Company's revolving credit facility resulting from the
financial condition of Operating Company and certain restructuring
transactions, during the first quarter of 2000, Operating Company
obtained a waiver of events of default.
During the third quarter of 2000, the Company named a new president and
chief executive officer, followed by a new chief financial officer in the
fourth quarter. At the Company's 2000 annual meeting of stockholders held
during the fourth quarter of 2000, the Company's stockholders elected a
newly constituted nine-member board of directors of the Company,
including six independent directors.
Following the completion of the Operating Company Merger and the
acquisitions of PMSI and JJFMSI, during the fourth quarter of 2000, the
Company's new management conducted strategic assessments; developed a
strategic operating plan to improve the Company's financial position;
F - 15
125
developed revised projections for 2001; and evaluated the utilization of
existing facilities, projects under development, excess land parcels, and
identified certain of these non-strategic assets for sale. As a result of
these assessments, the Company recorded non-cash impairment losses
totaling $508.7 million, as further discussed in Note 7.
As further discussed in Note 14, during the fourth quarter of 2000, the
Company obtained a consent and amendment to its Amended Bank Credit
Facility to replace existing financial covenants. During the first
quarter of 2001, the Company also obtained amendments to the Amended Bank
Credit Facility, as further discussed in Note 14, to modify the financial
covenants to take into consideration any loss of EBITDA that may result
from certain asset dispositions during 2001 and subsequent periods and to
permit the issuance of indebtedness in partial satisfaction of it
obligations in the stockholder litigation settlement. Also, during the
first quarter of 2001, the Company amended the provisions to the note
purchase agreement governing its $30.0 million convertible subordinated
notes to replace previously existing financial covenants, as further
discussed in Note 14, in order to remove existing defaults and attempt to
remain in compliance during 2001 and subsequent periods.
The Company believes that its operating plans and related projections are
achievable, and would allow the Company to maintain compliance with its
debt covenants during 2001. However, there can be no assurance that the
Company will be able to maintain compliance with its debt covenants or
that, if the Company defaults under any of its debt covenants, the
Company will be able to obtain additional waivers or amendments.
Additionally, the Company also has certain non-financial covenants which
must be met in order to remain in compliance with its debt agreements.
The Company's Amended Bank Credit Facility contains a non-financial
covenant requiring the Company to consummate the securitization of lease
payments (or other similar transaction) with respect to the Company's
Agecroft facility located in Salford, England by March 31, 2001. The
Agecroft transaction did not close by the required date. However, the
covenant allows for a 30-day grace period during which the lenders under
the Amended Bank Credit Facility could not exercise their rights to
declare an event of default. On April 10, 2001, prior to the expiration
of the grace period, the Company consummated the Agecroft transaction
through the sale of all of the issued and outstanding capital stock of
Agecroft Properties, Inc., a wholly-owned subsidiary of the Company,
thereby fulfilling the Company's covenant requirements with respect to
the Agecroft transaction.
The Amended Bank Credit Facility also contains a non-financial covenant
requiring the Company to provide the lenders with audited financial
statements within 90 days of the Company's fiscal year end, subject to an
additional five-day grace period. Due to the Company's attempts to close
the securitization discussed above, the Company did not provide the
audited financial statements within the required time period. However,
the Company has obtained a waiver from the lenders under the Amended Bank
Credit Facility of this financial reporting requirement. This waiver also
cured the resulting cross-default under the Company's $40.0 million
convertible notes.
Additional non-financial covenants, among others, include a requirement
to use commercially reasonable efforts to (i) raise $100.0 million
through equity or asset sales (excluding the securitization of lease
payments or other similar transaction with respect to the Salford,
England facility) on or before June 30, 2001, and (ii) register shares
into which the $40.0 million convertible notes are convertible. The
Company believes it will be able to demonstrate commercially reasonable
efforts regarding the $100.0 million capital raising event on or before
June 30, 2001, primarily by attempting to sell certain assets, as
discussed above. Subsequent to year-end, the Company completed the sale
of a facility located in North Carolina for approximately $25 million, as
discussed in Note 8. The Company is currently evaluating and would also
consider a distribution of rights to purchase common or preferred stock
to the Company's existing stockholders, or an
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equity investment in the Company from an outside investor. The Company
expects to use the net proceeds from these transactions to pay-down debt
under the Amended Bank Credit Facility. Management also intends to take
the necessary actions to achieve compliance with the covenant regarding
the registration of shares.
The revolving loan portion of the Amended Bank Credit Facility of $382.5
million matures on January 1, 2002. As part of management's plans to
improve the Company's financial position and address the January 1, 2002
maturity of portions of the debt under the Amended Bank Credit Facility,
management has committed to a plan of disposal for certain long-lived
assets. These assets are being actively marketed for sale and are
classified as held for sale in the accompanying consolidated balance
sheet at December 31, 2000. Anticipated proceeds from these asset sales
are to be applied as loan repayments. The Company believes that utilizing
such proceeds to pay-down debt will improve its leverage ratios and
overall financial position, improving its ability to refinance or renew
maturing indebtedness, including primarily the Company's revolving loans
under the Amended Bank Credit Facility.
While management has developed strategic operating plans to deal with the
uncertainties facing the Company and to remain in compliance with its
debt covenants, there can be no assurance that the cash flow projections
will reflect actual results and there can be no assurance that the
Company will remain in compliance with its debt covenants during 2001.
Further, even if the Company is successful in selling assets, there can
be no assurance that it will be able to refinance or renew its debt
obligations maturing January 1, 2002.
Due to certain cross-default provisions contained in certain of the
Company's debt instruments (as further discussed in Note 14), if the
Company were to be in default under the Amended Bank Credit Facility and
if the lenders under the Amended Bank Credit Facility elected to exercise
their rights to accelerate the Company's obligations under the Amended
Bank Credit Facility, such events could result in the acceleration of all
or a portion of the outstanding principal amount of the Company's $100.0
million senior notes or the Company's aggregate $70.0 million convertible
subordinated notes, which would have a material adverse effect on the
Company's liquidity and financial position. Additionally, under the
Company's $40.0 million convertible subordinated notes, even if the
lenders under the Amended Bank Credit Facility did not elect to exercise
their acceleration rights, the holders of the $40.0 million convertible
subordinated notes could require the Company to repurchase such notes.
The Company does not have sufficient working capital to satisfy its debt
obligations in the event of an acceleration of all or a substantial
portion of the Company's outstanding indebtedness.
3. MERGER TRANSACTIONS
THE 1999 MERGER
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold
to Operating Company all of the issued and outstanding capital stock of
certain wholly-owned corporate subsidiaries of Old CCA, certain
management contracts and certain other assets and liabilities, and the
Company and Operating Company entered into a series of agreements as more
fully described in Note 5. In exchange, Old CCA received a $137.0 million
promissory note payable by Operating Company (the "CCA Note") and 100% of
the non-voting common stock of Operating Company. The non-voting common
stock represented a 9.5% economic interest in Operating Company and was
valued at the implied fair market value of $4.8 million. The Company
succeeded to these interests as a result of the 1999 Merger. The sale to
Operating Company generated a deferred gain
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of $63.3 million. See Note 5 for discussion of the accounting for the CCA
Note, the deferred gain and for discussion of other relationships between
the Company and Operating Company.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold
to a newly-created company, Prison Management Services, LLC ("PMS, LLC"),
certain management contracts and certain other assets and liabilities
relating to government-owned adult prison facilities. In exchange, Old
CCA received 100% of the non-voting membership interest in PMS, LLC,
valued at the implied fair market value of $67.1 million. On January 1,
1999, PMS, LLC merged with PMSI and all PMS, LLC membership interests
were converted into a similar class of stock in PMSI. The Company
succeeded to this ownership interest as a result of the 1999 Merger. The
sale to PMSI generated a deferred gain of $35.4 million.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold
to a newly-created company, Juvenile and Jail Facility Management
Services, LLC ("JJFMS, LLC"), certain management contracts and certain
other assets and liabilities relating to government-owned jails and
juvenile facilities, as well as Old CCA's international operations. In
exchange, Old CCA received 100% of the non-voting membership interest in
JJFMS, LLC valued at the implied fair market value of $55.9 million. On
January 1, 1999, JJFMS, LLC merged with JJFMSI and all JJFMS, LLC
membership interests were converted into a similar class of stock in
JJFMSI. The Company succeeded to this ownership interest as a result of
the 1999 Merger. The sale to JJFMSI generated a deferred gain of $18.0
million.
On December 31, 1998, Old CCA merged with and into New Prison Realty. In
the 1999 Merger, each share of Old CCA's common stock was converted into
the right to receive 0.875 share of New Prison Realty's common stock. On
January 1, 1999, Old Prison Realty merged with and into New Prison Realty
in the 1999 Merger. In the 1999 Merger, Old Prison Realty shareholders
received 1.0 share of common stock or 8.0% Series A Cumulative Preferred
Stock ("Series A Preferred Stock") of the Company in exchange for each
Old Prison Realty common share or 8.0% Series A Cumulative Preferred
Share.
The first step of the 1999 Merger was accounted for as a reverse
acquisition of New Prison Realty by Old CCA and as an acquisition of Old
Prison Realty by New Prison Realty. As such, Old CCA's assets and
liabilities have been carried forward at historical cost, and the
provisions of reverse acquisition accounting prescribe that Old CCA's
historical financial statements be presented as the Company's historical
financial statements prior to January 1, 1999. The historical equity
section of the financial statements and earnings per share have been
retroactively restated to reflect the Company's equity structure,
including the exchange ratio and the effects of the differences in par
values of the respective companies' common stock. Old Prison Realty's
assets and liabilities acquired in the second step of the 1999 Merger
have been recorded at fair market value, as required by Accounting
Principles Board Opinion No. 16, "Business Combinations" ("APB 16").
THE 2000 OPERATING COMPANY MERGER AND RESTRUCTURING TRANSACTIONS
In order to address liquidity and capital constraints, the Company
entered into a series of agreements providing for the comprehensive
restructuring of the Company. As a part of this Restructuring, the
Company entered into an agreement and plan of merger with Operating
Company, dated as of June 30, 2000, providing for the Operating Company
Merger.
Effective October 1, 2000, New Prison Realty and Operating Company
completed the Operating Company Merger in accordance with an agreement
and plan of merger, after New Prison Realty's stockholders approved the
agreement and plan of merger on September 12, 2000. In connection
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with the completion of the Operating Company Merger, New Prison Realty
amended its charter to, among other things:
- remove provisions relating to its qualification as a REIT for
federal income tax purposes commencing with its 2000 taxable year,
- change its name to "Corrections Corporation of America" and
- increase the amount of its authorized capital stock.
Following the completion of the Operating Company Merger, Operating
Company ceased to exist, and the Company and its wholly-owned subsidiary
began operating collectively under the "Corrections Corporation of
America" name. Pursuant to the terms of the agreement and plan of merger,
the Company issued approximately 7.5 million shares of its common stock
valued at approximately $10.6 million to the holders of Operating
Company's voting common stock at the time of the completion of the
Operating Company Merger.
On October 1, 2000, immediately prior to the completion of the Operating
Company Merger, the Company purchased all of the shares of Operating
Company's voting common stock held by the Baron Asset Fund ("Baron") and
Sodexho Alliance S.A., a French conglomerate ("Sodexho"), the holders of
approximately 34% of the outstanding common stock of Operating Company,
for an aggregate of $16.0 million in non-cash consideration, consisting
of an aggregate of approximately 11.3 million shares of the Company's
common stock. In addition, the Company issued to Baron warrants to
purchase approximately 1.4 million shares of the Company's common stock
at an exercise price of $0.01 per share and warrants to purchase
approximately 0.7 million shares of the Company's common stock at an
exercise price of $1.41 per share in consideration for Baron's consent to
the Operating Company Merger. The warrants issued to Baron were valued at
approximately $2.2 million. In addition, in the Operating Company Merger,
the Company assumed the obligation to issue up to approximately 0.8
million shares of its common stock, at an exercise price of $3.33 per
share, pursuant to the exercise of warrants to purchase common stock
previously issued by Operating Company.
Also on October 1, 2000, immediately prior to the Operating Company
Merger, the Company purchased an aggregate of 100,000 shares of Operating
Company's voting common stock for $200,000 cash from D. Robert Crants,
III and Michael W. Devlin, former executive officers and directors of the
Company, pursuant to the terms of severance agreements between the
Company and Messrs. Crants, III and Devlin. The cash proceeds from the
purchase of the shares of Operating Company's voting common stock from
Messrs. Crants, III and Devlin were used to immediately repay a like
portion of amounts outstanding under loans previously granted to Messrs.
Crants, III and Devlin by the Company. The Company also purchased 300,000
shares of Operating Company's voting common stock held by Doctor R.
Crants, the former chief executive officer of the Company and Operating
Company, for $600,000 cash. Under the original terms of the severance
agreements between the Company and each of Messrs. Crants, III and
Devlin, Operating Company was to make a $300,000 payment for the purchase
of a portion of the shares of Operating Company's voting common stock
originally held by Messrs. Crants, III and Devlin on December 31, 1999.
However, as a result of restrictions on Operating Company's ability to
purchase these shares, the rights and obligations were assigned to and
assumed by Doctor R. Crants. In connection with this assignment, Mr.
Crants received a loan in the aggregate principal amount of $600,000 from
PMSI, the proceeds of which were used to purchase the 300,000 shares of
Operating Company's voting common stock owned by Messrs. Crants, III and
Devlin. The cash proceeds from the purchase by the Company of the shares
of Operating Company's voting common stock from Mr. Crants were used to
immediately repay the $600,000 loan previously granted to Mr. Crants by
PMSI.
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The Operating Company Merger was accounted for using the purchase method
of accounting as prescribed by APB 16. Accordingly, the aggregate
purchase price of $75.3 million was allocated to the assets purchased and
liabilities assumed (identifiable intangibles included a workforce asset
of approximately $1.6 million, a contract acquisition costs asset of
approximately $1.5 million and a contract values liability of
approximately $26.1 million) based upon the estimated fair value at the
date of acquisition. The aggregate purchase price consisted of the value
of the Company's common stock and warrants issued in the transaction, the
Company's net carrying amount of the CCA Note as of the date of
acquisition (which has been extinguished), the Company's net carrying
amount of deferred gains and receivables/payables between the Company and
Operating Company as of the date of acquisition, and capitalized merger
costs. The excess of the aggregate purchase price over the assets
purchased and liabilities assumed of $87.0 million was reflected as
goodwill. See Note 4 regarding amortization of the Company's intangibles.
As a result of the Restructuring, all existing Operating Company Leases
(as defined in Note 5), the Tenant Incentive Agreement, the Trade Name
Use Agreement, the Right to Purchase Agreement, the Services Agreement
and the Business Development Agreement (each as defined in Note 5) were
cancelled. In addition, all outstanding shares of Operating Company's
non-voting common stock, all of which shares were owned by the Company,
were cancelled in the Operating Company Merger.
In connection with the Restructuring, in September 2000 a wholly-owned
subsidiary of PMSI purchased 85% of the outstanding voting common stock
of PMSI which was held by Privatized Management Services Investors, LLC,
an outside entity controlled by a director of PMSI and members of the
director's family, for a cash purchase price of $8.0 million. In
addition, PMSI and its wholly-owned subsidiary paid the chief manager of
Privatized Management Services Investors, LLC $150,000 as compensation
for expenses incurred in connection with the transaction, as well as
$125,000 in consideration for the chief manager's agreement not to engage
in a business competitive to the business of PMSI for a period of one
year following the completion of the transaction. Also in connection with
the Restructuring, in September 2000 a wholly-owned subsidiary of JJFMSI
purchased 85% of the outstanding voting common stock of JJFMSI which was
held by Correctional Services Investors, LLC, an outside entity
controlled by a director of JJFMSI, for a cash purchase price of $4.8
million. In addition, JJFMSI and its wholly-owned subsidiary paid the
chief manager of Correctional Services Investors, LLC $250,000 for
expenses incurred in connection with the transaction.
As a result of the acquisitions of PMSI and JJFMSI on December 1, 2000,
all shares of PMSI and JJFMSI voting and non-voting common stock held by
the Company and certain subsidiaries of PMSI and JJFMSI were cancelled.
In connection with the acquisition of PMSI, the Company issued
approximately 1.3 million shares of its common stock valued at
approximately $0.6 million to the wardens of the correctional and
detention facilities operated by PMSI who were the remaining shareholders
of PMSI. Shares of the Company's common stock owned by the PMSI wardens
are subject to vesting and forfeiture provisions under a restricted stock
plan. In connection with the acquisition of JJFMSI, the Company issued
approximately 1.6 million shares of its common stock valued at
approximately $0.7 million to the wardens of the correctional and
detention facilities operated by JJFMSI who were the remaining
shareholders of JJFMSI. Shares of the Company's common stock owned by the
JJFMSI wardens are subject to vesting and forfeiture provisions under a
restricted stock plan.
The acquisition of PMSI was accounted for using the purchase method of
accounting as prescribed by APB 16. Accordingly, the aggregate purchase
price of $43.2 million was allocated to the assets
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purchased and liabilities assumed (identifiable intangibles included a
workforce asset of approximately $0.5 million, a contract acquisition
costs asset of approximately $0.7 million and a contract values asset of
approximately $4.0 million) based upon the estimated fair value at the
date of acquisition. The aggregate purchase price consisted of the net
carrying amount of the Company's investment in PMSI less the Company's
net carrying amount of deferred gains and receivables/payables between
the Company and PMSI as of the date of acquisition, and capitalized
merger costs. The excess of the aggregate purchase price over the assets
purchased and liabilities assumed of $12.2 million was reflected as
goodwill. See Note 4 regarding amortization of the Company's intangibles.
The acquisition of JJFMSI was also accounted for using the purchase
method of accounting as prescribed by APB 16. Accordingly, the aggregate
purchase price of $38.2 million was allocated to the assets purchased and
liabilities assumed (identifiable intangibles included a workforce asset
of approximately $0.5 million, a contract acquisition costs asset of
approximately $0.5 million and a contract values liability of
approximately $3.1 million) based upon the estimated fair value at the
date of acquisition. The aggregate purchase price consisted of the net
carrying amount of the Company's investment in JJFMSI less the Company's
net carrying amount of deferred gains and receivables/payables between
the Company and JJFMSI as of the date of acquisition, and capitalized
merger costs. The excess of the aggregate purchase price over the assets
purchased and liabilities assumed of $11.4 million was reflected as
goodwill. See Note 4 regarding amortization of the Company's intangibles.
As a part of the Restructuring, CCA (UK) Limited, a company incorporated
in England and Wales ("CCA UK") and a wholly-owned subsidiary of JJFMSI,
sold its 50% ownership interest in two international subsidiaries,
Corrections Corporation of Australia Pty. Ltd., an Australian corporation
("CCA Australia"), and U.K. Detention Services Limited, a company
incorporated in England and Wales ("UKDS"), to Sodexho on November 30,
2000 and December 7, 2000, respectively, for an aggregate cash purchase
price of $6.4 million. Sodexho already owned the remaining 50% interest
in each of CCA Australia and UKDS. The purchase price of $6.4 million
included $5.0 million for the purchase of UKDS and $1.4 million for the
purchase of CCA Australia. JJFMSI's book basis in UKDS was $3.4 million,
which resulted in a $1.6 million gain in the fourth quarter of 2000.
JJFMSI's book basis in CCA Australia was $5.0 million, which resulted in
a $3.6 million loss, which was recognized as a loss on sale of assets
during the third quarter of 2000. In connection with the sale of CCA UK's
interest in CCA Australia and UKDS to Sodexho, Sodexho granted JJFMSI an
option to repurchase a 25% interest in each entity at any time prior to
September 11, 2002 for aggregate cash consideration of $4.0 million if
such option is exercised on or before February 11, 2002, and for
aggregate cash consideration of $4.2 million if such option is exercised
after February 11, 2002 but prior to September 11, 2002.
The following unaudited pro forma operating information presents a
summary of comparable results of combined operations of the Company,
Operating Company, PMSI and JJFMSI for the years ended December 31, 2000
and 1999 as if the Operating Company Merger and acquisitions of PMSI and
JJFMSI had collectively occurred as of the beginning of the periods
presented. The unaudited information includes the dilutive effects of the
Company's common stock issued in the Operating Company Merger and the
acquisitions of PMSI and JJFMSI as well as the amortization of the
intangibles recorded in the Operating Company Merger and the acquisition
of PMSI and JJFMSI, but excludes: (i) transactions or the effects of
transactions between the Company, Operating Company, PMSI and JJFMSI
including rental payments, licensing fees, administrative service fees
and tenant incentive fees; (ii) the Company's write-off of amounts under
lease arrangements; (iii) the Company's recognition of deferred gains on
sales of contracts; (iv) the Company's recognition of equity in earnings
or losses of Operating Company, PMSI and JJFMSI; (v) non-recurring merger
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costs expensed by the Company; (vi) strategic investor fees expensed by
the Company; (vii) excise taxes accrued by the Company in 1999 related to
its status as a REIT; and (viii) the Company's provisions for changes in
tax status in both 1999 and 2000. The unaudited pro forma operating
information is presented for comparison purposes only and does not
purport to represent what the Company's results of operations actually
would have been had the Operating Company Merger and acquisitions of PMSI
and JJFMSI, in fact, collectively occurred at the beginning of the
periods presented.
PRO FORMA FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
Revenue $ 891,680 $ 782,335
Operating loss $(481,026) $ (10,167)
Net loss available to common stockholders $(578,174) $ (57,844)
Net loss per common share:
Basic $ (3.90) $ (0.42)
Diluted $ (3.90) $ (0.42)
The unaudited pro forma information presented above does not include
adjustments to reflect the dilutive effects of the fourth quarter of 2000
conversion of the Company's Series B Preferred Stock into approximately
95.1 million shares of the Company's common stock as if those conversions
occurred at the beginning of the periods presented. Additionally, the
unaudited pro forma information does not include the dilutive effects of
the Company's potentially issuable common shares such as convertible debt
and equity securities, options and warrants as the provision of SFAS 128
prohibit the inclusion of the effects of potentially issuable shares in
periods that a company reports losses from continuing operations. The
unaudited pro forma information also does not include the dilutive
effects of the expected issuance of 46.9 million shares of the Company's
common stock in connection with the proposed settlement of the Company's
stockholder litigation.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined and consolidated financial statements include the accounts
of the Company on a consolidated basis with its wholly-owned subsidiaries
as of and for each period presented. The Company's results of operations
for all periods prior to January 1, 1999 reflect the operating results of
Old CCA as a prison management company, while the results of operations
for 1999 reflect the operating results of the Company as a REIT.
Management believes the comparison between 1999 and prior years is not
meaningful because the prior years' financial condition, results of
operations, and cash flows reflect the operations of Old CCA and the 1999
financial condition, results of operations and cash flows reflect the
operations of the Company as a REIT.
Further, management believes the comparison between 2000 and prior years
is not meaningful because the 2000 financial condition, results of
operations and cash flows reflect the operation of the Company as a
subchapter C corporation, and which, for the period from January 1, 2000
through September 30, 2000, included real estate activities between the
Company and Operating Company during a period of severe liquidity
problems, and as of October 1, 2000, also includes the operations of the
correctional and detention facilities previously leased to and managed by
Operating Company. In addition, the Company's financial condition,
results of operations and cash flows as of and for the year ended
December 31, 2000 also include the operations of the Service
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Companies as of December 1, 2000 (acquisition date) on a consolidated
basis. For the period January 1, 2000 through August 31, 2000, the
investments in the Service Companies were accounted for and were
presented under the equity method of accounting. For the period from
September 1, 2000 through November 30, 2000, the investments in the
Service Companies were accounted for on a combined basis due to the
repurchase by the wholly-owned subsidiaries of the Service Companies of
the non-management, outside stockholders' equity interest in the Service
Companies during September 2000. The resulting increase in the Company's
assets and liabilities as of September 1, 2000 as a result of combining
the balance sheets of PMSI and JJFMSI has been treated as a non-cash
transaction in the accompanying combined statement of cash flows for the
year ended December 31, 2000, with the September 1, 2000 cash balances of
PMSI and JJFMSI included in "cash and cash equivalents, beginning of
year." Consistent with the Company's previous financial statement
presentations, the Company has presented its economic interests in each
of PMSI and JJFMSI under the equity method for all periods prior to
September 1, 2000. All material intercompany transactions and balances
have been eliminated in combining the consolidated financial statements
of the Company and its wholly-owned subsidiaries with the respective
financial statements of PMSI and JJFMSI.
Although the Company's consolidated results of operations and cash flows
presented in the accompanying financial statements are presented on a
combined basis with the results of operations and cash flows of PMSI and
JJFMSI, the Company did not control the assets and liabilities of either
PMSI or JJFMSI. Additionally, the Company was only entitled to receive
dividends on its non-voting common stock upon declaration by the
respective boards of directors of PMSI and JJFMSI.
Prior to the Operating Company Merger, the Company had accounted for its
9.5% non-voting interest in Operating Company under the cost method of
accounting. As such, the Company had not recognized any income or loss
related to its stock ownership investment in Operating Company during the
period from January 1, 1999 through September 30, 2000. However, in
connection with the Operating Company Merger, the financial statements of
the Company have been restated to recognize the Company's 9.5% pro-rata
share of Operating Company's losses on a retroactive basis for the period
from January 1, 1999 through September 30, 2000 under the equity method
of accounting, in accordance with APB 18, "The Equity Method of
Accounting for Investments in Common Stock" ("APB 18").
CASH AND CASH EQUIVALENTS
The Company considers all liquid debt instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
RESTRICTED CASH
Restricted cash at December 31, 2000 was $9.2 million, of which $7.0
million represents cash collateral for a guarantee agreement and $2.2
million represents cash collateral for outstanding letters of credit.
Restricted cash at December 31, 1999 was $24.4 million, of which $15.5
million represented cash collateral for an irrevocable letter of credit
issued in connection with the construction of a facility and $6.9 million
represented cash collateral for a guarantee agreement. The remaining $2.0
million represented cash collateral for outstanding letters of credit.
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PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Assets acquired by the Company
in conjunction with acquisitions are recorded at estimated fair market
value in accordance with the purchase method of accounting prescribed by
APB 16. Betterments, renewals and extraordinary repairs that extend the
life of an asset are capitalized; other repair and maintenance costs are
expensed. Interest is capitalized to the asset to which it relates in
connection with the construction of major facilities. The cost and
accumulated depreciation applicable to assets retired are removed from
the accounts and the gain or loss on disposition is recognized in income.
Depreciation is computed over the estimated useful lives of depreciable
assets using the straight-line method. Useful lives for property and
equipment are as follows:
Land improvements 5 - 20 years
Buildings and improvements 5 - 50 years
Equipment 3 - 5 years
Office furniture and fixtures 5 years
ASSETS HELD FOR SALE
Assets held for sale are carried at the lower of cost or estimated fair
value less estimated cost to sell. Depreciation is suspended during the
period held for sale.
INTANGIBLE ASSETS
Intangible assets primarily include goodwill, value of workforce,
contract acquisition costs, and contract values established in connection
with certain business combinations. Goodwill represents the cost in
excess of the net assets of businesses acquired. Goodwill is amortized
into amortization expense over fifteen years using the straight-line
method. Value of workforce, contract acquisition costs and contract
values represent the estimated fair values of the identifiable
intangibles acquired in the Operating Company Merger and in the
acquisitions of the Service Companies. Value of workforce is amortized
into amortization expense over estimated useful lives ranging from 23 to
38 months using the straight-line method. Contract acquisition costs and
contract values are generally amortized into amortization expense using
the interest method over the lives of the related management contracts
acquired, which range from three to 227 months. The Company periodically
reviews the value of its intangible assets to determine if an impairment
has occurred. The Company determines if a potential impairment of
intangible assets exists based on the estimated undiscounted value of
expected future operating cash flows in relation to the carrying values.
The Company does not believe that impairments of intangible assets have
occurred. The Company also periodically evaluates whether changes have
occurred that would require revision of the remaining estimated useful
lives of intangible assets.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of" ("SFAS 121"), the Company evaluates the recoverability
of the carrying values of its long-lived assets, other than intangibles,
when events suggest that an impairment may have occurred. In these
circumstances, the Company utilizes estimates of undiscounted cash flows
to determine if an impairment exists. If an impairment exists, it is
measured as the amount by which the carrying amount of the asset exceeds
the estimated fair value of the asset. See Note 7 for discussion of
impairment of long-lived assets.
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INVESTMENT IN DIRECT FINANCING LEASES
Investment in direct financing leases represents the portion of the
Company's management contracts with certain governmental agencies that
represent capitalized lease payments on building and equipment. 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.
INVESTMENT IN AFFILIATES
Investments in affiliates that are equal to or less than 50%-owned over
which the Company cannot exercise significant influence are accounted for
using the equity method of accounting. For the period from January 1,
1999 through August 31, 2000, the investments in the Service Companies
were accounted for under the equity method of accounting. For the period
from September 1, 2000 through November 30, 2000, the investments in the
Service Companies are presented on a combined basis due to the repurchase
by the wholly-owned subsidiaries of the Service Companies of the
non-management, outside stockholders' equity interest in the Service
Companies during September 2000.
Prior to the Operating Company Merger, the Company had accounted for its
9.5% non-voting interest in Operating Company under the cost method of
accounting. As such, the Company had not recognized any income or loss
related to its stock ownership investment in Operating Company during the
period from January 1, 1999 through September 30, 2000. However, in
connection with the Operating Company Merger, the financial statements of
the Company have been restated to recognize the Company's 9.5% pro-rata
share of Operating Company's losses on a retroactive basis for the period
from January 1, 1999 through September 30, 2000 under the equity method
of accounting, in accordance with APB 18.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized into interest expense on a
straight-line basis, which is not materially different than the interest
method, over the term of the related debt.
DEFERRED GAINS ON SALES OF CONTRACTS
Deferred gains on sales of contracts were generated as a result of the
sale of certain management contracts to Operating Company, PMSI and
JJFMSI. The Company previously amortized these deferred gains into income
in accordance with SAB 81. The deferred gain from the sale to Operating
Company was to be amortized concurrently with the receipt of the
principal payments on the CCA Note, over a six-year period beginning
December 31, 2003. As of the date of the Operating Company Merger, the
Company had not recognized any of the deferred gain from the sale to
Operating Company. The deferred gains from the sales to PMSI and JJFMSI
had been amortized over a five year period commencing January 1, 1999,
which represented the average remaining lives of the contracts sold to
PMSI and JJFMSI, plus any contractual renewal options. Effective with the
Operating Company Merger and the acquisitions of PMSI and JJFMSI, the
Company applied the unamortized balances of the deferred gains on sales
of contracts in accordance with the purchase method of accounting under
APB 16.
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MANAGEMENT AND OTHER REVENUE
The Company maintains contracts with certain governmental entities to
manage their facilities for fixed per diem rates or monthly fixed rates.
The Company also maintains contracts with various federal, state and
local governmental entities for the housing of inmates in company-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. Additionally, most facility contracts contain
clauses which allow the government agency to terminate a contract without
cause, and are generally subject to legislative appropriations. The
Company expects to renew these contracts for periods consistent with the
remaining renewal options allowed by the contracts or other reasonable
extensions; however, no assurance can be given that such renewals will be
obtained. Fixed monthly rate revenue is recorded in the month earned and
fixed per diem revenue is recorded based on the per diem rate multiplied
by the number of inmates housed during the respective period. The Company
recognizes any additional management service revenues when earned.
RENTAL REVENUE
Rental revenues are recognized based on the terms of the Company's
leases. Tenant incentive fees paid to lessees, including Operating
Company prior to the Operating Company Merger, are deferred and amortized
as a reduction of rental revenue over the term of related leases. During
1999, due to Operating Company's financial condition, as well as the
proposed merger with Operating Company and the proposed termination of
the Operating Company Leases in connection therewith, the Company
wrote-off the tenant incentive fees due to Operating Company, totaling
$65.7 million for the year ended December 31, 1999. Tenant incentive fees
due to Operating Company during 2000 totaling $11.9 million were expensed
as incurred.
START-UP COSTS
In accordance with the AICPA's Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities," the Company expenses all start-up
costs as incurred in operating expenses. During 1998, the Company
recorded a $16.1 million charge as a cumulative effect of accounting
change, net of taxes of $10.3 million, upon adoption of this Statement
for the effect of this change on periods through December 31, 1997.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 generally requires the Company to record deferred
income taxes for the tax effect of differences between book and tax bases
of its assets and liabilities. For the year ended December 31, 1999, the
Company elected to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"). As a result, the Company was generally not
subject to income tax on its taxable income at corporate rates to the
extent it distributed annually at least 95% of its taxable income to its
shareholders and complied with certain other requirements. Accordingly,
no provision has been made for income taxes in the accompanying 1999
consolidated financial statements. The Company's election of REIT status
for the taxable year ended December 31, 1999 is subject to review by the
Internal Revenue Service ("IRS"), generally for a period of three years
from the date of filing of its 1999 tax return. In connection with the
Restructuring, on September 12, 2000, the Company's stockholders approved
an amendment to the Company's charter to remove provisions requiring the
Company to elect to qualify and be taxed as a REIT for federal income tax
purposes effective January 1, 2000. The
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Company will be taxed as a taxable subchapter C corporation beginning
with its taxable year ended December 31, 2000.
Prior to the 1999 Merger, Old CCA operated as a taxable corporation for
federal income tax purposes since its inception. Subsequent to the 1999
Merger the Company elected to change its tax status to a REIT effective
with the filing of its 1999 federal income tax return. Although the
Company recorded a provision for income taxes during 1999 reflecting the
removal of net deferred tax assets on the Company's balance sheet as of
December 31, 1998, as a REIT, the Company was no longer subject to
federal income taxes, so long as the Company continued to qualify as a
REIT under the Internal Revenue Code. Therefore, no income tax provision
was incurred, nor benefit realized, relating to the Company's operations
for the year ended December 31, 1999. However, in order to qualify as a
REIT, the Company was required to distribute the accumulated earnings and
profits of Old CCA. See Note 13 for further information. In connection
with the Restructuring, the Company's stockholders approved an amendment
to the Company's charter to, among other things, remove provisions
relating to the Company's operation and qualification as a REIT for
federal income tax purposes commencing with its taxable year ended
December 31, 2000. The Company recognized an income tax provision during
the third quarter of 2000 for establishing net deferred tax liabilities
in connection with the change in tax status, net of a valuation allowance
applied to certain deferred tax assets. The Company expects to continue
to operate as a taxable corporation in future years.
FOREIGN CURRENCY TRANSACTIONS
During 2000, a wholly-owned subsidiary of the Company entered into a
25-year property lease with Agecroft Prison Management, Ltd. ("APM") in
connection with the construction and development of the Company's HMP
Forrest Bank facility, located in Salford, England. The Company also
extended a working capital loan to the operator of this facility. These
assets along with various other short-term receivables are denominated in
British pounds; consequently, the Company adjusts these receivables to
the current exchange rate at each balance sheet date and recognizes the
unrealized currency gain or loss in current period earnings. Realized
foreign currency gains or losses are recognized in operating expenses
when the direct financing lease payments are received. On April 10, 2001,
the Company sold its interest in the facility located in Salford,
England.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial
Instruments" ("SFAS 107"), the Company calculates the estimated fair
value of financial instruments using quoted market prices of similar
instruments or discounted cash flow techniques. At December 31, 2000 and
1999, there were no differences between the carrying amounts and the
estimated fair values of the Company's financial instruments, other than
as follows (in thousands):
DECEMBER 31,
--------------------------------------------------------------------------
2000 1999
---------------------------------- -----------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------- -------------- --------------- ----------------
Investment in direct financing
leases $ 24,877 $ 17,541 $ 74,059 $ 62,650
Debt $ (1,152,570) $ (844,334) $ (1,098,991) $ (1,103,171)
Interest rate swap arrangement $ -- $ (5,023) $ -- $ 2,407
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USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISKS
The Company's credit risks relate primarily to cash and cash equivalents,
restricted cash, accounts receivable and investment in direct financing
leases. Cash and cash equivalents and restricted cash are primarily held
in bank accounts and overnight investments. The Company's accounts
receivable and investment in direct financing leases represent amounts
due primarily from governmental agencies. The Company's financial
instruments are subject to the possibility of loss in carrying value as a
result of either the failure of other parties to perform according to
their contractual obligations or changes in market prices that make the
instruments less valuable.
Approximately 13% and 84% of the Company's revenue for the year ended
December 31, 2000 relates to amounts earned under lease arrangements from
tenants (primarily Operating Company) and federal, state and local
government management contracts, respectively. Approximately 20% and 52%
of the Company's revenue was from federal and state governments,
respectively, for the year ended December 31, 2000. Management revenue
from the Federal Bureau of Prisons ("BOP") represents approximately 11%
of total revenue. No other customer generated more than 10% of total
revenue.
Approximately 95% of the Company's revenue for the year ended December
31, 1999 relates to amounts earned under lease arrangements from tenants,
primarily Operating Company. Approximately 96% of Old CCA's revenue for
the year ended December 31, 1998 related to amounts earned from federal,
state and local governmental management and transportation contracts. Old
CCA had revenue of 18% from federal governments and 65% from state
governments for the year ended December 31, 1998. One state government
accounted for 10% of Old CCA's revenue for the year ended December 31,
1998.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning
after December 15, 1997. SFAS 130 requires that changes in the amounts of
certain items, including gains and losses on certain securities, be shown
in the financial statements as a component of comprehensive income. The
Company's adoption of SFAS 130, effective January 1, 1998, has had no
significant impact on the Company's results of operations as
comprehensive income (loss) has been equivalent to the Company's reported
net income (loss) for the years ended December 31, 2000, 1999 and 1998.
SEGMENT DISCLOSURES
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), effective for fiscal years beginning after
December 15, 1997. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and
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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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133, as amended, establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS 133, as amended, requires that changes in a derivative's fair value
be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133, as amended, is effective for fiscal quarters
of fiscal years beginning after June 15, 2000. The Company's derivative
instruments include an interest rate swap agreement and, subject to the
expiration of a court appeals process, an 8.0%, $29.0 million promissory
note expected to be issued in 2001 to plaintiffs arising from the
settlement of a series of stockholder lawsuits against the Company and
certain of its existing and former directors and executive officers.
Beginning January 1, 2001, in accordance with SFAS 133, as amended, the
Company will reflect in earnings the change in the estimated fair value
of the interest rate protection agreement on a quarterly basis. The
Company estimates the fair value of interest rate protection agreements
using option-pricing models that value the potential for interest rate
protection agreements to become in-the-money through changes in interest
rates during the remaining terms of the agreements. A negative fair value
represents the estimated amount the Company would have to pay to cancel
the contract or transfer it to other parties. As of December 31, 2000,
due to a reduction in interest rates since entering into the swap
agreement, the interest rate swap agreement has a negative fair value of
approximately $5.0 million.
As further discussed in Note 21, the ultimate liability relating to the
$29.0 million promissory note and related interest will be determined on
the future issuance date and thereafter, based upon fluctuations in the
Company's common stock price. If the promissory note is issued under the
current terms, in accordance with SFAS 133, as amended, the Company will
reflect in earnings, the change in the estimated fair value of the
promissory note from quarter to quarter. Since the Company has reflected
the maximum obligation of the contingency associated with the stockholder
litigation in the accompanying balance sheet as of December 31, 2000, the
adoption of SFAS 133, as amended, may have a material impact on the
Company's consolidated financial position and results of operations if
the fair value is deemed to be significantly different than the carrying
amount of the liability at December 31, 2000. However, the impact cannot
be determined until the promissory note is issued and an estimated fair
value of the promissory note is determined.
RECLASSIFICATIONS
Certain reclassifications of 1999 and 1998 amounts have been made to
conform with the 2000 presentation.
5. HISTORICAL RELATIONSHIP WITH OPERATING COMPANY
Operating Company was a private prison management company that operated,
managed and leased the substantial majority of facilities owned by the
Company from January 1, 1999 through
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September 30, 2000. As a result of the 1999 Merger and certain
contractual relationships existing between the Company and Operating
Company, the Company was dependent on Operating Company for a significant
source of its income. In addition, the Company was obligated to pay
Operating Company tenant incentive fees and fees for services rendered to
the Company in the development of its correctional and detention
facilities. As of September 30, 2000 (immediately prior to the Operating
Company Merger), Operating Company leased 37 of the 46 operating
facilities owned by the Company.
CCA NOTE
As discussed in Note 3, the Company succeeded to the CCA Note as a result
of the 1999 Merger. Interest on the CCA Note was payable annually at an
interest rate of 12%. Principal was due in six equal annual installments
of approximately $22.8 million beginning December 31, 2003. Ten percent
of the outstanding principal of the CCA Note was personally guaranteed by
the Company's former chief executive officer, who also served as the
chief executive officer and a member of the board of directors of
Operating Company. As of December 31, 1999, the first scheduled payment
of interest, totaling approximately $16.4 million, on the CCA Note was
unpaid. Pursuant to the terms of the CCA Note, Operating Company was
required to make the payment on December 31, 1999; however, pursuant to
the terms of a subordination agreement, dated as of March 1, 1999, by and
between the Company and the agent of Operating Company's revolving credit
facility, Operating Company was prohibited from making the scheduled
interest payment on the CCA Note when Operating Company was not in
compliance with certain financial covenants under the facility. Pursuant
to the terms of the subordination agreement between the Company and the
agent of Operating Company's revolving credit facility, the Company was
prohibited from accelerating payment of the principal amount of the CCA
Note or taking any other action to enforce its rights under the
provisions of the CCA Note for so long as Operating Company's revolving
credit facility remained outstanding. The Company fully reserved the
$16.4 million of interest accrued under the terms of the CCA Note during
1999.
On September 29, 2000, the Company and Operating Company entered into
agreements pursuant to which the Company forgave interest due under the
CCA Note. The Company forgave $27.4 million of interest accrued under the
terms of the CCA Note from January 1, 1999 to August 31, 2000, all of
which had been fully reserved. The Company also fully reserved the $1.4
million of interest accrued for the month of September 2000. In
connection with the Operating Company Merger, the CCA Note was assumed by
the Company's wholly-owned subsidiary on October 1, 2000. The CCA Note
has since been extinguished.
DEFERRED GAIN ON SALE TO OPERATING COMPANY
The sale to Operating Company as part of the 1999 Merger generated a
deferred gain of $63.3 million. The $63.3 million deferred gain is
included in deferred gains on sales of contracts in the accompanying 1999
consolidated balance sheet. No amortization of the Operating Company
deferred gain occurred during the year ended December 31, 1999 or during
the period from January 1, 2000 through September 30, 2000. Effective
with the Operating Company Merger on October 1, 2000, the Company applied
the unamortized balance of the deferred gain on sales of contracts in
accordance with the purchase method of accounting under APB 16.
OPERATING COMPANY LEASES
In order for New Prison Realty to qualify as a REIT, New Prison Realty's
income generally could not include income from the operation and
management of correctional and detention facilities,
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including those facilities operated and managed by Old CCA. Accordingly,
immediately prior to the 1999 Merger, the non-real estate assets of Old
CCA, including all management contracts, were sold to Operating Company
and the Service Companies. On January 1, 1999, immediately after the 1999
Merger, all existing leases between Old CCA and Old Prison Realty were
cancelled. Following the 1999 Merger, a substantial majority of the
correctional and detention facilities acquired by New Prison Realty in
the 1999 Merger were leased to Operating Company pursuant to long-term
"triple-net" leases (the "Operating Company Leases"). The terms of the
Operating Company Leases were for twelve years and could be extended at
fair market rates for three additional five-year periods upon the mutual
agreement of the Company and Operating Company.
As of December 31, 1999, the annual base rent with respect to each
facility was subject to increase each year in an amount equal to the
lesser of: (i) 4% of the annualized yearly rental payment with respect to
such facility or (ii) 10% of the excess of Operating Company's aggregate
gross management revenues for the prior year over a base amount of $325.0
million.
For the years ended December 31, 2000 and 1999, the Company recognized
rental revenue from Operating Company of $31.0 million and $263.5
million, respectively, all of which was collected by the Company as
discussed below.
During the month ended December 31, 1999, and the nine months ended
September 30, 2000, due to Operating Company's liquidity position,
Operating Company failed to make timely rental payments under the terms
of the Operating Company Leases. As of December 31, 1999, approximately
$24.9 million of rents due from Operating Company to the Company were
unpaid. The terms of the Operating Company Leases provided that rental
payments were due and payable on December 25, 1999. During 2000,
Operating Company paid the $24.9 million of lease payments related to
1999 and $31.0 million of lease payments related to 2000. For the nine
months ended September 30, 2000, the Company recognized rental revenue
from Operating Company of $244.3 million and recorded a reserve of $213.3
million, resulting in recognition of net rental revenue from Operating
Company of $31.0 million. The reserve was recorded due to the uncertainty
regarding the collectibility of the revenue. In June 2000, the Operating
Company Leases were amended to defer, with interest, rental payments
originally due during the period from January 1, 2000 to September 2000,
with the exception of certain installment payments. Through September 30,
2000, the Company accrued and fully reserved $8.0 million of interest due
to the Company on unpaid rental payments. On September 29, 2000, the
Company and Operating Company entered into agreements pursuant to which
the Company forgave all unpaid rental payments plus accrued interest, due
and payable from Operating Company through August 31, 2000, including
$190.8 million due under the Operating Company Leases and $7.9 million of
interest due on the unpaid rental payments. The Company also fully
reserved the $22.5 million of rental payments due for the month of
September 2000. The Company cancelled the Operating Company Leases in
connection with the Operating Company Merger.
TENANT INCENTIVE ARRANGEMENT
On May 4, 1999, the Company and Operating Company entered into an amended
and restated tenant incentive agreement (the "Amended and Restated Tenant
Incentive Agreement"), effective as of January 1, 1999, providing for (i)
a tenant incentive fee of up to $4,000 per bed payable with respect to
all future facilities developed and facilitated by Operating Company, as
well as certain other facilities which, although operational on January
1, 1999, had not achieved full occupancy, and (ii) an $840 per bed
allowance for all beds in operation at the beginning of January 1999,
approximately 21,500 beds, that were not subject to the tenant allowance
in the first quarter of 1999. The amount of the amended tenant incentive
fee included an allowance for rental payments to be
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paid by Operating Company prior to the facility reaching stabilized
occupancy. The term of the Amended and Restated Tenant Incentive
Agreement was four years, unless extended upon the written agreement of
the Company and Operating Company. The incentive fees with Operating
Company were deferred and the Company expected to amortize them as a
reduction to rental revenue over the respective lease term.
For the year ended December 1999, the Company paid tenant incentive fees
of $68.6 million, with $2.9 million of those fees amortized against
rental revenue. During the fourth quarter of 1999, the Company undertook
a plan that contemplated either merging with Operating Company and
thereby eliminating the Operating Company Leases or amending the
Operating Company Leases to reduce the lease payments to be paid by
Operating Company to the Company during 2000. Consequently, the Company
determined that the remaining deferred tenant incentive fees under the
existing lease arrangements at December 31, 1999 were not realizable and
wrote-off fees totaling $65.7 million.
During the nine months ended September 30, 2000, the Company opened two
facilities and expanded three facilities that were operated and leased by
Operating Company. The Company expensed the tenant incentive fees due
Operating Company in 2000, totaling $11.9 million, but made no payments
to Operating Company in 2000 with respect to the Amended and Restated
Tenant Incentive Agreement. On June 9, 2000, Operating Company and the
Company amended the Amended and Restated Tenant Incentive Agreement to
defer, with interest, payments to Operating Company by the Company
pursuant to this agreement. At September 30, 2000, $11.9 million of
payments under the Amended and Restated Tenant Incentive Agreement, plus
$0.7 million of interest payments, were accrued but unpaid under the
original terms of this agreement. This agreement was cancelled in
connection with the Operating Company Merger on October 1, 2000, and the
unpaid amounts due under this agreement, plus accrued interest, were
applied in accordance with the purchase method of accounting under APB
16.
TRADE NAME USE AGREEMENT
In connection with the 1999 Merger, Old CCA entered into a trade name use
agreement with Operating Company (the "Trade Name Use Agreement"). Under
the Trade Name Use Agreement, which had a term of ten years, Old CCA
granted to Operating Company the right to use the name "Corrections
Corporation of America" and derivatives thereof, subject to specified
terms and conditions therein. The Company succeeded to this interest as a
result of the 1999 Merger. In consideration for such right under the
terms of the Trade Name Use Agreement, Operating Company was to pay a
licensing fee equal to (i) 2.75% of the gross revenue of Operating
Company for the first three years, (ii) 3.25% of Operating Company's
gross revenue for the following two years, and (iii) 3.625% of Operating
Company's gross revenue for the remaining term, provided that after
completion of the 1999 Merger the amount of such fee could not exceed (a)
2.75% of the gross revenue of the Company for the first three years, (b)
3.5% of the Company's gross revenue for the following two years, and (c)
3.875% of the Company's gross revenue for the remaining term.
For the years ended December 31, 2000 and 1999, the Company recognized
income of $7.6 million and $8.7 million, respectively, from Operating
Company under the terms of the Trade Name Use Agreement, all of which has
been collected. As of December 31, 1999, $2.2 million was outstanding
under this agreement. This agreement was cancelled in connection with the
Operating Company Merger.
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RIGHT TO PURCHASE AGREEMENT
On January 1, 1999, immediately after the 1999 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
ten years following the date inmates are first received at such facility.
The initial annual rental rate on such facilities was to be the fair
market rental rate as determined by the Company and Operating Company.
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. Since January 1, 1999, the Company had not
purchased any assets from Operating Company under the Right to Purchase
Agreement. This agreement was cancelled in connection with the Operating
Company Merger.
SERVICES AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a services agreement (the "Services Agreement") with
Operating Company pursuant to which Operating Company agreed to serve as
a facilitator of the construction and development of additional
facilities on behalf of the Company for a term of five years from the
date of the Services Agreement. In such capacity, Operating Company
agreed to perform, at the direction of the Company, such services as were
customarily needed in the construction and development of correctional
and detention facilities, including services related to construction of
the facilities, project bidding, project design and governmental
relations. In consideration for the performance of such services by
Operating Company, the Company agreed to pay a fee equal to 5% of the
total capital expenditures (excluding the incentive fee discussed below
and the 5% fee herein referred to) incurred in connection with the
construction and development of a facility, plus an amount equal to
approximately $560 per bed for facility preparation services provided by
Operating Company prior to the date on which inmates are first received
at such facility. The board of directors of the Company subsequently
authorized payments, and pursuant to an amended and restated services
agreement, dated as of March 5, 1999 (the "Amended and Restated Services
Agreement"), the Company agreed to pay up to an additional 5% of the
total capital expenditures (as determined above) to Operating Company if
additional services were requested by the Company. A majority of the
Company's development projects during 1999 and 2000 were subject to a fee
totaling 10%.
Costs incurred by the Company under the Amended and Restated Services
Agreement were capitalized as part of the facilities' development cost.
Costs incurred under the Amended and Restated Services Agreement and
capitalized as part of the facilities' development cost totaled $41.6
million for the year ended December 31, 1999, and $5.6 million for the
nine months ended September 30, 2000.
On June 9, 2000, Operating Company and the Company amended the Amended
and Restated Services Agreement to defer, with interest, payments to
Operating Company by the Company pursuant to this agreement. At September
30, 2000, $5.6 million of payments under the Amended and Restated
Services Agreement, plus $0.3 million of interest payments, were accrued
but unpaid under the original terms of this agreement. This agreement was
cancelled in connection with the Operating Company Merger and the unpaid
amounts due under the agreement, plus accrued interest, were applied in
accordance with the purchase method of accounting under APB 16.
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BUSINESS DEVELOPMENT AGREEMENT
On May 4, 1999, the Company entered into a four year business development
agreement (the "Business Development Agreement") with Operating Company,
which provided that Operating Company would perform, at the direction of
the Company, services designed to assist the Company in identifying and
obtaining new business. Pursuant to the agreement, the Company agreed to
pay to Operating Company a total fee equal to 4.5% of the total capital
expenditures (excluding the amount of the tenant incentive fee and the
services fee discussed above as well as the 4.5% fee) incurred in
connection with the construction and development of each new facility, or
the construction and development of an addition to an existing facility,
for which Operating Company performed business development services.
Costs incurred by the Company under the Business Development Agreement
were capitalized as part of the facilities' development cost. Costs
incurred under the Business Development Agreement and capitalized as part
of the facilities' development cost totaled $15.0 million for the year
ended December 31, 1999. No costs were incurred under the Business
Development Agreement during 2000. On June 9, 2000, Operating Company and
the Company amended this agreement to defer, with interest, any payments
to Operating Company by the Company pursuant to this agreement. This
agreement was cancelled in connection with the Operating Company Merger.
6. PROPERTY AND EQUIPMENT
At December 31, 2000, the Company owned 48 real estate properties,
including 46 correctional and detention facilities and two corporate
office buildings, of which 44 properties were operating and two were
under construction. At December 31, 2000, the Company operated 35
properties, governmental agencies leased six facilities from the Company
and private operators leased three facilities from the Company. Four of
the properties owned by the Company are held for sale and are classified
as such on the accompanying balance sheet as of December 31, 2000. Three
of the properties are owned under direct financing leases. Two of the
direct financing leases are held for sale and are classified as such in
the accompanying balance sheet as of December 31, 2000.
Property and equipment, at cost, consists of the following:
DECEMBER 31,
-------------------------------
2000 1999
----------- -----------
(in thousands)
Land and improvements $ 25,651 $ 37,412
Buildings and improvements 1,523,560 1,862,836
Equipment 27,455 17,902
Office furniture and fixtures 20,270 20,361
Construction in progress 99,416 319,770
----------- -----------
1,696,352 2,258,281
Less: Accumulated depreciation (81,222) (49,785)
----------- -----------
$ 1,615,130 $ 2,208,496
=========== ===========
Depreciation expense was $57.2 million, $44.1 million and $14.4 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
Pursuant to the 1999 Merger, the Company acquired all of the assets and
liabilities of Old Prison Realty on January 1, 1999, including 23 leased
facilities and one real estate property under construction. The real
estate properties acquired by the Company in conjunction with the
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acquisition of Old Prison Realty were recorded at estimated fair market
value in accordance with the purchase method of accounting prescribed by
APB 16, resulting in a $1.2 billion increase to real estate properties at
January 1, 1999.
As of December 31, 2000, eleven of the facilities owned by the Company
are subject to options that allow various governmental agencies to
purchase those facilities. Three of such facilities are held for sale as
of December 31, 2000. In addition, two of the facilities are constructed
on land that the Company leases from governmental agencies under ground
leases. Under the terms of those ground leases, the facilities become the
property of the governmental agencies upon expiration of the ground
leases. The Company depreciates these two properties over the term of the
ground lease.
7. IMPAIRMENT LOSSES AND ASSETS HELD FOR SALE
SFAS 121 requires impairment losses to be recognized for long-lived
assets used in operations when indications of impairment are present and
the estimate of undiscounted future cash flows is not sufficient to
recover asset carrying amounts. Under terms of the June 2000 Waiver and
Amendment, the Company was obligated to complete the Restructuring,
including the Operating Company Merger, and complete the restructuring of
management through the appointment of a new chief executive officer and a
new chief financial officer. The Restructuring also permitted the
acquisitions of PMSI and JJFMSI. During the third quarter of 2000, the
Company named a new president and chief executive officer, followed by
the appointment of a new chief financial officer during the fourth
quarter. At the Company's 2000 annual meeting of stockholders held during
the fourth quarter of 2000, the Company's stockholders elected a newly
constituted nine-member board of directors of the Company, including six
independent directors.
Following the completion of the Operating Company Merger and the
acquisitions of PMSI and JJFMSI, during the fourth quarter of 2000, after
considering the Company's financial condition, the Company's new
management developed a strategic operating plan to improve the Company's
financial position, and developed revised projections for 2001 to
evaluate various potential transactions. Management also conducted
strategic assessments and evaluated the Company's assets for impairment.
Further, the Company evaluated the utilization of existing facilities,
projects under development, and excess land parcels, and identified
certain of these non-strategic assets for sale.
In accordance with SFAS 121, the Company estimated the undiscounted net
cash flows for each of its properties and compared the sum of those
undiscounted net cash flows to the Company's investment in each property.
Through its analyses, the Company determined that eight of its
correctional and detention facilities and the long-lived assets of the
transportation business had been impaired. For these properties, the
Company reduced the carrying values of the underlying assets to their
estimated fair values, as determined based on anticipated future cash
flows discounted at rates commensurate with the risks involved. The
resulting impairment loss totaled $420.5 million.
During the fourth quarter of 2000, as part of the strategic assessment,
the Company's management committed to a plan of disposal for certain
long-lived assets of the Company. In accordance with SFAS 121, the
Company recorded losses on these assets based on the difference between
the carrying value and the estimated net realizable value of the assets.
The Company estimated the net realizable values of certain facilities and
direct financing leases held for sale based on outstanding offers to
purchase and appraisals, as well as by utilizing various financial
models, including discounted cash flow analyses, less estimated costs to
sell each asset. The resulting impairment loss for these assets totaled
$86.1 million.
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Included in property and equipment were costs associated with the
development of potential facilities. Based on the Company's strategic
assessment during the fourth quarter of 2000, management decided to
abandon further development of these projects and expense any amounts
previously capitalized. The resulting expense totaled $2.1 million.
During the third quarter of 2000, the Company's management determined
either not to pursue further development or to reconsider the use of
certain parcels of property in California, Maryland and the District of
Columbia. Accordingly, the Company reduced the carrying values of the
land to their estimated net realizable value, resulting in an impairment
loss totaling $19.2 million.
In December 1999, based on the poor financial position of the Operating
Company, the Company determined that three of its correctional and
detention facilities located in the state of Kentucky and leased to
Operating Company were impaired. In accordance with SFAS 121, the Company
reduced the carrying values of the underlying assets to their estimated
fair values, as determined based on anticipated future cash flows
discounted at rates commensurate with the risks involved. The resulting
impairment loss totaled $76.4 million.
8. ACQUISITIONS AND DIVESTITURES
In April 1999, the Company purchased the Eden Detention Center in Eden,
Texas for $28.1 million. The facility has a design capacity of 1,225
beds, and prior to the Operating Company Merger, had been leased to
Operating Company under lease terms substantially similar to the
Operating Company Leases.
In June 1999, the Company incurred a loss of $1.6 million as a result of
a settlement with the State of South Carolina for property previously
owned by Old CCA. Under the settlement, the Company, as the successor to
Old CCA, will receive $6.5 million in three installments by June 30, 2001
for the transferred assets. The net proceeds were approximately $1.6
million less than the surrendered assets' depreciated book value. The
Company received $3.5 million of the proceeds during 1999 and $1.5
million of the proceeds during 2000. As of December 31, 2000, the Company
has a receivable of $1.5 million related to this settlement reflected in
other notes receivable.
In December 1999, the Company incurred a loss of $0.4 million resulting
from a sale of a newly constructed facility in Florida. Construction on
the facility was completed by the Company in May 1999. In accordance with
the terms of the management contract between Old CCA and Polk County,
Florida, Polk County exercised an option to purchase the facility. Net
proceeds of $40.5 million were received by the Company.
In April 1998, Old CCA acquired all of the issued and outstanding capital
stock of eight subsidiaries of U.S. Corrections Corporation ("USCC") (the
"USCC Acquisition") for approximately $10.0 million, less cash acquired.
The transaction was accounted for as a purchase transaction, and the
purchase price was allocated to the assets purchased and the liabilities
assumed based on the fair value of the assets and liabilities acquired.
By virtue of the USCC Acquisition, Old CCA acquired contracts to manage
four facilities in Kentucky, each of which was owned by Old Prison
Realty, one facility in Florida, which is owned by a governmental entity
in Florida, as well as one facility in Texas, which is owned by a
governmental entity in Texas. During 1998, subsequent to the USCC
Acquisition, the contract to manage the Texas facility expired and was
not renewed. During 2000, the contract to manage one of the Kentucky
facilities expired and was not renewed. Subsequent to the non-renewal of
the contract, the Company sold the facility for a net sales price of
approximately $1.0 million, resulting in a gain on sale of approximately
$0.6 million during 2000, after writing-down the carrying value of this
asset by $7.1 million in 1999. Old CCA also obtained the right to
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enter into contracts to manage two North Carolina facilities previously
owned by Old Prison Realty, both of which were under construction as of
the date of the USCC Merger. During 1998, both North Carolina facilities
became operational and Old CCA entered into contracts to manage those
facilities upon completion of the construction. During 2000, Operating
Company and the contracting party mutually agreed to cancel the
management contracts. In March 2001, the Company sold one of the North
Carolina facilities, which was classified as held for sale under contract
in the accompanying consolidated balance sheet, for a sales price of
approximately $25 million. The net proceeds were used to pay-down the
Amended Bank Credit Facility.
On April 10, 2001, the Company sold its interest in a facility located in
Salford, England, for approximately $65.7 million. The net proceeds were
used to pay-down the Amended Bank Credit Facility.
9. INVESTMENTS IN AFFILIATES
In connection with the 1999 Merger, Old CCA received 100% of the
non-voting common stock in each of PMSI and JJFMSI, valued at the implied
fair market values of $67.1 million and $55.9 million, respectively. The
Company succeeded to these interests as a result of the 1999 Merger. The
Company's ownership of the non-voting common stock of PMSI and JJFMSI
entitled the Company to receive, when and if declared by the boards of
directors of the respective companies, 95% of the net income, as defined,
of each company as cash dividends. Dividends were cumulative if not
declared. For the years ended December 31, 2000 and 1999, the Company
received cash dividends from PMSI totaling approximately $4.4 million and
$11.0 million, respectively. For the years ended December 31, 2000 and
1999, the Company received cash dividends from JJFMSI totaling
approximately $2.3 million and $10.6 million, respectively.
Investments in affiliates consisted of the following at December 31, 1999
(in thousands):
Investment in PMSI $ 60,756
Investment in JJFMSI 52,726
--------
$113,482
========
The following operating information presents a combined summary of the
results of operations of PMSI and JJFMSI for the period January 1, 2000
through November 30, 2000 and for the year ended December 31, 1999 (in
thousands):
JANUARY 1, 2000 - Year ended
NOVEMBER 30, 2000 December 31, 1999
----------------- -----------------
Revenue $279,228 $288,289
Net income (loss) before taxes $ (588) $ 12,851
The following balance sheet information presents a combined summary of
the financial position of PMSI and JJFMSI as of December 31, 1999 (in
thousands):
Current assets $ 60,741
Total assets $151,167
Current liabilities $ 31,750
Total liabilities $ 32,622
Stockholders' equity $118,545
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During 2000 and prior to the acquisition of PMSI and JJFMSI on December
1, 2000, PMSI and JJFMSI (collectively) recorded approximately $27.3
million in charges related to agreements with the Company and Operating
Company. Of these charges, approximately $5.4 million are fees paid under
a trade name use agreement, approximately $9.9 million are fees paid
under an administrative service agreement and approximately $12.0 million
are fees paid under an indemnification agreement with the Company.
Under the terms of the indemnification agreements, effective September
29, 2000, each of PMSI and JJFMSI agreed to pay the Company $6.0 million
in exchange for full indemnity by the Company for any and all liabilities
incurred by PMSI and JJFMSI in connection with the settlement or
disposition of litigation known as Prison Acquisition Company, LLC v.
Prison Realty Trust, Inc., et al. described in Note 21 herein. The
combined and consolidated results of operations of the Company were
unaffected by the indemnification agreements.
As previously discussed in Note 4, the combined and consolidated
financial statements reflect the results of operations of PMSI and JJFMSI
under the equity method of accounting from January 1, 1999 through August
31, 2000, on a combined basis from September 1, 2000 through November 30,
2000, and consolidated for the month of December 2000. The financial
statements for the period January 1, 1999 through September 30, 2000 have
also been restated to reflect 9.5% of Operating Company's net losses, as
discussed in Note 4.
As discussed in Note 3, the Company's 9.5% non-voting interest in
Operating Company had been recorded in the 1999 Merger at its implied
value of $4.8 million. In accordance with the provisions of APB 18, the
Company applied the recognized equity in losses of Operating Company of
$19.3 million for the year ended December 31, 1999, first to reduce the
Company's recorded investment in Operating Company of $4.8 million to
zero and then to reduce the carrying value of the CCA Note by the amount
of the recognized equity in losses in excess of $4.8 million. The
Company's recognized equity in losses related to its investment in
Operating Company for the nine months ended September 30, 2000 were
applied to reduce the carrying value of the CCA Note.
For the years ended December 31, 2000 and 1999, equity in earnings
(losses) and amortization of deferred gains were approximately $11.6
million in losses and $3.6 million in earnings, respectively. For the
year ended December 31, 2000, the Company recognized equity in losses of
PMSI and JJFMSI of approximately $12,000 and $870,000, respectively. In
addition, for the year ended December 31, 2000, the Company recognized
equity in losses of Operating Company of approximately $20.6 million. For
2000, the amortization of the deferred gain on the sales of contracts to
PMSI and JJFMSI was approximately $6.5 million and $3.3 million,
respectively. For the year ended December 31, 1999, the Company
recognized equity in earnings of PMSI and JJFMSI of approximately $4.7
million and $7.5 million, respectively. In addition, for the year ended
December 31, 1999, the Company recognized equity in losses of Operating
Company of approximately $19.3 million. For 1999, the amortization of the
deferred gain on the sales of contracts to PMSI and JJFMSI was
approximately $7.1 million and $3.6 million, respectively.
10. INVESTMENT IN DIRECT FINANCING LEASES
At December 31, 2000, the Company's investment in a direct financing
lease represents net receivables under a building and equipment lease
between the Company and a governmental agency.
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A schedule of future minimum rentals to be received under the direct
financing lease in years subsequent to December 31, 2000, is as follows
(in thousands):
2001 $ 2,309
2002 2,309
2003 2,309
2004 2,309
2005 2,309
Thereafter 23,776
--------
Total minimum obligation 35,321
Less unearned interest income (10,444)
Less current portion of direct financing lease (1,069)
--------
Investment in direct financing leases $ 23,808
========
As discussed in Note 7, during the fourth quarter of 2000, the Company's
management committed to a plan of disposal for certain long-lived assets
of the Company, including two investments in direct financing leases. The
Company estimated the fair values of these direct financing leases held
for sale based on outstanding offers to purchase and discounted cash flow
analyses. These direct financing leases, with estimated net realizable
values totaling $85.7 million at December 31, 2000, have been classified
on the consolidated balance sheet as assets held for sale as of December
31, 2000.
During the years ended December 31, 2000, 1999 and 1998, the Company
recorded interest income of $10.1 million, $3.4 million, and $3.5
million, respectively, under all direct financing leases.
In May 1998, the Company agreed to pay a governmental agency $3.5 million
in consideration of the governmental agency's relinquishing its rights to
purchase a facility. As a result, the Company converted the facility from
a direct financing lease to property and equipment.
11. OTHER ASSETS
Other assets consist of the following (in thousands):
DECEMBER 31,
----------------------
2000 1999
------- -------
Debt issuance costs, less accumulated
amortization of $13,178 and $5,888 $37,099 $43,976
Value of workforce, net 2,425 --
Contract acquisition costs, net 2,190 --
Deposits 1,630 --
Other 1,692 1,505
------- -------
$45,036 $45,481
======= =======
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12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
-----------------------
2000 1999
-------- -------
Stockholder litigation settlements $ 75,406 $ --
Trade accounts payable 26,356 39,031
Other accrued litigation 41,114 5,717
Accrued salaries and wages 14,183 208
Accrued property taxes 13,638 --
Accrued interest 5,765 14,968
Other 66,850 7,671
-------- -------
$243,312 $67,595
======== =======
13. DISTRIBUTIONS TO STOCKHOLDERS
On March 22, 2000, the board of directors of the Company declared a
quarterly dividend on the Company's Series A Preferred Stock of $0.50 per
share to preferred stockholders of record on March 31, 2000. These
dividends were paid on April 17, 2000. The Company's board of directors
has not declared a dividend on the Series A Preferred Stock since the
first quarter of 2000. In connection with the June 2000 Waiver and
Amendment, the Company is currently prohibited from declaring or paying
any dividends with respect to the Company's currently outstanding Series
A Preferred Stock until such time as the Company has raised at least
$100.0 million in equity. Therefore, the Company has not made any such
dividend payments to the Series A Preferred stockholders since the first
quarter of 2000. Dividends with respect to the Series A Preferred Stock
will continue to accrue under the terms of the Company's charter until
such time as payment of such dividends is permitted under the terms of
the June 2000 Waiver and Amendment. Under the terms of the Company's
charter, in the event dividends are unpaid and in arrears for six or more
quarterly periods, the holders of the Series A Preferred Stock will have
the right to vote for the election of two additional directors to the
Company's board of directors. No assurance can be given as to if and when
the Company will commence the payment of cash dividends on its shares of
Series A Preferred Stock. Quarterly dividends of $0.50 per share for the
second, third and fourth quarters of 2000 have been accrued as of
December 31, 2000 and totaled $6.5 million.
Under the terms of the Company's charter, as in effect prior to the
Restructuring, the Company was required to elect to be taxed as a REIT
for federal income tax purposes for its taxable year ended December 31,
1999. The Company, as a REIT, could not complete any taxable year with
accumulated earnings and profits from a taxable corporation. Accordingly,
the Company was required to distribute Old CCA's earnings and profits to
which it succeeded in the 1999 Merger (the "Accumulated Earnings and
Profits"). For the year ended December 31, 1999, the Company made
approximately $217.7 million of distributions related to its common stock
and Series A Preferred Stock. Because the Company's Accumulated Earnings
and Profits were approximately $152.5 million, and the Company's
distributions were deemed to have been paid first from those Accumulated
Earnings and Profits, the Company met the above-described distribution
requirements. In addition to distributing its Accumulated Earnings and
Profits, the Company, in order to qualify for taxation as a REIT with
respect to its 1999 taxable year, was required to distribute 95.0% of its
taxable income for 1999. The Company believes that this distribution
requirement has been satisfied by its distribution of shares of the
Company's Series B Preferred Stock, as discussed below.
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On September 22, 2000, the Company issued approximately 5.9 million
shares of its Series B Preferred Stock in connection with its remaining
1999 REIT distribution requirement. The distribution was made to the
Company's common stockholders of record on September 14, 2000, who
received five shares of Series B Preferred Stock for every 100 shares of
the Company's common stock held on the record date. The Company paid its
common stockholders approximately $15,000 in cash in lieu of issuing
fractional shares of Series B Preferred Stock. On November 13, 2000, the
Company issued approximately 1.6 million additional shares of Series B
Preferred Stock in satisfaction of this REIT distribution requirement.
This distribution was made to the Company's common stockholders of record
on November 6, 2000, who received one share of Series B Preferred Stock
for every 100 shares of the Company's common stock held on the record
date. The Company also paid its common stockholders approximately $15,000
in cash in lieu of issuing fractional shares of Series B Preferred Stock
in the second distribution.
The Company recorded the issuance of the Series B Preferred Stock at its
stated value of $24.46 per share, or a total of $183.9 million. The
Company has determined the distribution made on September 22, 2000
amounted to a taxable distribution by the Company of approximately $107.6
million. The Company has also determined that the distribution made on
November 13, 2000 amounted to a taxable distribution by the Company of
approximately $20.4 million. Common stockholders who received shares of
Series B Cumulative Convertible Preferred Stock in the distribution
generally will be required to include the taxable value of the
distribution in ordinary income. Refer to Note 18 for a more complete
description of the terms of Series B Preferred Stock.
As a result of the Company's failure to declare, prior to December 31,
1999, and failure to distribute, prior to January 31, 2000, dividends
sufficient to distribute 95% of its taxable income for 1999, the Company
was subject to excise taxes, of which $7.1 million was accrued as of
December 31, 1999 in accounts payable and accrued expenses in the 1999
consolidated balance sheet. The excise tax was satisfied in full during
2000.
Quarterly distributions and the resulting tax classification for common
stock distributions are as follows:
Declaration Date Record Payment Distribution Ordinary Income Return of
Date Date Per Share Capital
---------------------- ------------------ ------------------ ----------------- ------------------ ---------------
03/04/99 03/19/99 03/31/99 $ 0.60 100.0% 0.0%
05/11/99 06/18/99 06/30/99 0.60 100.0% 0.0%
08/27/99 09/17/99 09/30/99 0.60 100.0% 0.0%
Quarterly distributions and the resulting tax classification for the
Series A Preferred Stock are as follows:
Declaration Date Record Payment Distribution Ordinary Income Return of
Date Date Per Share Capital
---------------------- ------------------ ------------------ ----------------- ------------------ ---------------
03/04/99 03/31/99 04/15/99 $ 0.50 100.0% 0.0%
05/11/99 06/30/99 07/15/99 0.50 100.0% 0.0%
08/27/99 09/30/99 10/15/99 0.50 100.0% 0.0%
12/22/99 12/31/99 01/15/00 0.50 100.0% 0.0%
03/22/00 03/31/00 04/17/00 0.50 100.0% 0.0%
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14. DEBT
Debt consists of the following:
DECEMBER 31,
----------------------------
2000 1999
----------- -----------
(in thousands)
$1.0 Billion Amended Bank Credit Facility:
Revolving loans, with unpaid balance due January 1, 2002, interest payable
periodically at variable interest rates $ 382,532 $ 332,484
Term loans, quarterly principal payments of $1.5 million with unpaid
balance due December 31, 2002, interest payable periodically at
variable interest rates 589,750 595,750
----------- -----------
Outstanding under Amended Bank Credit Facility 972,282 928,234
Senior Notes, principal due at maturity in June 2006, interest payable
semi-annually at 12% 100,000 100,000
10.0% Convertible Subordinated Notes, principal due at maturity in
December 2008, interest payable semi-annually at 9.5% through June 30,
2000, at which time the rate was increased to 10.0% 41,114 40,000
8.0% Convertible Subordinated Notes, principal due at maturity in February
2005 with call provisions beginning in February 2003, interest payable
quarterly at 7.5% through June 30, 2000, at which time the rate was
increased to 8.0% 30,000 30,000
$50.0 Million Revolving Credit Facility, with unpaid balance due at maturity in
December 2002, interest payable at prime plus 2.25%. At December 31, 2000
interest was 11.75% 7,601 --
Other 1,573 757
----------- -----------
1,152,570 1,098,991
Less: Current portion of long-term debt (14,594) (6,084)
----------- -----------
$ 1,137,976 $ 1,092,907
=========== ===========
THE CREDIT FACILITY AND AMENDED BANK CREDIT FACILITY
On January 1, 1999, in connection with the completion of the 1999 Merger,
the Company obtained a $650.0 million secured credit facility (the
"Credit Facility") from NationsBank, N.A., as Administrative Agent, and
several U.S. and non-U.S. banks. The Credit Facility included up to a
maximum of $250.0 million in tranche B term loans and $400.0 million in
revolving loans, including a $150.0 million subfacility for letters of
credit. The term loan requires quarterly principal payments of $625,000
throughout the term of the loan with the remaining balance maturing on
December 31, 2002. The revolving loans mature on January 1, 2002.
Interest rates, unused commitment fees and letter of credit fees on the
Credit Facility were subject to change based on the Company's senior debt
rating. The Credit Facility was secured by mortgages on the Company's
real property.
On August 4, 1999, the Company completed an amendment and restatement of
the Credit Facility (the "Amended Bank Credit Facility") increasing
amounts available to the Company under the original Credit Facility to
$1.0 billion through the addition of a $350.0 million tranche C term
loan. The tranche C term loan is payable in equal quarterly installments
in the amount of $875,000
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152
through the calendar quarter ending September 30, 2002, with the balance
to be paid in full on December 31, 2002. Under the Amended Bank Credit
Facility, Lehman Commercial Paper Inc. ("Lehman") replaced NationsBank,
N.A. as administrative agent.
The Amended Bank Credit Facility bears interest at variable rates of
interest based on a spread over an applicable base rate or the London
Interbank Offering Rate ("LIBOR") (as elected by the Company), which
spread is determined by reference to the Company's credit rating. Prior
to the June 2000 Waiver and Amendment, the spread for the revolving loans
ranged from 0.5% to 2.25% for base rate loans and from 2.0% to 3.75% for
LIBOR rate loans. (These ranges replaced the original spread ranges of
0.25% to 1.25% for base rate loans and 1.375% to 2.75% for LIBOR rate
loans.) Prior to the June 2000 Waiver and Amendment, the spread for the
term loans ranged from 2.25% to 2.5% for base rate loans and from 3.75%
to 4.0% for LIBOR rate loans. (These rates replaced the original variable
rate equal to 1.75% in excess of a base rate or 3.25% in excess of
LIBOR). The Amended Bank Credit Facility, similar to the original Credit
Facility, is secured by mortgages on the Company's real property.
During the first quarter of 2000, the ratings on the Company's bank
indebtedness, senior unsecured indebtedness and Series A Preferred Stock
were lowered. As a result of these reductions, the interest rate
applicable to outstanding amounts under the Amended Bank Credit Facility
for revolving loans was increased by 0.5%, to 1.5% over the base rate and
to 3.0% over the LIBOR rate; the spread for term loans remained unchanged
at 2.5% for base rate loans and 4.0% for LIBOR rate loans. The rating on
the Company's indebtedness was also lowered during the second quarter of
2000, although no interest rate increase was attributable to this rating
adjustment.
Following the approval of the requisite senior lenders under the Amended
Bank Credit Facility, the Company, certain of its wholly-owned
subsidiaries, various lenders and Lehman, as administrative agent,
executed the June 2000 Waiver and Amendment, dated as of June 9, 2000, to
the provisions of the Amended and Restated Credit Agreement. Upon
effectiveness, the June 2000 Waiver and Amendment waived or addressed all
then existing events of default under the provisions of the Amended and
Restated Credit Agreement that resulted from: (i) the financial condition
of the Company and Operating Company; (ii) the transactions undertaken by
the Company and Operating Company in an attempt to resolve the liquidity
issues of the Company and Operating Company; and (iii) previously
announced restructuring transactions. As a result of the then existing
defaults, the Company was subject to the default rate of interest, or
2.0% higher than the rates discussed above, effective from January 25,
2000 until June 9, 2000. The June 2000 Waiver and Amendment also
contained certain amendments to the Amended and Restated Credit
Agreement, including the replacement of existing financial covenants
contained in the Amended and Restated Credit Agreement applicable to the
Company with new financial ratios following completion of the
Restructuring. As a result of the June 2000 Waiver and Amendment, the
Company began monthly interest payments on outstanding amounts under the
Amended Bank Credit Facility beginning July 2000.
In obtaining the June 2000 Waiver and Amendment, the Company agreed to
complete certain transactions which were incorporated as covenants in the
June 2000 Waiver and Amendment. Pursuant to these requirements, the
Company was obligated to complete the Restructuring, including: (i) the
Operating Company Merger; (ii) the amendment of its charter to remove the
requirements that it elect to be taxed as a REIT commencing with its 2000
taxable year; (iii) the restructuring of management; and (iv) the
distribution of shares of Series B Preferred Stock in satisfaction of the
Company's remaining 1999 REIT distribution requirement. The June 2000
Waiver and Amendment also amended the terms of the Amended and Restated
Credit Agreement to permit (i) the amendment of the Operating Company
Leases and the other contractual arrangements
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between the Company and Operating Company, and (ii) the merger of each of
PMSI and JJFMSI with the Company, upon terms and conditions specified in
the June 2000 Waiver and Amendment.
The June 2000 Waiver and Amendment prohibited: (i) the Company from
settling its then outstanding stockholder litigation for cash amounts not
otherwise fully covered by the Company's existing directors' and
officers' liability insurance policies; (ii) the declaration and payment
of dividends with respect to the Company's currently outstanding Series A
Preferred Stock prior to the receipt of net cash proceeds of at least
$100.0 million from the issuance of additional shares of common or
preferred stock; and (iii) Operating Company from amending or refinancing
its revolving credit facility on terms and conditions less favorable than
Operating Company's then existing revolving credit facility. The June
2000 Waiver and Amendment also required the Company to complete the
securitization of lease payments (or other similar transaction) with
respect to the Company's Agecroft facility located in Salford, England on
or prior to February 28, 2001, although such deadline was extended (as
described herein).
As a result of the June 2000 Waiver and Amendment, the Company is
generally required to use the net cash proceeds received by the Company
from certain transactions, including the following transactions, to repay
outstanding indebtedness under the Amended Bank Credit Facility:
- any disposition of real estate assets;
- the securitization of lease payments (or other similar
transaction) with respect to the Company's Agecroft facility; and
- the sale-leaseback of the Company's headquarters.
Under the terms of the June 2000 Waiver and Amendment, the Company is
also required to apply a designated portion of its "excess cash flow," as
such term is defined in the June 2000 Waiver and Amendment, to the
prepayment of outstanding indebtedness under the Amended Bank Credit
Facility.
As a result of the June 2000 Waiver and Amendment, the interest rate
spreads applicable to outstanding borrowings under the Amended Bank
Credit Facility were increased by 0.5%. As a result, the spread for the
revolving loans ranges from 1.0% to 2.75% for base rate loans and from
2.5% to 4.25% for LIBOR rate loans. The resulting spread for the term
loans ranges from 2.75% to 3.0% for base rate loans and from 4.25% to
4.5% for LIBOR rate loans. Based on the Company's current credit rating,
the spread for revolving loans is 2.75% for base rate loans and 4.25% for
LIBOR rate loans, while the spread for term loans is 3.0% for base rate
loans and 4.5% for LIBOR rate loans.
During the third and fourth quarters of 2000, the Company was not in
compliance with certain applicable financial covenants contained in the
Company's Amended and Restated Credit Agreement, including: (i) debt
service coverage ratio; (ii) interest coverage ratio; (iii) leverage
ratio; and (iv) net worth. In November 2000, the Company obtained the
consent of the requisite percentage of the senior lenders (the "November
2000 Consent and Amendment") to replace previously existing financial
covenants with amended financial covenants, each defined in the November
2000 Consent and Amendment:
- total leverage ratio;
- interest coverage ratio;
- fixed charge coverage ratio;
- ratio of total indebtedness to total capitalization;
- minimum EBITDA; and
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- total beds occupied ratio.
The November 2000 Consent and Amendment further provided that the Company
will be required to use commercially reasonable efforts to complete a
"capital raising event" on or before June 30, 2001. A "capital raising
event" is defined in the November 2000 Consent and Amendment as any
combination of the following transactions, which together would result in
net cash proceeds to the Company of $100.0 million:
- an offering of the Company's common stock through the distribution
of rights to the Company's existing stockholders;
- any other offering of the Company's common stock or certain types
of the Company's preferred stock;
- issuances by the Company of unsecured, subordinated indebtedness
providing for in-kind payments of principal and interest until
repayment of the Amended Credit Facility;
- certain types of asset sales by the Company, including the
sale-leaseback of the Company's headquarters, but excluding the
securitization of lease payments (or other similar transaction)
with respect to the Salford, England facility.
The November 2000 Consent and Amendment also contains limitations upon
the use of proceeds obtained from the completion of such "capital raising
events." The requirements relating to "capital raising events" contained
in the November 2000 Consent and Amendment replaced the requirement
contained in the Amended and Restated Credit Agreement that the Company
use commercially reasonable efforts to consummate a rights offering on or
before December 31, 2000.
As a result of the November 2000 Consent and Amendment, the current
interest rate applicable to the Company's Amended Bank Credit Facility
remains unchanged. This applicable rate, however, is subject to (i) an
increase of 25 basis points (0.25%) from the current interest rate on
July 1, 2001 if the Company has not prepaid $100.0 million of the
outstanding loans under the Amended Bank Credit Facility, and (ii) an
increase of 50 basis points (0.50%) from the current interest rate on
October 1, 2001 if the Company has not prepaid an aggregate of $200.0
million of the loans under the Amended Bank Credit Facility.
The maturities of the loans under the Amended Bank Credit Facility remain
unchanged as a result of the November 2000 Consent and Amendment. No
event of default was declared due to the amendment of the financial
covenants obtained in connection with the November 2000 Consent and
Amendment.
In January 2001, the requisite percentage of the Company's senior lenders
under the Amended Bank Credit Facility consented to the Company's
issuance of a promissory note (described in Note 21) in partial
satisfaction of its requirements under the definitive settlement
agreements relating to the Company's then-outstanding stockholder
litigation (the "January 2001 Consent and Amendment"). The January 2001
Consent and Amendment also modified certain provisions of the Amended
Bank Credit Facility to permit the issuance of the promissory note.
In March 2001, the Company obtained an amendment to the Amended Bank
Credit Facility which included the following amendments: (i) changed the
date the securitization of lease payments (or other similar transactions)
with respect to the Company's Agecroft facility must be consummated from
February 28, 2001 to March 31, 2001; (ii) modified the calculation of
EBITDA used in calculating the total leverage ratio, to take into effect
any loss of EBITDA that may result from certain asset dispositions, and
(iii) modified the minimum EBITDA covenant to permit a reduction by the
amount of EBITDA that certain asset dispositions had generated.
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The securitization of lease payments (or other similar transaction) with
respect to the Company's Agecroft facility did not close by the required
date. However, the covenant allows for a 30 day grace period during which
the lenders under the Amended Bank Credit Facility could not exercise
their rights to declare an event of default. On April 10, 2001, prior to
the expiration of the grace period, the Company consummated the Agecroft
transaction through the sale of all of the issued and outstanding capital
stock of Agecroft Properties, Inc., a wholly-owned subsidiary of the
Company, and used the net proceeds to pay-down the Amended Bank Credit
Facility, thereby fulfilling the Company's covenant requirements with
respect to the Agecroft transaction.
The Amended Bank Credit Facility also contains a covenant requiring the
Company to provide the lenders with audited financial statements within
90 days of the Company's fiscal year-end, subject to an additional
five-day grace period. Due to the Company's attempts to close the
securitization of the Company's Salford, England facility, the Company
did not provide the audited financial statements within the required time
period. However, the Company has obtained a waiver from the lenders under
the Amended Bank Credit Facility of this financial reporting requirement.
The revolving loan portion of the Amended Bank Credit Facility of $382.5
million matures on January 1, 2002. As part of management's plans to
improve the Company's financial position and address the January 1, 2002
maturity of portions of the debt under the Amended Bank Credit Facility,
management has committed to a plan of disposal for certain long-lived
assets. These assets are being actively marketed for sale and are
classified as held for sale in the accompanying consolidated balance
sheet at December 31, 2000. Anticipated proceeds from these asset sales
are to be applied as loan repayments. The Company believes that utilizing
such proceeds to pay-down debt will improve its leverage ratios and
overall financial position, improving its ability to refinance or renew
maturing indebtedness, including primarily the Company's revolving loans
under the Amended Bank Credit Facility.
The Company believes it will be able to demonstrate commercially
reasonable efforts regarding the $100.0 million capital raising event on
or before June 30, 2001, primarily by attempting to sell certain assets,
as discussed above. Subsequent to year-end, the Company completed the
sale of a facility located in North Carolina for approximately $25
million, as discussed in Note 8. The Company is currently evaluating and
would also consider a distribution of rights to purchase common or
preferred stock to the Company's existing stockholders, or an equity
investment in the Company from an outside investor. The Company expects
to use the net proceeds from these transactions to pay-down debt under
the Amended Bank Credit Facility.
The Company believes that it is currently in compliance with the terms of
the debt covenants contained in the Amended Bank Credit Facility.
Further, the Company believes its operating plans and related projections
are achievable, and will allow the Company to remain in compliance with
its debt covenants during 2001. However, there can be no assurance that
the cash flow projections will reflect actual results and there can be no
assurance that the Company will remain in compliance with its debt
covenants during 2001. Further, even if the Company is successful in
selling assets, there can be no assurance that it will be able to
refinance or renew its debt obligations maturing January 1, 2002 on
commercially reasonable or any other terms.
During 1999, the Company incurred costs of $59.2 million in consummating
the Credit Facility and the Amended Bank Credit Facility transactions,
including $41.2 million related to the amendment and restatement. The
Company wrote-off $9.0 million of expenses related to the Credit Facility
upon completion of the amendment and restatement, in addition to $5.6
million of other debt financing costs written-off in 1999. During 2000
the Company incurred and capitalized
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approximately $9.0 million in consummating the June 2000 Waiver and
Amendment, and $0.5 million for the November 2000 Consent and Amendment.
In accordance with the terms of the Amended Bank Credit Facility, the
Company entered into certain swap arrangements guaranteeing that it will
not pay an index rate greater than 6.51% on outstanding balances of at
least (i) $325.0 million through December 31, 2001 and (ii) $200.0
million through December 31, 2002. The effect of these arrangements is
recognized in interest expense.
$100.0 MILLION SENIOR NOTES
On June 11, 1999, the Company completed its offering of $100.0 million
aggregate principal amount of 12% Senior Notes due 2006 (the "Senior
Notes"). Interest on the Senior Notes is paid semi-annually in arrears,
and the Senior Notes have a seven year non-callable term due June 1,
2006. Net proceeds from the offering were approximately $95.0 million
after deducting expenses payable by the Company in connection with the
offering. The Company used the net proceeds from the sale of the Senior
Notes for general corporate purposes and to repay revolving bank
borrowings under the Amended Bank Credit Facility.
The Company has made all required interest payments under the terms of
the Senior Notes, and currently believes it is in compliance with all of
its covenants. The indenture governing the Senior Notes contains
cross-default provisions, as further discussed below.
$40.0 MILLION CONVERTIBLE SUBORDINATED NOTES
On January 29, 1999, the Company issued $20.0 million of convertible
subordinated notes due in December 2008, with interest payable
semi-annually at 9.5%. This issuance constituted the second tranche of a
commitment by the Company to issue an aggregate of $40.0 million of
convertible subordinated notes, with the first $20.0 million tranche
issued in December 1998 under substantially similar terms. The
convertible subordinated notes (the "$40.0 Million Convertible
Subordinated Notes"), which were issued to MDP Ventures IV LLC and
affiliated purchasers (collectively, "MDP"), require that the Company
revise the conversion price as a result of the payment of a dividend or
the issuance of stock or convertible securities below market price.
During the first and second quarters of 2000, certain existing or
potential events of default arose under the provisions of the note
purchase agreement relating to the $40.0 Million Convertible Subordinated
Notes as a result of the Company's financial condition and a "change of
control" arising from the Company's execution of certain securities
purchase agreements with respect to the proposed restructuring. This
"change of control" gave rise to the right of MDP to require the Company
to repurchase the notes at a price of 105% of the aggregate principal
amount of such notes within 45 days after the provision of written notice
by such holders to the Company. In addition, the Company's defaults under
the provisions of the note purchase agreement gave rise to the right of
the holders of such notes to require the Company to pay an applicable
default rate of interest of 20.0%. In addition to the default rate of
interest, as a result of the events of default, the Company was
obligated, under the original terms of the $40.0 Million Convertible
Subordinated Notes, to pay the holders of the notes contingent interest
sufficient to permit the holders to receive a 15.0% rate of return,
excluding the effect of the default rate of interest, on the $40.0
million principal amount, unless the holders of the notes elect to
convert the notes into the Company's common stock under the terms of the
note purchase agreement. Such contingent interest was retroactive to the
date of issuance of the notes.
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In order to address the events of default discussed above, on June 30,
2000, the Company and MDP executed a waiver and amendment to the
provisions of the note purchase agreement governing the notes. This
waiver and amendment provided for a waiver of all existing events of
default under the provisions of the note purchase agreement. In addition,
the waiver and amendment to the note purchase agreement amended the
economic terms of the notes to increase the applicable interest rate of
the notes by 0.5% per annum from 9.5% to 10.0%, and adjusted the
conversion price of the notes to a price equal to 125% of the average
high and low sales price of the Company's common stock on the NYSE for a
period of 20 trading days immediately following the earlier of (i)
October 31, 2000 or (ii) the closing date of the Operating Company
Merger. In addition, the waiver and amendment to the note purchase
agreement provided for the replacement of financial ratios applicable to
the Company. The conversion price for the notes has been established at
$1.19, subject to adjustment in the future upon the occurrence of certain
events, including the payment of dividends and the issuance of stock at
below market prices by the Company. Under the terms of the waiver and
amendment, the distribution of the Company's Series B Preferred Stock
during the fourth quarter of 2000 did not cause an adjustment to the
conversion price of the notes. In addition, the Company does not believe
that the distribution of shares of the Company's common stock in
connection with the settlement of all outstanding stockholder litigation
against the Company, as further discussed in Note 21, will cause an
adjustment to the conversion price of the notes. MDP, however, has
indicated its belief that such an adjustment is required. The Company and
MDP are currently in discussions concerning this matter. At an adjusted
conversion price of $1.19, the $40.0 Million Convertible Subordinated
Notes are convertible into approximately 33.6 million shares of the
Company's common stock.
In connection with the waiver and amendment to the note purchase
agreement, the Company issued additional convertible subordinated notes
containing substantially similar terms in the aggregate principal amount
of $1.1 million, which amount represented all interest owed at the
default rate of interest through June 30, 2000. These additional notes
are currently convertible, at an adjusted conversion price of $1.19, into
an additional 0.9 million shares of the Company's common stock. After
giving consideration to the issuance of these additional notes, the
Company has made all required interest payments under the $40.0 Million
Convertible Subordinated Notes.
The terms of a registration rights agreement with the holders of the
$40.0 Million Convertible Subordinated Notes also require the Company to
use its best efforts to register the shares of the Company's common stock
into which the notes are convertible. Management intends to take the
necessary actions to achieve compliance with this covenant.
The Company currently believes it is in compliance with all covenants
under the provisions of the $40.0 Million Convertible Subordinated Notes,
as amended. There can be no assurance, however, that the Company will be
able to remain in compliance with all covenants under the provisions of
the $40.0 Million Convertible Subordinated Notes. The provisions of the
note purchase agreement governing the $40.0 Million Convertible
Subordinated Notes contain cross-default provisions as further discussed
below.
$30.0 MILLION CONVERTIBLE SUBORDINATED NOTES
The Company's $30.0 million 7.5% convertible subordinated notes due
February 2005 (the "$30.0 Million Convertible Subordinated Notes"), which
were issued to PMI Mezzanine Fund, L.P. ("PMI") on December 31, 1998,
require that the Company revise the conversion price as a result of the
payment of a dividend or the issuance of stock or convertible securities
below market price.
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Certain existing or potential events of default arose under the
provisions of the note purchase agreement relating to the Company's $30.0
Million Convertible Subordinated Notes as a result of the Company's
financial condition and as a result of the Restructuring. However, on
June 30, 2000, the Company and PMI executed a waiver and amendment to the
provisions of the note purchase agreement governing the notes. This
waiver and amendment provided for a waiver of all existing events of
default under the revisions of the note purchase agreement. In addition,
the waiver and amendment to the note purchase agreement amended the
economic terms of the notes to increase the applicable interest rate of
the notes by 0.5% per annum, from 7.5% to 8.0%, and adjusted the
conversion price of the notes to a price equal to 125% of the average
closing price of the Company's common stock on the NYSE for a period of
30 trading days immediately following the earlier of (i) October 31, 2000
or (ii) the closing date of the Operating Company Merger. In addition,
the waiver and amendment to the note purchase agreement provided for the
replacement of financial ratios applicable to the Company.
The conversion price for the notes has been established at $1.07, subject
to adjustment in the future upon the occurrence of certain events,
including the payment of dividends and the issuance of stock at below
market prices by the Company. Under the terms of the waiver and
amendment, the distribution of the Company's Series B Preferred Stock
during the fourth quarter of 2000 did not cause an adjustment to the
conversion price of the notes. However, the distribution of shares of the
Company's common stock in connection with the settlement of all
outstanding stockholder litigation against the Company, as further
discussed in Note 21, will cause an adjustment to the conversion price of
the notes in an amount to be determined at the time shares of the
Company's common stock are distributed pursuant to the settlement.
However, the ultimate adjustment to the conversion ratio will depend on
the number of shares of the Company's common stock outstanding on the
date of issuance of the shares pursuant to the stockholder litigation
settlement. In addition, if, as currently contemplated, all of the shares
are not issued simultaneously, multiple adjustments to the conversion
ratio will be required. At an adjusted conversion price of $1.07, the
$30.0 Million Convertible Subordinated Notes are convertible into
approximately 28.0 million shares of the Company's common stock.
At December 31, 2000, the Company was in default under the terms of the
note purchase agreement governing the $30.0 Million Convertible
Subordinated Notes. The default related to the Company's failure to
comply with the total leverage ratio financial covenant. However, in
March 2001, the Company and PMI executed a waiver and amendment to the
provisions of the note purchase agreement governing the notes. This
waiver and amendment provided for a waiver of all existing events of
default under the provisions of the note purchase agreement and amended
the financial covenants applicable to the Company.
The Company has made all required interest payments under the $30.0
Million Convertible Subordinated Notes. The Company currently believes it
is in compliance with all covenants under the provisions of the $30.0
Million Convertible Subordinated Notes, as amended. There can be no
assurance, however, that the Company will be able to remain in compliance
with all of the covenants under the provisions of the $30.0 Million
Convertible Subordinated Notes. The provisions of the note purchase
agreement governing the $30.0 Million Convertible Subordinated Notes
contain cross-default provisions as further discussed below.
$50.0 MILLION REVOLVING CREDIT FACILITY
On April 27, 2000, Operating Company obtained a waiver of events of
default under its $100.0 million revolving credit facility with a group
of lenders led by Foothill Capital Corporation ("Foothill Capital")
relating to: (i) the amendment of certain contractual arrangements
between the
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Company and Operating Company; (ii) Operating Company's violation of a
net worth covenant contained in the revolving credit facility; and (iii)
the execution of the Agreement and Plan of Merger with respect to the
Operating Company Merger. On June 30, 2000, the terms of the initial
waiver were amended to provide that the waiver would remain in effect,
subject to certain other events of termination, until the earlier of (i)
September 15, 2000 or (ii) the completion of the Operating Company
Merger.
On September 15, 2000, Operating Company terminated its revolving credit
facility with Foothill Capital and simultaneously entered into a new
$50.0 million revolving credit facility with Lehman (the "Operating
Company Revolving Credit Facility"). This facility, which bears interest
at an applicable prime rate, plus 2.25%, is secured by the accounts
receivable and all other assets of Operating Company. This facility,
which matures on December 31, 2002, was assumed by a wholly-owned
subsidiary of the Company in connection with the Operating Company
Merger.
OTHER DEBT TRANSACTIONS
On March 8, 1999, the Company issued a $20.0 million convertible
subordinated note to Sodexho pursuant to a forward contract assumed by
the Company from Old CCA in the 1999 Merger (the "$20.0 Million Floating
Rate Convertible Note"). The note bore interest at LIBOR plus 1.35% and
was convertible into shares of the Company's common stock at a conversion
price of $7.80 per share. On March 8, 1999, Sodexho converted (i) a $7.0
million convertible subordinated note bearing interest at 8.5% into 1.7
million shares of the Company's common stock at a conversion price of
$4.09 per share, (ii) a $20.0 million convertible subordinated note
bearing interest at 7.5% into 700,000 shares of the Company's common
stock at a conversion price of $28.53 per share and (iii) the $20.0
Million Floating Rate Convertible Note into 2.6 million shares of the
Company's common stock at a conversion price of $7.80 per share.
During 1998, convertible subordinated notes with a face value of $5.8
million were converted into 2.9 million shares of the Company's common
stock.
At December 31, 2000 and 1999, the Company had $2.2 million and $16.3
million in letters of credit, respectively. The letters of credit were
issued to secure the Company's worker's compensation insurance policy,
performance bonds and utility deposits. An additional letter of credit
outstanding at December 31, 1999, was issued to secure the Company's
construction of a facility. The Company is required to maintain cash
collateral for the letters of credit.
The Company capitalized interest of $8.3 million, $37.7 million, and
$11.8 million in 2000, 1999, and 1998, respectively.
Debt maturities for the next five years and thereafter are (in
thousands):
2001 $ 14,594
2002 966,385
2003 1,228
2004 126
2005 30,139
Thereafter 140,098
--------------
$ 1,152,570
==============
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CROSS-DEFAULT PROVISIONS
The provisions of the Company's debt agreements related to the Amended
Bank Credit Facility, the $40.0 Million Convertible Subordinated Notes,
the $30.0 Million Convertible Subordinated Notes and the Senior Notes
contain certain cross-default provisions. Any events of default under the
Amended Bank Credit Facility also result in an event of default under the
Company's $40.0 Million Convertible Subordinated Notes. Any events of
default under the Amended Bank Credit Facility that results in the
lenders' acceleration of amounts outstanding thereunder also result in an
event of default under the Company's $30.0 Million Convertible
Subordinated Notes and the Senior Notes. Additionally, any events of
default under the $40.0 Million Convertible Subordinated Notes, the $30.0
Million Convertible Subordinated Notes and the Senior Notes also result
in an event of default under the Amended Bank Credit Facility.
If the Company were to be in default under the Amended Bank Credit
Facility, and if the lenders under the Amended Bank Credit Facility
elected to exercise their rights to accelerate the Company's obligations
under the Amended Bank Credit Facility, such events could result in the
acceleration of all or a portion of the Company's $40.0 Million
Convertible Subordinated Notes, the $30.0 Million Convertible
Subordinated Notes and the Senior Notes which would have a material
adverse effect on the Company's liquidity and financial position.
Additionally, under the Company's $40.0 Million Convertible Subordinated
Notes, even if the lenders under the Amended Bank Credit Facility did not
exercise their acceleration rights, the holders of the $40.0 Million
Convertible Subordinated Notes could require the Company to repurchase
such notes. The Company does not have sufficient working capital to
satisfy its debt obligations in the event of an acceleration of all or a
substantial portion of the Company's outstanding indebtedness.
15. INCOME TAXES
Prior to 1999, Old CCA, the Company's predecessor by merger, operated as
a taxable subchapter C corporation. The Company elected to change its tax
status from a taxable corporation to a REIT effective with the filing of
its 1999 federal income tax return. As of December 31, 1998, the
Company's balance sheet reflected $83.2 million in net deferred tax
assets. In accordance with the provisions of SFAS 109, the Company
provided a provision for these deferred tax assets, excluding any
estimated tax liabilities required for prior tax periods, upon completion
of the 1999 Merger and the election to be taxed as a REIT. As such, the
Company's results of operations reflect a provision for income taxes of
$83.2 million for the year ended December 31, 1999. However, due to New
Prison Realty's tax status as a REIT, New Prison Realty recorded no
income tax provision or benefit related to operations for the year ended
December 31, 1999.
In connection with the Restructuring, on September 12, 2000, the
Company's stockholders approved an amendment to the Company's charter to
remove provisions requiring the Company to elect to qualify and be taxed
as a REIT for federal income tax purposes effective January 1, 2000. As a
result of the amendment to the Company's charter, the Company will be
taxed as a taxable subchapter C corporation beginning with its taxable
year ended December 31, 2000. In accordance with the provisions of SFAS
109, the Company is required to establish current and deferred tax assets
and liabilities in its financial statements in the period in which a
change of tax status occurs. As such, the Company's benefit for income
taxes for the year ended December 31, 2000 includes the provision
associated with establishing the deferred tax assets and liabilities in
connection with the change in tax status during the third quarter of
2000, net of a valuation allowance applied to certain deferred tax
assets.
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The provision (benefit) for income taxes is comprised of the following
components (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
CURRENT PROVISION (BENEFIT)
Federal $(26,593) $ -- $ 41,904
State 586 -- 7,914
-------- -------- --------
(26,007) -- 49,818
-------- -------- --------
INCOME TAXES CHARGED TO EQUITY
Federal -- -- 4,016
State -- -- 459
-------- -------- --------
-- -- 4,475
-------- -------- --------
DEFERRED PROVISION (BENEFIT)
Federal (19,739) 74,664 (34,848)
State (2,256) 8,536 (4,021)
-------- -------- --------
(21,995) 83,200 (38,869)
-------- -------- --------
PROVISION (BENEFIT) FOR INCOME TAXES $(48,002) $ 83,200 $ 15,424
======== ======== ========
In addition to the above, the cumulative effect of accounting change for
1998 was reported net of $10.3 million of estimated tax benefit. Of the
$10.3 million total tax benefit related to the cumulative effect of
accounting change, approximately $4.0 million related to current tax
benefit and approximately $6.3 million related to deferred tax benefit.
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2000, are as follows (in thousands):
CURRENT DEFERRED TAX ASSETS:
Asset reserves and liabilities not yet deductible for tax $ 24,894
Less valuation allowance (24,894)
---------
Net total current deferred tax assets $ --
=========
NONCURRENT DEFERRED TAX ASSETS:
Asset reserves and liabilities not yet deductible for tax $ 4,634
Tax over book basis of certain assets 41,923
Net operating loss carryforwards 56,115
Other 8,743
---------
Total noncurrent deferred tax assets 111,415
Less valuation allowance (111,415)
---------
Net noncurrent deferred tax assets --
---------
NONCURRENT DEFERRED TAX LIABILITIES:
Book over tax basis of certain assets 6,556
Items deductible for tax not yet recorded to income 49,839
Other 55
---------
Total noncurrent deferred tax liabilities 56,450
---------
Net noncurrent deferred tax liabilities $ 56,450
=========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Realization of the future tax benefits related to deferred tax
assets is dependent on
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many factors, including the Company's ability to generate taxable income
within the net operating loss carryforward period. Management has
considered these factors in assessing the valuation allowance for
financial reporting purposes. In accordance with SFAS 109, the Company
has provided a valuation allowance to reserve the deferred tax assets. At
December 31, 2000, the Company had net operating loss carryforwards for
income tax purposes totaling $143.8 million available to offset future
taxable income. The carryforward period begins expiring in 2009.
A reconciliation of the statutory federal income tax rate and the
effective tax rate as a percentage of pretax income (loss) for the years
ended December 31, 2000 and 1998 is as follows:
2000 1998
------ ------
Statutory federal rate (35.0)% 35.0%
State taxes, net of federal tax benefit (4.0) 4.0
Change in tax status 12.5 --
Items not deductible for tax 5.9 --
Valuation allowance 12.2 --
Old CCA compensation charge -- 21.0
Deductions not previously benefited -- (29.4)
Other items, net 2.2 5.8
------ ------
(6.2)% 36.4%
====== ======
16. OLD CCA COMPENSATION CHARGE
Old CCA recorded a $22.9 million charge to expense in 1998 for the
implied fair value of approximately 5.0 million shares of Operating
Company voting common stock issued by Operating Company to certain
employees of Old CCA and Old Prison Realty. The shares were granted to
certain founding shareholders of Operating Company in September 1998.
Neither the Company, Old CCA nor Operating Company received any proceeds
from the issuance of these shares. The fair value of these shares of
voting common stock was determined at the date of the 1999 Merger based
upon the implied value of Operating Company derived from $16.0 million in
cash investments made by outside investors in December 1998 in return for
a 32% ownership interest in Operating Company.
17. EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") basic earnings per share is computed by
dividing net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the year.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. For the
Company, diluted earnings per share is computed by dividing net income
(loss), as adjusted, by the weighted average number of common shares
after considering the additional dilution related to convertible
preferred stock, convertible subordinated notes, options and warrants.
For the years ended December 31, 2000 and 1999, the Company's stock
options and warrants were convertible into 1.0 million and 0.2 million
shares, respectively. For the years ended December 31, 2000 and 1999, the
Company's convertible subordinated notes were convertible into 62.5
million and 3.2 million shares, respectively. These incremental shares
were excluded from the computation of diluted earnings per share for the
years ended December 31, 2000 and 1999 as the effect of their inclusion
was anti-dilutive.
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In computing diluted earnings per common share for the year ended
December 31, 1998, the Company's stock warrants and stock options are
considered dilutive using the treasury stock method, and the various
convertible subordinated notes are considered dilutive using the
if-converted method. A reconciliation of the numerator and denominator of
the basic earnings per share computation to the numerator and denominator
of the diluted earnings per share computation is as follows (in
thousands, except per share data):
2000 1999 1998
--------- --------- ---------
NUMERATOR
Basic
Net income (loss) available to common stockholders:
Before cumulative effect of accounting change $(744,308) $ (81,254) $ 26,981
Cumulative effect of accounting change -- -- (16,145)
--------- --------- ---------
Net income (loss) available to common stockholders (744,308) (81,254) 10,836
Diluted
Interest expense applicable to convertible
subordinated notes, net of tax -- -- 366
--------- --------- ---------
Adjusted net income (loss) available to common
stockholders $(744,308) $ (81,254) $ 11,202
========= ========= =========
DENOMINATOR
Basic
Weighted average common shares outstanding 131,324 115,097 71,380
========= ========= =========
Diluted
Weighted average common shares outstanding 131,324 115,097 71,380
Effect of dilutive options and warrants -- -- 3,689
Conversion of preferred stock -- -- 481
Conversion of convertible subordinated notes -- -- 3,389
--------- --------- ---------
Weighted average shares and assumed conversions 131,324 115,097 78,939
========= ========= =========
Basic net income (loss) per common share:
Before cumulative effect of accounting change $ (5.67) $ (0.71) $ 0.38
Cumulative effect of accounting change -- -- (0.23)
--------- --------- ---------
Net income (loss) available to common stockholders $ (5.67) $ (0.71) $ 0.15
========= ========= =========
Diluted net income (loss) per common share:
Before cumulative effect of accounting change $ (5.67) $ (0.71) $ 0.34
Cumulative effect of accounting change -- -- (0.20)
--------- --------- ---------
Net income (loss) available to common stockholders $ (5.67) $ (0.71) $ 0.14
========= ========= =========
As further discussed in Note 21, the Company has entered into definitive
settlement agreements regarding the settlement of all outstanding
stockholder litigation against the Company and certain of its existing
and former directors and executive officers. In February 2001, the
Company obtained final court approval of the definitive settlement
agreements. Pursuant to terms of the settlement, among other
consideration, the Company will issue to the plaintiffs an aggregate of
46.9 million shares of common stock. The issuance of these shares, which
is currently expected to occur during the second or third quarter of
2001, will increase the denominator used in the earnings per share
calculation, thereby reducing the net income or loss per common share of
the Company.
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18. STOCKHOLDERS' EQUITY
SERIES A PREFERRED STOCK
Upon its formation in 1998, the Company authorized 20.0 million shares of
$0.01 par value preferred stock, of which 4.3 million shares are
designated as Series A Preferred Stock.
As discussed in Note 3, in connection with the 1999 Merger, Old Prison
Realty shareholders received one share of Series A Preferred Stock of the
Company in exchange for each Old Prison Realty Series A Cumulative
Preferred Share. Consequently, the Company issued 4.3 million shares of
its Series A Preferred Stock on January 1, 1999. The shares of the
Company's Series A Preferred Stock are redeemable at any time by the
Company on or after January 30, 2003 at $25 per share, plus dividends
accrued and unpaid to the redemption date. Shares of the Company's Series
A Preferred Stock have no stated maturity, sinking fund provision or
mandatory redemption and are not convertible into any other securities of
the Company. Dividends on shares of the Company's Series A Preferred
Stock are cumulative from the date of original issue of such shares and
are payable quarterly in arrears on the fifteenth day of January, April,
July and October of each year, to shareholders of record on the last day
of March, June, September and December of each year, respectively, at a
fixed annual rate of 8.0%.
As discussed in Notes 13 and 14, in connection with the June 2000 Waiver
and Amendment, the Company is prohibited from declaring or paying any
dividends with respect to the Series A Preferred Stock until such time as
the Company has raised at least $100.0 million in equity. As a result,
the Company has not declared or paid any dividends on its Series A
Preferred Stock since the first quarter of 2000. Dividends will continue
to accrue under the terms of the Company's charter until such time as
payment of such dividends is permitted under terms of the bank credit
facility.
SERIES B PREFERRED STOCK
In order to satisfy the REIT distribution requirements with respect to
its 1999 taxable year, during 2000 the Company authorized an additional
30.0 million shares of $0.01 par value preferred stock, designated 12.0
million shares of such preferred stock as Series B Preferred Stock and
subsequently issued approximately 7.5 million shares to holders of the
Company's common stock as a stock dividend.
The shares of Series B Preferred Stock issued by the Company provide for
cumulative dividends payable at a rate of 12% per year of the stock's
stated value of $24.46. The dividends are payable quarterly in arrears,
in additional shares of Series B Preferred Stock through the third
quarter of 2003, and in cash thereafter. The shares of the Series B
Preferred Stock are callable by the Company, at a price per share equal
to the stated value of $24.46, plus any accrued dividends, at any time
after six months following the later of (i) three years following the
date of issuance or (ii) the 91st day following the redemption of the
Company's 12.0% senior notes, due 2006. The shares of Series B Preferred
Stock were convertible into shares of the Company's common stock during
two conversion periods: (i) from October 2, 2000 to October 13, 2000; and
(ii) from December 7, 2000 to December 20, 2000, at a conversion price
based on the average closing price of the Company's common stock on the
NYSE during the 10 trading days prior to the first day of the applicable
conversion period, provided, however, that the conversion price used to
determine the number of shares of the Company's common stock issuable
upon conversion of the Series B Preferred Stock could not be less than
$1.00. The number of shares of the Company's common stock that were
issued upon the conversion of each share of Series B Preferred Stock was
calculated
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by dividing the stated price ($24.46), plus accrued and unpaid dividends
as of the date of conversion of each share of Series B Preferred Stock,
by the conversion price established for the conversion period.
Approximately 1.3 million shares of Series B Preferred Stock issued by
the Company on September 22, 2000 were converted during the first
conversion period in October 2000, resulting in the issuance of
approximately 21.7 million shares of the Company's common stock. The
conversion price for the initial conversion period was established at
$1.4813.
Approximately 2.9 million shares of Series B Preferred Stock issued by
the Company on November 13, 2000 were converted during the second
conversion period in December 2000, resulting in the issuance of
approximately 73.4 million shares of the Company's common stock. The
conversion price for the second conversion period was established at
$1.00. The shares of Series B Preferred Stock currently outstanding, as
well as any additional shares issued as dividends, are not and will not
be convertible into shares of the Company's common stock.
On December 13, 2000, the Company's board of directors declared a
paid-in-kind dividend on the shares of Series B Preferred Stock for the
period from September 22, 2000 (the original date of issuance) through
December 31, 2000, payable on January 2, 2001, to the holders of record
of the Company's Series B Preferred Stock on December 22, 2000. As a
result of the board's declaration, the holders of the Company's Series B
Preferred Stock were entitled to receive approximately 3.3 shares of
Series B Preferred Stock for every 100 shares of Series B Preferred Stock
held by them on the record date. The number of shares to be issued as the
dividend was based on a dividend rate of 12.0% per annum of the stock's
stated value ($24.46 per share). As of December 31, 2000, the Company has
accrued approximately $2.7 million of distributions on Series B Preferred
Stock and approximately $6.5 million of distributions on the Series A
Preferred Stock. Approximately 0.1 million shares of Series B Preferred
Stock were issued on January 2, 2001 as a result of this dividend.
On March 9, 2001, the Company's board of directors declared a
paid-in-kind dividend on the shares of Series B Preferred Stock for the
first quarter of 2001, payable on April 2, 2001 to the holders of record
of the Company's Series B Preferred Stock on March 19, 2001. As a result
of this declaration, the holders of the Company's Series B Preferred
Stock are entitled to receive 3.0 shares of Series B Preferred Stock for
every 100 shares of Series B Preferred Stock held by them on the record
date. The number of shares to be issued as the dividend is based on a
dividend rate of 12.0% per annum of the stock's stated value ($24.46).
Approximately 0.1 million shares of Series B Preferred Stock will be
issued on April 2, 2001 as a result of this dividend.
STOCK OFFERINGS
On November 4, 1998, Old CCA filed a Registration Statement on Form S-3
to register up to 3.0 million shares of Old CCA common stock for sale on
a continuous and delayed basis using a "shelf" registration process.
During December 1998, Old CCA sold, in a series of private placements,
2.9 million shares of Old CCA common stock to institutional investors
pursuant to this registration statement. The net proceeds of
approximately $66.1 million were utilized by Old CCA for general
corporate purposes, including the repayment of indebtedness, financing
capital expenditures and working capital.
On January 11, 1999, the Company filed a Registration Statement on Form
S-3 to register an aggregate of $1.5 billion in value of its common
stock, preferred stock, common stock rights, warrants and debt securities
for sale to the public (the "Shelf Registration Statement"). Proceeds
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from sales under the Shelf Registration Statement were used for general
corporate purposes, including the acquisition and development of
correctional and detention facilities. During 1999, the Company issued
and sold approximately 6.7 million shares of its common stock under the
Shelf Registration Statement, resulting in net proceeds to the Company of
approximately $120.0 million.
On May 7, 1999, the Company registered 10.0 million shares of the
Company's common stock for issuance under the Company's Dividend
Reinvestment and Stock Purchase Plan (the "DRSPP"). The DRSPP provided a
method of investing cash dividends in, and making optional monthly cash
purchases of, the Company's common stock, at prices reflecting a discount
between 0% and 5% from the market price of the common stock on the NYSE.
As of December 31, 2000, the Company issued approximately 1.3 million
shares under the DRSPP, with substantially all of these shares issued
under the DRSPP's optional cash feature, resulting in proceeds of $12.3
million. The Company has suspended the DRSPP.
At the Company's 2000 annual meeting of stockholders on December 13,
2000, the holders of the Company's common stock as of the record date for
the meeting approved a reverse stock split of the Company's common stock
at a ratio to be determined by the board of directors of the Company of
not less than one-for-ten and not to exceed one-for-twenty. The Company
obtained the approval for the reverse stock split based on the Company's
actual and prospective issuances of shares of its common stock and the
effect of such issuances on the market price of the Company's common
stock. Management expects that the reverse stock split will allow the
Company to continue to meet the minimum stock price requirement for
continued listing on the NYSE and that the reverse stock split will be
effected during the second quarter of 2001.
STOCK WARRANTS
Old CCA had issued stock warrants to certain affiliated and unaffiliated
parties for providing certain financing, consulting and brokerage
services to Old CCA and to stockholders as a dividend. All outstanding
warrants were exercised in 1998 for 3.9 million shares of common stock
with no cash proceeds received by Old CCA.
In connection with the Operating Company Merger, the Company issued
warrants for 2.1 million shares of the Company's common stock to acquire
the voting common stock of Operating Company. The warrants issued allow
the holder to purchase 1.4 million shares of the Company's common stock
at an exercise price of $0.01 per share and 0.7 million shares of the
Company's common stock at an exercise price of $1.41 per share. Also in
connection with the Operating Company Merger, the Company assumed the
obligation to issue up to approximately 0.8 million shares of its common
stock, at a per share price of $3.33.
TREASURY STOCK
Old CCA's Board of Directors approved a stock repurchase program for up
to an aggregate of 350,000 shares of Old CCA's stock for the purpose of
funding Old CCA's employee stock options, stock ownership and stock award
plans. In September 1997, Old CCA repurchased 108,000 shares of its stock
from a member of the board of directors of Old CCA at the market price
pursuant to this program. In March 1998, Old CCA repurchased 175,000
shares from its chief executive officer at the market price pursuant to
this program. On December 31, 1998, all then outstanding treasury stock
was retired in connection with the 1999 Merger. Treasury stock was
recorded in 1999 related to the cashless exercise of stock options.
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STOCK OPTION PLANS
The Company has incentive and nonqualified stock option plans under which
options were granted to "key employees" as designated by the board of
directors. The options are generally granted with exercise prices equal
to the market value at the date of grant. Vesting periods for options
granted to employees generally range from one to four years. Options
granted to non-employee directors vest at the date of grant. The term of
such options is ten years from the date of grant.
In connection with the 1999 Merger, all options outstanding at December
31, 1998 to purchase Old CCA common stock and all options outstanding at
January 1, 1999 to purchase Old Prison Realty common stock, were
converted into options to purchase shares of the Company's common stock,
after giving effect to the exchange ratio and carryover of the vesting
and other relevant terms. Options granted under Old CCA's stock option
plans are exercisable after the later of two years from the date of
employment or one year after the date of grant until ten years after the
date of grant. Options granted under Old Prison Realty's stock option
plans were granted with terms similar to the terms of the Company's
plans.
During the fourth quarter of 2000, pursuant to anti-dilution provisions
under the Company's equity incentive plans, an automatic adjustment of
approximately 5.9 million stock options was issued to existing optionees
as a result of the dilutive effect of the issuance of the Series B
Preferred Stock, as further discussed in Note 13, and below. In
accordance with APB 25, "Accounting for Stock Issued to Employees," the
Company also adjusted the exercise prices of existing and newly issued
options such that the automatic adjustment resulted in no accounting
consequence to the Company's financial statements. All references in this
Note to the number and prices of options still outstanding have been
retroactively restated to reflect the increased number of options
resulting from the automatic adjustment.
Stock option transactions relating to the Company's incentive and
nonqualified stock option plans are summarized below (in thousands,
except exercise prices):
WEIGHTED AVERAGE
EXERCISE PRICE PER
NUMBER OF OPTIONS OPTION
----------------- ------------------
Outstanding at December 31, 1997 6,797 $ 5.47
Granted 1,173 $15.35
Exercised (3,498) $ 2.47
Cancelled (128) $11.25
------ ------
Outstanding at December 31, 1998 4,344 $10.39
Old Prison Realty options 3,068 $ 9.13
Granted 997 $ 7.94
Exercised (362) $ 1.12
Cancelled (1,966) $ 9.64
------ ------
Outstanding at December 31, 1999 6,081 $10.15
GRANTED 5,524 $ 1.65
CANCELLED (1,816) $ 9.59
------ ------
OUTSTANDING AT DECEMBER 31, 2000 9,789 $ 5.45
====== ======
The weighted average fair value of options granted during 2000, 1999 and
1998 was $0.81, $1.54, and $6.54 per option, respectively, based on the
estimated fair value using the Black-Scholes option-pricing model.
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Stock options outstanding at December 31, 2000, are summarized below:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING AT REMAINING OPTIONS
DECEMBER 31, 2000 CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISABLE AT
EXERCISE PRICE (IN THOUSANDS) IN YEARS EXERCISE PRICE DECEMBER 31, 2000
-------------------- ------------------ ------------------- ------------------ --------------------
$ 0.58 - 1.00 3,137 9.32 $ 0.95 1,881
$ 1.82 - 2.99 2,728 9.14 $ 2.46 218
$ 4.00 - 7.94 460 6.39 $ 6.94 460
$ 8.31 - 11.78 1,900 6.46 $ 9.38 1,900
$ 12.18 - 15.93 1,564 6.48 $14.50 1,564
----- ---- ------ -----
9,789 8.12 $ 5.45 6,023
===== ==== ====== =====
During 1995, Old CCA authorized the issuance of 295,000 shares of common
stock to certain key employees as a deferred stock award. The award was
to fully vest ten years from the date of grant based on continuous
employment with the Company. The Company had been expensing the $3.7
million of awards over the ten-year vesting period. During 2000, due to
the resignations of such employees, approximately 176,000 shares of
deferred stock became vested immediately. As a result, the Company
expensed the unamortized portion of the award, totaling approximately
$1.8 million. The remainder of such shares of deferred stock became
immediately vested during the first quarter of 2001 upon the resignation
or termination of an employee from the Company. Approximately 155,000
shares of the deferred stock are subject to adjustment as a result of the
issuance and subsequent conversion of shares of Series B Preferred Stock
as discussed above, resulting in the issuance of an additional 235,000
shares of common stock pursuant to the deferred awards.
During 1997, Old CCA granted 70,000 stock options to a member of the
board of directors of Old CCA to purchase Old CCA's common stock. The
options were granted with an exercise price less than the market value on
the date of grant and were exercisable immediately. During 1998, Old CCA
fully recognized the $0.5 million of compensation expense related to the
issuance of these stock options.
During 1999, the Company authorized the issuance of 23,000 shares of
common stock to four executives as deferred stock awards. The value of
the awards on the date of grant was approximately $0.5 million. The
awards vested 25% immediately upon date of the grant with the remaining
shares vesting 25% on each anniversary date of the grant in each of the
next three years. Effective December 31, 1999, two of the executives that
received the awards resigned from the Company. All unvested shares issued
to those two executives were forfeited upon their resignation. The
Company expensed $0.1 million related to the shares in 1999. During 2000,
the remaining two executives resigned from the Company, resulting in the
forfeiture of the unvested shares.
At the Company's 2000 annual meeting of stockholders held in December
2000, the Company obtained the approval of an amendment to the Company's
1997 Employee Share Incentive Plan to increase the number of shares of
common stock available for issuance thereunder from 1.3 million to 15.0
million and the adoption of the Company's 2000 Equity Incentive Plan,
pursuant to which the Company will reserve 25.0 million in shares of the
common stock for issuance thereunder. These changes were made in order to
provide the Company with adequate means to retain and attract quality
directors, officers and key employees through the granting of equity
incentives. The number of shares available for issuance under each of the
plans will be adjusted in the event the reverse stock split discussed
above is approved and implemented.
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The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and accounts for stock-based compensation
using the intrinsic value method as prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations. As a result, no compensation cost has been
recognized for the Company's stock option plans under the criteria
established by SFAS 123. Had compensation cost for the stock option plans
been determined based on the fair value of the options at the grant date
for awards in 2000, 1999, and 1998 consistent with the provisions of SFAS
123, the Company's net income (loss) and net income (loss) per share
would have been reduced to the pro forma amounts indicated below for the
years ended December 31 (amounts in thousands except per share data):
2000 1999 1998
------------ ------------ ------------
Net income (loss) - as reported $ (744,308) $ (81,254) $ 10,836
Net income (loss) - pro forma (745,598) (84,252) 6,769
Net income (loss) per share - Basic - as reported $ (5.67) $ (0.71) $ 0.15
Net income (loss) per share - Basic - pro forma (5.68) (0.73) 0.09
Net income (loss) per share - Diluted - as reported $ (5.67) $ (0.71) $ 0.14
Net income (loss) per share - Diluted - pro forma (5.68) (0.73) 0.09
The effect of applying SFAS 123 for disclosing compensation costs under
such pronouncement may not be representative of the effects on reported
net income (loss) for 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:
2000 1999 1998
-------- ---------- --------
Expected dividend yield 0.0% 9.0% 0.0%
Expected stock price volatility 112.5% 49.1% 47.7%
Risk-free interest rate 5.3% 5.4% 4.6%
Expected life of options 7 YEARS 10 years 4 years
RETIREMENT PLANS
On December 28, 1998, Operating Company adopted a 401(k) plan (the
"Plan"). In connection with the Operating Company Merger, the Company
assumed all benefits and obligations of the Plan. All employees of the
Company are eligible to participate upon reaching age 18 and completing
one year of qualified service. Employees may elect to defer from 1% to
15% of their compensation. The provisions of the Plan provide for
employer matching discretionary contributions currently equal to 100% of
the employee's contributions up to 4% of the employee's compensation.
Additionally, the Company also makes a basic contribution on behalf of
each eligible employee, equal to 2% of the employee's compensation for
the first year of eligibility, and 1% of the employee's compensation for
each year of eligibility following. The Company's contributions become
40% vested after four years of service and 100% vested after five years
of service. The Company's board of directors has discretion in
establishing the amount of the Company's matching and basic
contributions, which amounted to $0.8 million since the Operating Company
Merger on October 1, 2000.
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19. INTERNATIONAL ALLIANCE
In 1994, Old CCA entered into an International Alliance (the "Alliance")
with Sodexho to pursue prison management business outside the United
States. In conjunction with the Alliance, Sodexho purchased an equity
position in Old CCA by acquiring several instruments. In 1994, Old CCA
issued to Sodexho 2.5 million shares of common stock at $4.29 per share
and a $7.0 million convertible subordinated note bearing interest at
8.5%. Sodexho also received warrants that were exercised in 1998 for 3.9
million shares of common stock. In consideration of the placement of the
aforementioned securities, Old CCA paid Sodexho $4.0 million over a
four-year period ending in 1998. These fees include debt issuance costs
and private placement equity fees. These fees have been allocated to the
various instruments based on the estimated cost to Old CCA of raising the
various components of capital and are charged to debt issuance costs or
equity as the respective financings are completed.
In 1995, Old CCA and Sodexho entered into a forward contract whereby
Sodexho would purchase up to $20.0 million of convertible subordinated
notes at any time prior to December 1997. In 1997, Old CCA and Sodexho
extended the expiration date of this contract to December 1999. As
discussed in Note 14, on March 8, 1999, the Company issued the $20.0
Million Floating Rate Convertible Note to Sodexho. The notes bore
interest at LIBOR plus 1.35% and were convertible into shares of the
Company's common stock at a conversion price of $7.80 per share.
In 1996, Old CCA sold $20.0 million of convertible notes to Sodexho
pursuant to their contractual preemptive right. The notes had an interest
rate of 7.5% and were convertible into common shares at a conversion
price of $28.53 per share.
As discussed in Note 14, on March 8, 1999, Sodexho converted (i) the $7.0
million convertible subordinated note bearing interest at 8.5% into 1.7
million shares of the Company's common stock at a conversion price of
$4.09 per share, (ii) the $20.0 million convertible subordinated note
bearing interest at 7.5% into 0.7 million shares of the Company's common
stock at a conversion price of $28.53 per share and (iii) the $20.0
Million Floating Rate Convertible Note bearing interest at LIBOR plus
1.35% into 2.6 million shares of the Company's common stock at a
conversion price of $7.80 per share.
As discussed in Note 3, the Company sold its 50% interest in two
international subsidiaries to Sodexho for an aggregate sales price of
approximately $6.4 million, resulting in a net loss on sale of
approximately $2.0 million.
20. RELATED PARTY TRANSACTIONS
Old CCA paid legal fees to a law firm of which one of the partners had
been a member of the Old CCA board of directors. Legal fees paid to the
law firm amounted to $5.8 million and $3.0 million in 1999 and 1998,
respectively. The Company and Operating Company paid $3.0 million to this
law firm during 2000.
Old CCA paid $0.3 million in 1998, to a member of the Old CCA board of
directors for consulting services related to various contractual
relationships. The Company paid $0.1 million in 2000 to a former member
of Operating Company's board of directors for consulting services related
to various contractual relationships. The Company did not make any
payments to this individual during 1999.
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Old CCA paid $1.3 million in 1998, to a company that is majority-owned by
an individual that was a member of the Old CCA board of directors, for
services rendered at one of its facilities. The Company and Operating
Company paid $0.6 million for services rendered during 2000. The Company
did not make any payments to this company during 1999.
The Company paid $26.5 million in each of 2000 and 1999, to a
construction company that is owned by a former member of the Company's
board of directors, for services rendered in the construction of
facilities. The board member did not stand for re-election to the
Company's board of directors at the Company's 2000 annual meeting of
stockholders, which was held during the fourth quarter of 2000. During
1998, Old CCA paid $40.8 million and Old Prison Realty paid $8.7 million
to this construction company.
During 1998, the Company paid $3.0 million to a former member of the
Company's board of directors for consulting services rendered in
connection with the merger transactions discussed in Note 3. The Company
and Operating Company paid $0.2 million to this individual in 2000 for
ongoing consulting services. The Company did not make payments to this
individual during 1999 other than board of director fees. The board
member did not stand for re-election to the Company's board of directors
at the Company's 2000 annual meeting of stockholders, which was held
during the fourth quarter of 2000. Refer to Note 18 for stock
transactions with officers and former officers.
21. COMMITMENTS AND CONTINGENCIES
LITIGATION
During the first quarter of 2001, the Company obtained final court
approval of the settlements of the following outstanding consolidated
federal and state class action and derivative stockholder lawsuits
brought against the Company and certain of its former directors and
executive officers: (i) In re: Prison Realty Securities Litigation; (ii)
In re: Old CCA Securities Litigation; (iii) John Neiger, on behalf of
himself and all others similarly situated v. Doctor Crants, Robert Crants
and Prison Realty Trust, Inc.; (iv) Dasburg, S.A., on behalf of itself
and all others similarly situated v. Corrections Corporation of America,
Doctor R. Crants, Thomas W. Beasley, Charles A. Blanchette, and David L.
Myers; (v) Wanstrath v. Crants, et al.; and (vi) Bernstein v. Prison
Realty Trust, Inc. The final terms of the settlement agreements provide
for the "global" settlement of all such outstanding stockholder
litigation against the Company brought as the result of, among other
things, agreements entered into by the Company and Operating Company in
May 1999 to increase payments made by the Company to Operating Company
under the terms of certain agreements, as well as transactions relating
to the restructuring of the Company led by Fortress/Blackstone and
Pacific Life Insurance Company. Pursuant to the terms of the settlements,
the Company will issue or pay to the plaintiffs in the actions: (i) an
aggregate of 46.9 million shares of the Company's common stock; (ii) a
subordinated promissory note in the aggregate principal amount of $29.0
million; and (iii) approximately $47.5 million in cash payable solely
from the proceeds of certain insurance policies.
It is expected that the promissory note will be due January 2, 2009, and
will accrue interest at a rate of 8.0% per annum. Pursuant to the terms
of the settlement, the note and accrued interest may be extinguished if
the Company's common stock meets or exceeds a "termination price" equal
to $1.63 per share for fifteen consecutive trading days prior to the
maturity date of the note. Additionally, to the extent the Company's
common stock price does not meet the termination price, the note will be
reduced by the amount that the shares of common stock issued to the
plaintiffs appreciate in value in excess of $0.49 per common share, based
on the average trading price of the stock prior to the maturity of the
note. The Company has reflected the estimated obligation of approximately
$75.4
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million associated with the stockholder litigation in the accompanying
balance sheet at December 31, 2000.
On June 9, 2000, a complaint captioned Prison Acquisition Company, L.L.C.
v. Prison Realty Trust, Inc., Correction Corporation of America, Prison
Management Services, Inc. and Juvenile and Jail Facility Management
Services, Inc. was filed in federal court in the United States District
Court for the Southern District of New York to recover fees allegedly
owed the plaintiff as a result of the termination of a securities
purchase agreement by and among the parties related to a proposed
restructuring of the Company led by Fortress/Blackstone. The complaint
alleges that the defendants failed to pay amounts allegedly due under the
securities purchase agreement and asks for compensatory damages of
approximately $24.0 million consisting of various fees, expenses and
other relief the court may deem appropriate. The Company is contesting
this action vigorously. The Company has recorded an accrual reflecting
management's best estimate of the ultimate outcome of this matter based
on consultation with legal counsel.
On September 14, 1998, a complaint captioned Thomas Horn, Ferman Heaton,
Ricky Estes, and Charles Combs, individually and on behalf of the U.S.
Corrections Corporation Employee Stock Ownership Plan and its
participants v. Robert B. McQueen, Milton Thompson, the U.S. Corrections
Corporation Employee Stock Ownership Plan, U.S. Corrections Corporation,
and Corrections Corporation of America was filed in the U.S. District
Court for the Western District of Kentucky alleging numerous violations
of the Employee Retirement Income Security Act ("ERISA"), including but
not limited to a failure to manage the assets of the U.S. Corrections
Corporation Employee Stock Ownership Plan (the "ESOP") in the sole
interest of the participants, purchasing assets without undertaking
adequate investigation of the investment, overpayment for employer
securities, failure to resolve conflicts of interest, lending money
between the ESOP and employer, allowing the ESOP to borrow money other
than for the acquisition of employer securities, failure to make
adequate, independent and reasoned investigation into the prudence and
advisability of certain transaction, and otherwise. The plaintiffs are
seeking damages in excess of $30.0 million plus prejudgement interest and
attorneys' fees. The Company's insurance carrier has indicated that it
did not receive timely notice of these claims and, as a result, is
currently contesting its coverage obligations in this suit. The Company
is currently contesting this issue with the carrier. The Company has
recorded an accrual reflecting management's best estimate of the ultimate
outcome of this matter based on consultation with legal counsel.
Commencing in late 1997 and through 1998, Old CCA became subject to
approximately sixteen separate suits in federal district court in the
state of South Carolina claiming the abuse and mistreatment of certain
juveniles housed in the Columbia Training Center, a South Carolina
juvenile detention facility formerly operated by Old CCA. The Company is
aware that six additional plaintiffs may file suits with respect to this
matter. These suits claim unspecified compensatory and punitive damages,
as well as certain costs provided for by statute. One of these suits,
captioned William Pacetti v. Corrections Corporation of America, went to
trial in late November 2000, and in December 2000 the jury returned a
verdict awarding the plaintiff in the action $125,000 in compensatory
damages, $3.0 million in punitive damages, and attorneys' fees. The
Company is currently challenging this verdict with post-judgement
motions, and a final judgement has not been entered in this case. The
Company's insurance carrier has indicated to the Company that its
coverage does not extend to punitive damages such as those awarded in
Pacetti. The Company is currently contesting this issue with the carrier.
The Company has recorded an accrual reflecting management's best estimate
of the ultimate outcome of this matter based on consultation with legal
counsel.
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In February 2000, a complaint was filed in federal court in the United
States District Court for the Western District of Texas against the
Company's inmate transportation subsidiary, TransCor. The lawsuit,
captioned Cheryl Schoenfeld v. TransCor America, Inc., et al., names as
defendants TransCor and its directors. The lawsuit alleges that two
former employees of TransCor sexually assaulted plaintiff Schoenfeld
during her transportation to a facility in Texas in late 1999. An
additional individual, Annette Jones, has also joined the suit as a
plaintiff, alleging that she was also mistreated by the two former
employees during the same trip. Discovery and case preparation are
on-going. Both former employees are subject to pending criminal charges
in Houston, Harris County, Texas. Plaintiff Schoenfeld has previously
submitted a settlement demand exceeding $20.0 million. The Company, its
wholly-owned subsidiary (the parent corporation of TransCor and successor
by merger to Operating Company) and TransCor are defending this action
vigorously. The Company has recorded an accrual reflecting management's
best estimate of the ultimate outcome of this matter based on
consultation with legal counsel. It is expected that a portion of any
liabilities resulting from this litigation will be covered by liability
insurance. The Company's and TransCor's insurance carrier, however, has
indicated that it did not receive proper notice of this claim, and as a
result, may challenge its coverage of any resulting liability of
TransCor. In addition, the insurance carrier asserts it will not be
responsible for punitive damages. The Company and TransCor are currently
contesting this issue with the carrier. In the event any resulting
liability is not covered by insurance proceeds and is in excess of the
amount accrued by the Company, such liability would have a material
adverse effect upon the business or financial position of TransCor and,
potentially, the Company and its other subsidiaries.
The Company has received an invoice, dated October 25, 2000, from Merrill
Lynch for $8.1 million. Prior to their termination, Merrill Lynch served
as a financial advisor to the Company and its board of directors in
connection with the Restructuring. Merrill Lynch claims that the merger
between Operating Company and the Company constitutes a "restructuring
transaction," which Merrill Lynch further contends would trigger certain
fees under engagement letters allegedly entered into between Merrill
Lynch and the Company and Merrill Lynch and Operating Company management,
respectively. The Company denies the validity of these claims. Merrill
Lynch has not initiated legal action or threatened litigation. If Merrill
Lynch initiated legal action on the basis of these claims, the Company
would contest those claims. The Company has recorded an accrual
reflecting management's best estimate of the ultimate outcome of this
matter based on consultation with legal counsel. However, in the event
Merrill Lynch were to prevail on its claims and the resulting liability
were to be in excess of the amount accrued by the Company, such liability
could have a material adverse effect upon the business or financial
position of the Company.
With the exception of certain insurance contingencies discussed above,
the Company believes it has adequate insurance coverage related to the
litigation matters discussed. Should the Company's insurance carriers
fail to provide adequate insurance coverage, the resolution of the
matters discussed above could result in a material adverse effect on the
business and financial position of the Company and its subsidiaries.
In addition to the above legal matters, the nature of the Company's
business results in claims and litigation alleging that the Company is
liable for damages arising from the conduct of its employees or others.
In the opinion of management, other than the outstanding litigation
discussed above, there are no pending legal proceedings that would have a
material effect on the consolidated financial position or results of
operations of the Company for which the Company has not established
adequate reserves.
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INSURANCE CONTINGENCIES
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.
INCOME TAX CONTINGENCIES
Prior to the 1999 Merger, Old CCA operated as a taxable corporation for
federal income tax purposes since its inception, and, therefore,
generated accumulated earnings and profits to the extent its taxable
income, subject to certain adjustments, was not distributed to its
shareholders. To preserve its ability to qualify as a REIT, the Company
was required to distribute all of Old CCA's accumulated earnings and
profits before the end of 1999. If in the future the IRS makes
adjustments increasing Old CCA's earnings and profits, the Company may be
required to make additional distributions equal to the amount of the
increase.
Under previous terms of the Company's charter, the Company was required
to elect to be taxed as a REIT for the year ended December 31, 1999. The
Company, as a REIT, could not complete any taxable year with Accumulated
Earnings and Profits. For the year ended December 31, 1999, the Company
made approximately $217.7 million of distributions related to its common
stock and Series A Preferred Stock. The Company met the above described
distribution requirements by designating approximately $152.5 million of
the total distributions in 1999 as distributions of its Accumulated
Earnings and Profits. In addition to distributing its Accumulated
Earnings and Profits, the Company, in order to qualify for taxation as a
REIT with respect to its 1999 taxable year, was required to distribute
95% of its taxable income for 1999. The Company believes that this
distribution requirement has been satisfied by its distribution of shares
of the Company's Series B Preferred Stock. The Company's failure to
distribute 95% of its taxable income for 1999 or the failure of the
Company to comply with other requirements for REIT qualification under
the Code with respect to its taxable year ended December 31, 1999 could
have a material adverse impact on the Company's combined and consolidated
financial position, results of operations and cash flows.
The Company's election of REIT status for its taxable year ended December
31, 1999 is subject to review by the IRS generally for a period of three
years from the date of filing of its 1999 tax return. Should the IRS
review the Company's election to be taxed as a REIT for the 1999 taxable
year and reach a conclusion disallowing the Company's dividends paid
deduction, the Company would be subject to income taxes and interest on
its 1999 taxable income and possibly subject to fines and/or penalties.
Income taxes, penalties and interest for the year ended December 31, 1999
could exceed $83.5 million, which would have an adverse impact on the
Company's combined and consolidated financial position, results of
operations and cash flows.
In connection with the 1999 Merger, the Company assumed the tax
obligations of Old CCA resulting from disputes with federal and state
taxing authorities related to tax returns filed by Old CCA in 1998 and
prior taxable years. The IRS is currently conducting audits of Old CCA's
federal tax returns for the taxable years ended December 31, 1998 and
1997, and the Company's federal tax return for the taxable year ended
December 31, 1999. The Company has received the IRS's preliminary
findings related to the taxable year ended December 31, 1997 and is
currently appealing those findings. The Company currently is unable to
predict the ultimate outcome of the IRS's audits of Old CCA's 1998 and
1997 federal tax returns, the Company's 1999 federal tax return or the
ultimate outcome of audits of other tax returns of the Company or Old CCA
by the IRS or by other
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taxing authorities; however, it is possible that such audits will result
in claims against the Company in excess of reserves currently recorded by
the Company. In addition, to the extent that IRS audit adjustments
increase the Accumulated Earnings and Profits of Old CCA, the Company
would be required to make timely distribution of the Accumulated Earnings
and Profits of Old CCA to stockholders. Such results could have a
material adverse impact on the Company's financial position, results of
operations and cash flows.
GUARANTEES
In connection with the bond issuance of a governmental entity for which
the Company currently provides management services at a 2,016 bed
correctional facility, the Company is obligated, under a debt service
deficits agreement, to pay the trustee of the bond's trust indenture (the
"Trustee") amounts necessary to pay any debt service deficits consisting
of principal and interest requirements (outstanding principal balance of
$66.2 million at December 31, 2000 plus future interest payments). In the
event the State of Tennessee, which is currently utilizing the facility,
exercises its option to purchase the correctional facility, the Company
is also obligated to pay the difference between principal and interest
owed on the bonds on the date set for the redemption of the bonds and
amounts paid by the State of Tennessee for the facility and all other
funds on deposit with the Trustee and available for redemption of the
bonds. The Company also maintains a restricted cash account of
approximately $7.0 million as collateral against a guarantee it has
provided for a forward purchase agreement related to the above bond
issuance.
EMPLOYMENT AND SEVERANCE AGREEMENTS
On July 28, 2000, Doctor R. Crants was terminated as the chief executive
officer of the Company and from all positions with the Company and
Operating Company. Under certain employment and severance agreements, Mr.
Crants will continue to receive his salary and health, life and
disability insurance benefits for a period of three years and was vested
immediately in 140,000 shares of the Company's common stock previously
granted as part of a deferred stock award. The compensation expense
related to these benefits, totaling $0.7 million in cash and $1.2 million
in non-cash charges representing the unamortized portion of the deferred
stock award, was recognized during the third quarter of 2000. The
unamortized portion was based on the trading price of the common stock of
Old CCA, as of the date of grant, which occurred in the fourth quarter of
1995.
Effective November 17, 2000, Darrell K. Massengale, secretary of the
Company, resigned from all positions with the Company, its subsidiaries
and its affiliates. Under Mr. Massengale's employment agreement, all
deferred or restricted shares of common stock granted to Mr. Massengale
became fully vested. The compensation expense related to the deferred
shares, a $0.1 million non-cash charge representing the unamortized
portion of the deferred stock award, was recognized during the third
quarter of 2000. The unamortized portion was based on the trading price
of the common stock of Old CCA as of the date of grant, which was during
the first quarter of 1995. In addition, Mr. Massengale is entitled to
receive his salary and health, life and disability insurance benefits for
a period of three years and was vested immediately in approximately
36,000 shares of the Company's common stock previously granted as part of
a deferred stock award. These shares increased to approximately 90,000 as
a result of an adjustment due to the issuance and subsequent conversion
of shares of Series B Preferred Stock.
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22. SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)
Selected quarterly financial information for each of the quarters in the
years ended December 31, 2000 and 1999 is as follows (in thousands,
except per share data):
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- --------- ------------ ------------
Revenue $ 14,036 $ 14,132 $ 43,854 $ 238,256
Operating loss (5,424) (7,742) (21,942) (494,209)
Net loss (33,751) (79,405) (258,488) (359,138)
Net loss available to common stockholders (35,901) (81,555) (261,072) (365,780)
Net loss per common share - basic (0.30) (0.69) (2.20) (2.15)
Net loss per common share - diluted (0.30) (0.69) (2.20) (2.15)
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
---------- --------- ------------- ------------
Revenue $ 65,772 $68,014 $69,267 $ 75,780
Operating income (loss) 54,973 55,787 56,064 (98,288)
Net income (loss) (26,383) 56,883 36,902 (140,056)
Net income (loss) available to common
stockholders (28,533) 54,733 34,752 (142,206)
Net income (loss) per common share -
basic (0.27) 0.47 0.29 (1.20)
Net income (loss) per common share -
diluted (0.27) 0.47 0.29 (1.20)
As discussed in Note 4, the results of operations for 1999 reflect the
operations of the Company as a REIT, which specialized in acquiring, developing,
owning and leasing correctional and detention facilities primarily to Operating
Company. The 2000 results of operations reflect the operations of the Company as
a subchapter C corporation which, as of October 1, 2000, also includes the
operations of the correctional and detention facilities previously leased to and
managed by Operating Company. The results of operations in 2000 also include the
operations of the Service Companies as of December 1, 2000 on a consolidated
basis. Through August 31, 2000, the investments in the Service Companies were
accounted for under the equity method of accounting. For the period from
September 1, 2000 through November 30, 2000, the investments in the Service
Companies are presented on a combined basis.
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