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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 2001
SEC REGISTRATION NO. 333-_______
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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CORRECTIONS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
Maryland 8744 62-1763875
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation) Classification Code Number) Identification Number)
10 Burton Hills Boulevard
Nashville, Tennessee 37215
(615) 263-3000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive office)
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Copy to:
John D. Ferguson Elizabeth E. Moore, Esq./Albert J. Bart, Esq.
Chief Executive Officer and President Stokes Bartholomew Evans & Petree, P.A.
10 Burton Hills Boulevard 424 Church Street, Suite 2800
Nashville, Tennessee 37215 Nashville, Tennessee 37219
Telephone: (615) 263-3000 Telephone: (615) 259-1450
Facsimile: (615) 263-3010 Facsimile: (615) 259-1470
(Name, address, telephone number and facsimile number, including area code,
of agent for service)
Approximate date of commencement of proposed sale to public: From time to time
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Amount of
Title of Each Class of Amount to be Proposed Maximum Offering Aggregate Offering Registration
Securities to be Registered Registered (1) Price per Share (1) Price Fee
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Common Stock(2) 3,455,237 shares $15.00 $51,828,555 $12,957.14
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933. The
proposed maximum aggregate offering price for these shares, calculated pursuant
to Rule 457(c) under the Securities Act of 1933, is based upon the average of
the high and low reported prices of the registrant's common stock on the New
York Stock Exchange on September 6, 2001.
(2) The shares to be registered may be offered for sale and sold from time to
time during the period the registration statement remains effective by or for
the account of the selling stockholders. These shares consist of 3,455,237
shares issuable upon the conversion of the registrant's $41.1 million
convertible subordinated notes. The current conversion rate of these notes is
subject to adjustment upon the occurrence of future events.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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The information in this Preliminary Prospectus is not complete and may be
changed. These shares may not be sold, or no offer to buy these shares may be
accepted, until the registration statement filed with the Securities and
Exchange Commission is effective. We are not using this Prospectus to offer
securities or to solicit offers to buy these securities in any place where the
offer or sale is not permitted.
[CCA LOGO]
3,455,237 Shares of Common Stock
Issuable Upon Conversion of Subordinated Convertible Notes
This prospectus relates to the sale of shares of the common stock of Corrections
Corporation of America, a Maryland corporation formerly known as Prison Realty
Trust, Inc. and Prison Realty Corporation, that are issuable upon the conversion
of our $41.1 million 10.0% convertible subordinated notes due December 31, 2008
at any time at market prices prevailing at the time of the sale or at privately
negotiated prices. The selling security holders may sell the shares of common
stock directly to purchasers or through underwriters, broker-dealers or agents
who may receive compensation in the form of discounts, concessions or
commissions.
The holders of our 10.0% convertible notes may convert the notes into shares of
our common stock at any time prior to December 31, 2008 at a current conversion
rate of 84.04040 shares per $1,000 of the notes. The current conversion rate of
these notes is subject to adjustment upon the occurrence of future events.
Our common stock is traded on the New York Stock Exchange under the symbol
"CXW." On September 6, 2001, the last reported sale price of our common stock on
the NYSE was $14.90 per share.
Prospective investors should carefully consider the matters discussed under
"Risk Factors," beginning on page 9 of this prospectus before buying shares of
our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
SUBJECT TO COMPLETION. PRELIMINARY PROSPECTUS DATED SEPTEMBER 13, 2001
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TABLE OF CONTENTS
Page
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Prospectus Summary........................................................................................ 1
The Company........................................................................................ 1
Operations......................................................................................... 1
Business Objectives and Strategies................................................................. 2
The Industry....................................................................................... 3
Recent Developments................................................................................ 3
The Offering....................................................................................... 6
Summary Financial Data.................................................................................... 7
Risk Factors.............................................................................................. 9
We are Subject to Risks Associated with the Corrections and Detention Industry..................... 9
We are Subject to Litigation....................................................................... 10
We are Subject to Tax Related Risks................................................................ 11
We are Subject to Risks Associated with Ownership of Real Estate................................... 12
We are Subject to Refinancing Risk and Risk of Default............................................. 13
You are Subject to Risks Related to an Investment in Our Common Stock.............................. 14
Cautionary Statement Regarding Forward-Looking Information................................................ 16
Use of Proceeds........................................................................................... 17
Market for Our Common Stock and Related Stockholder Matters............................................... 17
Market Price of and Distributions on Common Stock.................................................. 17
Dividend Policy.................................................................................... 18
Selected Financial Data................................................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 23
Quantitative and Qualitative Disclosures About Market Risk................................................ 45
Business.................................................................................................. 46
Overview........................................................................................... 46
Operations......................................................................................... 46
Facilities We Manage or Lease to Other Operators................................................... 48
Properties We Own.................................................................................. 53
Business Objectives and Strategies................................................................. 56
Business Development............................................................................... 57
The Industry....................................................................................... 58
Financial Information About Industry Segments...................................................... 59
Government Regulation.............................................................................. 60
Insurance.......................................................................................... 61
Employees.......................................................................................... 61
Competition........................................................................................ 62
Legal Proceedings.................................................................................. 62
Formation Transactions............................................................................. 64
The Restructuring and Related Transactions......................................................... 65
Registration Rights of the Selling Stockholders........................................................... 73
The Selling Stockholders.................................................................................. 73
Plan of Distribution...................................................................................... 74
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Description of Capital Stock.............................................................................. 76
General............................................................................................ 76
Common Stock....................................................................................... 76
Preferred Stock.................................................................................... 77
Transfer Agent and Registrar....................................................................... 77
Ownership of Our Securities............................................................................... 77
Common Stock....................................................................................... 77
Series A Preferred Stock........................................................................... 79
Series B Preferred Stock........................................................................... 80
Executive Officers and Directors ......................................................................... 82
Information Concerning Our Board of Directors............................................................. 86
General............................................................................................ 86
Committees of Our Board of Directors............................................................... 86
Meetings of Our Board of Directors................................................................. 87
Compensation of Our Board of Directors............................................................. 87
Employment Agreements and Change in Control Provisions.................................................... 87
Employment Agreements.............................................................................. 87
Change in Control Provisions of Our Stock Incentive Plans.......................................... 89
Executive Compensation.................................................................................... 89
Summary Compensation Table......................................................................... 89
Options/SAR Grants in Last Fiscal Year............................................................. 93
Aggregated Option/SAR Exercises in the Last Fiscal Year and Fiscal Year-End Option/SAR Values...... 95
Compensation Committee Report...................................................................... 96
Compensation Committee Interlocks and Insider Participation........................................ 101
Certain Relationships and Related Transactions............................................................ 101
Experts ................................................................................................. 103
Legal Matters ............................................................................................ 103
Index to Financial Statements............................................................................. F-1
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read this entire prospectus carefully before deciding to acquire shares
of our common stock. This prospectus contains forward-looking statements, which
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus. All references to "we," "our," "us," "our company," or "CCA" in this
prospectus refer to Corrections Corporation of America and its predecessors,
subsidiaries and operating divisions.
THE COMPANY
We are currently the nation's largest provider of outsourced correctional
management services, housing an inmate population larger than that of all but
five public corrections systems in the United States. We specialize in owning,
operating and managing prisons and other correctional facilities and providing
inmate residential and prisoner transportation services for governmental
agencies. In addition to providing the fundamental residential services relating
to inmates, each of our facilities offers a variety of rehabilitation and
educational programs, including basic education, life skills and employment
training and substance abuse treatment. We also provide health care (including
medical, dental and psychiatric services), institutional food services and work
and recreational programs.
At June 30, 2001, we owned or managed 71 correctional and detention facilities
with a total design capacity of approximately 66,000 beds in 21 states, the
District of Columbia and Puerto Rico, with 69 operating facilities and two
facilities under construction. At June 30, 2001, we controlled approximately 52%
of all beds under contract with private operators of correctional and detention
facilities in the United States.
OPERATIONS
MANAGEMENT AND OPERATION OF FACILITIES. At June 30, 2001, we owned and managed
37 correctional and detention facilities, managed an additional 28 correctional
and detention facilities owned by governmental agencies, and leased four
facilities to other private operators. Our customers consist of local, state and
federal correctional and detention authorities. For the six months ended June
30, 2001, federal correctional and detention authorities represented
approximately 28.5% of our total management revenue.
Our facility contracts are short term in nature. Terms of our federal contracts
generally range from one to five years, and contain multiple renewal options.
The terms of certain of our local and state contracts may be for longer periods
with additional renewal options. Most of our facility contracts also contain
provisions which allow the contracting government agency to terminate the
contract without cause, and our contracts are generally subject to annual or
bi-annual legislative appropriation of funds.
We are compensated on the basis of the number of inmates held at each of our
facilities. Of the 65 domestic facilities we operate and manage, 64 of the
facility management contracts provide that we will be compensated at an inmate
per diem rate based upon actual or minimum guaranteed occupancy levels, with one
contract based on a monthly fixed rate. For 2000, the average occupancy, based
on rated capacity, of our facilities was 84.8%. The occupancy rate at June 30,
2001 was 89.1%.
Pursuant to the terms of our management contracts, we are responsible for the
overall operation of our facilities, including staff recruitment, general
administration of the facilities, facility maintenance,
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security and supervision of the offenders. We also provide a variety of
rehabilitative and educational programs at our facilities. Inmates at most
facilities we manage may receive basic education through academic programs
designed to improve inmate literacy levels and the opportunity to acquire
General Education Development, or GED, certificates. We also offer vocational
training to inmates who lack marketable job skills. In addition, we offer 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 our facilities, we
also offer counseling, education and/or treatment to inmates with alcohol and
drug abuse problems. Except for certain aspects of food and medical services,
which are generally subcontracted, all of the facility support services are
provided by our personnel.
We operate each facility in accordance with company-wide policies and procedures
and the standards and guidelines established by the American Correctional
Association Commission on Accreditation. The American Correctional Association
Commission, or 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 believes its
standards safeguard the life, health and safety of offenders and personnel, and,
accordingly, these standards 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 areas as administration,
personnel and staff training, security, medical and healthcare, food services,
inmate supervision and physical plant requirements. We have sought and received
ACA accreditation for 49, or approximately 75%, of the facilities we currently
manage, and we intend to apply for ACA accreditation for all of our facilities
once they become eligible.
FACILITY DESIGN, CONSTRUCTION AND FINANCE. In addition to our facility
management services, we also provide consultation to various governmental
agencies with respect to the design and construction of new correctional and
detention facilities and the redesign and renovation of older facilities. Our
current business objectives, however, do not focus on the design and
construction of new correctional and detention facilities.
BUSINESS OBJECTIVES AND STRATEGIES
Our primary business objectives are to provide quality corrections services,
increase revenue and control operating costs, while maintaining our position as
the largest owner, operator and manager of privatized correctional and detention
facilities. Our principal business strategies are to fill vacant beds currently
in our inventory and increase revenue by obtaining additional management
contracts. Substantially all of our income is expected to be derived from
contracts with governmental entities for the provision of correctional and
detention facility management and related services.
We believe that we are the industry leader in promoting the benefits of
privatization of prisons and other correctional and detention facilities. We
also believe that we are well positioned to take advantage of the opportunities
in the privatized corrections industry.
We believe that we can further develop our business by, among other things:
- maintaining existing customer relationships and continuing to
fill existing beds within our facilities;
- enhancing the terms of existing contracts; and
- establishing relationships with new customers who have either
previously not outsourced management needs or have utilized
other private providers.
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THE INDUSTRY
We believe that governments will continue to privatize correctional and
detention facilities and that, as a result, the private corrections industry in
the United States will continue to grow. According to statistics recently
released by the United States Department of Justice, Bureau of Justice
Statistics, 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 only 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
than was experienced in previous years, we see 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.
In an attempt to address the fiscal pressure resulting from rising incarceration
costs, statistics indicate that government agencies responsible for correctional
and detention facilities are increasingly privatizing such facilities. According
to the most recent Private Adult Correctional Facility Census, the design
capacity of privately managed adult correctional and detention facilities
worldwide has increased dramatically since the first privatized facility was
opened by our predecessor in 1984. The majority of this growth has occurred
since 1989, as the number of privately managed adult correctional and detention
facilities in operation or under construction worldwide increased from 26
facilities with a design capacity of 10,973 beds in 1989 to 182 facilities with
a design capacity of 141,613 beds in 2000, 153 of which were in the United
States at December 31, 2000.
The Private 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 U.S.
federal agencies with prisoner custody responsibilities (i.e., the Federal
Bureau of Prisons, the U.S. Immigration and Naturalization Service and the U.S.
Marshals Service) continued to contract with private management firms. We
believe that the continued trend indicated by these statistics is primarily the
result of competition among private companies in the industry who have
incentives to keep costs down and to improve the quality of services to its
customers.
RECENT DEVELOPMENTS
LITIGATION SETTLEMENTS. During the first quarter of 2001, we obtained final
court approval of the settlements of a series of outstanding consolidated
federal and state class action and derivative stockholder lawsuits brought
against us and certain of our former directors and executive officers. The final
terms of the settlement agreements provide for the "global" settlement of all
such outstanding stockholder litigation against us brought as the result of,
among other things, agreements entered into by us and our formerly independent
operating company in May 1999 to increase payments made by us to the operating
company under the terms of certain agreements, as well as transactions relating
to proposed corporate restructurings. Pursuant to the terms of the settlement,
we will issue or pay to the plaintiffs (and their respective legal counsel) in
the actions:
- an aggregate of 4.7 million shares of our common stock, as
adjusted for the reverse stock split discussed below;
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- a $29.0 million 8.0% subordinated promissory note, due January
2, 2009, all or a portion of which may be extinguished if the
trading price of our common stock meets or exceeds certain
trading prices following the date of the note's issuance and
prior to the date of the note's maturity; and
- approximately $47.5 million in cash payable solely from the
proceeds of certain insurance policies.
As of September 12, 2001, we have paid a portion of the insurance proceeds and
issued 1.6 million shares of our common stock, as adjusted for the reverse stock
split, under the terms of the settlement to the plaintiffs' counsel in the
actions. We currently expect that the remaining 3.1 million settlement shares,
and therefore the $29.0 million promissory note, will be issued later this year
or in early 2002.
On August 8, 2001, we entered into a definitive agreement to settle litigation
regarding fees we allegedly owed to an entity formed by a group of institutional
investors, as a result of the termination of a securities purchase agreement
related to our proposed corporate restructuring in 2000 led by
Fortress/Blackstone investment group. Under the terms of the agreement, we have
made a cash payment of $15.0 million in full settlement of all claims related to
the matter.
ASSET SALES AND DEBT RENEWAL OR REFINANCING. During the first half of 2001, we
sold our Mountain View Correctional Facility and Pamlico Correctional Facility,
two facilities located in North Carolina, for net sales proceeds of
approximately $24.9 million and $24.0 million, respectively. Prior to the sale,
we leased the facilities to the State of North Carolina under the terms of
long-term, triple-net leases. The North Carolina Department of Corrections
operates the facilities. In April 2001, we sold our interest in a facility
located in Salford, England, known as Agecroft, for approximately $65.7 million.
The net proceeds from each of these sales were used to pay-down amounts
outstanding under our bank credit facility, which consists of up to $600.0
million of term loans maturing December 31, 2002, and up to $400.0 million of
revolving loans maturing January 1, 2002.
As of June 30, 2001, we had $544.3 million outstanding under the term loan
portion of our credit facility and $280.4 million outstanding under the
revolving loan portion of our credit facility. In order to address the January
1, 2002 maturity of the revolving loan portion of our bank credit facility, we
are currently in the process of seeking a renewal of the revolving loans from
our existing lenders or a refinancing of all or a portion of the bank credit
facility from other lenders. In connection with such a renewal or refinancing,
and as part of our plans to improve our overall financial condition, we have
committed to a plan of disposal of certain long-lived assets, in addition to the
aforementioned asset sales. These assets, consisting primarily of certain of our
correctional and detention facilities with an aggregate book value of
approximately $71.4 million, are currently held for sale as indicated in our
June 30, 2001 financial statements, and are being actively marketed for sale. We
may also elect to sell additional assets. Any proceeds from the sale of these
assets will primarily be used to pay down amounts outstanding under our bank
credit facility. We believe that using such proceeds to pay-down our debt will
improve our leverage ratios and overall financial position, improving our
ability to renew or refinance our maturing indebtedness, including primarily the
revolving loan portion of our bank credit facility. No assurance can be given,
however, that we will be able to sell any of these assets or that if we do sell
such assets, that the proceeds from such sales will meet expected levels.
Further, even if we are successful in selling all or a portion of these assets
at expected levels, no assurance can be given that we will be able to renew or
refinance our debt obligations as they become due on reasonable or other terms.
RATING AGENCY OUTLOOK IMPROVEMENT. On September 4, 2001, Standard & Poor's
raised the outlook on our debt from negative to positive.
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Our secured debt is rated "B" by Standard & Poor's and our unsecured debt is
rated "CCC+".
REVERSE STOCK SPLIT. We completed a reverse stock split of our common stock,
effective May 18, 2001, at a ratio of one-for-ten. As a result, every ten shares
of common stock issued and outstanding immediately prior to the reverse stock
split have been reclassified and changed into one fully paid and nonassessable
share of our common stock. In conjunction with the reverse stock split we
amended our charter to reduce the number of shares of our authorized common
stock from 400.0 million shares to 80.0 million shares. At September 12, 2001,
we had approximately 25.1 million shares of our common stock issued and
outstanding on a post-reverse stock split basis.
Our principal executive offices are located at 10 Burton Hills Boulevard,
Nashville, Tennessee 37215, and our telephone number is (615) 263-3000. Our web
site address is www.correctionscorp.com. Information on our web site is not a
part of this prospectus.
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THE OFFERING
This prospectus relates to the sale of shares of our common stock that are
issuable upon the conversion of our $41.1 million 10.0% convertible subordinated
notes, due December 31, 2008, at any time at market prices prevailing at the
time of the sale or at privately negotiated prices. The selling stockholders may
sell the shares of common stock directly to purchasers or through underwriters,
brokers-dealers or agents who may receive compensation in the form of discounts,
concessions or commissions.
The holders of our 10.0% convertible notes may convert the notes into shares of
our common stock at any time prior to December 31, 2008 at a current conversion
rate of 84.04040 shares per $1,000 of the notes, subject to potential adjustment
in the future.
Our common stock is traded on the New York Stock Exchange under the symbol
"CXW." On September 6, 2001, the last reported sale price of our common stock on
the NYSE was $14.90 per share.
We are a Maryland corporation formerly known as Prison Realty Trust, Inc. which
commenced operations as Prison Realty Corporation on January 1, 1999, following
the mergers with and into us of each of the former Corrections Corporation of
America, a Tennessee corporation, referred to herein as Old CCA, on December 31,
1998 and CCA Prison Realty Trust, a Maryland real estate investment trust,
referred to herein as Old Prison Realty, on January 1, 1999.
During 2000, we completed a comprehensive restructuring. As part of the
restructuring, on October 1, 2000, we completed the acquisition of a
privately-held operating company, referred to herein as Operating Company, which
operated the majority of the correctional and detention facilities owned by us,
through a merger of Operating Company with and into our wholly-owned operating
subsidiary. Immediately prior to the merger, Operating Company leased 35 of our
correctional and detention facilities, with a total design capacity of 37,520
beds. Also in connection with the restructuring, we amended our charter to,
among other things, remove provisions relating to our operation and
qualification as a real estate investment trust, or REIT, for federal income tax
purposes commencing with our 2000 taxable year and change our name to
"Corrections Corporation of America." On December 1, 2000, we also completed the
acquisitions of two privately-held service companies, referred to herein as the
Service Companies, which operated government-owned correctional and detention
facilities and conducted certain international operations, through mergers of
the Service Companies with and into our wholly-owned operating subsidiary.
Immediately prior to the mergers, the Service Companies had contracts to manage
a total of 28 correctional and detention facilities with a total design capacity
of 22,576 beds.
As a result of the restructuring, we now specialize in owning, operating and
managing prisons and other correctional facilities and providing inmate
residential and prisoner transportation services for governmental agencies.
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SUMMARY FINANCIAL DATA
The following table shows our summary financial data, which you should read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements and accompanying
notes and the other financial data included elsewhere in this prospectus.
Amounts are in thousands except per share data.
SIX MONTHS
ENDED, YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS: JUNE 30, 2001 -----------------------------------------------------------------
(UNAUDITED) 2000 1999 1998 1997 1996
------------- --------- --------- --------- --------- ---------
Revenue $ 486,107 $ 310,278 $ 278,833 $ 662,059 $ 462,249 $ 292,513
Operating income (loss) $ 69,360 $(529,317) $ 68,536 $ 41,678 $ 83,692 $ 54,573
Interest expense (income), net $ 67,115 $ 131,545 $ 45,036 $ (2,770) $ (3,404) $ 4,224
Net income (loss) $ (4,793) $(730,782) $ (72,654) $ 10,836 $ 53,955 $ 30,880
Distributions to preferred
stockholders $ (9,801) $ (13,526) $ (8,600) $ -- $ -- $ --
Net income (loss) available to
common stockholders $ (14,594) $(744,308) $ (81,254) $ 10,836 $ 53,955 $ 30,880
Basic net income (loss)
available to common stockholders per
common share:
Before cumulative effect of
accounting change $ (0.61) $ (56.68) $ (7.06) $ 3.78 $ 7.99 $ 4.92
Cumulative effect of
accounting change -- -- -- (2.26) -- --
--------- --------- --------- --------- --------- ---------
$ (0.61) $ (56.68) $ (7.06) $ 1.52 $ 7.99 $ 4.92
========= ========= ========= ========= ========= =========
Diluted net income (loss) available to
common stockholders per
common share:
Before cumulative effect of
accounting change $ (0.61) $ (56.68) $ (7.06) $ 3.47 $ 6.92 $ 4.15
Cumulative effect of
accounting change -- -- -- (2.05) -- --
--------- --------- --------- --------- --------- ---------
$ (0.61) $ (56.68) $ (7.06) $ 1.42 $ 6.92 $ 4.15
========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding:
Basic 23,938 13,132 11,510 7,138 6,757 6,279
Diluted 23,938 13,132 11,510 7,894 7,894 7,616
DECEMBER 31,
JUNE 30, 2001 ------------------------------------------------------------------
BALANCE SHEET DATA: (UNAUDITED) 2000 1999 1998 1997 1996
------------- ---------- ---------- ---------- -------- --------
Total assets $2,004,947 $2,176,992 $2,716,644 $1,090,437 $697,940 $468,888
Long-term debt, less current portion $ 709,918 $1,137,976 $1,092,907 $ 290,257 $127,075 $117,535
Total liabilities excluding deferred
gains $1,315,861 $1,488,977 $1,209,528 $ 395,999 $214,112 $187,136
Stockholders' equity $ 689,086 $ 688,015 $1,401,071 $ 451,986 $348,076 $281,752
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Prior to our merger with Old CCA, 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 merger was
accounted for as a reverse acquisition of us by Old CCA and as an acquisition of
Old Prison Realty by us. 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.
Therefore, the results of operations prior to 1999 reflect the results of Old
CCA as a taxable corporation operating as a prison management company.
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In connection with the merger, we elected to change our tax status from a
taxable corporation to a real estate investment trust effective with the filing
of our 1999 federal income tax return. Therefore, the 1999 financial statements
reflect the results of our operations as a real estate investment trust. As a
real estate investment trust, we were dependent on Operating Company, as a
lessee, for a significant source of our income. In connection with the
restructuring in 2000, we acquired Operating Company on October 1, 2000 and the
Service Companies on December 1, 2000, and amended our charter to remove
provisions requiring us to elect to qualify and be taxed as a real estate
investment trust. Therefore, the 2000 results of operations and the results of
operations for the six months ended June 30, 2001 reflect our operations as a
taxable corporation, specializing in the ownership, operation and management of
prisons and other correctional facilities and providing inmate residential and
prisoner transportation services for governmental agencies.
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RISK FACTORS
You should carefully consider the risks described below before making a decision
to invest in our common stock. Some of the following factors relate principally
to our business and the industry in which we operate. Other factors relate
principally to your investment in our common stock. The risks and uncertainties
described below are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently consider immaterial
may also have an adverse effect on us. If any of the matters discussed in the
following risk factors were to occur, our business, financial condition, results
of operations or prospects could be materially adversely affected. Then the
trading price of our common stock could decline and you could lose all or part
of your investment.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE CORRECTIONS AND DETENTION INDUSTRY
General. As of June 30, 2001, we owned or managed 71 correctional and detention
facilities with a total design capacity of approximately 66,000 beds in 21
states, the District of Columbia and Puerto Rico. Accordingly, we are subject to
the operating risks associated with the corrections and detention industry,
including those set forth below. See "Business" for a complete description of
our business operations.
We Are 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 governmental agency. No assurance can
be given that any agency will exercise a renewal option in the future. The
contracting agency typically may also terminate a facility contract at any time
without cause by giving the private prison manager written notice. The
non-renewal or termination of any of our contracts with governmental agencies
could materially adversely affect our financial condition, results of operation
and liquidity, including our ability to secure new facility management contracts
from others.
There also exists the risk that a facility we own, but do not manage, may not be
the subject of a contract between a private manager and a governmental entity
while it is leased to a private prison manager since our leases 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 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 us.
We Are 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 governmental entities. If the appropriate governmental 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 our cash flow and financial condition.
Public Resistance to Privatization of Correctional and Detention Facilities
Could Result in Our 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.
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Moreover, negative publicity about an escape, riot or other disturbance at a
privately managed facility may result in publicity adverse to us, and the
private corrections industry in general. Any of these occurrences or continued
trends may make it more difficult for us to renew or maintain existing contracts
or to obtain new contracts or sites on which to operate new facilities or for us
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 our
business.
Our Ability to Secure New Contracts to Develop and Manage Correctional and
Detention Facilities Depends on Many Factors Outside Our Control. Our growth is
generally dependent upon our ability to obtain new contracts to develop and
manage new correctional and detention facilities. This depends on a number of
factors we cannot control, including crime rates and sentencing patterns in
various jurisdictions and acceptance of privatization. While we believe that
governments will continue to privatize correctional and detention facilities, we
believe 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 us to have sufficient capital resources to compete
effectively. We may not be able to obtain these capital resources when needed.
Additionally, our success in obtaining new awards and contracts may depend, in
part, upon our 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 Our Contracts to Manage
Correctional and Detention Facilities. The industry in which we operate 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 corrections industry, and
the combination of regulations we face 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 us
to award subcontracts on a competitive basis or to subcontract with businesses
owned by members of minority groups. Our facilities are also subject to
operational and financial audits by the governmental agencies with which we have
contracts. We 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 we do not believe that
existing legislation will have a material adverse effect on us, there can be no
assurance that future legislation would not have such an effect.
WE ARE SUBJECT TO LITIGATION
We Are Subject to Legal Proceedings Associated with Owning and Managing
Correctional and Detention Facilities. Our ownership and management of
correctional and detention facilities, and the provision of inmate
transportation services by a subsidiary, expose us 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
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prisoner's escape from, or a disturbance or riot at, a facility we own or
manage. In addition, as an owner of real property, we may be subject to a
variety of proceedings relating to personal injuries of persons at such
facilities. See "Business -- Legal Proceedings" for a description of certain
outstanding litigation against us associated with owning and managing
correctional and detention facilities.
We Are Subject to Legal Proceedings Associated with Corporate Operations. In
addition to litigation associated with owning and managing correctional and
detention facilities, we are also subject to litigation arising as a result of
actions brought by our stockholders, current and former employees and other
parties. See "Business -- Legal Proceedings" for a description of certain
outstanding litigation against us associated with corporate operations.
WE ARE 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 to the extent its taxable income, subject to
certain adjustments, was not distributed to its shareholders. To preserve our
ability to qualify as a real estate investment trust for the year ended December
31, 1999, we were 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, we may be required to make additional
distributions equal to the amount of the increase.
Under previous terms of our charter, we were required to operate so as to
preserve our ability to elect to be taxed as a real estate investment trust for
the year ended December 31, 1999. As a real estate investment trust, we could
not complete any taxable year with accumulated earnings and profits. For the
year ended December 31, 1999, we made approximately $217.7 million of
distributions related to our common stock and series A preferred stock. We met
the above described distribution requirements by designating approximately
$152.5 million of the total distributions in 1999 as distributions of our
accumulated earnings and profits. In addition to distributing our accumulated
earnings and profits, we, in order to qualify for taxation as a real estate
investment trust with respect to our 1999 taxable year, were required to
distribute 95% of our taxable income for 1999. We believe that this distribution
requirement has been substantially satisfied by our distribution of shares of
series B preferred stock. Our failure to distribute 95% of our taxable income
for 1999 or the failure to comply with other requirements for real estate
investment trust qualification under the Code with respect to our taxable year
ended December 31, 1999 could have a material adverse impact on our financial
position, results of operations and cash flows.
Our election of real estate investment trust status for the 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 our 1999 tax return. Should the IRS
review our election to be taxed as a real estate investment trust for the 1999
taxable year and reach a conclusion disallowing our dividends paid deduction, we
would be subject to income taxes and interest on our 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 our financial position, results of operations and cash
flows.
In connection with the 1999 merger, we 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 our federal tax return for the taxable year
ended December 31, 1999. We have received the IRS's preliminary findings related
to the taxable year ended December 31, 1997, and we are currently appealing
those findings. We are currently unable to predict the ultimate outcome of the
IRS's audits of Old CCA's 1998 and 1997 federal tax returns, our 1999
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federal tax return or the ultimate outcome of audits of our other tax returns or
Old CCA's tax returns by the IRS or by other taxing authorities; however, it is
possible that such audits will result in claims against us in excess of reserves
currently recorded. In addition, to the extent that IRS audit adjustments
increase the accumulated earnings and profits of Old CCA, we would be required
to make timely distribution of the accumulated earnings and profits of Old CCA
to our stockholders. Such results could have a material adverse impact on our
financial position, results of operations and cash flows. See "Business --
Formation Transactions" for a complete description of the 1999 merger and our
operation so as to qualify as a real estate investment rust for the taxable year
ended December 31, 1999.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OWNERSHIP OF REAL ESTATE
We Are Subject to General Real Estate Risks. Our ownership of correctional and
detention facilities subjects us to risks typically associated with investments
in real estate. Investments in real estate are relatively illiquid and,
therefore, our ability to divest ourselves of one or more of our facilities
promptly in response to changed conditions is limited. Investments in
correctional and detention facilities, in particular, subject us to risks
involving potential exposure to environmental liability and uninsured loss. Our
operating costs 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 we
maintain 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, we could lose
both our capital invested in, and anticipated profits from, one or more of the
facilities we own. Further, it is possible to experience losses which exceed the
limits of insurance coverage or for which we may be uninsured. See "Business --
Insurance."
We May be Unable to Sell Assets or Receive Sales Proceeds at Expected Levels. As
of June 30, 2001, we were holding for sale numerous assets, including ten
parcels of land, one correctional facility leased to a governmental agency, one
correctional facility leased to a private operator, and investments in two
direct financing leases, with an aggregate book value of approximately $71.4
million. We may also elect to sell additional assets. We expect to use the net
proceeds from such sales to repay outstanding indebtedness. Our ability to
refinance or renew indebtedness could be adversely affected if we are not able
to sell a sufficient number of assets, or if the proceeds received from such
sales do not achieve expected levels. See "Business -- The Restructuring and
Related Transactions" for a complete discussion of our efforts to sell
designated assets and apply the proceeds from such sales to our outstanding
indebtedness.
Options to Purchase and Reversions Could Adversely Affect Our Investments. Nine
of our facilities are or will be subject to an option to purchase by certain
government agencies. One of these facilities is held for sale as of June 30,
2001. If any of these options are exercised, there exists the risk that we will
not recoup our full investment from the applicable facility or that we 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 will, upon
the expiration of a specified time period, revert to the respective governmental
agency contracting with us. Also, one facility under development will have its
ownership revert back to a governmental agency under its contract. See "Business
-- Properties We Own" herein for a description of the terms and conditions of
these options to purchase and reversions.
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WE ARE SUBJECT TO REFINANCING RISK AND RISK OF DEFAULT
A Significant Portion of Our Indebtedness Matures January 1, 2002. Our 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 bank credit facility bears interest at a floating rate calculated
from either the current LIBOR rate or an applicable base rate, at our election.
As a result of an amendment to the bank credit facility executed in June 2000,
we are generally required to use the net cash proceeds received from certain
transactions, including the following transactions, to repay our outstanding
indebtedness under the bank credit facility:
- any disposition of real estate assets;
- the sale-leaseback of our corporate headquarters.
Under the terms of the amendment executed in June 2000, we are also required to
apply a designated portion of our "excess cash flow," as such term is defined in
the amendment, to the prepayment of outstanding indebtedness under the bank
credit facility. We believe that we will be able to refinance or renew the bank
credit facility upon maturity; however, there can be no assurance that the we
will be able to refinance or renew such indebtedness on commercially reasonable
or any other terms. We do not have sufficient working capital to satisfy our
obligations in the event we are unable to refinance or renew the bank credit
facility upon maturity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- The Restructuring and
Related Transactions" for more complete discussions of the provisions of our
bank credit facility.
We Are Restricted in Our Ability to Incur Additional Debt. Our bank credit
facility also contains restrictions upon our ability to incur additional debt
and requires us to maintain specified financial ratios. These provisions may
also restrict our ability to obtain additional debt capital or limit our ability
to engage in certain transactions. These restrictions may inhibit our 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. Additionally, the
incurrence of additional indebtedness may result in an increased risk of
default, and increase our exposure to the risks associated with debt financing
and access to debt markets to fund future growth at an acceptable cost.
We Could Default on Our Indebtedness. As of June 30, 2001, our debt consisted
primarily of $824.7 million outstanding under our bank credit facility, $100.0
million of senior notes, $41.1 million of 10.0% convertible subordinated notes
and $30.0 million of 8.0% convertible subordinated notes. We also had $50.0
million available under a revolving credit facility with a $50.0 million
capacity. Terms of our indebtedness contain financial and non-financial
covenants. These terms are further described in the notes to our financial
statements and under "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Failure to comply with these covenants
could result in the acceleration of all or a significant portion of our
indebtedness. We do not have sufficient working capital to satisfy our debt
obligations in the event of an acceleration of all or a significant portion of
our outstanding indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- The
Restructuring and Related Transactions," which contain discussions of the impact
of a default under the terms of our existing indebtedness.
Our Indebtedness is Subject to a Risk of Cross-Default. Subject to the waivers
and amendments discussed herein, we currently believe that we are in compliance
with the financial and other covenants under our bank credit facility and under
the terms of our other indebtedness. If we were to be in default under our bank
credit facility, and if the senior lenders under the bank credit facility
elected to
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exercise their rights to accelerate our obligations under the bank credit
facility, such events could result in the acceleration of all or a portion of
the outstanding principal amount of our 12% senior notes or our aggregate $71.1
million convertible subordinated notes, which would have a material adverse
effect on our liquidity and financial position. Our 12% senior notes and our
$30.0 million convertible subordinated notes generally contain cross-default
provisions which allow the holders of these notes to accelerate this debt and
seek remedies if we have a payment default under the bank credit facility or if
the obligations under the bank credit facility are accelerated. Our $41.1
million convertible subordinated notes contain a cross-default provision which
allows the holders of the notes to accelerate this debt and seek remedies if we
have a payment default under the 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 bank credit facility provide
that our obligations under the bank credit facility may be accelerated if our
obligations under the 12% senior notes or our convertible subordinated notes are
subject to acceleration or have been accelerated. We do not have sufficient
working capital to satisfy our debt obligations in the event of an acceleration
of all or a significant portion of our outstanding indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- The Restructuring and Related Transactions," which
contain discussions of the impact of a default under the terms of our existing
indebtedness.
Because Portions of Our Indebtedness Have Floating Rates, a General Increase in
Interest Rates Will Adversely Affect Cash Flows. Our bank credit facility bears
interest at a variable rate. To the extent our exposure to increases in interest
rates is not eliminated through interest rate protection or cap agreements, such
increases will adversely affect our cash flows. In accordance with terms of the
bank credit facility, we have entered into certain swap arrangements
guaranteeing that we 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, we will enter into additional
interest rate protection agreements. See "Quantitative and Qualitative
Disclosures About Market Risk" for a further discussion of our exposure to
interest rate increases.
YOU ARE SUBJECT TO RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
Future Sales of Our Common Stock by the Selling Stockholders May Depress Our
Stock Price. This prospectus relates to the sale of approximately 3.5 million
shares of our common stock issuable upon the conversion of an aggregate of $41.1
million of convertible subordinated notes we have previously issued. All of the
shares of our common stock issuable upon conversion of the notes will be freely
tradeable immediately following such conversion. Sales of a substantial number
of shares of common stock issued upon conversion of the notes in the public
market by the selling stockholders, or the perception that these sales may
occur, could substantially decrease the market price of our common stock. In
addition, the sale of these shares in the public market could impair our ability
to raise capital through the sale of additional common or preferred stock in the
future.
Our Common Stock Has Been and May Continue to be Volatile. The trading price our
common stock has been and may continue to be subject to wide fluctuations. Our
stock price may fluctuate in response to a number of events and factors,
including:
- quarterly variations in our operating results;
- the operating and stock price performance of other companies
that investors may deem comparable; and
- news reports relating to trends in our markets.
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In addition, the entire stock market has experienced significant volatility in
recent months. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons that may be unrelated to
their operating performance. Therefore, we cannot predict the future market
price for our common stock. See "Market for Our Common Stock and Related
Stockholder Matters -- Market Price of and Distributions on Common Stock" for a
summary of our quarterly stock prices since 1999.
Our Charter, Bylaws and Maryland Law Could Discourage Takeover Attempts Even
Though Our Stockholders May Consider These Proposals Desirable. Certain
provision of our charter, bylaws and Maryland law may have the effect of
discouraging an acquisition of control or other takeover attempt not approved by
our board of directors, although a proposal, if made, might be considered
desirable by a majority of our stockholders. These provisions include the
ability of the board of directors to issue "blank check" preferred stock without
stockholder approval, advance notice procedures for stockholders to nominate
candidates for election as directors, and higher stockholder voting requirements
for some transactions, including business combinations with certain classes of
"interested stockholders." See "Description of Our Capital Stock."
We Have No Current Plans to Pay Dividends on Shares of Our Common Stock. We do
not anticipate paying any cash dividends on shares of our common stock. In
addition, our bank credit facility and other indebtedness restricts the payment
of cash dividends on shares of our common stock. Moreover, even if we refinance
or replace our existing indebtedness, our ability to pay dividends on shares of
our common stock may continue to be restricted by the terms of such
indebtedness. See "Market For Our Common Stock and Related Stockholder Matters
-- Dividend Policy."
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains some forward-looking statements. Forward-looking
statements give our current expectations of forecasts of future events. All
statements other than statements of current or historical fact contained in this
prospectus, including statements regarding our future financial position,
business strategy, budgets, projected costs and plans and objectives of
management for future operations, are forward-looking statements. The words
"anticipate," "believe," "continue," "estimate," "expect," "intend," "may,"
"plan," "will" and similar expressions, as they relate to us, are intended to
identify forward-looking statements. In particular, these include, among other
things, statements relating to:
- the growth of the private corrections and detention industry
and public acceptance of our services;
- our ability to obtain and maintain correctional facility
management contracts;
- changes in government regulation of the corrections and
detention industry that adversely affect our business;
- our ability to remain in compliance with the terms of our
existing indebtedness; and
- general market conditions.
Any or all of our forward-looking statements in this prospectus may turn out to
be inaccurate. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
that we believe may affect our financial condition, results of operations,
business strategy and financial needs. They can be affected by inaccurate
assumptions we might make or by known or unknown risks, uncertainties and
assumptions, including the risks, uncertainties and assumptions described in
"Risk Factors."
In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this prospectus may not occur and actual
results could differ materially from those anticipated or implied in the
forward-looking statements. When you consider these forward-looking statements,
you should keep in mind these risk factors and other cautionary statements in
this prospectus, including in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
Our forward-looking statements speak only as of the date made. We undertake no
obligation to publicly update or revise forward-looking statements, whether as a
result of new information, future events or otherwise.
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USE OF PROCEEDS
We will not receive any of the proceeds of the sale, if any conversions and
subsequent sales occur, by the selling stockholders of the common shares covered
by this prospectus.
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DISTRIBUTIONS ON COMMON STOCK
Our common stock is traded on the NYSE under the symbol "CXW," our series A
preferred stock is traded on the NYSE under the symbol "CXW PrA," and our
series B preferred stock is traded on the NYSE under the symbol "CXW PrB." On
September 6, 2001, the last reported sale price of our common stock was $14.90
per share, and on April 16, 2001, the date of our last proxy solicitation, there
were approximately 1,500 registered holders and approximately 23,000 beneficial
holders, respectively, of our common stock.
Our 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 our mergers with Old CCA and Old Prison
Realty. Our series B preferred stock began trading on the NYSE September 13,
2000.
The following table sets forth, for the fiscal quarters indicated, the range of
high and low sales prices of our common stock, on the NYSE, and the amount of
cash distributions or dividends paid per share. We completed a reverse stock
split of our common stock effective May 18, 2001, at a ratio of one-for-ten.
Accordingly, all per share amounts of the common stock have been retroactively
restated to reflect the reduction in common shares and corresponding increase in
the per share amounts resulting from the reverse stock split.
SALES PRICE
------------------- PER SHARE CASH
HIGH LOW DISTRIBUTION
------- ------- --------------
FISCAL YEAR 2001
First Quarter $ 15.00 $ 3.75 $0.00
Second Quarter $ 16.00 $ 6.00 $0.00
Third Quarter (through September 12, 2001) $ 17.88 $ 12.41 $0.00
FISCAL YEAR 2000
First Quarter $ 62.50 $ 27.50 $0.00
Second Quarter $ 40.00 $ 20.00 $0.00
Third Quarter $ 32.50 $ 6.30 $0.00
Fourth Quarter $ 11.90 $ 1.90 $0.00
FISCAL YEAR 1999
First Quarter $243.80 $166.30 $6.00
Second Quarter $223.80 $ 92.50 $6.00
Third Quarter $141.80 $ 90.00 $6.00
Fourth Quarter $116.90 $ 45.00 $0.00
The market price of our common stock is volatile and fluctuates in response to a
wide variety of factors. See "Risk Factors -- You Are Subject to Risks Relating
to an Investment in Our Common Stock."
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DIVIDEND POLICY
Pursuant to the terms of our bank credit facility, we are restricted from
declaring or paying cash dividends with respect to outstanding shares of our
common stock. In addition, under the terms of our series A and series B
preferred stock we are prohibited from paying cash dividends on shares of our
common stock or any other shares of our capital stock ranking junior to our
preferred stock while any dividends on the shares of preferred stock remain
unpaid and in arrears.
Our series A preferred stock provides for quarterly cash dividends at a rate of
8.0% per year, based on a liquidation price of $25.00 per share. Our board of
directors has not declared or paid dividends on the shares of series A preferred
stock since the first quarter of 2000. Under the terms of our bank credit
facility we are prohibited from paying any dividends with respect to the series
A preferred stock until such time as we have raised $100.0 million in equity.
The terms of our series B preferred stock provide for quarterly dividends at a
rate of 12.0% per annum, based on a stated value of $24.46 per share. The
dividends are paid in additional shares of series B preferred stock through the
third quarter of 2003, and in cash thereafter. Under the current terms of our
bank credit facility, we would also be prohibited from paying any cash dividends
with respect to the series B preferred stock.
Even if the restrictions contained in our bank credit facility are ultimately
removed and we pay all cash dividends currently accrued and unpaid, or required
to be paid in the future, under the terms of our preferred stock, we do not
currently intend to pay any cash dividends with respect to shares of our common
stock.
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SELECTED FINANCIAL DATA
PRO FORMA
The following unaudited pro forma operating information presents a summary of
comparable results of our combined operations with Operating Company and the
Service Companies for the six months ended June 30, 2000 and for the year ended
December 31, 2000 as if our merger with Operating Company and our acquisitions
of the Service Companies had collectively occurred as of the beginning of the
periods presented. The pro forma operating information was derived from the
unaudited pro forma financial statements and related notes thereto, included
elsewhere in this prospectus. The unaudited information includes the dilutive
effects of our common stock issued in the Operating Company merger and the
acquisitions of the Service Companies as well as the amortization of the
intangibles recorded in the Operating Company merger and the acquisition of the
Service Companies, but excludes: (i) transactions or the effects of
transactions between us, Operating Company, and the Service Companies including
rental payments, licensing fees, administrative service fees and tenant
incentive fees; (ii) the write-off of amounts under lease arrangements; (iii)
the recognition of deferred gains on sales of contracts; (iv) the recognition
of equity in earnings or losses of Operating Company and the Service Companies;
(v) non-recurring merger expenses; (vi) strategic investor fees; (vii) excise
taxes accrued in 1999 related to our status as a real estate investment trust;
and (viii) the provision for changes in tax status. The unaudited pro forma
operating information is presented for comparison purposes only and does not
purport to represent what our results of operations actually would have been
had the Operating Company merger and acquisitions of the Service Companies, in
fact, collectively occurred at the beginning of the periods presented.
The unaudited pro forma information does not include adjustments to reflect the
dilutive effects of the fourth quarter of 2000 conversion of our series B
preferred stock into approximately 9.5 million shares of our common stock (as
adjusted for the reverse stock split) 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 our potentially issuable
common shares such as convertible debt and equity securities, options and
warrants as the provisions of Statement of Financial Accounting Standards No.
128, "Earnings Per Share," 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 an aggregate of 4.7 million shares
of our common stock in connection with the settlement of our stockholder
litigation.
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CORRECTIONS CORPORATION OF AMERICA
(FORMERLY PRISON REALTY TRUST, INC.)
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(Unaudited and amounts in thousands, except per share data)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2000 JUNE 30, 2000
----------- -----------
Revenue $ 891,680 $ 429,778
----------- -----------
Expenses:
Operating 719,683 344,679
General and administrative 47,411 20,412
Lease 8,654 4,017
Depreciation and amortization 63,416 31,150
Impairment losses 527,919 --
----------- -----------
Total expenses 1,367,083 400,258
Operating income (loss) (475,403) 29,520
Equity loss 835 777
Interest expense, net 139,808 65,220
Other income (3,099) --
Unrealized foreign currency transaction loss 8,147 7,530
Loss on disposal of assets 1,733 301
Stockholder litigation settlements 75,406 --
----------- -----------
Loss before income taxes (698,233) (44,308)
Income tax benefit 146,230 478
----------- -----------
Net loss (552,003) (43,830)
Distributions to preferred stockholders (13,526) (4,300)
----------- -----------
Net loss attributable to common stockholders $ (565,529) $ (48,130)
=========== ===========
Net loss available to common stockholders per common share:
Basic $ (38.21) $ (3.44)
Diluted $ (38.21) $ (3.44)
Weighted average common shares outstanding:
Basic 14,801 14,001
Diluted 14,801 14,001
HISTORICAL
The following selected financial data for the five years ended December 31,
2000, were derived from the audited consolidated financial statements and the
related notes thereto, included elsewhere in this prospectus. The following
selected financial data for the six months ended June 30, 2001, were derived
from the unaudited consolidated financial statements and the related notes
thereto, included elsewhere in this prospectus, and, in our opinion, include all
adjustments (consisting of normal and recurring adjustments) which are necessary
to present fairly the results of operations and financial position for the
periods and dates presented. The selected financial data for the six months
ended June 30, 2001 are not necessarily indicative of the results to be expected
for the full year. 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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26
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
SELECTED HISTORICAL FINANCIAL INFORMATION
(in thousands, except per share data)
SIX MONTHS
ENDED, YEAR ENDED DECEMBER 31,
JUNE 30, 2001 ------------------------------------------------------------------
STATEMENT OF OPERATIONS: (UNAUDITED) 2000 1999 1998 1997 1996
------------- ---------- ---------- ---------- ---------- ----------
Revenue $ 486,107 $ 310,278 $ 278,833 $ 662,059 $ 462,249 $ 292,513
---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Operating 373,836 214,872 -- 496,522 330,470 211,208
General and administrative 17,034 21,241 24,125 28,628 16,025 12,607
Lease -- 2,443 -- 58,018 18,684 2,786
Depreciation and amortization 25,877 59,799 44,062 14,363 13,378 11,339
Fees to Operating Company -- 1,401 -- -- -- --
Write-off of amounts under
lease arrangements -- 11,920 65,677 -- -- --
Impairment losses -- 527,919 76,433 -- -- --
Old CCA compensation charge -- -- -- 22,850 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 416,747 839,595 210,297 620,381 378,557 237,940
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 69,360 (529,317) 68,536 41,678 83,692 54,573
Equity (earnings) loss and
amortization of deferred gain 175 11,638 (3,608) -- -- --
Interest expense (income), net 67,115 131,545 45,036 (2,770) (3,404) 4,224
Change in fair value of interest rate
swap agreement 6,296 -- -- -- -- --
Other income -- (3,099) -- -- -- --
Strategic investor fees -- 24,222 -- -- -- --
Unrealized foreign currency
transaction loss 344 8,147 -- -- -- --
(Gain) loss on sales of assets (39) 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 (4,531) (778,909) 10,546 42,405 87,096 50,349
Income tax (expense) benefit (262) 48,002 (83,200) (15,424) (33,141) (19,469)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest and cumulative
effect of accounting change (4,793) (730,907) (72,654) 26,981 53,955 30,880
---------- ---------- ---------- ---------- ---------- ----------
Minority interest in net loss of
service companies -- 125 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative
effect of accounting change (4,793) (730,782) (72,654) 26,981 53,955 30,880
Cumulative effect of accounting
change, net of taxes -- -- -- (16,145) -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (4,793) (730,782) (72,654) 10,836 53,955 30,880
Distributions to preferred
stockholders (9,801) (13,526) (8,600) -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) available to
common stockholders $ (14,594) $ (744,308) $ (81,254) $ 10,836 $ 53,955 $ 30,880
========== ========== ========== ========== ========== ==========
(continued)
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
SELECTED HISTORICAL FINANCIAL INFORMATION
(in thousands, except per share data)
(continued)
SIX MONTHS
ENDED, YEAR ENDED DECEMBER 31,
JUNE 30, 2001 ----------------------------------------------------------------------
STATEMENT OF OPERATIONS: (UNAUDITED) 2000 1999 1998 1997 1996
------------- ---------- ---------- ---------- ---------- ----------
Basic net income (loss)
available to common
stockholders per common
share:
Before cumulative effect of
accounting change $ (0.61) $ (56.68) $ (7.06) $ 3.78 $ 7.99 $ 4.92
Cumulative effect of
accounting change -- -- -- (2.26) -- --
---------- ---------- ---------- ---------- ---------- ----------
$ (0.61) $ (56.68) $ (7.06) $ 1.52 $ 7.99 $ 4.92
========== ========== ========== ========== ========== ==========
Diluted net income (loss)
available to stockholders per
common share:
Before cumulative effect
of accounting change $ (0.61) $ (56.68) $ (7.06) $ 3.47 $ 6.92 $ 4.15
Cumulative effect of
accounting change -- -- -- (2.05) -- --
---------- ---------- ---------- ---------- ---------- ----------
$ (0.61) $ (56.68) $ (7.06) $ 1.42 $ 6.92 $ 4.15
========== ========== ========== ========== ========== ==========
Weighted average common shares
outstanding:
Basic 23,938 13,132 11,510 7,138 6,757 6,279
Diluted 23,938 13,132 11,510 7,894 7,894 7,616
DECEMBER 31
JUNE 30, 2001 ------------------------------------------------------------------
BALANCE SHEET DATA: (UNAUDITED) 2000 1999 1998 1997 1996
------------- ---------- ---------- ---------- -------- --------
Total assets $2,004,947 $2,176,992 $2,716,644 $1,090,437 $697,940 $468,888
Long-term debt, less current
portion $ 709,918 $1,137,976 $1,092,907 $ 290,257 $127,075 $117,535
Total liabilities excluding deferred
gains $1,315,861 $1,488,977 $1,209,528 $ 395,999 $214,112 $187,136
Stockholders' equity $ 689,086 $ 688,015 $1,401,071 $ 451,986 $348,076 $281,752
Prior to our merger with Old CCA, 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 merger was
accounted for as a reverse acquisition of us by Old CCA and as an acquisition of
Old Prison Realty by us. 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.
Therefore, the results of operations prior to 1999 reflect the results of Old
CCA as a taxable corporation operating as a prison management company.
In connection with the merger, we elected to change our tax status from a
taxable corporation to a real estate investment trust effective with the filing
of our 1999 federal income tax return. Therefore, the 1999 financial statements
reflect the results of our operations as a real estate investment trust. As a
real estate investment trust, we were dependent on Operating Company, as a
lessee, for a significant source of our income. In connection with the
restructuring in 2000, we acquired Operating Company on October 1, 2000 and the
Service Companies on December 1, 2000, and amended our charter to remove
provisions requiring us to elect to qualify and be taxed as a real estate
investment trust. Therefore, the 2000 results of operations and the results of
operations for the six months ended June 30, 2001 reflect our operation as a
taxable corporation specializing in the ownership, operation and management of
prisons and other correctional facilities and providing inmate residential and
prisoner transportation services for governmental agencies.
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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. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in those
forward-looking statements as a result of certain factors, including, but not
limited to, those described under "Risk Factors" and included in other portions
of this prospectus.
OVERVIEW
We were formed in September 1998 as Prison Realty Corporation and commenced
operations on January 1, 1999, following the mergers of Old CCA, on December 31,
1998 and Old Prison Realty, on January 1, 1999 with and into the Company, which
are collectively referred to herein as the 1999 merger. As more fully discussed
in Note 3 to the accompanying 2000 financial statements, effective October 1,
2000, we completed a series of previously announced restructuring transactions.
As part of the restructuring, our primary tenant, Operating Company, was merged
with and into our wholly-owned operating subsidiary on October 1, 2000. This
merger is referred to herein as the Operating Company merger. In connection with
the restructuring and the Operating Company merger, we amended our charter to,
among other things, remove provisions relating to our operation and
qualification as a real estate investment trust, or REIT, for federal income tax
purposes commencing with our 2000 taxable year and change our name to
"Corrections Corporation of America." As more fully discussed in Note 3 to the
accompanying 2000 financial statements, effective December 1, 2000, each of the
Service Companies, known herein individually as PMSI and JJFMSI, also merged
with and into our wholly-owned operating subsidiary.
As the result of the Operating Company merger and the acquisitions of PMSI and
JJFMSI, we now specialize in owning, operating and managing prisons and other
correctional facilities and providing inmate residential and prisoner
transportation services for governmental agencies. In addition to providing the
fundamental residential services relating to inmates, each of our facilities
offers a variety of rehabilitation and educational programs, including basic
education, life skills and employment training and substance abuse treatment. We
also provide health care (including medical, dental and psychiatric services),
institutional food services and work and recreational programs.
Our 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 our operating results as a REIT. We believe 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 our operations as a REIT.
Further, we believe the comparison between 2000 and prior years is not
meaningful because the 2000 financial condition, results of operations and cash
flows reflect our operation 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, our financial condition, results of operations
and cash flows as of and for the year ended December 31, 2000 also include the
operations of PMSI and JJFMSI as of December 1, 2000 (acquisition date) on a
consolidated basis. For the period January 1, 2000 through August 31, 2000, the
investments in PMSI
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and JJFMSI were accounted for and presented under the equity method of
accounting. For the period from September 1, 2000 through November 30, 2000, the
investments in PMSI and JJFMSI were accounted for on a combined basis with the
results of our operations due to the repurchase by the wholly-owned subsidiaries
of PMSI and JJFMSI of the non-management, outside stockholders' equity interest
in the PMSI and JJFMSI during September 2000. For these same reasons, we believe
the comparison between the results of operations for the six months ended June
30, 2001 and the results of operations for periods prior to the restructuring in
the fourth quarter of 2000 is not meaningful.
Prior to the Operating Company merger, we had accounted for our 9.5% non-voting
interest in Operating Company under the cost method of accounting. As such, we
had not recognized any income or loss related to our 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, our
financial statements have been restated to recognize our 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 Accounting Principles Board Opinion No. 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 Accounting Principles Board Opinion No. 16,
"Business Combinations." 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 our common stock and warrants issued in the
transaction, the net carrying amount of our promissory note from Operating
Company as of the date of acquisition (which has been extinguished), our net
carrying amount of deferred gains and receivables/payables between us 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, we specialized in
acquiring, developing and owning correctional and detention facilities.
Operating Company was a private prison management company that operated and
managed the substantial majority of the facilities we owned. As a result of the
1999 merger and certain contractual relationships with Operating Company, we
were dependent on Operating Company for a significant source of our income. In
addition, we were obligated to pay Operating Company for services rendered to us
in the development of our correctional and detention facilities. As a result of
certain liquidity issues, the parties amended the contractual agreements during
2000. For a more complete description of the historical contractual
relationships and of these amendments, see Note 5 to the accompanying 2000
financial statements.
As required by its governing instruments, we operated and elected to be taxed as
a real estate investment trust, or REIT, for federal income tax purposes with
respect to our taxable year ended December 31, 1999. In connection with the
completion of the restructuring, on September 12, 2000, our stockholders
approved an amendment to our charter to remove the requirements that we elect to
be taxed and qualify as a REIT for federal income tax purposes commencing with
our 2000 taxable year. Accordingly, with respect to our taxable year ended
December 31, 2000 and thereafter, we have operated and are taxed as a subchapter
C corporation.
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30
LIQUIDITY AND CAPITAL RESOURCES FOR THE SIX MONTHS ENDED JUNE 30, 2001
As of June 30, 2001, our liquidity was provided by cash on hand of approximately
$41.9 million and $50.0 million available under a revolving credit facility with
a $50.0 million capacity which was assumed in connection with the Operating
Company merger. During the six months ended June 30, 2001, we generated $64.5
million in cash through operating activities. As of June 30, 2001, we had a net
working capital deficiency of $322.6 million. Contributing to the net working
capital deficiency was an accrual at June 30, 2001 of $59.5 million related to
the settlement of our stockholder litigation (which is expected to be satisfied
through the remaining issuance of 3.1 million shares of common stock and the
issuance of a $29.0 million note payable due in 2009) and the classification of
our $280.4 million revolving credit facility under the bank credit facility,
which matures on January 1, 2002, as current. As of June 30, 2001, we had issued
1.6 million shares (out of the aggregate of approximately 4.7 million shares)
under terms of our stockholder litigation settlement to plaintiffs' counsel in
the actions, as adjusted for the reverse stock split. We have been advised by
the settlement claims processing agent that the remaining settlement shares will
be issued in late 2001 or early 2002.
Our principal capital requirements are for working capital, capital expenditures
and debt maturities. Capital requirements may also include cash expenditures
associated with our outstanding litigation, as further discussed in the notes to
the financial statements. We have financed, and intend to continue to finance,
the working capital and capital expenditure requirements with existing cash
balances, net cash provided by operations, and borrowings under the Operating
Company revolving credit facility. We currently expect to be able to meet our
cash expenditure requirements and extend or refinance our debt maturities,
including primarily the revolving credit facility under the bank credit
facility, due within the next year.
As a result of our current financial condition, including: (i) the revolving
loans under the bank credit facility maturing January 1, 2002; (ii) our negative
working capital position; and (iii) our highly leveraged capital structure,
management is evaluating our current capital structure, including the
consideration of various potential transactions that could improve our financial
position.
Following the completion of the Operating Company merger and the acquisitions of
PMSI and JJFMSI, during the fourth quarter of 2000, our new management conducted
strategic assessments; developed a strategic operating plan to improve our
financial position; developed revised projections for 2001; evaluated the
utilization of existing facilities, projects under development and excess land
parcels; and identified certain non-strategic assets for sale. During the first
quarter of 2001, we completed the sale of one of these assets, a facility
located in North Carolina, for a sales price of approximately $24.9 million.
During the second quarter of 2001, we completed the sale of our interest in our
Agecroft facility located in Salford, England, for a sales price of
approximately $65.7 million, and an additional facility located in North
Carolina for a sales price of approximately $24.1 million, improving our
leverage ratios and providing us with additional liquidity. The net proceeds
from the sales were used to pay-down outstanding balances under the bank credit
facility. During the fourth quarter of 2000, we completed the sale of our
interest in two international subsidiaries, an Australian corporation, CCA
Australia and a company incorporated in England and Wales, U.K. Detention
Services Limited, for an aggregate sales price of $6.4 million. As a result of
these sales, we own only correctional and detention facilities located in the
United States and its Territories.
As part of management's plans to improve our financial position and address the
January 1, 2002 maturity of portions of the debt under the bank credit facility,
management has committed to a plan of disposal for certain additional long-lived
assets. These assets are being actively marketed for sale and are classified as
held for sale in the accompanying condensed consolidated balance sheet as of
June 30, 2001. Anticipated proceeds from these asset sales are to be applied as
loan repayments. We believe
25
31
that utilizing such proceeds to pay-down debt will improve our leverage ratios
and overall financial position, improving our ability to refinance or renew
maturing indebtedness, including primarily our revolving loans under the bank
credit facility.
During the first quarter of 2001, we obtained amendments to the 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 our obligations in the stockholder litigation settlement. Also,
during the first quarter of 2001, we amended the provisions of the note purchase
agreement governing our $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.
We also have certain non-financial covenants which must be met in order to
remain in compliance with our debt agreements. Our bank credit facility contains
a non-financial covenant which required us to consummate the securitization of
lease payments (or other similar transaction) with respect to the Agecroft
facility by March 31, 2001. The Agecroft transaction did not close by the
required date. However, the covenant allowed for a 30-day grace period during
which the lenders under the 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, we closed the Agecroft transaction through the sale of all of
the issued and outstanding capital stock of one of our wholly-owned
subsidiaries.
The bank credit facility also contains a non-financial covenant requiring us to
provide the lenders with audited financial statements within 90 days of our
fiscal year-end, subject to an additional five-day grace period. Due to our
attempts to close the sale of Agecroft, we did not provide the audited financial
statements within the required time period. However, in April 2001, the lenders
waived this financial reporting requirement. This waiver also cured the
resulting cross-default under our $40.0 million convertible notes.
The bank credit facility also required us 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 bank credit facility as any combination of the
following transactions, which together would result in net cash proceeds to us
of at least $100.0 million:
- an offering of our common stock through the distribution of
rights to our existing stockholders;
- any other offering of our common stock or certain types of our
preferred stock;
- issuances of unsecured, subordinated indebtedness providing
for in-kind payments of principal and interest until repayment
of the bank credit facility; or
- certain types of asset sales, including the sale-leaseback of
our headquarters, but excluding the securitization of lease
payments (or other similar transaction) with respect to the
Agecroft facility.
The bank credit facility also contains limitations upon the use of proceeds
obtained from the completion of such transactions. We had considered a
distribution of rights to purchase common or preferred stock to our existing
stockholders, or an equity investment from an outside investor. However, we
determined that it was not commercially reasonable to issue additional equity or
debt securities, other than those securities for which we have already
contractually agreed to issue, including primarily the issuance of shares of our
common stock in connection with the settlement of our stockholder litigation.
Further, as a result of our restructuring, prior to the completion of the audit
26
32
of our 2000 financial statements and the filing of our Annual Report on Form
10-K for the year ended December 31, 2000 with the SEC on April 17, 2001, we
were unable to provide the SEC with the requisite financial information required
to be included in a registration statement. Therefore, even if we had been able
to negotiate a public or private sale of our equity securities on commercially
reasonable terms, our inability to obtain an effective SEC registration
statement with respect to such securities prior to April 17, 2001 would have
effectively prohibited any such transaction. Moreover, the terms of any private
sale of our equity securities likely would have included a requirement that we
register with the SEC the resale of our securities issued to a private purchaser
thereby also making it impossible to complete any private issuance of its
securities. Due to the fact that we would have been unable to obtain an
effective registration statement, and therefore, would have been unable to make
any public issuance of our securities (or any private sale that included the
right of resale), any actions prior to April 17, 2001 to complete a capital
raising event through the sale of equity or debt securities would have been
futile.
Although we would technically have been able to file a registration statement
with the SEC following April 17, 2001, we believe that various market factors,
including the depressed market price of our common stock immediately preceding
April 17, 2001, the pending reverse stock split required to maintain our
continued NYSE listing, and the uncertainty regarding the maturity of the
revolving loans under the bank credit facility, made the issuance of additional
equity or debt securities unreasonable.
Because the issuance of additional equity or debt securities was deemed
unreasonable, we determined that the sale of assets represented the most
effective means by which we could satisfy the covenant. As discussed above,
during the first quarter of 2001, we completed the sale of our Mountain View
Correctional Facility for approximately $24.9 million. In addition, during the
second quarter of 2001, we completed the sale of our Pamlico Correctional
Facility, for approximately $24.1 million, and are actively pursuing the sale of
additional assets. As a result of the foregoing, we believe we have demonstrated
commercially reasonable efforts to complete the $100.0 million capital raising
event as of June 30, 2001; however, there can be no assurance that the lenders
under the bank credit facility concur with our position.
Based on our current credit rating, the current interest rate applicable to the
bank credit facility is 2.75% over the base rate and 4.25% over the London
Interbank Offering Rate, or LIBOR, for revolving loans, and 3.0% over the base
rate and 4.5% over LIBOR for term loans. These rates, however, were subject to
an increase of 25 basis points (0.25%) from the current interest rate on July 1,
2001 if we had not prepaid $100.0 million of the outstanding loans under the
bank credit facility, and are subject to an increase of 50 basis points (0.50%)
from the current interest rate on October 1, 2001 if we have not prepaid an
aggregate of $200.0 million of the outstanding loans under the bank credit
facility. We have satisfied the condition to prepay, prior to July 1, 2001,
$100.0 million of outstanding loans under the bank credit facility through the
application of proceeds from the sale of the Mountain View Correctional
Facility, the Pamlico Correctional Facility and the completion of the Agecroft
transaction, and through the pay-down of $35.0 million of outstanding loans
under the bank credit facility with cash on hand. We do not currently anticipate
that cash generated from operations combined with cash on hand will be
sufficient to prepay an aggregate of $200.0 million of outstanding loans prior
to October 1, 2001. Therefore, we will be required to raise additional cash,
such as through the sale of additional assets, in order to satisfy this
condition. There can be no assurance that we will be successful in generating
sufficient cash in order to prepay such amount and satisfy this condition.
We believe that we are currently in compliance with the terms of our debt
covenants. Further, we believe our operating plans and related projections are
achievable and, subject to the foregoing discussion regarding the capital
raising event covenant and the registration obligation under the terms of the
$40.0 million convertible subordinated notes as more fully described in Note 5
to the June 30,
27
33
2001 financial statements, will allow us to remain in compliance with our 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 we
will remain in compliance with our debt covenants or that, if we default under
any of our debt covenants, we will be able to obtain additional waivers or
amendments. Further, even if we are successful in selling assets, there can be
no assurance that we will be able to refinance or renew our debt obligations
maturing January 1, 2002 on commercially reasonable or any other terms.
Due to certain cross-default provisions contained in certain of our debt
instruments, if we were to be in default under the bank credit facility and if
the lenders under the bank credit facility elected to exercise their rights to
accelerate our obligations under the bank credit facility, such events could
result in the acceleration of all or a portion of the outstanding principal
amount of our $100.0 million senior notes and our aggregate $70.0 million
convertible subordinated notes, which would have a material adverse effect on
our liquidity and financial position. Additionally, under our $40.0 million
convertible subordinated notes, even if the lenders under the bank credit
facility did not elect to exercise their acceleration rights, the holders of the
$40.0 million convertible subordinated notes could require us to repurchase such
notes. We do not have sufficient working capital to satisfy our debt obligations
in the event of an acceleration of all or a substantial portion of our
outstanding indebtedness.
Under the terms of the bank credit facility, we are prohibited from declaring or
paying any dividends with respect to our currently outstanding series A
preferred stock until such time as we have 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 our charter until such time as payment of such
dividends is permitted under the terms of the June 2000 waiver and amendment to
the bank credit facility. Quarterly dividends of $0.50 per share for the second,
third and fourth quarters of 2000, and for the first and second quarters of 2001
have been accrued as of June 30, 2001. Under the terms of our 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 our board of directors. Based on the
existing non-payments, the failure to pay dividends through the third quarter of
2001 will result in the ability of the holders of the series A preferred stock
to elect two additional directors to our board of directors.
We currently believe that reinstating the payment of the dividends on the series
A preferred stock prior to September 30, 2001 is in the best interest of the
Company and its stockholders for a variety of reasons, including the fact that
such reinstatement would: (i) enhance our credit rating and thus our ability to
refinance or renew our debt obligations as they mature; (ii) eliminate the
requirement that two additional directors be elected to serve on our board of
directors; and (iii) restore our eligibility to use Form S-3 under the rules of
the SEC in connection with the registration of our securities in future
offerings. Accordingly, we have expressed the desire to remove the restriction
on the payment of such dividends prior to September 30, 2001 in our discussions
with the lenders regarding refinancing strategies for the bank credit facility.
As of the date hereof, the lenders have not expressed a willingness to remove
the restriction prior to September 30, 2001 or thereafter. However, we continue
to actively pursue an amendment to the terms of the bank credit facility to
remove the restriction on the payment of such dividends prior to September 30,
2001, or in conjunction with a refinancing if the lenders do not agree to an
amendment prior to September 30, 2001. No assurance can be given, however, that
the lenders will agree to a reinstatement, and that as a result, if and when we
will commence the payment of cash dividends on our shares of series A preferred
stock.
At our 2000 annual meeting of stockholders held in December 2000, the holders of
our common stock approved a reverse stock split of our 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 board of directors subsequently approved a reverse
stock split of our common stock at a ratio of one-for-ten, which was
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effective May 18, 2001. As a result of the reverse stock split, every ten shares
of our common stock issued and outstanding immediately prior to the reverse
stock split has been reclassified and changed into one fully paid and
nonassessable share of our common stock. We paid our registered common
stockholders cash in lieu of issuing fractional shares in the reverse stock
split at post reverse-split rate of $8.60 per share, which is based on the
closing price of the common stock on the NYSE on May 17, 2001, totaling
approximately $15,000. The number of common shares and per share amounts have
been retroactively restated to reflect the reduction in common shares and
corresponding increase in per share amounts resulting from the reverse stock
split. As of June 30, 2001, we had approximately 25.1 million shares of common
stock issued and outstanding on a post-reverse stock split basis.
OPERATING ACTIVITIES
Our net cash provided by operating activities for the six months ended June 30,
2001, was $64.5 million. This amount represents the year-to-date net loss plus
depreciation and amortization, changes in various components of working capital
and adjustments for various non-cash charges, including the change in fair value
of the interest rate swap agreement. During the first half of 2001, we received
significant tax refunds of approximately $32.0 million, contributing to the net
cash provided by operating activities.
INVESTING ACTIVITIES
Our cash flow provided by investing activities was $113.0 million for the six
months ended June 30, 2001, primarily attributable to the proceeds received from
the sale of the Mountain View Correctional Facility on March 16, 2001, the
Agecroft facility on April 10, 2001, and the Pamlico Correctional Facility, on
June 28, 2001.
FINANCING ACTIVITIES
Our cash flow used in financing activities was $156.4 million for the six months
ended June 30, 2001. Net payments on debt totaled $155.9 million and primarily
represents the net cash proceeds received from the sale of the Mountain View
Correctional Facility, the Agecroft facility, and the Pamlico Correctional
Facility that were immediately applied to amounts outstanding under the bank
credit facility. We paid-down an additional $35.0 million on the bank credit
facility with cash on hand.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2000
We 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 our
stockholder litigation (which is expected to be satisfied through the issuance
of 4.7 million shares of common stock, as adjusted for the reverse stock split
in May 2001, 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.
In 2000, our principal capital requirements were for working capital, capital
expenditures and debt maturities. We financed these requirements with existing
cash balances, net cash provided by
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operations and borrowings under the bank credit facility and the Operating
Company revolving credit facility. As of December 31, 2000, our liquidity was
provided by cash on hand of approximately $20.9 million and $42.4 million
available under the Operating Company revolving credit facility. At December 31,
2000, borrowings outstanding under the revolving loans of the bank credit
facility totaled $382.5 million.
Following the completion of the Operating Company merger and the acquisitions of
PMSI and JJFMSI, during the fourth quarter of 2000, our new management conducted
strategic assessments; developed a strategic operating plan to improve our
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, we recorded non-cash impairment losses totaling
$508.7 million.
During the fourth quarter of 2000, we obtained a consent and amendment to our
bank credit facility to replace existing financial covenants. During the first
quarter of 2001, we also obtained amendments to the 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
our obligations in the stockholder litigation settlement. Also, during the first
quarter of 2001, we amended the provisions to the note purchase agreement
governing our $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.
OPERATING ACTIVITIES
Our 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
Our 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, we 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
Our 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, our board of directors declared a quarterly dividend on our
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. Our 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
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December 31, 2000. During the first quarter of 2000, we also paid the accrued
distributions as of December 31, 1999, on our series A preferred stock, totaling
$2.2 million.
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 bank credit facility, we amended the terms of our
leases with Operating Company 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, we agreed with
Operating Company 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, we forgave all unpaid amounts due and payable to us
through August 31, 2000 related to the Operating Company leases, including
unpaid interest, as further described in Note 5 to the 2000 financial
statements.
In connection with the amendments to the Operating Company leases, deferring a
substantial portion of the rental payments due to us thereunder, the terms of
the June 2000 waiver and amendment to the bank credit facility also conditioned
its effectiveness upon the deferral of our payment of fees to Operating Company
which would otherwise be payable pursuant to the terms of certain agreements,
each as further described in Note 5 to the 2000 financial statements. The
payment of such amounts, with interest, was deferred. The terms of Operating
Company's 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 2000 financial statements.
During 2000, we recognized rental income, net of reserves, from Operating
Company based on the actual cash payments received. In addition, we continued to
record our 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 our 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 our promissory note from
Operating Company; and (iv) license fees earned under our trade name use
agreement with Operating Company. Operating Company leased 34 of our 43
operating facilities pursuant to the Operating Company leases. We, therefore,
were dependent for rental revenue upon Operating Company's ability to make the
requisite lease payments.
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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 promissory note to us as a result of Operating Company's failure to pay the
first scheduled interest payment under the terms of the note. Operating Company
also did not make certain scheduled lease payments to us pursuant to the terms
of the Operating Company leases. We 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.
Our financial condition at December 31, 1999, the inability of Operating Company
to make certain of its payment obligations to us, and the actions taken in
attempts to resolve these liquidity issues resulted in a series of default
issues under certain of our debt agreements. We obtained waivers of these
default events in 2000.
Due to Operating Company's liquidity position and its inability to make required
payments to us under the terms of the Operating Company leases and the
promissory note from Operating Company, 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 our financial dependence on
Operating Company and our resulting liquidity position, as well as concerns with
respect to our noncompliance with, and resulting defaults under, certain
provisions and covenants contained in our indebtedness and potential liability
arising as a result of shareholder and other litigation commenced against us,
our independent auditors included an explanatory paragraph in its report to our
consolidated financial statements for the year ended December 31, 1999 that
expressed substantial doubt as to our ability to continue as a going concern.
In 1999, our growth strategy included acquiring, developing and expanding
correctional and detention facilities as well as other properties. Because we
were required to distribute to our stockholders at least 95% of our taxable
income to qualify as a real estate investment trust for 1999, we 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 our financial condition, the financial condition of
Operating Company and the decline in our stock price, our ability to fund this
growth strategy was substantially diminished.
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
Our cash flows provided by operating activities was $79.5 million for 1999 and
represents net income for the year plus depreciation and amortization and
changes in the various components of working capital. Our cash flows used in
investing activities was $447.6 million for 1999 and primarily represents
acquisitions of real estate properties and payments made under lease
arrangements. Our 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 our 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
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herein. In exchange, Old CCA received an installment promissory note in the
principal amount of $137.0 million, and 100% of the non-voting common stock of
Operating Company. Old CCA's ownership interest in the 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 promissory note was payable
over ten years at an interest rate of 12% per annum. Interest only was generally
payable for the first four years of the note, and the principal was to be
amortized over the following six years. Our former chief executive officer and a
member of our board of directors at that time had guaranteed payment of 10% of
the outstanding principal amount due under the 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 note, which was due December 31,
1999. During the third quarter of 2000, we forgave all accrued and unpaid
interest due under the note as of August 31, 2000. The note, along with the
remaining deferred interest, was assumed by our wholly-owned subsidiary in
connection with the Operating Company merger.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
MANAGEMENT AND OTHER REVENUE
Management and other revenue consists of revenue earned from the operation and
management of adult and juvenile correctional and detention facilities for the
six months ended June 30, 2001, totaling $481.9 million. Occupancy for our
facilities under contract for management was 88.7% for the six months ended June
30, 2001. During the first quarter of 2001, the State of Georgia began filling
two of our facilities that had been expanded during 2000 to accommodate an
additional 524 beds at each facility, contributing to an increase in management
and other revenue at these facilities.
During the second quarter of 2001, we were informed that our current contract
with the District of Columbia to house its inmates at the Northeast Ohio
Correctional Facility, which expires September 8, 2001, will not be renewed due
to a new law that mandates the Federal Bureau of Prisons, or the BOP, to assume
jurisdiction of all District of Columbia offenders by the end of 2001. The
Northeast Ohio Correctional Facility is a 2,016-bed medium-security prison. The
District of Columbia began transferring inmates out of the facility during the
second quarter, and completed the process in July. Accordingly, substantially
all employees at the facility have been terminated. Total management and other
revenue at this facility was approximately $6.3 million during the six months
ended June 30, 2001. The related operating expenses at this facility were $10.1
million during the six months ended June 30, 2001. We are pursuing contracts to
replace the contract at the Northeast Ohio Correctional Facility; however, there
can be no assurance that we will be able to secure such contracts.
We have responded to a proposal from the BOP for the placement of up to 1,500
inmates under the BOP's Criminal Alien Requirement II, or CAR II. We have
earmarked our McRae Correctional Facility located in McRae, Georgia, which has a
design capacity of 1,524 beds, for this opportunity. The construction of McRae
Correctional Facility is substantially complete, and is immediately available to
accommodate the BOP's requirements. If we are successful in securing CAR II,
management and other revenue will increase beginning in 2002 at this facility.
There can be no assurance that we will be successful in securing CAR II, which
is expected to be awarded early in the fourth quarter of 2001.
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RENTAL REVENUE
Rental revenue was $4.2 million for the six months ended June 30, 2001, and was
generated from leasing correctional and detention facilities to governmental
agencies and other private operators. On March 16, 2001, we sold the Mountain
View Correctional Facility, and on June 28, 2001, we sold the Pamlico
Correctional Facility. Therefore, no further rental revenue will be received for
these facilities. For the six months ended June 30, 2001, rental revenue for
these facilities totaled $2.0 million.
OPERATING EXPENSES
Operating expenses totaled $373.8 million for the six months ended June 30,
2001. Operating expenses consist of those expenses incurred in the operation and
management of correctional and detention facilities and other correctional
facilities.
GENERAL AND ADMINISTRATIVE
For the six months ended June 30, 2001, general and administrative expenses
totaled $17.0 million. General and administrative expenses consist primarily of
corporate management salaries and benefits, professional fees and other
administrative expenses.
DEPRECIATION AND AMORTIZATION
For the six months ended June 30, 2001, depreciation and amortization expense
totaled $25.9 million. Amortization expense for the six months ended June 30,
2001 includes approximately $3.8 million for goodwill that was established in
connection with the acquisitions of Operating Company on October 1, 2000 and the
Service Companies on December 1, 2000. Amortization expense during the six
months ended June 30, 2001 is also net of a reduction to amortization expense of
$5.8 million for the amortization of a liability relating to contract values
established in connection with the mergers completed in 2000.
INTEREST EXPENSE, NET
Interest expense, net, is reported net of interest income for the six months
ended June 30, 2001. Gross interest expense was $72.3 million for the six months
ended June 30, 2001. Gross interest expense is based on outstanding convertible
subordinated notes payable balances, borrowings under the bank credit facility,
the Operating Company revolving credit facility, our $100.0 million senior
notes, net settlements on interest rate swaps, and amortization of loan costs
and unused facility fees. The increase in gross interest expense from the prior
year is primarily attributable to less capitalized interest as a result of fewer
ongoing construction and development projects.
Gross interest income was $5.2 million for the six months ended June 30, 2001.
Gross interest income is earned on cash used to collateralize letters of credit
for certain construction projects, direct financing leases, notes receivable and
investments of cash and cash equivalents.
CHANGE IN FAIR VALUE OF INTEREST RATE SWAP AGREEMENT
As of June 30, 2001, in accordance with Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended, we have reflected in earnings the change
in the estimated fair value of our interest rate swap agreement during the six
months ended June 30, 2001. We estimate the fair value of interest rate swap
agreements using
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option-pricing models that value the potential for interest rate swap 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
we would have to pay to cancel the contract or transfer it to other parties. As
of June 30, 2001, 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 $10.1 million. This negative fair value consists of a transition
adjustment of $5.0 million as of January 1, 2001 and a reduction in the fair
value of the swap agreement of $5.1 million during the first half of 2001. In
accordance with SFAS 133, we have recorded a $6.3 million non-cash charge for
the change in fair value of derivative instruments for the six months ended June
30, 2001, which includes $1.3 million for amortization of the transition
adjustment. The transition adjustment represents the fair value of the swap
agreement as of January 1, 2001, and has been reflected as a liability on the
accompanying balance sheet, and as a cumulative effect of accounting change
included in other comprehensive income in the accompanying statement of
stockholders' equity. The unamortized transition adjustment at June 30, 2001 of
$3.8 million is expected to be reclassified into earnings as a non-cash charge
over the remaining term of the swap agreement. The non-cash charge of $5.1
million for the six months ended June 30, 2001, is expected to reverse into
earnings through increases in the fair value of the swap agreement, prior to the
maturity of the swap agreement on December 31, 2002, unless the swap is
terminated in conjunction with a refinancing of the bank credit facility.
However, for each quarterly period prior to the maturity of the swap agreement,
we will continue to adjust to market the swap agreement potentially resulting in
additional non-cash charges or gains.
UNREALIZED FOREIGN CURRENCY TRANSACTION LOSS
In connection with the construction and development of the Agecroft facility,
located in Salford, England, during the first quarter of 2000, we entered into a
25-year property lease. We had been accounting for the lease as a direct
financing lease and recorded a receivable equal to the discounted cash flows to
be received over the lease term. This asset was denominated in British pounds,
and was adjusted to the current exchange rate at each balance sheet date,
resulting in the recognition of the currency gain or loss in current period
earnings. On April 10, 2001 we sold our interest in the Agecroft facility,
resulting in the disposition of the asset related to the direct financing lease.
We also have extended a working capital loan to the operator of this facility.
This asset, along with various other short-term receivables, aggregating
approximately $5.2 million at June 30, 2001, is also denominated in British
pounds; consequently, we adjust these receivables to the current exchange rate
at each balance sheet date, and recognize the currency gain or loss in current
period earnings. Due to fluctuations in foreign currency exchange rates between
the British pound and the U.S. dollar, we recognized net unrealized foreign
currency transaction losses of $0.3 million for the six months ended June 30,
2001, respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
The accompanying combined and consolidated financial statements present our
financial statements 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 2000 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.
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MANAGEMENT REVENUE
Management revenue consists of revenue earned 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, PMSI and JJFMSI, 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, we
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,
we began leasing five new facilities in addition to the 37 facilities leased at
the beginning of the year. We recorded no reserves for the year ended December
31, 1999 as all rental revenue was collected from lessees, including Operating
Company. During September 2000, we forgave all unpaid rental payments due from
Operating Company as of August 31, 2000 (totaling $190.8 million). The
forgiveness did not impact our 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 trade name use agreement between us 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 our gross revenue. All licensing fees
were collected from Operating Company. The decrease in licensing fees in 2000
compared with 1999 was 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 we incurred for
the year ended December 31, 2000, totaling $151.2 million, which beginning as of
October 1, 2000 and December 1, 2000, included 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 our
realized losses on foreign currency transactions of $0.6 million for the year
ended December 31, 2000. These losses resulted from a detrimental fluctuation in
the
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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 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 our former chief
executive officer and secretary and $1.3 million in severance payments to
various other company employees.
During 1999, we were a party to various litigation matters, including
stockholder litigation and other legal matters, some of which have been settled.
We incurred legal expenses of $6.3 million during 1999 in relation to these
matters. Also included in 1999 is $3.9 million of expenses incurred for
consulting and legal advisory services in connection with the proposed
restructuring. In addition, as a result of our failure to declare, prior to
December 31, 1999, and the failure to distribute, prior to January 31, 2000,
dividends sufficient to distribute 95% of our taxable income for 1999, we were
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 us,
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 for the year ended December 31, 2000 totaled $1.6
million, which beginning as of October 1, 2000 and December 1, 2000, included
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.
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
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CCA 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. We
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, we 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, we 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, we 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, we 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 us. Consequently, we determined that
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 to our bank credit
facility, we were 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, we named a new president and chief executive
officer, followed by the appointment of a new chief financial officer during the
fourth quarter of 2000. At our 2000 annual meeting of stockholders held during
the fourth quarter of 2000, our stockholders elected a newly constituted
nine-member board of directors, 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 our
financial condition, our new management developed a strategic operating plan to
improve our financial position, and developed revised projections for 2001 to
evaluate various potential transactions. Management also conducted strategic
assessments and evaluated our assets for impairment. Further, management
evaluated the
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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, we estimated the undiscounted net cash flows for
each of our properties and compared the sum of those undiscounted net cash flows
to our investment in each property. Through this analyses, we determined that
eight of our correctional and detention facilities and the long-lived assets of
the transportation business had been impaired. For these properties, we 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, we
committed to a plan of disposal for certain of our long-lived assets. In
accordance with SFAS 121, we recorded losses on these assets based on the
difference between the carrying value and the estimated net realizable value of
the assets. We 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 our 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, our 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, we 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,
we determined that three of our correctional and detention facilities located in
the State of Kentucky and leased to Operating Company were impaired. In
accordance with SFAS 121, we 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.
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, we recognized equity in losses of PMSI and JJFMSI of
approximately $12,000 and $870,000, respectively through August 31, 2000. In
addition, we 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, we 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, we 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.
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Prior to the Operating Company merger, we accounted for our 9.5% non-voting
interest in Operating Company under the cost method of accounting. As such, we
had not recognized any income or loss related to our 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, our
financial statements have been restated to recognize our 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.
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 bank credit facility,
the Operating Company revolving credit facility, our $100.0 million 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 related to (i) higher
average debt balances outstanding, primarily related to the bank credit
facility; (ii) increased interest rates due to rising market rates, and
increases in contractual rates associated with the bank credit facility due to
modifications to the facility agreement in August 1999, the June 2000 waiver and
amendment and reductions to our credit rating; (iii) increased interest rates
due to the accrual of default interest on the bank credit facility and default
and contingent interest on the $40 million convertible notes during 2000; and
(iv) the assumption of the Operating Company revolving credit facility.
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 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 was primarily
due to interest earned on the direct financing lease with Agecroft Prison
Management, Ltd., or APM. During January 2000, we 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 was included in "assets held for sale" on the combined and
consolidated balance sheet at December 31, 2000. On April 10, 2001, we sold our
interest in this facility.
OTHER INCOME
Other income for the year ended December 31, 2000 totaled $3.1 million. In
September 2000, we 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, we 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. 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. In June
2000, our securities purchase
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agreement with Pacific Life was mutually terminated by the parties after Pacific
Life was unwilling to confirm that the June 2000 waiver and amendment to our
bank credit facility 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, we terminated the services of one of our financial
advisors during the third quarter of 2000. For the year ended December 31, 2000,
we accrued expenses of approximately $24.2 million in connection with existing
and potential litigation associated with the termination of the aforementioned
agreements. All disputes with these parties have since been settled.
UNREALIZED FOREIGN CURRENCY TRANSACTION LOSS
In connection with the construction and development of the Agecroft facility,
located in Salford, England, during the first quarter of 2000, we entered into a
25-year property lease. We have been accounting for the lease as a direct
financing lease and recorded a receivable equal to the discounted cash flows to
be received over the lease term. We also have 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, we adjust these
receivables to the current exchange rate at each balance sheet date, and
recognize the currency gain or loss in current period earnings. Due to negative
fluctuations in foreign currency exchange rates between the British pound and
the U.S. dollar, we recognized net unrealized foreign currency transaction
losses of $8.1 million for the year ended December 31, 2000. On April 10, 2001
we sold our interest in the Agecroft facility.
LOSS ON SALES OF ASSETS
We 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 and a loss of $0.3
million resulting from the abandonment of a project under development.
For the year ended December 31, 1999, we 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, we, as the successor to Old CCA,
received $6.5 million in three installments expiring June 30, 2001 for the
transferred assets. The net proceeds were approximately $1.6 million less than
the surrendered assets' depreciated book value. We received $3.5 million of the
proceeds during 1999 and $1.5 million during each of 2000 and 2001. In addition,
we incurred a loss of $0.4 million resulting from a sale of a newly constructed
facility in Florida. We 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. We
received net proceeds of $40.5 million.
STOCKHOLDER LITIGATION SETTLEMENT
In February 2001, we received court approval of the revised terms of the
definitive settlement agreements regarding the settlement of all outstanding
stockholder litigation against us and certain of our existing and former
directors and executive officers. Pursuant to the terms of the settlement, we
will issue to the plaintiffs an aggregate of 4.7 million shares of common stock,
as adjusted for the reverse stock split in May 2001, and a subordinated
promissory note in the aggregate principal amount of $29.0 million.
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As of December 31, 2000, we had 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 2000 financial statements, 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 our common stock price. If the promissory note is issued under
the current terms, in accordance with SFAS 133, we 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, we wrote-off loan costs of approximately $9.0 million during the year
ended December 31, 1999. Additionally, we 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 operated as a taxable subchapter C corporation. We
elected to change our tax status from a taxable corporation to a real estate
investment trust effective with the filing of our 1999 federal income tax
return. As of December 31, 1998, our balance sheet reflected $83.2 million in
net deferred tax assets. In accordance with the provisions of SFAS 109, we
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 real estate investment trust. As such, our
results of operations reflect a provision for income taxes of $83.2 million for
the year ended December 31, 1999. However, due to our tax status as a real
estate investment trust, we 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, our stockholders
approved an amendment to our charter to remove provisions requiring us to elect
to qualify and be taxed as a real investment trust for federal income tax
purposes effective January 1, 2000. As a result of the amendment to our charter,
we will be taxed as a taxable subchapter C corporation beginning with our
taxable year ended December 31, 2000. In accordance with the provisions of SFAS
109, we are required to establish current and deferred tax assets and
liabilities in our financial statements in the period in which a change of tax
status occurs. As such, our 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 ten new facilities, assumed management of eight
facilities and expanded seven existing facilities to increase their design
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 we leased facilities to
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Operating Company and other operators during 1999, rather than operating the
facilities, we 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 98-5, "Reporting on the Costs of
Start-up Activities," or SOP 98-5. 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. We assumed these lawsuits in the 1999 merger. Old CCA recognized
$2.1 million of expenses in 1998 related to these lawsuits.
Since Operating Company operated the correctional and detention facilities
leased by us during 1999, we did not incur operating expenses during 1999.
GENERAL AND ADMINISTRATIVE
General and administrative expenses totaled $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 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.
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DEPRECIATION AND AMORTIZATION
For the year ended December 31, 1998, depreciation and amortization expense was
$14.4 million. Old CCA generally used 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 was 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.
INFLATION
We do not believe that inflation has had or will have a direct adverse effect on
our operations. Many of our 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 our results of operations in the future to the
extent that
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wages or medical expenses increase at a faster pace than the per diem or fixed
rates we receive for management services.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our 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. We are exposed to market risk related to our bank credit facility
and certain other indebtedness. The interest on the bank credit facility and
such other indebtedness is subject to fluctuations in the market. If the
interest rate for our outstanding indebtedness under the bank credit facility
was 100 basis points higher or lower during the six months ended June 30, 2001
and in 2000, our interest expense, net of amounts capitalized, would have been
increased or decreased by approximately $6.3 million and $12.4 million,
respectively.
As of June 30, 2001, we had outstanding $100.0 million of 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 $85.9 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 our financial statements.
The bank credit facility required us to hedge $325.0 million of its floating
rate debt on or before August 16, 1999. We have entered into certain swap
arrangements fixing LIBOR at 6.51% (prior to the applicable spread) on
outstanding balances of at least $325.0 million through December 31, 2001 and at
least $200.0 million through December 31, 2002. The difference between the
floating rate and the swap rate is recognized in interest expense. In accordance
with SFAS 133, as amended, as of June 30, 2001 we recorded a $10.1 million
liability, representing the estimated amount we would have to pay to cancel the
contract or transfer it to other parties. The estimated negative fair value of
the swap agreement as of January 1, 2001 of $5.0 million was reflected as a
cumulative effect of accounting change included in other comprehensive income in
the statement of stockholders' equity. The reduction in the fair value of the
swap agreement during the six months ended June 30, 2001 was charged to
earnings. This decline in fair value is due to declining interest rates and is
expected to reverse into earnings prior to the maturity of the swap on December
31, 2002, unless the swap is terminated in connection with a refinancing of the
bank credit facility.
Additionally, we may, from time to time, invest our 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.
Our exposure to foreign currency exchange rate risk relates to our construction,
development and leasing of our Agecroft facility located in Salford, England,
which was sold in April 2001. We extended a working capital loan to the operator
of this facility. Such payments to us are denominated in British pounds rather
than the U.S. dollar. As a result, we bear the risk of fluctuations in the
relative exchange rate between the British pound and the U.S. dollar. At June
30, 2001, the receivables due us and denominated in British pounds totaled 3.6
million British pounds. A hypothetical 10% increase in the relative exchange
rate would have resulted in an increase of $0.5 million in the value of these
receivables and a corresponding unrealized foreign currency transaction gain,
and a hypothetical 10% decrease in the relative exchange rate would have
resulted in a decrease of $0.5 million in the value of these receivables and a
corresponding unrealized foreign currency transaction loss.
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BUSINESS
OVERVIEW
We are currently the nation's largest provider of outsourced correctional
management services, housing an inmate population larger than that of all but
five public corrections systems in the United States. We specialize in owning,
operating and managing prisons and other correctional facilities and providing
inmate residential and prisoner transportation services for governmental
agencies. In addition to providing the fundamental residential services relating
to inmates, each of our facilities offers a variety of rehabilitation and
educational programs, including basic education, life skills and employment
training and substance abuse treatment. We also provide health care (including
medical, dental and psychiatric services), institutional food services and work
and recreational programs.
At June 30, 2001, we owned or managed 71 correctional and detention facilities
with a total design capacity of approximately 66,000 beds in 21 states, the
District of Columbia and Puerto Rico, with 69 operating facilities and two
facilities under construction. At June 30, 2001, we controlled approximately 52%
of all beds under contract with private operators of correctional and detention
facilities in the United States.
OPERATIONS
MANAGEMENT AND OPERATION OF FACILITIES. At June 30, 2001 we owned and managed 37
correctional and detention facilities, managed an additional 28 correctional and
detention facilities owned by government agencies, and leased four facilities to
other private operators. Our customers consist of local, state and federal
correctional and detention authorities. For the [six months ended June 30,
2001], federal correctional and detention authorities represented approximately
28.5% of our total management revenue produced by all facilities. Federal
correctional and detention authorities consist of the Federal Bureau of Prisons
(the "BOP"), the U.S. Marshals Service (the "USMS") and the U.S. Immigration and
Naturalization Service (the "INS"). The federal correctional and detention
authorities were our only single customer that accounted for 10.0% or more of
our management revenue in 2000, or for the six months ended June 30, 2001.
Our facility contracts are short term in nature. Terms of our federal contracts
generally range from one to five years, and contain multiple renewal options.
The terms of certain of our local and state contracts may be for longer periods
with additional renewal options. Most of our facility contracts also contain
clauses which allow the government agency to terminate the contract without
cause, and our 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 our management fee. No assurance can be given that
government agencies will not terminate or renew a contract with us in the
future.
We are compensated on the basis of the number of inmates held in each of our
facilities. Of the 65 domestic facilities we operate and manage, 64 of the
facility management contracts provide that we 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 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, of our facilities was 84.8%. The
occupancy rate at June 30, 2001 was 89.1%.
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Our contracts generally require us to operate each facility in accordance with
all applicable laws and regulations. We are required by our contracts to
maintain certain levels of insurance coverage for general liability, workers'
compensation, vehicle liability and property loss or damage. We are also
required to indemnify the contracting agencies for claims and costs arising out
of our operations and, in certain cases, to maintain performance bonds.
OPERATING PROCEDURES. Pursuant to the terms of our management contracts, we are
responsible for the overall operation of our facilities, including staff
recruitment, general administration of the facilities, facility maintenance,
security and supervision of the offenders. We also provide a variety of
rehabilitative and educational programs at our facilities. Inmates at most
facilities we manage may receive basic education through academic programs
designed to improve inmate literacy levels and the opportunity to acquire
General Education Development, or GED, certificates. We also offer vocational
training to inmates who lack marketable job skills. In addition, we offer 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 our facilities, we
also offer counseling, education and/or treatment to inmates with alcohol and
drug abuse problems through our LifeLine(TM) program.
We operate each facility in accordance with company-wide policies and procedures
and the standards and guidelines established by the American Correctional
Association Commission on Accreditation. The American Correctional Association,
or 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 believes its standards
safeguard the life, health and safety of offenders and personnel, and,
accordingly, these standards 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 areas as administration,
personnel and staff training, security, medical and health care, food services,
inmate supervision and physical plant requirements. We have sought and received
ACA accreditation for 49 of the facilities we currently manage, and we intend to
apply for ACA accreditation for all of our facilities once they become eligible.
The accreditation process is usually completed 18 to 24 months after a facility
is opened.
We devote considerable resources to assuring compliance with contractual and
other requirements and in 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 our management contracts, we usually provide 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. We offer
full logistical support to the facilities we manage, 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 our personnel.
Our operations department, in conjunction with our 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. We provide meals for inmates at the
facilities we operate in accordance with regulatory, client and nutritional
requirements.
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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 our facility
management services, we also provide 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. Our current
business objectives, as discussed below, however, do not focus on the design and
construction of new correctional and detention facilities.
Pursuant to our design, build and manage contracts, we are responsible for
overall project development and completion. Typically, we develop the conceptual
design for a project, then hire architects, engineers and construction companies
to complete the development. When designing a particular facility, we utilize,
with appropriate modifications, prototype designs we have used in developing
other projects. Our management believes that the use of such prototype designs
allows us to reduce cost overruns and construction delays. Our facilities are
designed to maximize staffing efficiencies by increasing the area of vision
under surveillance by correctional officers and utilizing additional electronic
surveillance systems.
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, we have 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 us
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 we are 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.
FACILITIES WE MANAGE OR LEASE TO OTHER OPERATORS
GENERAL. Our facilities can generally be classified according to the level(s) of
security at such facility. Minimum security facilities are facilities having
open housing within an appropriately designed and patrolled institutional
perimeter. Medium security facilities are facilities having either cells, rooms
or dormitories, a secure perimeter and some form of external patrol. Maximum
security facilities are facilities having single occupancy cells, a secure
perimeter and external patrol. 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.
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Our facilities 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 INS, prisoners who are awaiting trial
who have been charged with violations of federal criminal law
who are in the custody of 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 we
own but do not manage.
FACILITIES OWNED AND/OR MANAGED. The following table sets forth all of the
facilities which, as of June 30, 2001, we (i) owned and managed, (ii) owned, but
are leased to another operator, and (iii) managed but are owned by a government
authority. The table includes certain information regarding each facility,
including the term of the primary management contract related to such facility,
or, in the case of facilities we own but lease to another operator, the term of
such lease.
REMAINING
PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (A) LEVEL TYPE (B) TERM OPTIONS (I)
------------- -------- ------------ -------- --------- ---- -----------
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 (6) 1 year
Eloy, Arizona 2002
Florence Correctional Center State of Hawaii 1,600 Medium Correctional June 2004 -
Florence, Arizona
California Correctional Center BOP 2,304 Medium Correctional September (7) 1 year
California City, California 2003
Leo Chesney Correctional Center Cornell 240 Minimum Leased February (2) 5 year
(C) Corrections 2002
Live Oak, California
San Diego Correctional Facility INS 1,232 Minimum/ Detention December (3) 1 year
San Diego, California Medium 2001
Bent County Correctional Facility State of Colorado 700 Medium Correctional June 2002 (2) 1 year
Las Animas, Colorado
Huerfano County Correctional State of Colorado 752 Medium Correctional June 2002 (2) 1 year
Center
Walsenburg, Colorado
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REMAINING
PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (A) LEVEL TYPE (B) TERM OPTIONS (I)
------------- -------- ------------ -------- -------- ---- -----------
Kit Carson Correctional Center State of Colorado 768 Medium Correctional June 2002 (2) 1 year
Burlington, Colorado
Bay Correctional Facility State of Florida 750 Medium Correctional June 2002 (1) 2 year
Panama City, Florida
Bay County Jail and Annex Bay County 677 Multi Detention September -
Panama City, Florida 2006
Citrus County Detention Facility Citrus County 400 Multi Detention September (1) 5 year
Lecanto, Florida 2005
Gadsden Correctional Institution State of Florida 896 Minimum/ Correctional June 2003 -
Quincy, Florida Medium
Hernando County Jail Hernando County 302 Multi Detention October -
Brooksville, Florida 2010
Lake City Correctional Facility State of Florida 350 Secure Correctional June 2003 (1) 2 year
Lake City, Florida
Okeechobee Juvenile Offender State of Florida 96 Secure Juvenile December -
Correctional Center 2002
Okeechobee, Florida
Coffee Correctional Facility State of Georgia 1,524 Medium Correctional June 2002 (8) 1 year
Nicholls, Georgia
Wheeler Correctional Facility State of Georgia 1,524 Medium Correctional June 2002 (8) 1 year
Alamo, Georgia
Idaho Correctional Center State of Idaho 1,270 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 188 Non-secure/ Juvenile July 2004 -
Village Secure
Vincennes, Indiana
Leavenworth Detention Center USMS 483 Maximum Detention December (1) 1 year
Leavenworth, Kansas 2001
Lee Adjustment Center State of Kentucky 756 Minimum/ Correctional May 2003 (3) 2 year
Beattyville, Kentucky Medium
Marion Adjustment Center State of Kentucky 790 Minimum Correctional December (1) 2 year
St. Mary, Kentucky 2001
Otter Creek Correctional Center State of Indiana 656 Minimum/ Correctional February -
Wheelwright, Kentucky Medium 2003
Winn Correctional Center State of 1,538 Medium/ Correctional March 2003 (1) 2 year
Winnfield, Louisiana Louisiana Maximum
Prairie Correctional Facility State of 1,338 Medium Correctional December (1) 1 year
Appleton, Minnesota Wisconsin 2001
Delta Correctional Facility State of 1,016 Minimum/ Correctional October (1) 2 year
Greenwood, Mississippi Mississippi Medium 2001
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REMAINING
PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (A) LEVEL TYPE (B) TERM OPTIONS (I)
------------- -------- ------------ -------- -------- ---- -----------
Tallahatchie County Correctional State of 1,104 Medium Correctional December -
Facility Wisconsin 2001 (D)
Tutweiler, Mississippi (D)
Wilkinson County Correctional State of 900 Medium Correctional January (1) 2 year
Facility Mississippi 2003
Woodville, Mississippi
Crossroads Correctional Center State of Montana 512 Multi Correctional August (8) 2 year
Shelby, Montana 2003
Southern Nevada Women's State of Nevada 500 Multi Correctional June 2015 -
Correctional Center (C) (E)
Las Vegas, Nevada
Elizabeth Detention Center INS 300 Minimum Detention January (3) 1 year
Elizabeth, New Jersey 2002
Cibola County Corrections Center BOP 1,072 Multi Correctional October (7) 1 year
Milan, New Mexico 2003
New Mexico Women's Correctional State of New 596 Multi Correctional June 2002 (3) 1 year
Facility Mexico
Grants, New Mexico
Torrance County Detention Facility USMS 910 Multi Detention Indefinite -
Estancia, New Mexico
Northeast Ohio Correctional Center District of 2,016 Medium Correctional September (1) 1 year
Youngstown, Ohio (F) Columbia 2001 (F)
Queensgate Correctional Facility Hamilton County, 850 Medium Leased February (3) 1 year
(C) Ohio 2003
Cincinnati, Ohio
Cimarron Correctional Facility State of Oklahoma 960 Medium Correctional June 2002 1 year
Cushing, Oklahoma indefinite
David L. Moss Criminal Justice Tulsa County, 1,440 Multi Detention August (2) 1 year
Center Oklahoma 2002
Tulsa, Oklahoma
Davis Correctional Facility State of Oklahoma 960 Medium Correctional June 2003 1 year
Holdenville, Oklahoma indefinite
Diamondback Correctional Facility State of Hawaii 2,160 Medium Correctional June 2004 -
Watonga, Oklahoma
North Fork Correctional Facility State of 1,440 Medium Correctional December (1) 1 year
Sayre, Oklahoma Wisconsin 2001
Guayama Correctional Center Commonwealth of 1,000 Medium Correctional December (1) 5 year
Guayama, Puerto Rico Puerto Rico 2001
Ponce Adult Correctional Center Commonwealth of 1,000 Medium Correctional February (1) 5 year
Ponce, Puerto Rico Puerto Rico 2002
Ponce-Jovenes y Adultos Commonwealth of 500 Multi Correctional February (1) 5 year
Ponce, Puerto Rico Puerto Rico 2002
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REMAINING
PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (A) LEVEL TYPE (B) TERM OPTIONS (I)
------------- -------- ------------ -------- -------- ---- -----------
Silverdale Facilities Hamilton County 576 Multi Juvenile September (2) 4 year
Chattanooga, Tennessee 2004
South Central Correctional Center State of 1,506 Medium Correctional February -
Clifton, Tennessee Tennessee 2002
West Tennessee Detention Facility State of 600 Multi Correctional December (1) 1 year
Mason, Tennessee Wisconsin 2001
Shelby Training Center Shelby County, 200 Secure Juvenile April 2015 -
Memphis, Tennessee Tennessee
Tall Trees State of 63 Non-secure Juvenile June 2002 -
Memphis, Tennessee Tennessee
Metro-Davidson County Detention Davidson County, 1,092 Multi Detention May 2002 -
Facility Tennessee
Nashville, Tennessee
Whiteville Correctional Facility State of 1,536 Medium Correctional December (1) 1 year
Whiteville, Tennessee Wisconsin 2001
Hardeman County Correctional State of 2,016 Medium Correctional July 2002 -
Facility Tennessee
Whiteville, Tennessee
Bartlett State Jail State of Texas 962 Minimum/ Correctional August (1) 1 year
Bartlett, Texas Medium 2002
Bridgeport Pre-Parole Transfer State of Texas 200 Medium Correctional August -
Facility 2002
Bridgeport, Texas
Brownfield Intermediate Sanction State of Texas 200 Minimum/ Correctional August -
Facility (G) Medium 2001 (G)
Brownfield, Texas
Community Education Partners (H) Community - Non-secure Leased August (3) 5 year
Dallas, Texas Education 2008
Partners
Eden Detention Center BOP, INS 1,225 Minimum Correctional April 2004 -
Eden, Texas
Community Education Partners (H) Community - Non-secure Leased June 2008 (3) 5 year
Houston, Texas Education
Partners
Houston Processing Center INS 411 Medium Detention September -
Houston, Texas 2001
Laredo Processing Center INS 258 Minimum/ Detention September (1) 1 year
Laredo, Texas Medium 2001
Webb County Detention Center USMS 480 Medium Detention February (1) 1 year
Laredo, Texas 2002
Liberty County Jail/Juvenile Center Liberty County, 380 Multi Detention November (2) 2 year
Liberty, Texas Texas 2001
Mineral Wells Pre-Parole Transfer State of Texas 2,103 Minimum Correctional August -
Facility 2002
Mineral Wells, Texas
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REMAINING
PRIMARY DESIGN SECURITY FACILITY RENEWAL
FACILITY NAME CUSTOMER CAPACITY (A) LEVEL TYPE (B) TERM OPTIONS (I)
------------- -------- ------------ ----- -------- ---- -----------
T. Don Hutto Correctional Center State of Texas 480 Medium Correctional January (1) 2 year
Taylor, Texas 2003
Sanders Estes Unit State of Texas 1,000 Minimum/ Correctional August (1) 1 year
Venus, Texas Medium 2002
Lawrenceville Correctional Center Commonwealth of 1,500 Medium Correctional March 2003 -
Lawrenceville, Virginia Virginia
D.C. Correctional Treatment District of 866 Medium Correctional March 2017 -
Facility (C) Columbia
Washington D.C.
(A) Design capacity measures the number of beds, and accordingly, the
number of inmates each facility is designed to accommodate. We believe
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 governmental entity. Our ability or the
ability of another private operator to satisfy its financial
obligations under our leases is based in part on the revenue generated
by the facilities, which in turn depends on the design capacity of each
facility.
(B) We manage 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.
(C) This facility is held for sale as of June 30, 2001.
(D) We have been notified by the State of Wisconsin that it will not renew
the contract at this facility upon expiration. All Wisconsin inmates
have been transferred out of this facility.
(E) We have contracted with the State of Nevada to manage and operate the
facility.
(F) The District of Columbia has notified us that it will not renew the
contract at this facility due to a new law that mandates the BOP to
assume jurisdiction of all D.C. offenders by the end of 2001. All
inmates have been transferred out of this facility.
(G) We have agreed with the State of Texas to terminate the contract upon
its expiration.
(H) 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. We believe that design capacity does
not generally apply to educational facilities, and therefore, the
aggregate design capacity of our facilities referred to in this
prospectus does not include the total number of at-risk juveniles which
can be accommodated at this facility.
(I) Remaining renewal options represents the number of renewal options if
applicable, and the remaining term of each option renewal.
PROPERTIES WE OWN
GENERAL. At June 30, 2001, we owned 45 real estate properties in 15 states and
the District of Columbia, with a total aggregate net book value of $1.7 billion,
including four properties held for sale. Our real estate properties include 41
correctional and detention facilities, two corporate office buildings and two
correctional and detention facilities under construction. We have pledged each
of the facilities we own to secure borrowings under our bank credit facility. At
June 30, 2001, we leased one facility to a government agency and three
facilities to private operators.
FACILITIES. Information regarding each of the correctional and detention
facility we owned as of June 30, 2001 is set forth below, grouped by those
facilities we own and manage followed by those facilities we own but are leased
to other governmental and private operators. We own two facilities under direct
financing leases which we manage. Those two facilities are included in the table
below with those facilities we own and manage.
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OWNED AND MANAGED FACILITIES
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)
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 Tutweiler Tallahatchie County Correctional Facility (idle)(6)
Montana Shelby Crossroads Correctional Center(7)
Nevada Las Vegas Southern Nevada Women's Correctional Facility(3)
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 (idle)
Oklahoma Cushing Cimarron Correctional Facility(8)
Holdenville Davis Correctional Facility(8)
Sayre North Fork Correctional Facility
Watonga Diamondback Correctional Facility
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STATE CITY FACILITY NAME
----- ---- -------------
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
OWNED AND LEASED FACILITIES
STATE CITY FACILITY NAME
----- ---- -------------
California Live Oak Leo Chesney Correctional Center(3)
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
---------------
(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 contract at a price determined by a formula
set forth in the agreement.
(3) Held for sale as of June 30, 2001.
(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
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 contract at a price determined by a formula set forth in the
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 contract with
us.
(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 us 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, we may purchase the property for $150,000; (b) if the
State fails to fund the contract, then we may purchase the property for
$150,000; (c) if we terminate the lease without cause, then we shall
purchase the property for its fair market value as agreed to by the
County and us; (d) if we breach the lease contract, then we may
purchase the property for its fair market value as agreed to by the
County and us; and (e) if the County breaches the lease contract, then
we may purchase the property for $150,000.
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FACILITIES UNDER CONSTRUCTION OR DEVELOPMENT. In addition to owning and/or
managing the facilities listed in the preceding table, we are 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 these
facilities.
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 has
submitted this facility in a response to a proposal from the BOP for the
placement of up to 1,500 inmates under the BOP's Criminal Alien Requirement II,
or CAR II. The BOP is expected to award CAR II early in the fourth quarter of
2001. There can be no assurance that we will be successful in securing CAR II,
or any other contract to utilize 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.
BUSINESS OBJECTIVES AND STRATEGIES
GENERAL. We specialize in owning, operating and managing prisons and other
correctional facilities and providing inmate residential and prisoner
transportation services for governmental agencies. In addition to providing the
fundamental residential services relating to inmates, each of our facilities
offers a variety of rehabilitation and educational programs, including basic
education, life skills and employment training and substance abuse treatment. We
also provide health care (including medical, dental and psychiatric services),
institutional food services and work and recreational programs.
BUSINESS OBJECTIVES. Our management believes that our recently completed
restructuring enables us to streamline our corporate structure and provide
increased operational support to all our facilities, emphasizing quality
assurance and exceeding customers' expectations while continuing to maintain
safe and secure facilities. Our primary business objectives are to provide
quality corrections services, increase revenue and control operating costs,
while maintaining our position as the largest owner, operator and manager of
privatized correctional and detention facilities. We expect to achieve these
objectives by the following:
- DELIVERY OF QUALITY CORRECTIONS SERVICES. We have reorganized
our 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. Our quality assurance division provides oversight
and establishes checkpoints for examining our performance, and
the human resources division formalizes our commitment to
employee recruitment and retention. Our management has
completed a systematic facility-by-facility review in order to
establish projections and benchmarks for facility performance.
We believe that a renewed focus on the day-to-day management
of our facilities, quality assurance and our employees will
ensure continued delivery of quality corrections services.
- INCREASING OCCUPANCY RATES. Our 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, we were awarded a
contract with the BOP to house approximately 3,316 federal
detainees at our California City,
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California and Milan, New Mexico facilities, the largest
contract award in our history. Total revenue over the life of
these contracts is projected to approximate $760.0 million.
- COST REDUCTION EFFORTS. An important component of our strategy
is to position our company as a cost effective, high quality
provider of prison management services in all our markets. We
continue to focus on improving operating performance and
efficiency through the following key operating initiatives:
(i) standardizing supply and service purchasing practices and
usage; (ii) improving inmate management, resource consumption
and reporting procedures; and (iii) improving employee
productivity.
- EXPANDING SCOPE OF SERVICES. We intend 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 we operate differ with respect to
security levels, ages, genders and cultures of inmates, we
focus on the particular needs of an inmate population and
tailor our service based on local conditions and our ability
to provide such services on a cost-effective basis.
BUSINESS STRATEGY. We believe that we are well positioned to take advantage of
opportunities in the privatized corrections industry. We currently are 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 us; (ii) facilities owned by government entities and managed by us;
(iii) facilities owned by us and managed by government entities; and (iv)
facilities owned by us and managed by other private operators.
Our principal business strategies are to fill vacant beds currently in our
inventory and increase revenue by obtaining additional management contracts.
Substantially all of our income is expected to be derived from contracts with
government entities for the provision of correctional and detention facility
management and related services.
BUSINESS DEVELOPMENT
GENERAL. We believe that we are an industry leader in promoting the benefits of
privatization of prisons and other correctional and detention facilities. At
June 30, 2001, we 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 our business development
department and our senior management with the aid, where appropriate, of certain
independent consultants.
Under the direction of our business development department and our senior
management, we market our 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 us a certain percentage
of management revenue, regardless of occupancy levels.
We believe that we can further develop our business by, among other things:
- maintaining our existing customer relationships and continuing
to fill existing beds within our facilities;
- enhancing the terms of our existing contracts; and
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- establishing relationships with new customers who have either
previously not outsourced their correctional management needs
or have utilized other private enterprises.
We generally receive 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 we receive such an inquiry, we determine
whether there is an existing need for our 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.
We pursue our business opportunities primarily through Request for Proposals, or
RFPs, and Request for Qualifications, or RFQs. 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 our
activities in the area of securing new business are in the form of responding to
RFPs. As part of our process of responding to RFPs, members of our management
team meet with the appropriate personnel from the agency making the request to
best determine the agency's needs. If the project fits within our strategy, we
submit 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 June 30, 2001, we were pursuing five prospective
contracts with a total of approximately 2,900 beds for which written responses
to RFPs and other solicitations have been submitted, including the BOP's CAR II
proposal. We are also pursuing additional prospects for which we have not
submitted proposals. Further, we are pursuing other projects for which we have
not yet submitted, and may not submit, a response to an RFP. No assurance can be
given that we will receive additional awards with respect to proposals
submitted.
THE INDUSTRY
We believe that governments will continue to privatize correctional and
detention facilities and that, as a result, the private corrections industry in
the United States will continue to grow. This moderation correlates with
decreased year-to-year growth rates in the nation's prisoner population.
According to statistics recently released by the United States Department of
Justice, Bureau of Justice Statistics 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, continued increasing inmate populations and the resulting 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 also estimates that
the prisoner population will reach approximately 2.1 million by the close of
2005.
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Although the BJS report indicates a more moderate prisoner population increase
than was experienced in previous years, we see the trend of increasing
privatization of the corrections industry continuing, in large part, because of
the general shortage of beds available in correctional and detention facilities
in the United States, especially in the federal prison system. However, we
believe that the procurement of new contracts is expected to become more
competitive and private corrections managers will be forced to contain rising
operating costs, including medical costs, 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 prepared by Dr. Charles W. Thomas, a former member
of our board of directors and a current consultant to us, the design capacity of
privately managed adult correctional and detention facilities worldwide has
increased dramatically since the first privatized facility was opened by our
predecessor in 1984. The majority of this growth has occurred since 1989, as the
number of privately managed adult correctional and detention facilities in
operation or under construction worldwide increased from 26 facilities with a
design capacity of 10,973 beds in 1989 to 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 Private 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 Private
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 Private 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. We believe
that the continued trend indicated by these statistics is primarily the result
of competition among private companies in the industry who have incentives to
keep costs down and to improve the quality of services to its customers.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We are 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. As of June 30, 2001, we owned
and managed 37 correctional and detention facilities, and managed an
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additional 28 correctional and detention facilities owned by governmental
agencies. During the second quarter of 2001, management began viewing our
operating results in two segments: owned and managed correctional and detention
facilities and managed-only correctional and detention facilities. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the notes to consolidated
financial statements included elsewhere in this registration statement. Owned
and managed facilities include the operating results of those facilities we own
and manage. Managed-only facilities include the operating results of those
facilities owned by a third party and managed by us. We measure the operating
performance of each facility within the above two segments, without
differentiation, based on facility contribution. We define facility contribution
as a facility's operating income or loss from operations before interest, taxes,
depreciation and amortization. Since each of our facilities within the two
operating segments exhibit similar economic characteristics, provide similar
services to governmental agencies, and operate under a similar set of operating
procedures and regulatory guidelines, the facilities within the identified
segments have been aggregated and reported as two operating segments. The
financial information and disclosures required under Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information," are included in this registration statement as of and for
the period ended June 30, 2001 referred to in the index to financial statements
commencing on page F-1.
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, we have been subject to these laws, rules, ordinances
and regulations. In addition, we are also subject to these laws, ordinances and
regulations as the result of our, and our subsidiaries', operation and
management of correctional and detention facilities. The cost of complying with
environmental laws could materially adversely affect our financial condition and
results of operations.
Phase I environmental assessments have been obtained on substantially all of the
facilities we currently own. 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 we believe would have a material
adverse effect on our business, assets, results of operations or liquidity, nor
are we 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 we are unaware. In addition, environmental
conditions on properties owned by us may affect the operation or expansion of
facilities located on the properties.
AMERICANS WITH DISABILITIES ACT. The correctional and detention facilities we
operate and manage are subject to the Americans with Disabilities Act of 1990,
as amended. The Americans with Disabilities Act, or the ADA, has separate
compliance requirements for "public accommodations" and "commercial facilities"
but generally requires that public facilities such as correctional and detention
facilities be made accessible to people with disabilities. These requirements
became effective in 1992. Compliance with the ADA requirements could require
removal of access barriers and other modifications or capital improvements at
the facilities. However, we do not believe that such costs
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will be material because we believe 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
We maintain a general liability insurance policy of $5.0 million for each
facility we operate, as well as insurance in amounts we deem adequate to cover
property and casualty risks, workers' compensation and directors and officers
liability. In addition, each of our leases with third-parties provide 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,
we have the right to periodically review our lessees' insurance coverage and
provide input with respect thereto.
Each of our management contracts and the statutes of certain states require the
maintenance of insurance. We maintain 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.
EMPLOYEES
As of June 30, 2001, we employed 14,955 full-time employees and 250 part-time
employees. Of such employees, 198 were employed at our corporate offices and
15,007 were employed at our facilities and in our inmate transportation
business. We employ 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 we currently operate 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.
We have not experienced a strike or work stoppage at any of our facilities. In
February 1996, we reached an agreement with a union to represent non-security
personnel at our Shelby Training Center. This agreement was renewed in March
1999. In October 1998, we entered into an agreement with a union to represent
resident supervisors at the Shelby Training Center. In March 1997, we assumed
management of the D.C. Correctional Treatment Facility and we agreed to
recognize organized labor in representing certain employees at this facility. In
December 1998, we finalized an agreement with the union to represent
correctional officers and other support services staff at the facility. In
December 1999, we reached an agreement with a union to represent the detention
officers and other support services staff at the Elizabeth Detention Center. In
January 2001, we reached an agreement with a union to represent certain
professional and non-professional employees at the Northeast Ohio Correctional
Center. We have also agreed to recognize organized labor in representing certain
support services staff at the Northeast Ohio Correctional Center. Despite a
lay-off of substantially all employees at this facility, we continue to
negotiate, in good faith, with organized labor at the Northeast Ohio
Correctional Center. We are currently negotiating with organized labor
representing employees of the Guayama Correctional Facility in Guayama, Puerto
Rico. In the opinion of our management, overall employee relations are generally
considered good.
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COMPETITION
The correctional and detention facilities we operate and manage, as well as
those facilities we own and are managed by other operators, are subject to
competition for inmates from other private prison managers. We compete primarily
on the basis of the quality and range of services offered, our experience in the
operation and management of correctional and detention facilities and our
reputation. We compete with a number of companies, including but not limited to
Wackenhut Corrections Corporation, Correctional Services Corporation, and
Cornell Corrections Corporation. We may also compete in some markets with small
local companies. Other potential competitors may in the future enter into
businesses competitive with us without a substantial capital investment or prior
experience. Competition by other companies may adversely affect the number of
inmates at our facilities, which could have a material adverse effect on the
operating revenue of our facilities. In addition, revenue derived from our
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.
We will also be subject to competition for the acquisition of correctional and
detention facilities with other purchasers of correctional and detention
facilities.
LEGAL PROCEEDINGS
During the first quarter of 2001, we obtained final court approval of the
settlements of the following outstanding consolidated federal and state class
action and derivative stockholder lawsuits brought against us and certain of our
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 us brought as the result of,
among other things, agreements entered into by us and our formerly independent
Operating Company in May 1999 to increase payments we made to the Operating
Company under the terms of certain agreements, as well as transactions relating
to proposed corporate restructurings led by the Fortress/Blackstone investment
group and Pacific Life Insurance Company. Pursuant to terms of the settlements,
we will issue or pay to the plaintiffs (and their respective legal counsel) in
the actions: (i) an aggregate of 4.7 million shares of our common stock, as
adjusted for the reverse stock split; (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.
The promissory note, which will be issued at the same time the remaining shares
under the settlement agreement are issued, will be due January 2, 2009, and will
accrue interest at a rate of 8.0% per year. Pursuant to the terms of the
settlement, the note and accrued interest may be extinguished if our common
stock price meets or exceeds a "termination price" equal to $16.30 per share for
any fifteen consecutive trading days following the note's issuance and prior to
the maturity date of the note. Additionally, to the extent our 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 $4.90 per share, based on the average trading price of the
stock following the date of the note's issuance and prior to the maturity of the
note. As of September 12, 2001, we have paid a portion of the insurance proceeds
and have issued 1.6 million shares of our common stock, as adjusted for the
reverse stock split, under terms of the settlement to plaintiffs' counsel in the
actions. We currently expect that the remaining 3.1 million settlement shares
and therefore, the promissory note, will be issued later this year or in early
2002.
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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 we allegedly owe to the plaintiff as a
result of the termination of a securities purchase agreement related to our
proposed corporate restructuring led by the Fortress/Blackstone investment
group. The complaint alleged that we failed to pay amounts allegedly due under
the securities purchase agreement and asked for compensatory damages of
approximately $24.0 million consisting of various fees, expenses and other
relief. During August 2001, we entered into a definitive agreement to settle
this litigation. Under terms of the agreement, we have made a cash payment of
$15.0 million to the plaintiffs in full settlement of all claims. During 2000,
we recorded an accrual reflecting the estimated liability of this matter.
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, including but not limited to a failure to manage the assets of the U.S.
Corrections Corporation Employee Stock Ownership Plan 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
were seeking damages in excess of $30.0 million plus prejudgment interest and
attorneys' fees. We have reached an agreement with the plaintiffs to settle
their claims against us, subject to court approval. There can be no assurance,
however, that the settlement will be approved by the court. Our insurance
carrier has indicated that it did not receive timely notice of these claims and,
as a result, is currently contesting its coverage obligations under the
settlement. We are currently contesting this issue with the carrier.
Commencing in late 1997 and through 1998, our predecessor, 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. These suits claim unspecified
compensatory and punitive damages, as well as certain statutory costs. 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. However, during the
second quarter of 2001, we reached an agreement in principle with all plaintiffs
to settle their asserted and unasserted claims against us, and we subsequently
executed a definitive settlement agreement which was approved by the court with
the full settlement funded by insurance.
In February 2000, a complaint was filed in federal court in the United States
District Court for the Western District of Texas against our 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, and one has
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pleaded guilty to criminal charges. The plaintiffs have previously submitted a
settlement demand exceeding $20.0 million. We, our wholly-owned subsidiary (the
parent corporation of TransCor and successor by merger to the formerly
independent 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. TransCor's and our insurance
carrier, however, indicated during the first quarter of 2001 that, under
Tennessee law, it will not be responsible for any punitive damages. During the
second quarter of 2001, the carrier filed a declaratory judgment action in
federal court in Houston, which complaint has not been served on us or TransCor,
in which the carrier asserts, among other things, that there is no coverage
under Texas law for the underlying events. In the event any resulting liability
is not covered by insurance proceeds and is in excess of the amount currently
accrued in our financial statements, such liability would have a material
adverse effect upon the business or financial position of TransCor and,
potentially, us and our other subsidiaries.
In addition to the above legal matters, the nature of our business results in
claims and litigation alleging that we are liable for damages arising from the
conduct of our employees or others. In the opinion of our management, other than
the outstanding litigation discussed above, there are no pending legal
proceedings that would have a material effect on our consolidated financial
position or results of our operations for which we have not established adequate
reserves.
FORMATION TRANSACTIONS
GENERAL. We are a Maryland corporation formerly known as Prison Realty Trust,
Inc. We commenced operations as Prison Realty Corporation on January 1, 1999,
following our mergers with each of the former Corrections Corporation of
America, a Tennessee corporation referred to herein as Old CCA, on December 31,
1998, and CCA Prison Realty Trust, a Maryland real estate investment trust
referred to herein as Old Prison Realty, on January 1, 1999. These mergers are
referred to collectively herein as the 1999 merger and we are referred to herein
as New Prison Realty for the period following the 1999 merger and prior to the
completion of our recent restructuring discussed further herein under " - The
Restructuring and Related Transactions".
Prior to the 1999 merger, Old Prison Realty had been a publicly-traded entity
operating as a real estate investment trust, or REIT, which was 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 engaged primarily in the business of owning,
operating and managing prisons on behalf of government entities. Additionally,
Old CCA had been Old Prison Realty's primary tenant.
THE 1999 MERGER. Pursuant to the terms of the 1999 merger, in the merger, the
holders of Old Prison Realty's common shares and Old Prison Realty's 8% series A
cumulative preferred shares received one share of New Prison Realty's common
stock or New Prison Realty's 8% series A preferred stock for each common share
or series A preferred share of Old Prison Realty they owned at January 1, 1999.
Also in the merger, the holders of shares of Old CCA's common stock obtained the
right to receive 0.875 share of New Prison Realty's common stock for each share
of Old CCA common stock they owned at December 31, 1998. An aggregate of
approximately 105,272,183 shares of New Prison Realty's common stock and
4,300,000 shares of New Prison Realty's series A preferred stock were issued in
the 1999 merger. Following the 1999 merger, New Prison Realty's common stock
began trading on the NYSE under the symbol "PZN," and New Prison Realty's series
A preferred stock began trading on the NYSE under the symbol "PZN PrA".
Immediately prior to the 1999 merger, Old CCA sold all of the issued and
outstanding capital stock of certain of its wholly-owned corporate subsidiaries,
certain of its facility management contracts and
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certain other non-real estate assets related thereto, to a newly formed entity
known as Correctional Management Services Corporation, a privately-held
Tennessee corporation, which, in May 1999, changed its name to Corrections
Corporation of America. Correctional Management Services Corporation is referred
to herein as the Operating Company. Also immediately prior to the 1999 merger,
Old CCA sold certain of its management contracts and other assets and
liabilities relating to government owned adult facilities located in the U.S.
and Puerto Rico to Prison Management Services, LLC (which subsequently merged
with Prison Management Services, Inc.) and sold certain of its management
contracts and other assets and liabilities relating to government owned jails
and juvenile facilities located in the U.S. and Puerto Rico, as well certain
assets related to its operations in the United Kingdom and Australia, to
Juvenile and Jail Facility Management Services, LLC (which subsequently merged
with Juvenile and Jail Facility Management Services, Inc.). Prison Management
Services, Inc. is referred to herein as PMSI and Juvenile and Jail Facility
Management Services, Inc. is referred to herein as JJFMSI. PMSI and JJFMSI are
also referred to herein, collectively, as the Service Companies.
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, pursuant to which
Operating Company leased the substantial majority of New Prison Realty's
facilities and Operating Company provided certain services to New Prison Realty.
As a result, following the 1999 merger, Operating Company, PMSI and JJFMSI
assumed the business of operating correctional and detention facilities formerly
operated by Old CCA, with Operating Company being the lessee of the substantial
majority of New Prison Realty's facilities.
Following the completion of the 1999 merger and the transactions described
above, New Prison Realty 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. Following the 1999
merger, New Prison Realty also owned 100% of the non-voting common stock of each
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.
For an additional discussion concerning the 1999 merger and the relationships
among New Prison Realty, Operating Company and the Service Companies, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein.
THE RESTRUCTURING AND RELATED TRANSACTIONS
DEVELOPMENTS FOLLOWING THE 1999 MERGER.
New Prison Realty and Operating Company Liquidity and Capital Constraints.
Following the completion of the 1999 merger, Operating Company experienced
severe liquidity constraints, and, as a result, was unable to make required
payments to New Prison Realty under the terms of the leases and other agreements
between the parties. As a result, New Prison Realty also experienced severe
liquidity constraints and was unable to make required payments to Operating
Company under the terms of certain agreements between the parties. Accordingly,
in May 1999, New Prison Realty and Operating Company amended certain of the
agreements between them to provide Operating Company with additional cash flow.
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Following the announcements of these amendments, a chain of events occurred
which adversely affected both New Prison Realty and Operating Company, including
a dramatic decrease in the trading price of New Prison Realty's common stock and
the institution of stockholder litigation against New Prison Realty and its
directors and executive officers. These events made it more difficult for New
Prison Realty to raise capital and obtain debt financing. While New Prison
Realty was able to increase its bank credit facility from $650.0 million to $1.0
billion during the summer of 1999, this financing had higher interest rates and
transaction costs, and also imposed other significant requirements on New Prison
Realty, including the requirement 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 its required 1999 REIT distributions in cash.
For an additional discussion concerning the financial condition and liquidity
and capital constraints of New Prison Realty and Operating Company following the
1999 merger, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources for the
Year Ended December 31, 1999" herein.
Proposed Restructurings. In order to address the liquidity and capital
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 and the first and second quarters of 2000, New Prison
Realty, Operating Company, PMSI and JJFMSI entered into a series of agreements
concerning two proposed corporate restructurings, one 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, and one led by Pacific Life Insurance Company. Each
proposed restructuring generally included, among other things, the combination
of New Prison Realty, Operating Company, PMSI and JJFMSI and the subsequent
operation as a taxable subchapter C corporation, the raising of additional
capital through the sale of equity, the refinancing of New Prison Realty's bank
credit facility, and the restructuring of existing management through a newly
constituted board of directors and executive management team. The companies,
however, terminated each of these proposed restructurings prior to their
completion. For a discussion of our recent settlement of certain litigation
regarding the termination of the restructuring led by the Fortress/Blackstone
investor group, please see the information contained herein under "Legal
Proceedings."
June 2000 Waiver and Amendment Under Bank Credit Facility. In June 2000, New
Prison Realty obtained a series of amendments to the provisions of the amended
and restated credit agreement governing its bank credit facility. The June 2000
waiver and amendment waived or addressed all then existing events of default
under the provisions of the credit agreement that resulted from: (i) the
financial condition of New Prison Realty and Operating Company; (ii) the
transactions undertaken by New Prison Realty and Operating Company in an attempt
to resolve the liquidity issues of New Prison Realty and Operating Company; and
(iii) the previously announced restructuring transactions. The June 2000 waiver
and amendment also contained certain amendments to the credit agreement,
including the replacement of existing financial covenants contained in the
credit agreement applicable to New Prison Realty with new financial ratios
following completion of a comprehensive restructuring.
In obtaining the June 2000 waiver and amendment, New Prison Realty also agreed
to complete certain transactions which were incorporated as covenants in the
waiver and amendment. Pursuant to these requirements, New Prison Realty was
obligated to complete a corporate restructuring, including: (i) its merger with
Operating Company; (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 its senior management; and (iv) the distribution of shares
of its series B cumulative convertible preferred stock in satisfaction of its
remaining 1999 REIT distribution requirement. The June 2000 waiver and amendment
also amended the terms of the credit agreement to, among other things, permit
(i) the
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amendment of New Prison Realty's leases with Operating Company and the other
contractual arrangements between the companies, and (ii) the merger of each of
PMSI and JJFMSI with New Prison Realty upon terms and conditions specified in
the waiver and amendment.
Pursuant to the covenants contained in the June 2000 waiver and amendment and in
order to address New Prison Realty's and Operating Company's liquidity and
capital constraints, the boards of directors of New Prison Realty, Operating
Company, PMSI and JJFMSI subsequently approved a series of agreements providing
for a comprehensive restructuring of the companies, pursuant to which, among
other things, the companies would combine and operate as a taxable subchapter C
corporation under the Corrections Corporation of America name.
MERGER WITH OPERATING COMPANY. We completed our merger with Operating Company
effective October 1, 2000. In connection with the completion of the Operating
Company merger, we amended our charter to, among other things,
- remove provisions relating to our qualification as a REIT for
federal income tax purposes commencing with our 2000 taxable
year,
- change our name to "Corrections Corporation of America" and
- increase the amount of our authorized capital stock.
The merger was completed through the merger of Operating Company with and into
our wholly-owned operating subsidiary, CCA of Tennessee, Inc., which assumed the
operations of the correctional and detention facilities managed by Operating
Company prior to the merger. Following the completion of the merger, Operating
Company ceased to exist, and our wholly-owned subsidiary began operating
collectively with us under the "Corrections Corporation of America" name. In
addition, following the completion of the Operating Company merger, our common
stock continued trading on the NYSE, but under the symbol "CXW," while the
symbols for our series A preferred stock and series B preferred stock were
changed to "CXW PrA" and "CXW PrB", respectively.
In connection with the completion of the Operating Company merger, we issued an
aggregate of approximately 1.9 million shares of our common stock (as adjusted
for our reverse stock split in May 2001) to the holders of Operating Company's
voting common stock, including the wardens of the facilities operated by
Operating Company and certain current and former members of management and key
employees of New Prison Realty and Operating Company, and certain outside
shareholders of Operating Company. The shares of our common stock issued to the
Operating Company wardens are subject to vesting and forfeiture provisions under
a restricted stock plan. In addition, we issued warrants to purchase 142,000
shares and 71,000 shares of our common stock with exercise prices of $0.01 per
share and $14.10 per share, respectively (as adjusted for our reverse stock
split in May 2001), to one of the outside shareholders of Operating Company in
consideration for its consent to the Operating Company merger, and warrants to
purchase 75,000 shares of our common stock with an exercise price of $33.30 per
share to the holders of warrants to purchase shares of Operating Company's
common stock outstanding at the time of the merger. Immediately prior to the
merger, we also purchased an aggregate of 400,000 shares of the Operating
Company's common stock from former executive officers of New Prison Realty for
$800,000 cash.
As a result of the merger with Operating Company, all existing leases and other
agreements with Operating Company were cancelled. In addition, all shares of
Operating Company's non-voting common stock, all of which were owned by us, were
cancelled. Also a result of the merger, our wholly-owned subsidiary assumed a
$137.0 million promissory note payable by Operating Company to us (which we
obtained from Old CCA in the 1999 merger), which was subsequently extinguished.
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MERGER WITH SERVICE COMPANIES. We completed our mergers with each of PMSI and
JJFMSI effective December 1, 2000. The mergers were completed through the
mergers of each of PMSI and JJFMSI with and into our wholly-owned operating
subsidiary, CCA of Tennessee, Inc., which assumed the operations of the
correctional and detention facilities managed by each of the Service Companies
prior to the merger.
In the Service Company mergers, all shares of PMSI and JJFMSI common stock held
by us and certain subsidiaries of PMSI and JJFMSI were cancelled. In connection
with the acquisition of PMSI, we issued approximately 130,000 shares of our
common stock (as adjusted for our reverse stock split in May 2001) to the
wardens of the correctional and detention facilities operated by PMSI and who
were the remaining shareholders of PMSI. The shares of our common stock issued
to the PMSI wardens are subject to vesting and forfeiture provisions under a
restricted stock plan. In connection with the acquisition of JJFMSI, we issued
approximately 160,000 shares of our common stock (as adjusted for our reverse
stock split in May 2001) to the wardens of the correctional and detention
facilities operated by JJFMSI and who were the remaining shareholders of JJFMSI.
The shares of our common stock issued to the JJFMSI wardens are also subject to
vesting and forfeiture provisions under a restricted stock plan. Prior to our
mergers with PMSI and JJFMSI, in 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.
CHANGES IN BOARD OF DIRECTORS AND SENIOR MANAGEMENT. In connection with our
corporate restructuring, we completed a restructuring of our board of directors
and executive management, including the appointment of John D. Ferguson as our
new chief executive officer and president and William F. Andrews as the chairman
of our board of directors. In addition, at our 2000 annual meeting of
stockholders, our stockholders elected a newly constituted nine-member board of
directors, including six independent directors. All of these board members were
subsequently re-elected at our 2001 annual meeting of stockholders, with the
exception of Jean-Pierre Cuny, who resigned from the board effective May 21,
2001. Biographical information concerning each of our current executive officers
and directors can be found herein under the heading "Executive Officers and
Directors."
In an effort to streamline operational support for our correctional and
detention facilities, as well as emphasize quality assurance intended to meet or
exceed customers' expectations while continuing to maintain safe and secure
facilities, we also reorganized our internal corporate structure into four
divisions: (i) operations, headed by J. Michael Quinlan, an executive
vice-president and our chief operating officer; (ii) finance, headed by Irving
E. Lingo, Jr., an executive vice-president and our chief financial officer;
(iii) business development, headed by William T. Baylor, an executive
vice-president and our chief development officer; and (iv) legal affairs, headed
by Gus A. Puryear, an executive vice-president and our general counsel. The head
of each of these divisions reports directly to our chief executive officer and
president.
CHANGES IN CAPITAL STRUCTURE. As a result of our highly leveraged capital
structure, which includes the revolving loans under our bank credit facility
maturing January 1, 2002, our management is evaluating our current capital
structure, including the consideration of various potential transactions that
could improve our financial position. The following information summarizes our
current debt and equity capital structure and, where applicable, certain steps
taken by our management to date in connection with its capital restructuring
strategy. For a more complete discussion of certain of the items discussed
below, please see the relevant portions of "Management's Discussion and Analysis
of Financial Condition and Results of Operations" herein.
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Debt Structure. As of June 30, 2001, we had $996.7 million of outstanding
indebtedness, consisting of: (i) $280.4 million and $544.3 million due January
1, 2002 and December 31, 2002, respectively, under our bank credit facility;
(ii) $100.0 million of 12% senior notes due 2006; (iii) $41.1 million of 10%
convertible subordinated notes due 2008; (iv) $30.0 million of 8% convertible
subordinated notes due 2005; and (v) $0.9 million of other debt.
Bank Credit Facility. Our 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 bank credit facility, which
is secured by, among other things, mortgages on our real property, bears
interest at variable rates of interest based on a spread over the base rate or
LIBOR (as elected by us), which spread is determined by reference to our credit
rating. For a more complete discussion of the current interest rate applicable
to the bank credit facility, as well as a discussion of certain financial and
non-financial covenants contained in the facility and our efforts to comply
therewith, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources for the
Six Months Ended June 30, 2001" herein.
As previously described herein, the revolving loan portion of the bank credit
facility (of which $280.4 million was outstanding as of June 30, 2001) matures
on January 1, 2002. As part of our management's plans to improve our financial
position and address the January 1, 2002 maturity of portions of the debt under
the 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 our consolidated balance sheet at June 30,
2001. Anticipated proceeds from these asset sales are to be applied as loan
repayments. We believe that utilizing such proceeds to pay-down debt will
improve our leverage ratios and overall financial position, improving our
ability to refinance or renew maturing indebtedness, including primarily our
revolving loans under the bank credit facility. For a summary of the assets we
are currently holding for sale and a complete discussion of the asset sales and
related pay-downs we have made to date, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources for the Six Months Ended June 30, 2001" herein. There can be
no assurance that we will sell any additional assets, or that if we do sell any
additional assets, that the proceeds ultimately received will achieve expected
levels. Further, even if we are successful in selling assets at expected levels,
there can be no assurance that we will be able to refinance or renew our debt
obligations when they come due on reasonable or any other terms.
We believe that we are currently in compliance with the terms of the debt
covenants currently contained in the bank credit facility. Further, we believe
our operating plans and related projections are achievable, and will allow us to
remain in compliance with the covenants contained in the bank credit facility
during 2001. However, there can be no assurance that the cash flow projections
will reflect actual results and there can be no assurance that we will remain in
compliance with these debt covenants during 2001. Further, even if we are
successful in selling assets, there can be no assurance that we will be able to
refinance or renew our debt obligations maturing January 1, 2002 on commercially
reasonable or any other terms. If we were to be in default under the bank credit
facility, and if the senior lenders under the bank credit facility elected to
exercise their rights to accelerate our obligations under the bank credit
facility, such events could result in the acceleration of all or a portion of
the outstanding principal amount of our senior notes or our convertible
subordinated notes discussed below, which would have a material adverse effect
on our liquidity and financial position. We do not have sufficient working
capital to satisfy our debt obligations in the event of an acceleration of all
or a substantial portion of our outstanding indebtedness.
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$100.0 Million Senior Notes. We currently have an aggregate of $100.0 million of
our 12.0% senior unsecured notes, due 2006, outstanding. As of June 30, 2001, we
have made all required interest payments under the senior notes, and we believe
that we are currently in compliance with all covenants under the senior notes.
$41.1 Million Convertible Subordinated Notes. We currently have an aggregate of
$41.1 million of our 10.0% convertible subordinates notes due December 31, 2008
outstanding. These notes are held by MDP Ventures IV LLC and certain affiliated
purchasers, which are collectively referred to herein as MDP. The conversion
price for the notes has been established at $11.90, subject to adjustment in the
future upon the occurrence of certain events, including our payment of dividends
and the issuance of shares of our stock at below market prices. The distribution
of our series B preferred stock during the fourth quarter of 2000 (and its
subsequent conversion into shares of our common stock) discussed elsewhere in
this prospectus did not cause an adjustment to the conversion price of the
notes. In addition, we do not believe that the distribution of shares of our
common stock in connection with the stockholder litigation settlement discussed
elsewhere in this prospectus will cause an adjustment to the conversion price of
the notes. MDP, however, has indicated its belief that such an adjustment is
required. At an adjusted conversion price of $11.90, we believe the $41.1
million convertible subordinated notes, including the $1.1 million note issued
in June 2000 in satisfaction of certain then existing default interest payment
obligations, are convertible into approximately 3.5 million shares of our common
stock. The price and shares have been adjusted in connection with the completion
of our reverse stock split.
As of June 30, 2001, we have made all required interest payments under the $41.1
million convertible subordinated notes. Under the terms of the notes, we are
obligated to pay the holders of the notes contingent interest sufficient to
permit the holders to receive a 15.5% internal rate of return, unless the
holders of the notes elect to convert the notes into our common stock prior to
December 31, 2003, or if other contingencies are met as set froth under terms of
the note purchase agreement governing the notes.
As discussed elsewhere herein, including in "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Liquidity and
Capital Resources for the Six Months Ended June 30, 2001," we are currently
required, under the terms of a registration rights agreement with the holders of
the $41.1 million convertible subordinated notes, to use our best efforts to
register the shares of our common stock issuable by us upon conversion of the
notes with the SEC. Accordingly, this prospectus relates to such shares and has
been prepared in connection with our compliance with this covenant. Subject to
the foregoing, we currently believe that we are in compliance with all covenants
under the provisions of the $41.1 million convertible subordinated notes. There
can no assurance, however, that we will be able to remain in compliance with all
covenants under the provisions of the $41.1 million convertible subordinated
notes.
$30.0 Million Convertible Subordinated Notes. We currently have an aggregate of
$30.0 million of our 8.0% convertible subordinates notes due February 28, 2005
outstanding. These notes are held by PMI Mezzanine Fund, L.P. The conversion
price for the notes has been established at $10.68, subject to adjustment in the
future upon the occurrence of certain events, including our payment of dividends
and the issuance of shares of our stock at below market prices. The distribution
of our series B preferred stock during the fourth quarter of 2000 (and its
subsequent conversion into shares of our common stock) did not cause an
adjustment to the conversion price of the notes. However, the distribution of
shares of our common stock in connection with our stockholder litigation
settlement does cause an adjustment to the conversion price of the notes in an
amount to be determined at the time shares of our common stock are distributed
pursuant to the settlement. However, the ultimate adjustment to the conversion
ratio will depend on the number of shares of our common stock outstanding on the
date of
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issuance of all of the shares pursuant to the stockholder litigation settlement.
In addition, since all of the shares are not issued simultaneously, multiple
adjustments to the conversion ratio will be required. We currently estimate that
the $30.0 million convertible subordinated notes will be convertible into
approximately 3.4 million shares of our common stock once all of the shares
under the stockholder litigation settlement have been issued. The price and
shares have been adjusted in connection with the completion of our reverse stock
split.
As of June 30, 2001, we have made all required interest payments under the $30.0
million convertible subordinated notes. We currently believe that we are in
compliance with all covenants under the provisions of the $30.0 million
convertible subordinated notes. There can be no assurance, however, that we will
be able to remain in compliance with all of the covenants under the provisions
of the $30.0 million convertible subordinated notes.
Operating Subsidiary Revolving Credit Facility. On September 15, 2000, Operating
Company obtained a $50.0 million revolving credit facility with Lehman
Commercial Paper, Inc. which replaced a prior $100.0 million revolving credit
facility with Foothill Capital Corporation. This facility was assumed by our
wholly-owned operating subsidiary in connection with the Operating Company
merger on October 1, 2000. The facility, which bears interest at an applicable
prime rate plus 2.25% and matures on December 31, 2002, is secured by the
accounts receivable of our operating subsidiary. At June 30, 2001, no amounts
were outstanding under the facility.
Cross Defaults. The provisions of our debt agreements related to the bank credit
facility, the $41.1 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 bank credit facility
also result in an event of default under our $41.1 million convertible
subordinated notes. Any events of default under the bank credit facility that
results in the lenders' acceleration of amounts outstanding thereunder also
result in an event of default under our $30.0 million convertible subordinated
notes and our senior notes. Additionally, any events of default under the $41.1
million convertible subordinated notes, the $30.0 million convertible
subordinated notes and the senior notes also result in an event of default under
the bank credit facility.
If we were to be in default under the bank credit facility, and if the lenders
under the bank credit facility elected to exercise their rights to accelerate
our obligations under the bank credit facility, such events could result in the
acceleration of all or a portion of our $41.1 million convertible subordinated
notes, our $30.0 million convertible subordinated notes and our senior notes
which would have a material adverse effect on our liquidity and financial
position. Additionally, under our $41.1 million convertible subordinated notes,
even if the lenders under the bank credit facility did not exercise their
acceleration rights, the holders of the $41.1 million convertible subordinated
notes could require us to repurchase such notes. We do not have sufficient
working capital to satisfy our debt obligations in the event of an acceleration
of all or a substantial portion of our outstanding indebtedness.
Equity Structure. As discussed herein in more detail under the heading
"Description of Our Capital Stock," under the terms of our charter, we currently
have 130.0 million shares of authorized capital stock, consisting of 80.0
million shares of common stock and 50.0 million shares of preferred stock.
Common Stock. At June 30, 2001, we had approximately 25.1 million shares of our
common stock issued and outstanding, as adjusted for our recently completed
reverse stock split, including an aggregate of 13.3 million shares of our common
stock issued in connection with the Operating Company merger, the Service
Company mergers, the conversion of our shares of series B preferred stock and,
to date, in our stockholder litigation settlement. We also have approximately
14.2 million shares of our common stock reserved for issuance pursuant to the
exercise of our convertible
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subordinated notes (including the shares subject to this prospectus) and
warrants to purchase shares of our common stock, the exercise of options and
other share based awards previously granted and to be granted in the future
under our equity incentive plans, and the completion of our stockholder
litigation settlement. For a complete description of the terms of our charter as
it relates to our common stock and our policy with respect to the payment of
dividends on such shares, please see the discussions found herein under
"Description of Our Capital Stock -- Common Stock" and "Market for Our Common
Stock and Related Stockholder Matters -- Dividend Policy." Please also see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of our potential issuance of common stock and other
securities to raise additional capital.
Preferred Stock. At June 30, 2001 we had 4.3 million shares of our series A
preferred stock issued and outstanding and 3.6 million shares of our series B
preferred stock issued and outstanding. For a complete description of the terms
of our charter as it relates to our preferred stock, please see the discussion
found herein under "Description of our Capital Stock -- Preferred Stock."
The series A preferred stock, which was originally issued by our predecessor Old
Prison Realty, provides for the payment of quarterly cash dividends at a rate of
8.0% per year, based on a liquidation price of $25.00 per share. Under the
existing terms of our credit facility, however, we are currently prohibited from
declaring or paying any dividends with respect to the shares of series A
preferred stock until such time as we have raised at least $100.0 million in
equity. Accordingly, our board of directors has not declared and we have not
paid any dividends on the shares of series A preferred stock since the first
quarter of 2000. Dividends on the shares of series A preferred stock will
continue to accrue under the terms of our charter until such time as dividend
payments are made. Under the terms of our charter, in the event dividends are
unpaid and in arrears for six or more quarterly periods, the holders of the
shares of our series A preferred stock will have the right to elect two
additional directors to our board of directors. For a complete discussion of the
nonpayment of dividends on the series A preferred stock and the resulting rights
of the series A preferred stockholders, as well as management's efforts with
respect to the reinstatement of such dividend payments, please see "Management
Discussion's and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources for the Six Months Ended June 30, 2001" herein.
In order to satisfy our REIT distribution requirements with respect to our 1999
taxable year, we issued approximately 7.5 million shares of our newly created
series B preferred stock to holders of our common stock as a stock dividend
during September and December of 2000. The series B preferred stock was
convertible into shares of our 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 our common
stock on the NYSE, subject to a floor. During the two conversion periods,
approximately 4.2 million shares of our series B preferred stock were converted
into approximately 9.5 million shares of our common stock, as adjusted for our
recently completed reverse stock split. The shares of our 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 our common stock.
The shares of our series B preferred stock currently outstanding provide for
cumulative dividends payable at a rate 12.0% 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, provided that all accrued and unpaid cash dividends have been
made on our series A preferred stock. The shares of series B preferred stock are
callable by us, at a price per share equal to the stated value of $24.46, plus
any accrual dividends, at anytime after six months following
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the later of (i) three years following the date of issuance or (ii) the 91st day
following the redemption of our senior notes, due 2006.
REGISTRATION RIGHTS OF THE SELLING STOCKHOLDERS
The following is a summary of the material terms and provisions of the
registration rights agreement with the selling stockholders. We entered into
this agreement in connection with the issuance of our 10.0% convertible notes to
the selling stockholders on December 31, 1998. The following summary may not
contain all the information that is important to you. You can access complete
information by referring to the registration rights agreement, which is filed as
an exhibit to the registration statement of which this prospectus is a part.
Under the registration rights agreement with MDP, we are obligated to use our
"best efforts" to cause to be filed a registration statement covering the sale
by MDP of shares of our common stock issuable upon conversion of all or a
portion of the notes previously issued to MDP. Pursuant to the registration
rights agreement, we must also use our best efforts to cause such registration
statement to be declared effective by the SEC and to keep such registration
statement continuously effective until such time as all shares of our common
stock issued to MDP upon conversion of the notes which could be sold pursuant to
this prospectus are either: (i) sold pursuant to this prospectus; or (ii) sold
in accordance with Rule 144 promulgated under the Securities Act. Any shares of
our common stock sold by the selling stockholders pursuant to this prospectus
will no longer be entitled to the benefits of the registration rights agreement
between us and the selling stockholders.
The registration rights agreement requires that we bear all expenses of
registering the shares of our common stock with the exception of brokerage and
underwriting commissions and taxes of any kind and any legal, accounting and
other expenses incurred by the selling stockholders. Subject to certain
limitations, we have also agreed to indemnify the selling stockholders and their
officers, directors and other affiliated persons, and any person who controls a
selling stockholder, against all losses, claims, damages, liabilities and
expenses arising under the securities laws as a result of any untrue statement
or alleged untrue statement of a material fact contained in, or any omission or
alleged omission to state a material fact (required to be included or necessary
to make the statements therein not misleading in the light of the circumstances
in which they were made) in, either the registration statement, this prospectus,
or any amendments to the registration statement or any prospectus supplements.
In addition, the selling stockholders have agreed to indemnify us and our
directors, officers and any person who controls us against all losses, claims,
damages, liabilities and expenses arising under the securities laws if they
result from written information furnished to us by the selling stockholders (for
use in the registration statement, this prospectus or any amendments to the
registration statement or any prospectus supplements) which contains any untrue
statement or alleged untrue statement of a material fact, or which omits or
allegedly omits to state a material fact (required to be included or necessary
to make the statements therein not misleading in the light of the circumstances
in which they were made).
THE SELLING STOCKHOLDERS
The following table provides information with respect to the shares of common
stock beneficially owned by the selling stockholders. The information set forth
below is based on the terms of our $41.1 million convertible subordinated notes.
Because the selling stockholders may sell all or some part of the shares of our
common stock which they hold under this prospectus, no estimate can be given as
to the amount of common stock that will be held by the selling stockholders upon
termination of this offering. See "Plan of Distribution." The selling
stockholders may from time to time offer and sell any or all of the shares of
our common stock under this prospectus. The term "selling stockholders" includes
their transferees, pledgees or donees or their successors.
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NUMBER OF SHARES OF
COMMON STOCK BENEFICIALLY
NAME OWNED AND OFFERED PERCENTAGE OF CLASS(1)
---- ------------------------- ----------------------
MDP Ventures IV LLC
c/o Millennium Partners
1995 Broadway
New York, New York 10023 3,455,237(2) 12.1%
(1) Based on 25,131,909 shares of our common stock issued and
outstanding on July 31, 2001. Does not include approximately
3,098,235 shares of our common stock remaining to be issued in
connection with our stockholder litigation settlement.
(2) This beneficial ownership information is based on the terms of
our $41.1 million 10.0% convertible subordinated notes dues
December 31, 2008. The holders of these notes may convert the
notes into shares of our common stock at any time prior to
December 31, 2008 at a current conversion rate of 84.04040 per
$1,000 of the notes. The current conversion rate of these
notes is subject to adjustment upon the occurrence of future
events.
PLAN OF DISTRIBUTION
This prospectus relates to the possible sale from time to time of up to an
aggregate of 3,455,237 shares of our common stock by the selling stockholders,
or any of their pledgees, donees, transferees or other successors in interest,
issuable upon the conversion of the convertible notes. We are registering the
shares of our common stock pursuant to our obligations under the registration
rights agreement, but the registration of the shares of our common stock does
not necessarily mean that any of the shares of our common stock will be offered
or sold by the selling stockholders.
The distribution of shares of common stock by the selling stockholders may be
effected by selling shares of our common stock directly to purchasers, to or
through broker-dealers, or any combination of these methods. In connection with
any such sale, a broker-dealer may act as agent for the selling stockholders or
may purchase from the selling stockholders all or a portion of the shares of our
common stock as principal, and such sales may be made pursuant to any of the
methods described below. Such sales may be made on the NYSE or other exchanges
on which the shares of our common stock are then traded, in the over-the-counter
market, in privately negotiated transactions or otherwise at prices and at terms
then prevailing or at prices related to the then-current market prices or at
prices otherwise negotiated.
Shares of our common stock may also be sold in one or more of the following
transactions:
- block transactions in which a broker-dealer may sell all or a
portion of such shares as agent but may position and resell
all or a portion of the block as principal to facilitate the
transaction;
- purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account pursuant to any
supplement to this prospectus;
- a special offering, an exchange distribution or a secondary
distribution in accordance with applicable NYSE or other stock
exchange rules;
- ordinary brokerage transactions and transactions in which any
such broker-dealer solicits purchasers;
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- sales "at the market" to or through a market maker or into an
existing trading market, on an exchange or otherwise, for such
shares; and
- sales in other ways not involving market makers or established
trading markets, including direct sales to purchasers.
In effecting sales as principal, broker-dealers engaged by the selling
stockholders may arrange for other broker-dealers to participate. Broker-dealers
will receive commissions or other compensation from the selling stockholders in
amounts to be negotiated immediately prior to the sale which may, although it is
not expected to, exceed those customary in the types of transactions involved.
Broker-dealers may also receive compensation from purchasers of the shares of
our common stock which may, although it is not expected to, exceed that
customary in the types of transactions involved.
The distribution of the shares of our common stock may also be effected from
time to time in one or more underwritten transactions at a fixed price or
prices, which may be changed, or at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at negotiated prices. Any
underwritten offering may be on a "best efforts" or a "firm commitment" basis.
In connection with any underwritten offering, underwriters or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders. Underwriters may sell the shares of our common stock to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents.
The selling stockholders and any underwriters, dealers or agents that
participate in the distribution of the shares of our common stock may be deemed
to be underwriters under the Securities Act, and any profit on the sale of the
shares of our common stock by them and any discounts, commissions or concessions
received by any underwriters, dealers or agents might be deemed to be
underwriting discounts and commissions under the Securities Act. At any time a
particular offer of shares of our common stock is made by the selling
stockholders, a prospectus supplement, if required, will be distributed that
will, where applicable:
- identify any underwriter, dealer or agent;
- describe any compensation in the form of discounts,
concessions, commissions or otherwise received by each
underwriter, dealer or agent and in the aggregate to all
underwriters, dealers and agents;
- identify the amounts underwritten;
- identify the nature of the underwriter's obligation to take
the shares of our common stock; and
- provide any other required information.
To comply with applicable state securities laws, the shares of our common stock
will be sold, if necessary, in such jurisdictions only through registered or
licensed brokers or dealers. In addition, shares of our common stock may not be
sold in some states unless they have been registered or qualified for sale in
the state or an exemption from such registration or qualification requirement is
available and is complied with.
Any shares of our common stock covered by this prospectus which qualify for sale
under Rule 144 of the Securities Act may be sold under Rule 144 rather than
under this prospectus. A selling stockholder may not sell any securities
described in this prospectus and may not transfer, devise or gift these
securities by other means not described in this prospectus.
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We will pay for all expenses relating to the offering and sale of the shares of
our common stock, other than commissions, discounts and fees of underwriters,
broker-dealers or agents. We have agreed to indemnify the selling stockholders
against some losses, claims, damages, liabilities and expenses, including
liabilities under the Securities Act. See "Registration Rights of the Selling
Stockholders."
We have agreed to keep the registration statement, of which this prospectus is a
part, effective from the time this registration statement becomes effective
until that time when all shares of our common stock covered by this registration
statement have been sold.
We may suspend the use of this prospectus in certain circumstances because of
pending corporate development or a need to file a post-effective amendment. In
any such event, we will use reasonable efforts to ensure that the use of the
prospectus is resumed as soon as practicable.
DESCRIPTION OF CAPITAL STOCK
This section of the prospectus describes certain aspects of our capital stock,
including our common stock. As described in this prospectus, in connection with
the conversion of our $41.1 million convertible subordinated notes, we will
issue shares of our common stock to the selling stockholders. The following
description of our capital stock, including our common stock, should be read in
conjunction with our charter.
GENERAL
As the result of our recently completed reverse-stock split, we currently have
130.0 million shares of authorized capital stock, consisting of 80.0 million
shares of common stock and 50.0 million shares of preferred stock, of which 4.3
million shares of preferred stock have been designated as 8% series A cumulative
preferred stock and 12.0 million shares of preferred stock have been designated
as series B cumulative preferred stock. We have an aggregate of approximately
25.1 million shares of our common stock currently issued and outstanding. We
also have 4.3 million shares of our series A preferred stock issued and
outstanding and 3.6 million shares of our series B preferred stock issued and
outstanding. Under the terms of our series B preferred stock, we are required to
pay quarterly dividends to the holders of the series B preferred stock in
additional shares of series B preferred stock at a rate of 12.0% per year
through September 30, 2003. We also have approximately 14.5 million shares of
our common stock reserved for issuance under various employee and director
benefit plans and pursuant to the conversion of our convertible subordinated
notes and the exercise of warrants. We also have an additional 3.1 million
shares of our common stock reserved for issuance pursuant to the terms of our
stockholder litigation settlement. Our charter currently provides for "blank
check" stock whereby our board of directors is permitted to classify or
reclassify any unissued stock without stockholder approval. However, the board
may not issue shares of our capital stock in excess of the amount authorized
under the charter.
COMMON STOCK
The holders of shares of our common stock are entitled to one vote per share on
all matters voted on by holders of our common stock, including the election of
directors, and, except as otherwise required by law or provided in any
resolution adopted by our board of directors with respect to any series of our
preferred stock establishing the powers, designations, preferences and relative,
participating, option or other special rights of such series, the holders of
such common stock exclusively possess all voting power. Our charter does not
provide for cumulative voting in the election of our directors. Subject to any
preferential rights of holders of shares of our series A preferred stock, series
B preferred stock or any other outstanding series of our preferred stock, the
holders of shares of our common stock are
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entitled to such distributions as may be declared from time to time by our board
of directors from funds available therefore, and upon liquidation are entitled
to receive pro rata all our assets available for distribution to such holders.
The terms of our bank credit facility currently prohibit the payment of cash
dividends on shares of capital stock, including the common stock. All shares of
our common sock are fully paid and nonassessable and the holders thereof do not
have preemptive rights.
PREFERRED STOCK
We are authorized to issue shares of our preferred stock, from time to time, in
one or more series, with such designating powers, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, in each
case, if any, as are permitted by the Maryland General Corporation Law and as
our board of directors may determine prior to issuance thereof by filing
articles supplementary to our charter, without any further vote or action by our
stockholders. An aggregate of 4.3 million shares of our series A preferred stock
and 12.0 million shares of our series B preferred stock have been authorized,
with 4.3 million and approximately 3.6 million shares currently issued,
respectively. The shares of our series A preferred stock and series B preferred
stock represent the only series of our preferred stock that are currently
issued. The rights and preferences of our series A preferred stock and series B
preferred stock can be found in our charter.
We encourage you to read our charter carefully. You may obtain a copy of our
charter and bylaws, without charge, by contacting our corporate secretary at 10
Burton Hills Boulevard, Nashville, Tennessee 37215.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common and preferred stock is American
Stock Transfer & Trust Company.
OWNERSHIP OF OUR SECURITIES
COMMON STOCK
Except as otherwise indicated, the following table sets forth certain
information with respect to the beneficial ownership of shares of our common
stock as of July 31, 2001 by: (i) each of our stockholders that we believe
currently holds more than a 5% beneficial interest in our common stock; (ii)
each of our existing directors; (iii) each of our existing executive officers;
and (iv) all of our directors and executive officers as a group. Except as
otherwise indicated, we believe that the beneficial owners of the shares of our
common stock listed below, based on information furnished by such owners and/or
from information contained in reports filed by the beneficial owner with the SEC
pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), have sole voting and investment power with respect to such
shares.
Number of Shares
of Common Stock
Name of Beneficial Owner Beneficially Owned(1) Percent of Class(2)
------------------------ --------------------- -------------------
MDP Ventures IV LLC
c/o Millennium Partners
1995 Broadway
New York, New York 10023..... 3,455,237(3) 12.1%
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NUMBER OF SHARES OF
COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF CLASS(2)
------------------------ --------------------- -------------------
Pacific Mezzanine Fund, L.P.
610 Newport Center Drive
Suite 1100
Newport Beach, California 92660................ 3,369,600(4) 11.8%
Rolaco Holding S.A.
c/o Oryx Merchant Bank Limited
104 Lancaster Gate
London W23 NT England.......................... 2,341,789(5) 9.3%
William F. Andrews............................. 94,437(6) *
John D. Ferguson............................... 281,420(7) 1.1%
Lucius E. Burch, III........................... 357,329(8) 1.4%
John D. Correnti............................... 8,500(9) *
C. Michael Jacobi.............................. 24,000(10) *
John R. Prann, Jr.............................. 8,400(11) *
Joseph V. Russell.............................. 51,299(12) *
Henri L. Wedell................................ 567,808(13) 2.3%
J. Michael Quinlan............................. 143,362(14) *
Irving E. Lingo, Jr............................ 0 *
William T. Baylor.............................. 0 *
Gus A. Puryear................................. 1,000 *
Todd Mullenger................................. 34,377 *
David M. Garfinkle............................. 0 *
All directors and executive officers as a
group (14 persons).......................... 1,571,932(15) 6.1%
---------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
our common stock.
(1) Includes shares as to which such person directly or indirectly, through
any contract, arrangement, understanding, relationship or otherwise,
has or shares voting power and/or investment power, as these terms are
defined in Rule 13d-3(a) of the Exchange Act. Shares of our common
stock underlying options to purchase shares of our common stock and
securities convertible into shares of our common stock, which are
exercisable or convertible, or become exercisable or convertible,
within 60 days after July 31, 2001 are deemed to be outstanding with
respect to a person or entity for the purpose of computing the
outstanding shares our of common stock owned by the particular person
and by the group, but are not deemed outstanding for any other purpose.
(2) Based on 25,131,909 shares of our common stock issued and outstanding
on July 31, 2001. Does not include approximately 3,098,235 shares of
our common stock remaining to be issued in connection with our
stockholder litigation settlement.
(3) This beneficial ownership information is based on the terms of our
$41.1 million 10% convertible subordinated notes due December 31, 2008.
The holders of the notes may convert the notes into shares of our
common stock at any time prior to December 31, 2008 at a current
conversion rate of 84.04040 per $1,000 of the notes. The current
conversion rate of the notes is subject to adjustment upon the
occurrence of future events. The shares listed are the shares to which
this prospectus relates.
(4) This beneficial ownership information is based on the terms of our
$30.0 million 8% convertible subordinated notes due February 28, 2005.
The holders of the notes may convert the notes into shares of our
common stock at any time prior to February 28, 2005 at a current
conversion rate of 11.232 per $100 of the notes (as adjusted
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to reflect the full issuance of shares in connection with our
stockholder litigation settlement). The current conversion rate of the
notes is subject to adjustment upon the occurrence of future events.
(5) This beneficial ownership information is based on information contained
in the Schedule 13G dated August 16, 2001 and filed with the SEC on
August 17, 2001.
(6) Includes 42,573 shares of our common stock owned directly by Mr.
Andrews. Also includes 51,864 shares of our common stock issuable upon
the exercise of vested options to purchase shares of our common stock.
(7) Includes 30,340 shares of our common stock owned directly by Mr.
Ferguson. Also includes 251,080 shares of our common stock issuable
upon the exercise of vested options to purchase shares of our common
stock.
(8) Includes 346,033 shares of our common stock owned directly by Mr.
Burch. Also includes 11,296 shares of our common stock issuable upon
the exercise of vested options to purchase shares of our common stock.
(9) Includes 500 shares of our common stock owned directly by Mr. Correnti.
Also includes 8,000 shares of our common stock issuable upon the
exercise of vested options to purchase shares of our common stock.
(10) Includes (i) 10,000 shares of our common stock owned directly by Mr.
Jacobi; and (ii) 6,000 shares of our common stock held in an IRA. Also
includes 8,000 shares of our common stock issuable upon the exercise of
vested options to purchase shares of our common stock.
(11) Includes 400 shares of our common stock owned directly by Mr. Prann.
Also includes 8,000 shares of our common stock issuable upon the
exercise of vested options to purchase shares of our common stock.
(12) Includes 38,277 shares of our common stock owned directly by Mr.
Russell or jointly with his wife and 13,022 shares of our common stock
issuable upon the exercise of vested options to purchase shares of our
common stock.
(13) Includes: (i) 5,037 shares of our common stock owned directly by Mr.
Wedell; (ii) 282,319 shares of our common stock owned by Mr. Wedell's
wife; (iii) 169,963 shares of our common stock held in an IRA; (iv)
102,489 shares of our common stock held by the Wedell Spendthrift
Trust; and (v) 8,000 shares of our common stock issuable upon the
exercise of vested options to purchased shares of our common stock.
Does not include shares of our common stock held by Mr. Wedell's
daughter, of which Mr. Wedell disclaims beneficial ownership.
(14) Includes: (i) 36,536 shares of our common stock owned directly by Mr.
Quinlan; (ii) 2,347 shares of our common stock held in a 401(k) plan;
(iii) 4,810 shares of our common stock owned by Mr. Quinlan's wife;
(iv) 101 shares of our common stock owned by each of Mr. Quinlan's two
daughters; (v) 604 shares of our common stock held in an IRA; and (vi)
98,863 shares of our common stock issuable upon the exercise of vested
options to purchase shares of our common stock.
(15) Includes 458,125 shares of our common stock issuable upon the exercise
of vested options to purchase shares of our common stock.
SERIES A PREFERRED STOCK
Except as otherwise indicated, the following table sets forth certain
information with respect to the beneficial ownership of shares of our series A
preferred stock as of July 31, 2001 by: (i) each our stockholders that we
believe currently holds more than a 5% beneficial interest in our series A
preferred stock; (ii) each of our existing directors; (iii) each of our existing
executive officers; and (iv) all of our directors and executive officers as a
group. Except as otherwise indicated, we believe that the beneficial owners of
the shares of our series A preferred stock listed below, based on information
furnished by such owners and/or from information contained in reports filed by
the beneficial owner with the SEC pursuant to Section 13 of the Exchange Act,
have sole voting and investment power with respect to such shares.
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Number of Shares of
Series A Preferred
Stock Beneficially
Name of Beneficial Owner Owned(1) Percent of Class(2)
------------------------ ------------------- ------------------
Jacob May
1900 Church Street, Suite 400
Nashville, TN 37203........................... 299,000(3) 7.0%
William F. Andrews............................. 0 *
John D. Ferguson............................... 20,860 *
Lucius E. Burch, III........................... 10,000 *
John D. Correnti............................... 0 *
C. Michael Jacobi.............................. 0 *
John R. Prann, Jr.............................. 0 *
Joseph V. Russell.............................. 5,000 *
Henri L. Wedell................................ 210,500(4) 4.9%
J. Michael Quinlan............................. 0 *
Irving E. Lingo, Jr............................ 9,000 *
William T. Baylor.............................. 0 *
Gus A. Puryear................................. 0 *
Todd Mullenger................................. 0 *
David M. Garfinkle............................. 0 *
All directors and executive officers as a
group (14 persons).......................... 255,360 5.9%
---------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
our series A preferred stock.
(1) Includes shares as to which such person directly or indirectly, through
any contract, arrangement, understanding, relationship, or otherwise,
has or shares voting power and/or investment power, as these terms are
defined in Rule 13d-3(a) of the Exchange Act.
(2) Based on 4,300,000 shares of our series A preferred stock issued and
outstanding on July 31, 2001.
(3) This beneficial ownership information is based on information contained
in a Schedule 13D dated August 1, 2001 and filed with the SEC on August
2, 2001.
(4) Consists of (i) 193,600 shares of our series A preferred stock owned by
Mr. Wedell's wife; (ii) 10,400 shares of our series A preferred stock
held in an IRA; and (iii) 6,500 shares of our series A preferred stock
held by the Wedell Spendthrift Trust.
SERIES B PREFERRED STOCK
Except as otherwise indicated, the following table sets forth certain
information with respect to the beneficial ownership of shares of our series B
preferred stock as of July 31, 2001 by: (i) each of our stockholders that we
believe currently holds more than a 5% beneficial interest in our series B
preferred stock; (ii) each of our existing directors; (iii) each of our existing
executive officers; and (iii) all of our directors and officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of the
shares of our series B preferred stock listed below, based on information
furnished by such owners and/or from information contained in reports filed by
the beneficial owner with the SEC
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pursuant to Section 13 of the Exchange Act,
have sole voting and investment power with respect to such shares.
Number of Shares of
Series B Preferred Stock
Name of Beneficial Owner Beneficially Owned(1) Percent of Class(2)
------------------------ ------------------------ -------------------
Dreman Value Management, LLC
10 Exchange Place, Suite 2150
Jersey City, New Jersey 07302-3913............. 658,233(3) 18.1%
Rolaco Holding S.A.
c/o Oryx Merchant Bank Limited
104 Lancaster Gate
London W23 NT England.......................... 350,282(4) 9.7%
William F. Andrews............................. 0 *
John D. Ferguson............................... 0 *
Lucius E. Burch, III........................... 0 *
John D. Correnti............................... 0 *
C. Michael Jacobi.............................. 0 *
John R. Prann, Jr.............................. 0 *
Joseph V. Russell.............................. 0 *
Henri L. Wedell................................ 97,850(5) 2.7%
J. Michael Quinlan............................. 6(6) *
Irving E. Lingo, Jr............................ 0 *
William T. Baylor.............................. 0 *
Gus A. Puryear................................. 0 *
Todd Mullenger................................. 0 *
David M. Garfinkle............................. 644 *
All directors and executive officers as a
group (14 persons)............................. 98,500 2.7%
------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
our series B preferred stock.
(1) Includes shares as to which such person directly or indirectly, through
any contract, arrangement, understanding, relationship, or otherwise,
has or shares voting power and/or investment power, as these terms are
defined in Rule 13d-3(a) of the Exchange Act.
(2) Based on 3,627,061 shares of our series B preferred stock issued and
outstanding on July 31, 2001. Does not include an aggregate of
approximately 108,812 shares of our series B preferred stock to be
issued on October 1, 2001 as a paid-in-kind dividend.
(3) This beneficial ownership information is based on information contained
in a Schedule 13G filed with the SEC and dated November 8, 2000. The
beneficial ownership information contained in the Schedule 13G related
to our common stock, however, and not our series B preferred stock.
Assuming Dreman Value Management, L.L.C. held 10,010,460 shares (on a
pre-reverse stock split basis) of our common stock on: (i) September
14, 2000, the record date for the distribution of five shares of series
B preferred stock for every 100 shares of common stock held; and (ii)
November 6, 2000, the record date for the distribution of one share of
series B preferred stock for every 100 shares of common stock held,
then Dreman Value Management, L.L.C. received 500,523 shares of our
series B preferred stock on September 22, 2000 and 100,104 shares of
our series B preferred stock on November 13, 2000. The share total
indicated also assumes that Dreman Value Management, L.L.C. did not
convert its shares of our series B preferred stock into shares of our
common stock during either of
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the two conversion periods. The share total also includes an aggregate
of approximately 57,606 shares of our series B preferred stock issued
on January 2, 2001, April 2, 2001 and July 2, 2001 as paid-in-kind
dividends on shares of our series B preferred stock previously issued
to and held by Dreman Value Management, L.L.C.
(4) This beneficial ownership information is based on information contained
in a Schedule 13G dated August 16, 2001 and filed with the SEC on
August 17, 2001.
(5) Includes 97,850 shares of our series B preferred stock owned by an IRA
on behalf of Mr. Wedell.
(6) Includes: (i) 2 shares of our series B preferred stock owned directly
by Mr. Quinlan; and (ii) 4 shares of our series B preferred stock held
in an IRA.
EXECUTIVE OFFICERS AND DIRECTORS
The following contains information concerning our directors and executive
officers as of September 12, 2001.
NAME AGE CURRENT POSITION
---- --- ----------------
William F. Andrews............. 69 Director, Chairman of the Board of
Directors
John D. Ferguson............... 56 Director, Vice Chairman of the Board
of Directors, Chief Executive
Officer and President
J. Michael Quinlan............. 59 Executive Vice President and Chief
Operating Officer
Irving E. Lingo, Jr............ 49 Executive Vice President, Chief
Financial Officer and Assistant
Secretary
William T. Baylor.............. 48 Executive Vice President and Chief
Development Officer
Gus A. Puryear................. 33 Executive Vice President, General
Counsel and Secretary
David M. Garfinkle............. 34 Vice President, Finance
Todd Mullenger................. 42 Vice President, Treasurer
Lucius E. Burch, III........... 59 Independent Director
John D. Correnti............... 54 Independent Director
C. Michael Jacobi.............. 59 Independent Director
John R. Prann, Jr.............. 51 Independent Director
Joseph V. Russell.............. 60 Independent Director
Henri L. Wedell................ 59 Independent Director
Biographical information regarding each of our executive officers and directors
is set forth below.
WILLIAM F. ANDREWS, a director and the chairman of our board of directors, has
held these positions 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 and is currently the chairman of the board of
directors of Katy Industries, Inc., a publicly-traded manufacturer and
distributor of consumer electric corded products and maintenance cleaning
products, among other product lines. 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
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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. Mr. Andrews also currently serves as
chairman of the board of directors of Northwestern Steel and Wire Company and as
a director of Johnson Controls 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.
JOHN D. FERGUSON, our president and chief executive officer and the vice
chairman of our board of directors, has held these positions since August 2000.
Prior to joining CCA, 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.
J. MICHAEL QUINLAN, an executive vice president and our chief operating officer,
has held these positions since August 2000. Mr. Quinlan previously served as our
president from December 1999 to August 2000 and as the president and chief
operating officer of Operating Company and as a member of its board of directors
from June 1999 through the completion of our restructuring. From January 1999
until May 1999, Mr. Quinlan served as a member of our board of directors and as
the vice-chairman of our 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.
IRVING E. LINGO JR., an executive vice president and our chief financial
officer, has held these positions since December 2000. Prior to joining CCA, 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 from Old Dominion University where he received a Bachelor of Science
degree in Business Administration.
WILLIAM T. BAYLOR, an executive vice president and our chief development
officer, has held these positions since January 2001. Prior to joining CCA, Mr.
Baylor served as government sales manager for Herman Miller for Healthcare in
Nashville, Tennessee. In that role, he managed the company's
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relationship with 372 medical centers and more than 1,500 clinics within the
federal government. 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.
GUS A. PURYEAR, an executive vice president and our general counsel and
secretary, has held these positions since January 2001. Prior to joining CCA,
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.
DAVID M. GARFINKLE, our vice president, finance, has held this position since
February 2001. Prior to joining CCA, 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.
TODD MULLENGER, our vice president, treasurer, has held this position since
January 2001, after serving as our vice president, finance since August 2000.
Mr. Mullenger previously served as the vice president of finance of Old CCA from
August 1998 until the completion of its merger with us. Mr. Mullenger also
served as vice president, finance of Operating Company from January 1, 1999
through the completion of our 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.
LUCIUS E. BURCH, III, an independent director and a member of the audit
committee of our board of directors, has held these positions since December
2000. Mr. Burch also serves as a member of the executive committee of our board
of directors. 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 its merger with us,
and as the chairman of the board of directors of the formerly independent
Operating Company from January 1999 through the completion of our 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, an independent director and a member of the compensation
committee of our board of directors, has held these positions 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
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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.
C. MICHAEL JACOBI, an independent director and the chairman of the audit
committee of our board of directors, has held these positions since December
2000. Mr. Jacobi is currently the president, chief executive officer and board
member of Katy Industries, Inc., a publicly-traded manufacturer and distributor
of consumer electric corded products and maintenance cleaning products, among
other product lines. 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. Mr.
Jacobi is a certified public accountant and holds a B.S. degree from the
University of Connecticut.
JOHN R. PRANN, JR., an independent director and a member of the compensation
committee of our board of directors, has held these positions since December
2000. Mr. Prann served as the president and chief executive officer of Katy
Industries, Inc., 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. A former 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, an independent director, has held this position since the
completion of the 1999 merger. Mr. Russell also serves as the chairman of the
compensation committee of our board of directors and as a member of the
executive committee of our board of directors. Prior to our merger with Old
Prison Realty, 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, an independent director and a member of the audit committee of
our board of directors, has held these positions 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.
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INFORMATION CONCERNING OUR BOARD OF DIRECTORS
GENERAL. Our charter provides that our 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 our bylaws, provided that the number of our
directors may be no less than the minimum number required by Maryland law. By
resolution of our board of directors, our board of directors currently consists
of the eight directors identified below. Our charter does not divide the
directors into classes. Accordingly, under Maryland law, all directors are to be
elected annually, at our annual meeting of stockholders, for a one-year term and
until the next annual meeting of stockholders. Our charter also requires that at
least two members of the board of directors must be "independent directors." For
purposes of our 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 us that requires disclosure under federal securities laws.
Under the terms of our stockholder litigation settlement, a majority of our
board of directors must be comprised of independent directors.
COMMITTEES OF OUR BOARD OF DIRECTORS
Pursuant to the authority granted under our bylaws, our board of directors has
designated an audit committee, compensation committee and executive committee.
Information regarding the members of each committee and the authority granted to
each committee by our board of directors is set forth below.
AUDIT COMMITTEE
Our audit committee currently consists of Messrs. Burch, Jacobi and Wedell, with
Mr. Jacobi serving as its chairman. The members of the audit committee are
"independent," as such term is defined in Sections 303.01(B)(2)(a) and
303.01(B)(3) of the NYSE Listed Company Manual. The audit committee operates
pursuant to a written charter adopted by our full board of directors, and is
responsible for monitoring and overseeing our internal controls and financial
reporting processes. The audit committee also recommends to our board of
directors the engagement of our independent auditors, Arthur Andersen LLP, and
reviews with the independent auditors the scope and results of the audits, our
internal accounting controls and the professional services furnished by the
independent auditors. The audit committee has held five meetings to date in 2001
and held four meetings in 2000.
COMPENSATION COMMITTEE
Our compensation committee currently consists of Messrs. Correnti, Prann and
Russell, with Mr. Russell serving as its chairman. The compensation committee
determines compensation, including awards under our current equity incentive
plans, for our executive officers and also administers our non-employee
directors' equity plan. The compensation committee has held four meetings to
date in 2001 and held two meetings in 2000.
EXECUTIVE COMMITTEE
Our executive committee was established in December 2000 and currently consists
of Messrs. Andrews, Ferguson, Burch and Russell, with Mr. Ferguson serving as
its chairman. The executive committee acts on behalf of the full board of
directors in the management of our business and affairs during the intervals
between meetings of the board of directors. The executive committee, however,
does not have the power or authority to: (i) amend our charter or bylaws; (ii)
adopt an agreement or
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plan of merger or consolidation to which we are a party; (iii) recommend to our
stockholders the sale, lease or exchange of all or substantially all of our
property and assets; (iv) recommend to our stockholders a dissolution of the
Company or a revocation of a dissolution of the Company; (v) declare a dividend
or authorize the issuance of our capital stock; or (vi) take any other action or
exercise any authority prohibited by law or our bylaws. The executive committee
has held three meetings to date in 2001 and held no meetings in 2000.
MEETINGS OF OUR BOARD OF DIRECTORS
Our full board of directors has held three meetings to date in 2001 and held 16
formal meetings and several informal meetings in 2000, with no directors
attending, either in person or by teleconference, less than 75% of such
meetings, and the committees, if any, upon which such director served and which
were held during the period of time that such person served on our board of
directors or such committee(s).
COMPENSATION OF OUR BOARD OF DIRECTORS
Currently, we pay our non-employee directors an annual retainer of $24,000 for
their services. In addition, the chairman of each committee of the board of
directors who is not an employee of ours receives an additional annual retainer
of $1,500. Non-employee directors also currently receive a fee of $1,000 for
each meeting of our board which they attend and an additional fee of $1,000 for
each meeting they attend of committees on which they serve.
Our non-employee directors are reimbursed for reasonable expenses incurred to
attend meetings of our board of directors and committees. Non-employee directors
also participate in our Non-Employee Directors' Share Option Plan, whereby each
non-employee director receives options to purchase 4,000 shares of our common
stock (on a post reverse stock split basis), on an annual basis.
Information concerning the compensation of our executive officers in 2000, the
ownership of our capital stock and certain relationships and transactions are
included elsewhere in this prospectus.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL PROVISIONS
EMPLOYMENT AGREEMENTS
In connection with Mr. Ferguson's appointment as our chief executive officer and
president, we entered into an employment agreement with Mr. Ferguson, dated
August 4, 2000. The initial term of the employment agreement expires on December
31, 2002 and is subject to a series of one year renewals. Mr. Ferguson is
entitled to receive an annual salary and cash bonus under the terms of the
employment agreement, as well as customary benefits, including life and health
insurance. Mr. Ferguson's annual salary and cash bonus are discussed in more
detail in the Report of the Compensation Committee found herein under the
heading "Executive Compensation." In addition, under the terms of the employment
agreement, we have issued Mr. Ferguson the option to purchase an aggregate of
502,160 shares of our common stock, at varying exercise prices, as adjusted
pursuant to the terms of our 1997 Employee Share Incentive Plan, also as more
fully described elsewhere herein, and as adjusted for our reverse stock split in
May 2001.
In the event Mr. Ferguson is terminated "without cause," or Mr. Ferguson resigns
from his employment for "good cause," including the non-renewal of the
employment agreement by us or Mr. Ferguson for any additional period after the
expiration of the initial term, we are generally required to pay Mr. Ferguson a
cash severance payment equal to two times his annual base salary then in effect,
payable in
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monthly installments for a period of two years following the termination of his
employment. Mr. Ferguson will also continue to be covered under existing life,
medical, disability and health insurance plans for a period of two years. In
addition, to the extent Mr. Ferguson has become vested in any options to
purchase shares of our common stock or other equity securities granted to him
prior to the date of such termination, Mr. Ferguson will remain entitled to
exercise such options for the duration of the terms of such options, provided,
however, that any unvested and unexercised options existing at such time will be
forfeited by Mr. Ferguson. In the event of a "change in control" and Mr.
Ferguson's employment is terminated, whether by resignation or otherwise, Mr.
Ferguson will be entitled to receive a lump sum cash payment equal to three
times his base salary then in effect, as well as certain tax reimbursement
payments. Mr. Ferguson will also continue to be covered under existing life,
medical, disability and health insurance plans for a period of two years. In
addition, all options to purchase shares of our common stock or other equity
securities granted to him prior to the date of such termination, whether vested
or unvested, will become immediately exercisable for the duration of the terms
of such options.
Pursuant to the terms of the employment agreement, Mr. Ferguson is prohibited
from competing with us during the term of his employment with us and for a
period of one year following the termination of his employment. Mr. Ferguson is
also subject to certain confidentiality and non-disclosure provisions during
this period.
In connection with our restructuring, J. Michael Quinlan became our executive
vice president and chief operating officer. Prior to the restructuring, Mr.
Quinlan was subject to an employment agreement with Operating Company, which was
assumed by our operating subsidiary in the restructuring. The agreement has a
remaining term of approximately one year. Mr. Quinlan's employment agreement
generally provides for annual compensation and incentive compensation, as
determined by the compensation committee of the board of directors on the terms
set forth therein. The employment agreement also generally provides for non-cash
benefits such as life and health insurance to Mr. Quinlan. Mr. Quinlan's
employment agreement, which contains provisions restricting Mr. Quinlan from
competing with us during the term of his employment and for a period of three
years thereafter, also provides that we may terminate Mr. Quinlan's employment
with prior written notice upon the happening of certain specified events. Mr.
Quinlan may terminate his employment with us upon prior written notice to us.
In connection with Mr. Andrews' appointment as the chairman of our board of
directors, we have entered into an agreement with Mr. Andrews pursuant to which
we have agreed to pay Mr. Andrews an annual cash retainer as well as an annual
cash bonus. Under the terms of the agreement, we are only obligated to make such
payments to Mr. Andrews for so long as he serves as a member of our board of
directors and is elected to serve as its chairman. Mr. Andrews' annual retainer
and cash bonus are discussed further under the heading "Certain Relationships
and Related Transactions." In addition, under the terms of the agreement, we
have issued Mr. Andrews options to purchase 50,216 shares of our common stock,
with an exercise price of $9.96 per share, as adjusted under the terms of our
1997 Employee Share Incentive Plan as more fully described elsewhere herein, and
as adjusted for our reverse stock split in May 2001.
In connection with the appointment of Mr. Lingo as our chief financial officer
and as an executive vice president in December 2000, we entered into an
employment agreement with Mr. Lingo, dated December 6, 2000. The initial term of
the employment agreement expires on December 31, 2001 and is subject to a series
of three one year renewals. Mr. Lingo is entitled to receive an annual salary
and cash bonus under the terms of his employment agreement, as well as customary
benefits, including life and health insurance.
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In the event Mr. Lingo is terminated "without cause," or Mr. Lingo resigns from
his employment for "good cause," including the non-renewal of the contract by us
or Mr. Lingo for any additional period after the expiration of the initial term,
we are generally required to pay Mr. Lingo a cash severance payment equal to his
annual base salary then in effect, payable in monthly installments for a period
of one year following the termination of his employment and any guaranteed bonus
due Mr. Lingo at the time of his termination. In the event of a "change in
control" and Mr. Lingo's employment is terminated, whether by resignation or
otherwise, Mr. Lingo will be entitled to receive a lump sum cash payment equal
to 2.99 times his base salary then in effect, as well as certain tax
reimbursement payments. Mr. Lingo will also continue to be covered under
existing life, medical, disability and health insurance plans for a period of
one year.
CHANGE IN CONTROL PROVISIONS OF OUR STOCK INCENTIVE PLANS
Our 1995 Stock Incentive Plan and our 1997 Employee Share Incentive Plan each
provide that upon a "change-of-control" or "potential change-in-control" of the
Company, as those terms are defined in the respective plans, the value of all
outstanding share options granted under the plans, to the extent vested, will be
cashed out on the basis of a "change-in-control price," which is generally based
on the highest price paid per share of our common stock on the NYSE at any time
during a 60-day period prior to the occurrence of the "change-in-control" event.
Certain of our executive officers have been granted options to purchase shares
of our common stock under the 1995 Stock Incentive Plan and under the 1997 Share
Incentive Plan.
Under our 2000 Stock Incentive Plan, the vesting of all or a portion of an
option, stock appreciation right or restricted stock award will be accelerated
upon a "change in control" of the Company, as defined in the plan. Each of our
executive officers and directors have been granted options to purchase shares of
our common stock under the 2000 Stock Incentive Plan.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation we have paid during the three
fiscal years ended December 31, 2000, 1999 and 1998 to John D. Ferguson, our
current chief executive officer, and president and the vice-chairman of our
board of directors, and our current executive officers whose annualized
compensation exceeds $100,000 (collectively, the "Named Executive Officers"). In
addition, the following table summarizes the compensation paid during such
periods to all other persons who served as our chief executive officer at any
time during the fiscal year ended December 31, 2000.
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LONG TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------ ------------------------- ----------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS (#) PAYOUTS($) COMPENSATION($)
---- ---------- ---------- ---------------- ---------- ----------- ---------- ---------------
John D. Ferguson............ 2000 $134,615(1) $ 75,000(2) -- -- 502,160(3) -- --
Chief Executive Officer, 1999 -- -- -- -- -- -- --
President and Vice- 1998 -- -- -- -- -- -- --
Chairman of the Board
J. Michael Quinlan.......... 2000 305,846(4) -- -- -- -- -- $9,068(5)
Executive Vice President and 1999 229,583(6) -- -- -- 2,511(7) -- 7,751(8)
Chief Operating Officer 1998 155,625(9) -- -- -- -- -- 5,000(10)
Irving E. Lingo, Jr......... 2000 10,577(11) -- -- -- --(12) -- --
Executive Vice President, 1999 -- -- -- -- -- -- --
Chief Financial Officer 1998 -- -- -- -- -- -- --
and Secretary
William T. Baylor........... 2000 --(13) -- -- -- -- -- --
Executive Vice President and 1999 -- -- -- -- -- --
Chief Development Officer 1998 -- -- -- -- -- -- --
Gus A. Puryear.............. 2000 --(14) -- -- -- -- -- --
Executive Vice President and 1999 -- -- -- -- -- -- --
General Counsel 1998 -- -- -- -- -- -- --
Todd Mullenger.............. 2000 142,308(15) 29,000(16) -- -- -- -- 9,068(5)
Vice President, Treasurer 1999 133,846(17) -- -- -- -- -- 4,355(8)
1998 50,000(18) -- -- -- -- -- --
Thomas W. Beasley............ 2000 469,000(19) -- -- -- -- -- 160(20)
Interim Chief Executive 1999 69,269(21) -- -- -- 1,255(22) -- 944(8)
Officer 1998 175,000(23) -- -- -- -- -- --
Doctor R. Crants............. 2000 597,298(24) -- -- -- -- -- --
Former Chief Executive 1999 566,102(25) 34,488(26) -- $103,465(27) --(28) -- 8,268(8)
Officer 1998 381,756(29) -- -- -- --(30) -- 7,450(31)
(1) Represents the base salary actually paid to Mr. Ferguson during 2000.
In August 2000, Mr. Ferguson was appointed to serve as our chief
executive officer, president and vice-chairman of our board. Pursuant
to the terms of an employment agreement with Mr. Ferguson, Mr.
Ferguson's annual base salary with respect to 2000 was $350,000.
(2) In accordance with the terms of our employment agreement with Mr.
Ferguson, we paid Mr. Ferguson a cash bonus of $75,000 with respect to
2000.
(3) Pursuant to our 1997 Employee Share Incentive Plan, Mr. Ferguson was
initially granted options to purchase an aggregate of 2,000,000 shares
of our common stock on August 4, 2000. As the result of an adjustment
under the plan, and as adjusted for the reverse stock split in May
2001, as of December 31, 2000, Mr. Ferguson held options to purchase an
aggregate of 502,160 shares of our common stock having the following
terms: (i) an option to purchase 125,540 shares of our common stock, at
an exercise price of $9.46 per share, which vested on August 4, 2000;
(ii) an option to purchase 125,540 shares of our common stock, at an
exercise price of $9.46 per share, which vested on August 4, 2001;
(iii) an option to purchase 125,540 shares of our common stock, at an
exercise price of $19.91 per share, which will vest on August 4, 2002;
and (iv) an option to purchase 125,540 shares of our common stock, at
an exercise price of $29.87 per share, which will vest on August 4,
2003.
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(4) Represents the base salary actually paid to Mr. Quinlan during 2000 by
us and Operating Company. Of this amount, Operating Company paid
$234,769 to Mr. Quinlan and we paid $71,077 to Mr. Quinlan. Mr. Quinlan
served as our president from January 2000 until the completion of our
restructuring. In connection with our restructuring, Mr. Quinlan became
our executive vice president and chief operating officer. Mr. Quinlan's
annual base salary with respect to 2000 was $308,000.
(5) Represents the contribution of $2,286 by us to our 401(k) Plan during
2000 and the contribution of $6,782 by Operating Company to its 401(k)
Plan during 2000.
(6) Represents the base salary actually paid to Mr. Quinlan during 1999 by
us and Operating Company. Of this amount, Operating Company paid
$150,000 to Mr. Quinlan and we paid $79,583 to Mr. Quinlan. Mr.
Quinlan's annual base salary with Operating Company during 1999 was
$300,000, and Mr. Quinlan's annual base salary with us during 1999 was
$79,583. From January 1, 1999 until May 11, 1999, Mr. Quinlan served as
the vice-chairman of our board of directors. From May 11, 1999 until
June 28, 1999, Mr. Quinlan served as our vice-president, special
projects. On June 28, 1999, Mr. Quinlan resigned from his positions
with us to become president and chief operating officer of Operating
Company. Mr. Quinlan subsequently became our president, effective
December 1999.
(7) Mr. Quinlan was initially granted options to purchase 10,000 shares of
our common stock on March 4, 1999, and these options became fully
vested upon action by our board of directors on June 28, 1999. As a
result of an adjustment under the plan pursuant to which the options
were granted, and as adjusted for the reverse stock split in May 2001,
these options are currently exercisable for an aggregate of 2,511
shares of our common stock, at an exercise price of $79.41 per share.
(8) Represents the contribution by Operating Company to its 401(k) Plan
during 1999.
(9) Represents the base salary actually paid to Mr. Quinlan by Old Prison
Realty during 1998. Prior to the completion of our merger with Old
Prison Realty, Mr. Quinlan served as chief executive officer of Old
Prison Realty.
(10) Amount represents the contribution by Old Prison Realty to Old Prison
Realty's Amended and Restated Employee Share Ownership Plan for 1998.
(11) Represents the base salary actually paid to Mr. Lingo during 2000. In
December 2000, Mr. Lingo was appointed to serve as our chief financial
officer and as an executive vice president. Pursuant to the terms of
our employment agreement with Mr. Lingo, Mr. Lingo's annual base salary
with respect to 2000 was $275,000.
(12) Pursuant to the terms of our employment agreement with Mr. Lingo, we
agreed to issue Mr. Lingo options to purchase shares of our common
stock following the completion of an independent third-party valuation
of our equity and compensation structure. In May 2001, we granted Mr.
Lingo these options.
(13) Mr. Baylor was appointed as our chief development officer and as an
executive vice president in January 2001. Mr. Baylor's initial annual
base salary has been established at $200,000.
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(14) Mr. Puryear was appointed as our general counsel and as an executive
vice president in January 2001 and as our secretary in May 2001. Mr.
Puryear's initial annual base salary has been established at $165,000.
(15) Represents the base salary actually paid to Mr. Mullenger during 2000
by us and Operating Company. Prior to the completion of our
restructuring, Mr. Mullenger served as the vice-president, finance of
Operating Company. Following our restructuring, Mr. Mullenger served as
our vice-president, finance until his appointment as our vice
president, treasurer. Mr. Mullenger's annual base salary with respect
to 2000 was $145,000.
(16) We paid Mr. Mullenger a cash bonus of $29,000 with respect to 2000.
(17) Represents the base salary actually paid to Mr. Mullenger by Operating
Company during 1999. Mr. Mullenger's annual base salary with respect to
1999 was $135,000.
(18) Represents the base salary actually paid to Mr. Mullenger by Old CCA
during 1998. Mr. Mullenger was appointed as vice president, finance of
Old CCA in July 1998. Mr. Mullenger's annual base salary with respect
to 1998 was $130,000.
(19) In consideration for Mr. Beasley's service as chairman of our board of
directors from January 2000 to August 2000 and as our interim chief
executive officer from July 2000 through August 2000, Mr. Beasley
received an aggregate of $450,000 in base salary. We also paid Mr.
Beasley an aggregate of $7,000 in consideration for his service as a
member of our board of directors. In addition, Mr. Beasley received an
aggregate of $12,000 in consideration for his service as chairman of
the board of directors and as a member of the board of directors of
PMSI.
(20) Represents our contribution of $40 to our 401(k) Plan during 2000 and
the contribution of $120 by Operating Company to its 401(k) Plan during
2000.
(21) Represents (i) an aggregate of $51,000 actually paid to Mr. Beasley
during 1999 in consideration for his service as the chairman of our
board of directors and as a member of our board of directors and (ii)
an aggregate of $18,269 actually paid to Mr. Beasley during 1999 in
consideration for his service as chairman of the board of directors and
as a member of the board of directors of PMSI.
(22) Mr. Beasley was initially granted options to purchase 5,000 shares of
our common stock in connection with his appointment to our board of
directors in December 1999. As a result of an adjustment under the plan
pursuant to which the options were granted, and as adjusted for the
reverse stock split in May 2001, these options are currently
exercisable for an aggregate of 1,255 shares of our common stock, at an
exercise price of $23.00 per share.
(23) In consideration for his service as chairman emeritus of Old CCA during
1998, Mr. Beasley received an aggregate of $175,000 in compensation.
(24) Represents (i) an aggregate of $286,225 actually paid to Mr. Crants by
us and (ii) an aggregate of $311,073 actually paid to Mr. Crants by
Operating Company as base salary prior to his termination, effective
July 28, 2000, from his position as our chief executive
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officer and from all positions with Operating Company, and as severance
pursuant to the terms of our employment agreement with Mr. Crants.
(25) Represents (i) an aggregate of $172,500 actually paid to Mr. Crants by
us in consideration for his service as our chief executive officer and
chairman of our board of directors during 1999 and (ii) an aggregate of
$393,602 actually paid to Mr. Crants by Operating Company in
consideration for his service as chief executive officer of Operating
Company in 1999. Mr. Crants' annual base salary from us with respect to
1999 was $172,500, and Mr. Crants' annual base salary from Operating
Company with respect to 1999 was 395,400.
(26) Mr. Crants was awarded 1,687 restricted shares of our common stock on
March 4, 1999 pursuant to our 1997 Employee Share Incentive Plan, which
we assumed in our merger with Old Prison Realty. These shares of common
stock were vested immediately upon the award of such shares to Mr.
Crants. The value of these shares on the date of award was $34,488,
based on the average of the high and low sales prices of our common
stock on the NYSE on March 3, 1999, $20.44.
(27) Mr. Crants was awarded 5,063 restricted shares of our common stock on
March 4, 1999 pursuant to our 1997 Employee Share Incentive Plan.
Pursuant to the terms of a restricted stock agreement with Mr. Crants,
the restricted shares were to vest ratably on each of the first three
anniversaries of the date of such award. The value of these shares on
the date of award was $103,465, based on the average of the high and
low sales prices of our common stock on the NYSE on March 3, 1999,
$20.44. In connection with Mr. Crants' termination as our chief
executive officer on July 28, 2000, 3,375 of these shares were
forfeited by Mr. Crants.
(28) Although Mr. Crants was granted options to purchase an aggregate of
113,750 shares of our common stock during 1999, these options were
forfeited by Mr. Crants in connection with Mr. Crants' termination as
our chief executive officer on July 28, 2000.
(29) Represents the compensation actually paid by Old CCA to Mr. Crants
during 1998. Mr. Crants' annual base salary with respect to 1998 was
$387,608.
(30) Although Mr. Crants was granted options by Old CCA to purchase an
aggregate of 113,125 shares of our common stock (as adjusted pursuant
to the terms of our merger with Old CCA) during 1998, these options
were forfeited by Mr. Crants in connection with Mr. Crants' termination
as our chief executive officer on July 28, 2000.
(31) Represents the contribution by Old CCA to Old CCA's Amended and
Restated Employee Stock Ownership Plan during 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth the options granted with respect to the fiscal
year ended December 31, 2000 to our chief executive officer and to any Named
Executive Officers. Named Executive Officers not included in the following table
were not granted options to purchase shares of our common stock during the
fiscal year ended December 31, 2000. The number of shares and per share amounts
have been adjusted for the reverse stock split in May 2001.
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OPTION SAR/GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------
Potential Realizable Value at
Percentage of Total Assumed Rates of Stock Price
Number of Securities Options Granted to Appreciation for Option Term(1)
Underlying Options Employees in Fiscal Exercise Expiration -------------------------------
Name Granted (#) Year(2) Price Date 5%($) 10%($)
---- -------------------- ------------------- ---------- ---------- ---------- ----------
John D. Ferguson 125,540(3) 22.7% $ 9.46(3) 8-4-2010 $ 748,193 $1,888,297
125,540(4) 22.7% $ 9.46(4) 8-4-2010 $ 748,193 $1,888,297
125,540(5) 22.7% $ 19.91(5) 8-4-2010 $1,574,400 $3,974,207
125,540(6) 22.7% $ 29.87(6) 8-4-2010 $2,362,424 $5,962,309
Irving E. Lingo, Jr. (7) -- -- -- -- --
(1) The dollar amounts under these columns are the result of calculations
at the 5% and 10% rates set by the SEC and therefore are not intended
to forecast future appreciation, if any, of the price of our common
stock.
(2) The percentage of total stock options granted to our chief executive
officer and each Named Executive Officer was based on the total number
of options to purchase shares of our common stock granted to employees
during the fiscal year ended December 31, 2000. In addition to the
options to purchase shares of our common stock granted to Mr. Ferguson,
we granted to William F. Andrews, the chairman of our board of
directors, options to purchase an aggregate of 502,160 shares of our
common stock. Except with respect to our commitment to issue Mr. Lingo
options to purchase shares of our common stock as described in footnote
7, no other options to purchase shares of our common stock were issued
in 2000 other than as the result of the adjustment under our equity
incentive plans described elsewhere herein.
(3) On August 4, 2000, Mr. Ferguson was initially granted an option to
purchase an aggregate of 500,000 shares of our common stock, at an
exercise price of $2.38 per share, which was immediately exercisable.
As a result of an adjustment under the plan pursuant to which the
options were granted, and as adjusted for the reverse stock split in
May 2001, this option is currently exercisable for an aggregate of
125,540 shares of our common stock, at an exercise price of $9.46 per
share.
(4) On August 4, 2000, Mr. Ferguson was initially granted an option to
purchase an aggregate of 500,000 shares of our common stock, at an
exercise price of $2.38 per share, exercisable on and after August 4,
2001. As a result of an adjustment under the plan pursuant to which the
options were granted, and as adjusted for the reverse stock split in
May 2001, this option is currently exercisable for an aggregate of
125,540 shares of our common stock, at an exercise price of $9.46 per
share.
(5) On August 4, 2000, Mr. Ferguson was initially granted an option to
purchase an aggregate of 500,000 shares of our common stock, at an
exercise price of $5.00 per share, exercisable on and after August 4,
2002. As a result of an adjustment under the plan pursuant to which the
options were granted, and as adjusted for the reverse stock split in
May 2001, this option will be exercisable, beginning on August 4, 2002,
for an aggregate of 125,540 shares of our common stock, at an exercise
price of $19.91 per share.
(6) On August 4, 2000, Mr. Ferguson was initially granted an option to
purchase an aggregate of 500,000 shares of our common stock, at an
exercise price of $7.50 per share, exercisable on and after August 4,
2003. As a result of an adjustment under the plan pursuant to which the
options were granted, and as adjusted for the reverse stock split in
May 2001, this option will be exercisable, beginning on August 4, 2003,
for an aggregate of 125,540 shares of our common stock, at an exercise
price of $29.87 per share.
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(7) Pursuant to the terms of our employment agreement with Mr. Lingo, we
agreed to issue Mr. Lingo options to purchase an undetermined number of
shares of our common stock following the completion of an independent
third-party valuation of our equity and compensation structure. In May
2001, we granted these options to Mr. Lingo.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information with respect to the value of
unexercised options to purchase shares of our common stock held on December 31,
2000 by our chief executive officer, the Named Executive Officers and all
persons serving as our chief executive officer during the fiscal year ended
December 31, 2000. Named Executive Officers not included in the following table
held no options to purchase shares of our common stock as of December 31, 2000.
The number of shares have been adjusted for the reverse stock split.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS HELD AT MONEY OPTIONS AT
DECEMBER 31, 2000 DECEMBER 31, 2000(1)
------------------------------- ----------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------ ------------- ----------- -------------
John D. Ferguson -- -- 125,540 376,620 -- --
J. Michael Quinlan -- -- 98,863(2) -- -- --
Irving E. Lingo -- -- -- --(3) -- --
Thomas W. Beasley -- -- 1,255(4) -- -- --
Doctor R. Crants -- -- --(5) -- -- --
(1) As of December 29, 2000 (the last trading date in 2000) the market
price of shares of our common stock (the closing price per share of our
common stock on the NYSE) was $3.40 per share (as adjusted for the
reverse stock split in May 2001). As a result, none of the unexercised
options to purchase shares of our common stock were in-the-money at
December 31, 2000.
(2) In connection with Mr. Quinlan's previous resignation from his
positions with us on June 28, 1999, the compensation committee of our
board of directors accelerated the date of exercise of all of Mr.
Quinlan's outstanding options to purchase shares of our common stock.
As a result of an adjustment under the plan pursuant to which such
options were granted, and as adjusted for the reverse stock split in
May 2001, Mr. Quinlan currently holds options to purchase an aggregate
of 98,863 shares of our common stock.
(3) Pursuant to the terms of our employment agreement with Mr. Lingo, we
agreed to issue Mr. Lingo options to purchase an undetermined number of
shares of our common stock following the completion of an independent
third-party valuation of our equity and compensation structure. In May
2001, we granted these options to Mr. Lingo.
(4) Represents an initial grant, pursuant to our Non-Employee Director's
Compensation Plan, of an option to purchase 5,000 shares of our common
stock to Mr. Beasley upon his appointment as a member of our board of
directors in December 1999. As a result of an adjustment under such
plan, and as adjusted for the reverse stock split in May 2001, Mr.
Beasley currently holds an option to purchase an aggregate of 1,255
shares of our common stock.
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(5) Upon Mr. Crants' termination as our chief executive officer on July 28,
2000, all options to purchase shares of our common stock previously
granted to Mr. Crants were cancelled. Accordingly, as of December 31,
2000, Mr. Crants held no options to purchase shares of our common stock.
COMPENSATION COMMITTEE REPORT
Our compensation committee is primarily responsible for the oversight and
administration of our executive compensation program. The following report
relates to the actions taken by the compensation committee in 2000 prior to the
annual meeting of our stockholders in December 2000, as well as the policies
adopted and actions taken by the compensation committee following the 2000
annual meeting and to date in 2001.
COMPOSITION OF THE COMPENSATION COMMITTEE. Our compensation committee is
currently comprised of John D. Correnti, John R. Prann, Jr. and Joseph V.
Russell, with Mr. Russell serving as chairman. Messrs. Correnti, Prann and
Russell were appointed to serve as members of the compensation committee on
December 13, 2000, immediately following their election as directors at the 2000
annual meeting of our stockholders. Prior to the 2000 annual meeting, Mr.
Russell and C. Ray Bell, a former member of our board of directors, served as a
member of the compensation committee. Prior to his resignation from the board of
directors, effective April 1, 2000, Jackson W. Moore also served as a member of
the compensation committee during 2000. Messrs. Correnti, Prann and Russell are,
and Mr. Bell and Mr. Moore were, independent directors.
ACTIONS OF THE COMPENSATION COMMITTEE DURING 2000. During 2000 and prior to the
2000 annual meeting of our stockholders, the compensation committee's activities
were primarily focused on matters relating to the completion of our
restructuring. Specifically, the compensation committee was responsible for: (i)
the evaluation of appropriate severance benefits for those executive officers
that were terminated (or who resigned) in connection with the restructuring in
2000; (ii) setting the compensation of our interim chief executive officer in
2000; and (iii) guiding the search for, and setting the compensation of, our
permanent chief executive officer. The following information relates to each of
these activities.
Severance Payments To Former Executive Officers And Directors. In connection
with the resignation and/or termination of Doctor R. Crants from his positions
with us in June and July 2000, we entered into a severance agreement with Mr.
Crants. In addition, we made certain severance and other payments to Vida H.
Carroll and Darrell K. Massengale during 2000 in connection with their
resignations from their positions with us and our subsidiaries. The terms and
conditions of these severance agreements and our severance payments to each of
these individuals are described below. Each of these severance agreements and
the payments pursuant to such agreements, which were approved by the
compensation committee and our full board of directors, were deemed necessary
and advisable in order to accomplish a comprehensive restructuring of our
management.
On December 26, 1999, Doctor R. Crants resigned as the chairman of our board of
directors and, on July 5, 2000, resigned as a member of our board of directors.
On July 28, 2000, Mr. Crants was terminated as our chief executive officer and
from all positions with Operating Company and each of the companies' respective
subsidiaries. In connection with Mr. Crants' resignation from our board of
directors and termination as our chief executive officer, the compensation
committee and our full board of directors approved modifications to certain
agreements and arrangements with Mr. Crants relating to his employment and
compensation. Specifically, the compensation committee and our board of
directors approved: (i) an amendment to our employment agreement with Mr. Crants
removing our right to offset payments owed to Mr. Crants upon his termination
under the employment agreement (consisting of
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three years of salary) against amounts earned by Mr. Crants through other
employment; (ii) a modification to the $1.0 million loan granted to Mr. Crants
under our Executive Equity Loan Plan whereby the outstanding principal amount of
the loan did not become immediately due and payable upon Mr. Crants'
termination, but rather, Mr. Crants would make interest-only payments on the
loan for the first three years following the modification with the principal
amount of the loan plus all accrued and unpaid interest thereon being payable in
equal installments on the fourth, fifth and sixth anniversaries of the
modification; and (iii) the immediate vesting of 140,000 deferred shares of our
common stock (on a pre-reverse stock split basis) previously granted to Mr.
Crants in November 1995 by Old CCA pursuant to a stock bonus plan and assumed by
us in the 1999 merger. As a result of Mr. Crants' termination, all stock options
or similar rights which were not exercised by Mr. Crants, and any other awards
of stock or equity interests in which Mr. Crants was not vested, were terminated
or forfeited to us. In connection with Mr. Crants' termination, Mr. Crants
agreed not to compete with us for a period of three years following such
agreement. We also entered into a mutual release with Mr. Crants of all
potential claims the parties may have had against each other based on facts
known to the parties at the time of the release. As of the date of this
prospectus, the outstanding principal balance of the loan to Mr. Crants under
the Executive Equity Loan Plan was $1.0 million.
In connection with Vida H. Carroll's resignation as our chief financial officer,
secretary and treasurer, which was originally to be effective June 30, 2000, we
granted Ms. Carroll cash severance equal to six months of her annual salary. In
consideration for the extension of Ms. Carroll's employment through the
completion of the restructuring, we paid Ms. Carroll an additional cash
severance payment equal to six months of her annual salary. Ms. Carroll
officially resigned from her positions with us in September 2000. Any stock
options or similar rights which were not exercised by Ms. Carroll, and any other
awards of stock or equity interests in which Ms. Carroll was not vested at the
effective time of her resignation, were terminated or forfeited to us.
Darrell K. Massengale, who was appointed our secretary in connection with the
restructuring, resigned from his positions with us and our operating subsidiary,
effective as of November 17, 2000. Pursuant to the terms of an employment
agreement between Mr. Massengale and Operating Company, which was assumed by our
operating subsidiary as the result of the restructuring, Mr. Massengale will
continue to receive his annual salary for three years following the date of the
termination of his employment. In addition, all outstanding options to purchase
shares of our common stock or other securities previously granted to Mr.
Massengale have become fully vested and exercisable, and all deferred or
restricted shares of common stock or other securities previously granted to Mr.
Massengale have become fully vested. In connection with Mr. Massengale's
resignation and in consideration for his services to us as a consultant through
April 2001, our board of directors, upon the recommendation of the compensation
committee, and our operating subsidiary approved an amendment to Mr.
Massengale's employment agreement removing our right to offset payments owed to
Mr. Massengale upon the termination of his employment (consisting of three years
of salary) against amounts earned by Mr. Massengale through other employment.
Operating Company also paid to Mr. Massengale a retention bonus equal to 50% of
his annual salary on September 15, 2000 for his continued services to Operating
Company through that date.
Compensation Of Our Interim Chief Executive Officer In 2000. Thomas W. Beasley
served as the chairman of our board of directors from December 26, 1999 through
August 7, 2000 and as our interim chief executive officer following the
termination of Doctor R. Crants and prior to the appointment of John D.
Ferguson. As our chairman and interim chief executive officer, Mr. Beasley
participated in our restructuring as a member of our senior management,
including the negotiation of waivers and amendments under our indebtedness, the
settlement of our outstanding stockholder litigation, and the identification and
hiring of our permanent chief executive officer and senior management team. As
compensation for these services, we paid Mr. Beasley a salary of $50,000 per
month from January
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through September 2000. The compensation committee and our full board of
directors believed that such compensation was reasonable and appropriate in
order to accomplish the restructuring and to compensate Mr. Beasley for his
services to us.
Guiding The Search For, And Setting The Compensation Of, Our Permanent Chief
Executive Officer. In connection with the termination of Doctor R. Crants and
the restructuring of our senior management team in 2000, our board of directors
and the compensation committee conducted a search for our permanent chief
executive officer. As a part of this process, we engaged a nationally recognized
executive search firm which identified and contacted numerous candidates on our
behalf. In addition, we contacted potential candidates identified directly by
the members of our board of directors and compensation committee. The search
focused on candidates with experience as senior managers of companies of
comparable size with us and with a proven record of success, including
candidates having experience in corporate restructurings. The search also
identified those candidates which had experience in both the public and private
sectors who could use their experience to identify and install a new senior
management team with the ability to work successfully with the federal, state
and local governmental agencies and authorities with which we and our
subsidiaries do business. As the result of this extensive search, it was
determined that John D. Ferguson met the criteria set by our board of directors
and the compensation committee, and Mr. Ferguson was selected to serve as our
permanent chief executive officer and president.
In connection with Mr. Ferguson's appointment as our chief executive officer,
president and vice chairman of our board, we entered into an employment
agreement with Mr. Ferguson, dated as of August 4, 2000, providing for, among
other things, an annual salary and cash bonus, as well as equity-based
compensation. The specific terms of Mr. Ferguson's employment agreement,
including the compensation to be paid to him, are described below. Our board of
directors and the compensation committee approved the terms of Mr. Ferguson's
employment agreement, including the compensation provided thereby, and
determined such compensation was reasonable and appropriate in order to attract
and retain a senior manager with Mr. Ferguson's experience and to compensate Mr.
Ferguson for his services to us during the restructuring and following its
completion.
The initial term of Mr. Ferguson's employment agreement expires on December 31,
2002, and is subject to a series of one year renewals. Under the terms of Mr.
Ferguson's employment agreement, Mr. Ferguson is entitled to receive an annual
base salary through December 31, 2001 of $350,000 and an annual base salary of
$400,000 in 2002, each subject to increase at the discretion of the compensation
committee of our board of directors. Mr. Ferguson is also entitled to receive a
cash bonus for 2000 of $75,000 and a cash bonus of $175,000 and $200,000 for
2001 and 2002, respectively. In addition, if we achieve certain financial
performance targets determined by the board of directors, Mr. Ferguson will be
entitled to receive additional cash bonuses of $175,000 and $200,000 for 2001
and 2002, respectively. In the event of Mr. Ferguson's termination or
resignation from his positions with us, he is entitled to certain severance
benefits following such termination or resignation. In addition, under the terms
of the employment agreement, we issued Mr. Ferguson options to purchase an
aggregate of 502,160 shares of our common stock (as adjusted for our reverse
stock split) at varying exercise prices, as adjusted pursuant to the terms of
our 1997 Employee Share Incentive Plan. The options issued to Mr. Ferguson, as
well as the adjustment to our equity incentive plans, are more fully described
elsewhere herein. Under the terms of the employment agreement and related option
agreement, certain of these options may be forfeited by Mr. Ferguson upon the
termination of his employment with us. For a discussion concerning the
termination and change in control provisions contained in Mr. Ferguson's
employment agreement and in our equity incentive plans, please see the
information included herein under the heading "Employment Agreements and Change
in Control Provisions."
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ACTIONS OF THE COMPENSATION COMMITTEE FOLLOWING THE 2000 ANNUAL MEETING AND
POLICIES OF THE COMPENSATION COMMITTEE IN 2001.
Adjustment To Options And Other Awards Previously Granted Under Our Equity
Incentive Plans. Under the terms of our equity incentive plans, including the
1997 Employee Share Incentive Plan, options and other share-based awards granted
thereunder are generally subject to an automatic adjustment in the event of,
among other things, a share dividend affecting the shares of our common stock.
Pursuant to these provisions, an adjustment is to be made to, among other
things, the number and exercise price of the shares of common stock subject to
options issued prior to the event, as may be determined to be appropriate by the
compensation committee. The distribution of shares of our series B preferred
stock (and subsequent conversion into shares of common stock) during 2000 in
connection with the satisfaction of our remaining 1999 REIT distribution
requirements constituted a share dividend as contemplated by the plans, and as
such, the compensation committee approved an adjustment to options and other
share-based awards previously granted under such plans; however, no adjustment
was made to options automatically granted to the non-employee directors under
the terms of our 2000 Stock Incentive Plan, as the number of shares of common
stock represented by each option granted under the plan was determined after
previously considering the effects of the distribution.
As a result of the adjustment, the number of shares of common stock represented
by previously granted and unexercised options (or previously granted and
unissued share-based awards) were increased and, accordingly, the exercise price
per share was decreased; provided, however, that the aggregate exercise price
for such shares was not decreased. Prior to the approval and implementation of
this adjustment, we had options to purchase an aggregate of approximately
421,380 shares of common stock issued and outstanding (on a post-reverse stock
split basis), all of which had exercise prices above the then existing market
price of our common stock. As a result of the adjustment, and prior to any
awards granted in 2001, we had options to purchase an aggregate of approximately
1,015,694 shares of common stock issued and outstanding (on a post-reverse stock
split basis), substantially all of which had exercise prices above the then
existing market price of our common stock.
Compensation Policy And Components. Due to the restructuring, including our
election not to qualify and to be taxed as a REIT commencing with our 2000
taxable year, our compensation policies differ from those previously adopted by
us. The compensation committee, in determining the future compensation of our
executive officers, will primarily take into account our financial and operating
performance relative to companies with similar annual revenues, capitalization
and business operations (including other private corrections providers), as well
as the performance of each individual executive officer. The compensation
committee will also, in its discretion, consider such other factors as may be
deemed to be relevant by providing compensation which: (i) is competitive in the
marketplace; (ii) rewards successful financial performance; and (iii) aligns
executive officers' interests with those of our stockholders. The components of
compensation will generally include base salary, annual cash incentive bonus,
and long-term equity incentives.
Base Salary. The compensation committee believes that the purpose of base salary
is to create a secure level of guaranteed cash compensation for executive
officers that is competitive in the marketplace for comparable talent. In the
second quarter of each fiscal year, the compensation committee will review and
approve an annual salary plan for our executive officers. This salary plan will
be developed by our chief executive officer with the aid of the other members of
our senior management. Many subjective factors will be included in determining
base salaries, such as the responsibilities borne by the executive officer, the
scope of the position, length of service with us, corporate and individual
performance, and the salaries paid by companies of similar size as ours to
officers in similar positions. These subjective factors will then be integrated
with certain objective factors, including net income, earnings per share, return
on equity and our growth.
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Cash Incentive Plan. The compensation committee is of the view that a
significant portion of the total cash compensation for our executive officers
should be subject to the attainment of specific earnings criteria. This approach
creates a direct incentive for executive officers to achieve desired performance
goals and places a significant percentage of each executive officers'
compensation at risk. In connection with this policy, at the annual meeting of
the board of directors held on December 13, 2000, the full board of directors,
upon the recommendation and approval of the compensation committee, adopted the
2001 Management Cash Incentive Plan. The purpose of the plan is to incentivize
members of management and other key employees through participation in a cash
bonus pool based on our meeting a certain specified net EBITDA (i.e., EBITDA
after deduction of interest expense) target. Pursuant to the 2001 Management
Incentive Plan, we have established a pool equal to 10% of our projected net
EBITDA for 2001 over a base of $59.0 million, subject to certain adjustments, to
be distributed to certain of our employees at varying percentages based on their
current annual salaries. Under the plan, our executive officers will be entitled
to receive approximately 37% of the total pool, with the balance to be
distributed to the other members of our senior management, wardens and certain
other key employees. The compensation committee believes that the levels of
participation in the 2001 Management Incentive Plan described above provides the
participants with the appropriate incentive for achieving the significant goals
established thereunder.
Equity Incentives. The compensation committee believes that long-term equity
incentives are also a key component of executive compensation. In connection
with this belief, under the guidance of the compensation committee, we have
developed a comprehensive plan regarding equity compensation and engaged
PricewaterhouseCoopers to assist us in determining appropriate types and levels
of such compensation. Based on the results of this report, and recommendations
made, the compensation committee has set, and will continue to set, appropriate
equity compensation for our executive officers and senior management, which have
been determined in a manner consistent with the plans and philosophies described
in this report.
The compensation committee believes that the mix of base salaries, variable cash
incentives and the potential for equity ownership represents a balance that will
motivate our management to produce strong returns. The compensation committee
further believes that the programs described above and contemplated herein
strike an appropriate balance between the interests and needs in operating our
business and appropriate rewards based on stockholder value.
TAX DEDUCTIBILITY OF COMPENSATION. Section 162(m) of the Internal Revenue Code
of 1986, as amended, limits the deductibility on our tax return of compensation
over $1.0 million to either the chief executive officer or any of the Named
Executive Officers unless, in general, the compensation is paid pursuant to a
plan which is performance-related, non-discretionary and has been approved by
our stockholders. The compensation committee's actions with respect to Section
162(m) in 2000 were to make every reasonable effort to ensure that compensation
was deductible to the extent permitted while simultaneously providing
appropriate rewards for performance. The compensation committee also currently
intends to structure performance based compensation awarded in the future to
executive officers who may be subject to Section 162(m) in a manner that
satisfies the relevant requirements. The compensation committee, however,
reserves the authority to award non-deductible compensation as they may deem
appropriate. Further, because of ambiguities and uncertainties as to the
application and interpretation of Section 162(m) and the regulations issued
thereunder, no assurance can be given, notwithstanding our efforts, that
compensation intended to satisfy the requirements for deductibility under
Section 162(m) does in fact do so.
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Submitted by the compensation committee of the board of directors:
Joseph V. Russell, Chairman
John D. Correnti
John R. Prann, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee is currently comprised of John D. Correnti, John R.
Prann, Jr. and Joseph V. Russell, with Mr. Russell serving as chairman. Messrs.
Correnti, Prann and Russell were appointed to serve as members of the
compensation committee on December 13, 2000, immediately following their
election as directors at the 2000 annual meeting of our stockholders and were
subsequently reappointed in May 2001 following their re-election as directors at
the 2001 annual meeting of our stockholders. Prior to the 2000 annual meeting,
Mr. Russell and C. Ray Bell, a former member of our board of directors, served
as members of the compensation committee. Prior to his resignation from our
board of directors, effective April 1, 2000, Jackson W. Moore also served as a
member of the compensation committee during 2000.
Mr. Bell has certain business relationships with us as described under the
heading "Certain Relationships and Related Transactions." None of the members of
the compensation committee named above have any professional, familial or
financial relationship with our chief executive officer or any other of our
executive officers other than as a member of our board of directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the completion of the restructuring, pursuant to a series of
contractual arrangements, we paid certain fees to Operating Company and
Operating Company paid certain fees to us. Prior to the completion of the
restructuring and pursuant to these contractual arrangements, Operating Company
paid us $58.1 million in 2000. We made no payments to Operating Company in 2000.
In August 2000, we forgave $190.8 million of rental payments previously due
under the terms of our leases with Operating Company but which had not been paid
to us, as well as $7.9 million in accrued but unpaid interest on the unpaid
rental payments. In addition, we also forgave $27.4 million of accrued but
unpaid interest on a promissory note due from Operating Company. As a result of
the restructuring, each of these agreements, including the promissory note, were
cancelled.
Prior to the restructuring, we owned 100% of the outstanding non-voting common
stock of Operating Company. As a part of the restructuring, Operating Company
merged with and into our wholly-owned operating subsidiary. In the merger, the
wardens of the facilities operated by Operating Company received shares of our
common stock valued at approximately $1.6 million in exchange for shares of
Operating Company's common stock held by such wardens. Other key employees of
the company and Operating Company holding shares of Operating Company's common
stock at the time of the merger received shares of our common stock valued at
approximately $9.0 million in exchange for shares of Operating Company's common
stock held by such persons.
Prior to the restructuring, we owned 100% of the outstanding non-voting common
stock of each of PMSI and JJFMSI, which entitled us to receive cash dividends
equal to 95% of each entity's net income, as defined. PMSI and JJFMSI paid us
$4.4 million and $2.3 million, respectively, as dividends in 2000. Following the
restructuring, each of PMSI and JJFMSI was merged with and into our wholly-owned
operating subsidiary. In the merger, the wardens of the facilities operated by
each of PMSI and JJFMSI received shares of our common stock valued at
approximately $1.3 million in exchange for shares of
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PMSI and JJFMSI common stock held by such wardens. All shares of PMSI and JJFMSI
common stock held by us and certain subsidiaries of PMSI and JJFMSI were
cancelled in the 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
held by an outside entity controlled by a director of PMSI and members of such
director's immediate family for a cash purchase price of $8.0 million. In
addition, PMSI and the subsidiary paid the chief manager of the entity $150,000
for expenses incurred in connection with the transaction, as well as $125,000 in
consideration of the chief manager's agreement not to compete with the business
of PMSI for a period of one year following the purchase. 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 held by an
outside entity controlled by a former director of JJFMSI for a cash purchase
price of $4.8 million. In addition, JJFMSI and the subsidiary paid the chief
manager of the entity $250,000 for expenses incurred in connection with the
transaction.
Jean-Pierre Cuny, a former member of our board of directors, is the senior
vice-president of The Sodexho Group, an affiliate of Sodexho Alliance, S.A.
Prior to the restructuring, Mr. Cuny also served as a member of the board of
directors of Operating Company. Prior to the Sodexho's sale of its interest in
us and the termination of a series of agreements between the two parties during
the second quarter of 2001, Sodexho had a contractual right to have a
representative serve on our board of directors, provided such nominee was
elected by our stockholders. Immediately prior to the completion of the
restructuring, we purchased all of the shares of common stock of Operating
Company held by Sodexho, which represented approximately 16.9% of the
outstanding common stock of Operating Company, for an aggregate of $8.0 million
in non-cash consideration, consisting of 567,376 shares of our common stock, as
adjusted for the reverse stock split in May 2001.
As a part of the restructuring and consistent with the requirements of
previously existing contractual arrangements, JJFMSI and its wholly-owned
subsidiary, CCA (UK) Limited, a company incorporated in England and Wales, sold
their 50% ownership interest in two international subsidiaries, Corrections
Corporation of Australia Pty. Ltd., an Australian corporation, and U.K.
Detention Services Limited, a company incorporated in England and Wales, to
Sodexho for a cash purchase price of $6.4 million. Sodexho owned the remaining
50% interest in each of CCA Australia and UKDS. In connection with the sale of
JJFMSI's and 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. JJFMSI had the right to repurchase a 25% interest
in each entity for aggregate cash consideration of $4.0 million if such option
was exercised on or before February 11, 2002 and for aggregate cash
consideration of $4.2 million if such option was exercised after February 11,
2002 but prior to September 11, 2002. These agreements were terminated in June
2001, in connection with the sale of Sodexho's interest in us.
In 2000, we made certain payments to our directors in connection with their
service on a special committee of our board of directors relating to the
restructuring.
Thomas W. Beasley, a member of our board of directors during 2000, served as the
chairman of our board of directors from December 1999 through August 2000. Mr.
Beasley also served as our interim chief executive officer during 2000 and as
interim chief executive officer of Operating Company during 2000. Mr. Beasley
served as the chairman of the board of directors of PMSI prior to its merger
with our wholly-owned operating subsidiary. Payments made to Mr. Beasley in 2000
for his services to us as our chairman and interim chief executive officer are
set forth in the Report of the Compensation Committee contained herein under the
heading "Executive Compensation."
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William F. Andrews, the chairman of our board of directors, served as the
chairman of the board of directors of JJFMSI following the completion of the
1999 merger and through August 2000. Mr. Andrews also receives an annual
retainer for his services as chairman of our board of directors equal to
$100,000 per year, as well as a cash bonus equal to 50% of the annual retainer
if we meet certain financial performance targets, and received options to
purchase shares of our common stock as set forth herein under the heading
"Employment Agreements and Change in Control Provisions."
C. Ray Bell, a member of our board of directors in 2000, is the principal of a
construction company which, as a part of its business, builds correctional and
detention facilities, including facilities for us. In 2000, we paid Mr. Bell's
construction company fees in the amount of $26.5 million for construction
services.
Charles W. Thomas, a member of our board of directors in 2000, received a total
of $150,000 from us in 2000 for the provision of certain consulting and investor
relations services.
EXPERTS
The audited financial statements included in this prospectus and elsewhere in
the registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports. Reference is made to the audited financial statements of
Corrections Corporation of America and Subsidiaries (formerly Correctional
Management Services Corporation) as of December 31, 1999 and 1998, which
includes an explanatory paragraph with respect to the uncertainty regarding the
company's ability to continue as a going concern as discussed in Note 3 to the
financial statements.
LEGAL MATTERS
The legality of the shares of our common stock subject to this prospectus has
been passed upon by Stokes Bartholomew Evans & Petree, P.A., Nashville,
Tennessee, as our corporate and securities counsel. Stokes Bartholomew Evans &
Petree, P.A. will rely, as to all matters of Maryland law, upon the opinion of
Miles & Stockbridge P.C., Baltimore, Maryland.
103
109
INDEX TO FINANCIAL STATEMENTS
Page
----
PRO FORMA FINANCIAL INFORMATION OF CORRECTIONS CORPORATION OF AMERICA
AND SUBSIDIARIES (FORMERLY PRISON REALTY TRUST, INC.)
Pro Forma Combined Statement of Operations (Unaudited) for the
year ended December 31, 2000........................................................................... F-3
Notes to the Pro Forma Combined Statement of Operations for the
year ended December 31, 2000........................................................................... F-5
Pro Forma Combined Statement of Operations (Unaudited) for the
six months ended June 30, 2000......................................................................... F-7
Notes to the Pro Forma Combined Statement of Operations for the
six months ended June 30, 2000......................................................................... F-9
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS OF CORRECTIONS CORPORATION OF AMERICA
AND SUBSIDIARIES (FORMERLY PRISON REALTY TRUST, INC.)
Report of Independent Public Accountants.................................................................. F-11
Consolidated Balance Sheets as of December 31, 2000 and 1999.............................................. F-12
Combined and Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998....................................................................... F-13
Combined and Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998....................................................................... F-15
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998....................................................................... F-19
Notes to the Combined and Consolidated Financial Statements for the years ended
December 31, 2000, 1999 and 1998....................................................................... F-21
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2001
and December 31, 2000.................................................................................. F-82
Condensed Consolidated Statements of Operations (Unaudited) for the
six months ended June 30, 2001 and 2000................................................................ F-83
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2001 and 2000................................................................ F-84
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the
six months ended June 30, 2001......................................................................... F-85
Notes to the Condensed Consolidated Financial Statements for the
six months ended June 30, 2001 and 2000................................................................ F-86
CONSOLIDATED FINANCIAL STATEMENTS OF CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
Condensed Consolidated Balance Sheet (Unaudited) as of June 30, 2000...................................... F-106
Condensed Consolidated Statement of Operations (Unaudited) for the
six months ended June 30, 2000......................................................................... F-107
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) for the
six months ended June 30, 2000......................................................................... F-108
F-1
110
Page
----
Condensed Consolidated Statement of Cash Flows (Unaudited) for the
six months ended June 30, 2000......................................................................... F-109
Notes to the Condensed Consolidated Financial Statements for the
six months ended June 30, 2000......................................................................... F-110
Report of Independent Public Accountants.................................................................. F-120
Consolidated Balance Sheets as of December 31, 1999 and 1998.............................................. F-121
Consolidated Statement of Operations for the year ended December 31, 1999................................. F-122
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1999 and for the period from September 11, 1998
through December 31, 1998.............................................................................. F-123
Consolidated Statements of Cash Flows for the year ended December 31, 1999
and for the period from September 11, 1998 through December 31, 1998................................... F-124
Notes to the Consolidated Financial Statements for the year ended December 31, 1999
and for the period from September 11, 1998 through December 31, 1999................................... F-126
F-2
111
CORRECTIONS CORPORATION OF AMERICA
(FORMERLY PRISON REALTY TRUST, INC.)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(Unaudited and amounts in thousands, except per share amounts)
PRO FORMA
CCA ACQUISITION
(FORMERLY TRANSACTIONS
PRISON COMBINED AND
REALTY OPERATING OPERATING ELIMINATION
TRUST, INC.) COMPANY COMPANIES ADJUSTMENTS CCA
(1) (2) PMSI(3) JJFMSI(3) ACQUIRED YY PRO FORMA
------------ --------- ------- --------- --------- ------------ ---------
REVENUE:
Management and other $261,774 $432,480 $152,927 $126,301 $711,708 $ (4,340) NN $ 881,742
(8,100) LL
(43,937) PP
(35,363) QQ
Rental 40,938 -- -- -- -- (31,000) AA 9,938
Licensing fees from affiliates 7,566 -- -- -- -- (7,566) CC --
------- ------- ------- ------- ------- -------- ---------
310,278 432,480 152,927 126,301 711,708 (130,306) 891,680
EXPENSES
Operating 214,872 337,238 125,636 105,594 568,468 (34,923) PP 719,683
(28,734) QQ
Lease 2,443 241,681 442 2,545 244,668 (244,309) AA 8,654
6,650 BB
(110) PP
(688) QQ
Administrative services fee to
Operating Company 900 -- 4,950 4,950 9,900 (10,800) LL --
General and administrative 21,241 25,144 951 698 26,793 (411) PP 47,411
(212) QQ
Write-off of amounts under lease
arrangements 11,920 -- -- -- -- (11,920) JJ --
Impairment losses 527,919 -- -- -- -- -- 527,919
Depreciation and amortization 59,799 6,498 9,117 5,120 20,735 (13,362) FF 63,416
5,783 FF
(253) GG
(2,541) PP
(1,351) QQ
1,164 TT
1,154 UU
(7,712) VV
Licensing fee to Operating
Company 501 7,566 2,939 2,428 12,933 (7,566) CC --
(5,868) NN
------- ------- ------- ------- ------- -------- ---------
839,595 618,127 144,035 121,335 883,497 (356,009) 1,367,083
------- ------- ------- ------- ------- -------- ---------
OPERATING INCOME (LOSS)
(529,317) (185,647) 8,892 4,966 (171,789) 225,703 (475,403)
(Continued)
F-3
112
CORRECTIONS CORPORATION OF AMERICA
(FORMERLY PRISON REALTY TRUST, INC.)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(Unaudited and amounts in thousands, except per share amounts)
PRO FORMA
CCA ACQUISITION
(FORMERLY TRANSACTIONS
PRISON COMBINED AND
REALTY OPERATING OPERATING ELIMINATION
TRUST, INC.) COMPANY COMPANIES ADJUSTMENTS CCA
(1) (2) PMSI(3) JJFMSI(3) ACQUIRED YY PRO FORMA
------------ --------- ------- --------- --------- ----------- ---------
OPERATING INCOME (LOSS)
(FROM PREVIOUS PAGE) $(529,317) $(185,647) $8,892 $ 4,966 $(171,789) $225,703 $(475,403)
Equity loss and amortization of
deferred gain 11,638 -- -- 779 779 9,787 RR 835
(760) MM
(20,609) SS
Interest (income) expense, net 131,545 26,208 (184) (184) 25,840 (12,330) DD 139,808
(14) PP
(86) QQ
2,739 VV
77 EE
(7,963) XX
Other income (3,099) -- -- -- -- -- (3,099)
Strategic investor fees 24,222 -- 6,000 6,000 12,000 (12,000) OO --
(24,222) WW
Unrealized foreign currency
transaction loss 8,147 -- -- -- -- -- 8,147
Stockholder litigation settlement 75,406 -- -- -- -- -- 75,406
Loss on sales of assets 1,733 -- -- 2,036 2,036 (2,036) QQ 1,733
--------- --------- ------ ------- --------- -------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES AND
MINORITY INTEREST (778,909) (211,855) 3,076 (3,665) (212,444) 293,120 (698,233)
(Provision) benefit for income
taxes 48,002 -- (2,602) (245) (2,847) 149,077 HH 146,230
(48,002) II
--------- --------- ------ ------- --------- -------- ---------
INCOME (LOSS) BEFORE
MINORITY INTEREST (730,907) (211,855) 474 (3,910) (215,291) 394,195 (552,003)
Minority interest in net loss
of PMSI and JJFMSI 125 -- -- -- -- 24 PP --
(149) QQ
--------- --------- ------ ------- --------- -------- ---------
NET INCOME (LOSS) (730,782) (211,855) 474 (3,910) (215,291) 394,070 (552,003)
Distributions to preferred
stockholders (13,526) -- -- -- -- -- (13,526)
--------- --------- ------ ------- --------- -------- ---------
NET INCOME (LOSS)
AVAILABLE TO COMMON
STOCKHOLDERS $(744,308) $(211,855) $ 474 $(3,910) $(215,291) $394,070 $(565,529)
========= ========= ====== -====== ========= ======== =========
Basic net loss available to
common stockholders per
common share $ (56.68) n/a n/a n/a n/a $ (38.21)
Diluted net loss available to
common stockholders per
common share $ (56.68) n/a n/a n/a n/a $ (38.21)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic 13,132 1,669 KK 14,801
Diluted 13,132 1,669 KK 14,801
F-4
113
CORRECTIONS CORPORATION OF AMERICA
(FORMERLY PRISON REALTY TRUST, INC.)
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(Unaudited and amounts in thousands, except per share amounts)
(1) Historical results of operations for the year ended December 31, 2000.
(2) Historical results of operations for the nine months ended September
30, 2000.
(3) Historical results of operations for the eleven months ended November
30, 2000.
AA To eliminate the gross rental revenue recognized by CCA and the gross
lease expense recognized by the Operating Company pursuant to the lease
agreements between CCA and the Operating Company.
BB To eliminate the amortization of deferred fees paid by CCA to the
Operating Company pursuant to the Tenant Incentive Agreement, the
Business Development Agreement and the Services Agreement.
CC To eliminate the license fee revenue recognized by CCA and the license
fee expense recognized by the Operating Company related to licensing
fees paid by the Operating Company to CCA.
DD To eliminate the interest expense recognized by the Operating Company
related to the interest accrued on the $137,000 Operating Company Note
payable to CCA.
EE Increase in the pro forma interest expense due to a pro forma decrease
in the capitalized interest based on the difference between historical
and pro forma construction in progress balances resulting from the pro
forma removal of capitalized fees paid to the Operating Company by CCA
during the year ended December 31, 2000 as if the merger transactions
had occurred on January 1, 2000.
FF To remove the historical amortization of investment in contracts
previously recognized by the Operating Company and to record the pro
forma amortization of goodwill based on the pro forma goodwill balance
of $110,596 amortized over the pro forma average life (15 years) of the
contracts acquired in the merger transactions net of the 2000
amortization already recorded by CCA.
GG To remove the historical depreciation expense recognized by CCA related
to capitalized fees paid by CCA to the Operating Company during 2000.
HH To adjust CCA's historical income tax benefit to reflect the pro forma
effective tax rate.
II To remove historical CCA tax benefit.
JJ To remove the historical non-recurring write-off of deferred tenant
incentive fees recorded by CCA during 2000.
KK To adjust CCA's weighted average outstanding shares for the effects of
the new common shares issued to the Operating Company, JJFMSI and PMSI
shareholders in the merger transactions as if the transaction had
occurred January 1, 2000:
The Operating Company- (1,873 shares issued) to add the
first nine months of shares outstanding to the weighted 1,405
average share calculation
JJFMSI- (160 shares issued) to add the first eleven months
of shares outstanding to the weighted average share 147
calculation
PMSI- (128 shares issued) to add the first eleven months of
shares outstanding to the weighted average share calculation 117
-----
1,669
-----
LL To eliminate the administrative service revenue recognized by the
Operating Company and the administrative service fee expense recognized
by PMSI and JJFMSI.
MM To eliminate the equity in earnings losses recognized by CCA based on
CCA owning 95% of the economic interests of PMSI and JJFMSI for the
period from January through August 2000.
NN To eliminate the license fee revenue recognized by the Operating
Company and the license fee expense recognized by PMSI and JJFMSI.
OO To eliminate strategic investor expenses paid to CCA by PMSI and JJFMSI
to indemnify themselves from the Fortress/Blackstone litigation.
PP To eliminate the related revenue and expenses during the period
(September through November) when PMSI was combined with CCA for
financial statement presentation.
F-5
114
QQ To eliminate the related revenue and expenses during the period
(September through November) when JJFMSI was combined with CCA for
financial statement presentation.
RR To eliminate the historical amortization of CCA's deferred gains
relating to the 1999 sale of contracts to PMSI and JJFMSI.
SS To eliminate CCA's recognition of 9.5% of the Operating Company's
losses as CCA owned 9.5% of the Operating Company before the merger.
TT To increase the historical amortization to a full year's amortization
of the work force intangible asset acquired in the Merger.
UU To increase the historical amortization to a full year's amortization
of the contracts acquired intangible asset acquired in the Merger.
VV To increase the historical amortization to a full year's amortization
of the liability created from the negative investment in contracts
value acquired in the Merger.
WW To remove the historical non-recurring expenses associated with the
proposed merger and related transactions that CCA had recorded during
2000.
XX To remove interest expense charged to the Operating Company by CCA on
unpaid lease amounts.
YY The unaudited pro forma information presented does not include
adjustments to reflect the dilutive effects of the fourth quarter 2000
conversion of the CCA Series B Preferred Stock into approximately 9.5
million shares of CCA's common stock (on a post reverse stock split
basis) as if those conversions occurred at the beginning of 2000.
Additionally, the provisions of SFAS No. 128 prohibit the inclusion of
the effects of potentially issuable common shares in periods that a
company reports losses from continuing operations. As such, the pro
forma statement of operations for the year ended December 31, 2000 does
not include the effects of CCA's potentially issuable common shares
such as convertible debt and equity securities, options and warrants.
The unaudited pro forma information also does not include the dilutive
effects of the expected issuance of an aggregate of 4.7 million shares
of CCA's common stock to be issued in connection with the settlement of
CCA's shareholder litigation.
F-6
115
CORRECTIONS CORPORATION OF AMERICA
(FORMERLY PRISON REALTY TRUST, INC.)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited and amounts in thousands, except per share amounts)
PRO FORMA
CCA ACQUISITION
(FORMERLY TRANSACTIONS
PRISON COMBINED AND
REALTY OPERATING OPERATING ELIMINATION
TRUST, INC.) COMPANY COMPANIES ADJUSTMENTS CCA
(1) (1) PMSI(1) JJFMSI(1) ACQUIRED UU PRO FORMA
------------ --------- ------- --------- --------- ----------- ---------
REVENUE:
Management and other $ -- $ 280,342 $79,881 $66,972 $ 427,195 $ 777 SS $ 424,852
(3,120) KK
Rental 22,926 -- -- -- -- (18,000) AA 4,926
Licensing fees from affiliates 5,242 -- -- -- -- (5,242) CC --
--------- --------- ------ ------ --------- -------- ---------
28,168 280,342 79,881 66,972 427,195 (25,585) 429,778
--------- --------- ------ ------ --------- -------- ---------
EXPENSES:
Operating -- 220,404 66,858 57,417 344,679 -- 344,679
Lease -- 160,153 264 1,388 161,805 (161,802) AA 4,017
4,014 BB
Administrative services fee to
Operating Company -- -- 1,560 1,560 3,120 (3,120) KK --
General and administrative 6,587 13,055 417 353 13,825 -- 20,412
Write-off of amounts under lease
arrangements 8,416 -- -- -- -- (8,416) II --
Impairment losses -- -- -- -- -- -- --
Depreciation and amortization 26,331 4,339 4,910 2,825 12,074 (7,754) FF 31,150
3,806 FF
(110) GG
647 OO
994 PP
(4,838) QQ
Licensing fees to Operating
Company -- 5,242 -- -- 5,242 (5,242) CC --
--------- --------- ------ ------ --------- -------- ---------
41,334 403,193 74,009 63,543 540,745 (181,821) 400,258
--------- --------- ------ ------ --------- -------- ---------
OPERATING INCOME (LOSS) (13,166) (122,851) 5,872 3,429 (113,550) 156,236 29,520
(Continued)
F-7
116
CORRECTIONS CORPORATION OF AMERICA
(FORMERLY PRISON REALTY TRUST, INC.)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited and amounts in thousands, except per share amounts)
(Continued)
PRO FORMA
CCA ACQUISITION
(FORMERLY TRANSACTIONS
PRISON COMBINED AND
REALTY OPERATING OPERATING ELIMINATION
TRUST, INC.) COMPANY COMPANIES ADJUSTMENTS CCA
(1) (1) PMSI(1) JJFMSI(1) ACQUIRED UU PRO FORMA
------------ --------- ------- --------- --------- ----------- ---------
OPERATING INCOME (LOSS)
(FROM PREVIOUS PAGE) $ (13,166) $(122,851) $5,872 $3,429 $(113,550) $156,236 $ 29,520
Equity loss and amortization
of deferred gain 4,257 -- -- -- -- 5,338 MM 777
3,649 LL
777 SS
(13,244) NN
Interest (income) expense, net 59,749 16,561 (131) (177) 16,253 (8,220) DD 65,220
(4,631) TT
1,994 QQ
75 EE
Other income -- -- -- -- -- -- --
Strategic investor fees 28,153 -- -- -- -- (28,153) RR --
Unrealized foreign currency
transaction loss 7,530 -- -- -- -- -- 7,530
Loss on sales of assets 301 -- -- -- -- -- 301
--------- --------- ------ ------ --------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (113,156) (139,412) 6,003 3,606 (129,803) 198,651 (44,308)
--------- --------- ------ ------ --------- --------- ---------
(Provision) benefit for
income taxes -- -- (3,715) (2,053) (5,768) 6,246 HH 478
--------- --------- ------ ------ --------- --------- ---------
NET INCOME (LOSS) (113,156) (139,412) 2,288 1,553 (135,571) 204,897 (43,830)
Distributions to preferred
stockholders (4,300) -- -- -- -- -- (4,300)
--------- --------- ------ ------ --------- --------- ---------
NET INCOME (LOSS)
AVAILABLE TO COMMON
STOCKHOLDERS $(117,456) $(139,412) $2,288 $1,553 $(135,571) $204,897 $ (48,130)
========= ========= ====== ====== ========= ========= =========
Basic net loss available to
common stockholders per
common share $ (9.92) n/a n/a n/a n/a $ (3.44)
Diluted net loss available
to common stockholders per
common share $ (9.92) n/a n/a n/a n/a $ (3.44)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic
11,840 2,161 JJ 14,001
Diluted 11,840 2,161 JJ 14,001
F-8
117
CORRECTIONS CORPORATION OF AMERICA
(FORMERLY PRISON REALTY TRUST, INC.)
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited and amounts in thousands, except per share amounts)
(1) Historical results of operations for the six months ended June 30,
2000.
AA To eliminate the gross rental revenue recognized by CCA and the gross
lease expense recognized by the Operating Company pursuant to the lease
agreements between CCA and the Operating Company.
BB To eliminate the amortization of deferred fees paid by CCA to the
Operating Company pursuant to the Tenant Incentive Agreement, the
Business Development Agreement and the Services Agreement.
CC To eliminate the license fee revenue recognized by CCA and the license
fee expense recognized by the Operating Company related to licensing
fees paid by the Operating Company to CCA.
DD To eliminate the interest expense recognized by the Operating Company
related to the interest accrued on the $137,000 Operating Company Note
payable to CCA.
EE Increase in the pro forma interest expense due to a pro forma decrease
in the capitalized interest based on the difference between historical
and pro forma construction in progress balances resulting from the pro
forma removal of capitalized fees paid to the Operating Company by CCA
during the six months ended June 30, 2000 as if the merger transactions
had occurred on January 1, 2000.
FF To remove the historical amortization of investment in contracts
previously recognized by the Operating Company and to record the pro
forma amortization of goodwill based on the pro forma goodwill balance
of $114,188 amortized over the pro forma average life (15 years) of the
contracts acquired in the merger transactions.
GG To remove the historical depreciation expense recognized by CCA related
to capitalized fees paid by CCA to the Operating Company for the six
months ended June 30, 2000.
HH To adjust CCA's historical income tax benefit to reflect the pro
forma effective tax rate.
II To remove the historical non-recurring write-off of deferred tenant
incentive fees recorded by CCA during the six months ended June 30,
2000.
JJ To adjust CCA's weighted average outstanding shares for the effects of
the new common shares issued to the Operating Company, JJFMSI and PMSI
shareholders in the merger transactions as if the transaction had
occurred January 1, 2000. The number of CCA common shares issued are as
follows:
The Operating Company- (1,873 shares issued) to add the
first six months of shares outstanding to the weighted 1,873
average share calculation
JJFMSI- (160 shares issued) to add the first six months of
shares outstanding to the weighted average share 160
calculation
PMSI- (128 shares issued) to add the first six months of
shares outstanding to the weighted average share 128
calculation
-----
2,161
-----
KK To eliminate the administrative service revenue recognized by the
Operating Company and the administrative service fee expense recognized
by PMSI and JJFMSI.
LL To eliminate the equity in earnings earnings recognized by CCA based on
CCA owning 95% of the economic interests of PMSI and JJFMSI for the
period from January through June 2000.
MM To eliminate the historical amortization of CCA's deferred gains
relating to the 1999 sale of contracts to PMSI and JJFMSI.
NN To eliminate CCA's recognition of the 9.5% of the Operating Company
losses as CCA owned 9.5% of the Operating Company before the merger.
OO To record six month's amortization of the work force intangible asset
acquired in the Merger.
PP To record six month's amortization of the contracts acquired intangible
asset acquired in the Merger.
QQ To record six month's amortization of the liability created from the
negative investment in contracts value acquired in the Merger.
RR To remove historical non-recurring expenses associated with the
proposed merger and related transactions that CCA had recorded during
the first six months of 2000.
F-9
118
SS To reclassify equity in earnings of JFMSI received from the
international investments from management revenue to equity in earnings
for consistent presentation compared to the first six months of 2001.
TT To remove interest expense charged to the Operating Company by CCA on
unpaid lease amounts.
UU The unaudited pro forma information presented does not include
adjustments to reflect the dilutive effects of the fourth quarter 2000
conversion of the CCA Series B Preferred Stock into approximately 9.5
million shares of CCA's common stock (on a post reverse stock split
basis) as if those conversions occurred at the beginning of 2000.
Additionally, the provisions of SFAS No. 128 prohibit the inclusion of
the effects of potentially issuable common shares in periods that a
company reports losses from continuing operations. As such, the pro
forma statement of operations for the six months ended June 30, 2000
does not include the effects of CCA's potentially issuable common
shares such as convertible debt and equity securities, options and
warrants. The unaudited pro forma information also does not include the
dilutive effects of the expected issuance of an aggregate of 4.7
million shares of CCA's common stock to be issued in connection with
the settlement of CCA's shareholder litigation.
F-10
119
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 at December 31, 2000, 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 (except with respect to the
matter discussed in Note 18, as to which the
date is May 18, 2001)
F-11
120
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(in thousands, except per share amounts)
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-12
121
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-13
122
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 $ (56.68) $ (7.06) $ 3.78
Cumulative effect of accounting change -- -- (2.26)
-------- -------- -------
$ (56.68) $ (7.06) $ 1.52
======== ======== =======
DILUTED NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS PER COMMON
SHARE:
Before cumulative effect of accounting change $ (56.68) $ (7.06) $ 3.47
Cumulative effect of accounting change -- -- (2.05)
-------- -------- -------
$ (56.68) $ (7.06) $ 1.42
======== ======== =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC
13,132 11,510 7,138
======== ======== =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, DILUTED 13,132 11,510 7,894
======== ======== =======
The accompanying notes are an integral part of these
combined and consolidated financial statements.
F-14
123
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-15
124
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-16
125
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-17
126
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-18
127
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 COMMON STOCK
-------------------------------------- ------------------------------------------
SERIES A SERIES B ISSUED TREASURY STOCK
----------------- ------------------ ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ -------- ------ -------- -------- ------- ------ ---------
BALANCE, DECEMBER 31, 1997 -- $ -- 380 $ 380 70,201 $ 702 (829) $ (40,842)
------ -------- ------ -------- ------- ------- ------ ---------
Conversion of preferred stock -- -- (380) (380) 610 6 -- --
Stock options and warrants
Exercised -- -- -- -- 5,161 52 (818) (20,148)
Stock repurchased -- -- -- -- -- -- (175) (7,600)
Income tax benefits of
incentive stock option
exercises -- -- -- -- -- -- -- --
Conversion of long-term debt -- -- -- -- 1,805 18 1,075 51,029
Retirement of treasury stock -- -- -- -- (747) (7) 747 17,561
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 4,300 107,500 -- -- 25,316 253 -- --
Effect of election of status as a
real estate investment trust -- -- -- -- -- -- -- --
Issuance of common stock -- -- -- -- 7,981 79 -- --
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 4,300 $107,500 -- $ -- 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
---------- ------ -------- -----------
F-19
128
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 COMMON STOCK
-------------------------------------- ----------------------------------------
SERIES A SERIES B ISSUED TREASURY STOCK
----------------- ------------------ ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ -------- ------ -------- -------- ------- ------ ---------
BALANCE, DECEMBER 31, 1999 4,300 $107,500 -- $ -- 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 -- -- 7,517 183,872 -- -- -- --
Conversion of series B
preferred stock into
common stock, net -- -- (4,312) (105,482) 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 -- -- 92 2,252 -- -- -- --
Net loss -- -- -- -- -- -- -- --
----- -------- ------ -------- -------- ------- ------ ---------
BALANCE, DECEMBER 31, 2000 4,300 $107,500 3,297 $ 80,642 235,395 $ 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 trustees 76 -- -- 76
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-20
129
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 with and
into the Company 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
F-21
130
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 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
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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.
As a result of the acquisition of Operating Company on October 1, 2000,
and the acquisition 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.
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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 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
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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;
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.
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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 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
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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 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
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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 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 (on a pre-reverse stock split basis) 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 (on a pre-reverse stock split
basis). In addition, the Company issued to Baron warrants to purchase
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approximately 1.4 million shares of the Company's common stock (on a
pre-reverse stock split basis) at an exercise price of $0.01 per share
and warrants to purchase approximately 0.7 million shares of the
Company's common stock (on a pre-reverse stock split basis) 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 (on a pre-reverse
stock split basis), 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.
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
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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 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
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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 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.
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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 $ (39.04) $ (4.23)
Diluted $ (39.04) $ (4.23)
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 (on a
pre-reverse stock split basis) 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 (on a pre-reverse stock split basis) 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 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
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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.
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
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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
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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 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):
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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
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
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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 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 manages its operations as one 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
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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 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,
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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, 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
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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 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
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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.
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
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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.
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
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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
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.
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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.
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,
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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. FACILITY TRANSACTIONS
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 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.
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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
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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
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
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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.
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.
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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
========= =========
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.
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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.
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:
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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%
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 $ 382,532 $ 332,484
periodically at variable interest rates
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
=========== ===========
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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 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
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163
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 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
F-55
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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 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
F-56
165
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.
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
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166
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 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.
F-58
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$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.
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
F-59
168
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 (on a
pre-reverse stock split basis), 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 (on a pre-reverse stock split basis).
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 (on a pre-reverse stock split basis). 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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169
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 (on a
pre-reverse stock split basis), 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 (on a
pre-reverse stock split basis).
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.
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$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 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.
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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
===========
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,
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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.
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):
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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 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%
====== ======
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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 0.1 million and 0.02 million
shares, respectively, as adjusted for the reverse stock split in May
2001, as further described in Note 18. For the years ended December 31,
2000 and 1999, the Company's convertible subordinated notes were
convertible into 6.3 million and 0.3 million shares, respectively, as
adjusted for the reverse stock split in May 2001. 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.
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):
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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 13,132 11,510 7,138
========= ========= =========
Diluted
Weighted average common shares outstanding 13,132 11,510 7,138
Effect of dilutive options and warrants -- -- 369
Conversion of preferred stock -- -- 48
Conversion of convertible subordinated notes -- -- 339
--------- --------- ---------
Weighted average shares and assumed conversions 13,132 11,510 7,894
========= ========= =========
Basic net income (loss) per common share:
Before cumulative effect of accounting change $ (56.68) $ (7.06) $ 3.78
Cumulative effect of accounting change -- -- (2.26)
--------- --------- ---------
Net income (loss) available to common stockholders $ (56.68) $ (7.06) $ 1.52
========= ========= =========
Diluted net income (loss) per common share:
Before cumulative effect of accounting change $ (56.68) $ (7.06) $ 3.47
Cumulative effect of accounting change -- -- (2.05)
--------- --------- ---------
Net income (loss) available to common stockholders $ (56.68) $ (7.06) $ 1.42
========= ========= =========
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 (on a pre-reverse stock split basis).
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.
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.
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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 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.
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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 (on a
pre-reverse stock split basis). 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 (on a
pre-reverse stock split basis). 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,
F-69
178
warrants and debt securities for sale to the public (the "Shelf
Registration Statement"). Proceeds 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 (on a pre-reverse stock split basis)
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 (on a pre-reverse stock split basis), 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. The board of directors subsequently approved a reverse stock split
of the Company's common stock at a ratio of one-for-ten, which was
effective May 18, 2001. The number of weighted average shares used in the
calculation of earnings per share and earnings per share amounts have
been retroactively restated in the accompanying financial statements and
these notes to the financial statements, unless otherwise indicated, to
reflect the reduction in the number of common shares outstanding and the
corresponding increase in the per share amounts resulting from the
reverse stock split.
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 (on a
pre-reverse stock split basis). 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 (on a pre-reverse stock split basis).
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179
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.
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 (on a pre-reverse stock split
basis) 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 and on a pre-reverse stock split basis):
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180
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.
Stock options outstanding at December 31, 2000, are summarized below
(on a pre-reverse stock split basis):
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 (on a pre-reverse
stock split basis).
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181
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 was adjusted for the reverse stock split discussed above.
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 (as
adjusted for the reverse stock split) 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 $ (56.68) $ (7.06) $ 1.52
Net income (loss) per share - Basic - pro forma (56.78) (7.31) .95
Net income (loss) per share - Diluted - as reported $ (56.68) $ (7.06) $ 1.42
Net income (loss) per share - Diluted - pro forma (56.78) (7.31) .86
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.
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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.
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.
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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.
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.
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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 (on a
pre-reverse stock split basis); (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 (on a pre-reverse stock split basis) 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 (on a pre-reverse stock split basis),
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 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.
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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.
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
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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.
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.
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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 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
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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 (on a pre-reverse stock split
basis).
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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 (as adjusted for the reverse stock
split) 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 (3.03) (6.89) (22.04) (21.55)
Net loss per common share - diluted (3.03) (6.89) (22.04) (21.55)
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 (2.66) 4.70 2.94 (12.02)
Net income (loss) per common share -
Diluted (2.66) 4.70 2.94 (12.02)
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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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and amounts in thousands, except per share amounts)
JUNE 30, December 31,
ASSETS 2001 2000
------------------------------------------------------------------------------ ---------- ------------
Cash and cash equivalents $ 41,934 $ 20,889
Restricted cash 10,522 9,209
Accounts receivable, net of allowance of $857 and $1,486, respectively 119,738 132,306
Income tax receivable 650 32,662
Prepaid expenses and other current assets 20,252 18,726
Assets held for sale under contract -- 24,895
---------- ----------
Total current assets 193,096 238,687
Property and equipment, net 1,590,472 1,615,130
Investment in direct financing lease -- 23,808
Assets held for sale 71,413 138,622
Goodwill 108,638 109,006
Other assets 41,328 51,739
---------- ----------
Total assets $2,004,947 $2,176,992
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------
Accounts payable and accrued expenses $ 208,664 $ 243,312
Income tax payable 6,804 8,437
Distributions payable 13,522 9,156
Current portion of long-term debt 286,751 14,594
---------- ----------
Total current liabilities 515,741 275,499
Long-term debt, net of current portion 709,918 1,137,976
Deferred tax liabilities 58,789 56,450
Fair value of interest rate swap agreement 10,062 --
Other liabilities 21,351 19,052
---------- ----------
Total liabilities 1,315,861 1,488,977
---------- ----------
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 - 3,514 and 3,297 shares issued and outstanding at June 30, 2001 and
December 31, 2000, respectively; stated at liquidation preference of $24.46
per share 85,946 80,642
Common stock - $0.01 par value; 80,000 and 400,000 shares authorized; 25,138 and
235,395 shares issued and 25,137 and 235,383 shares outstanding at
June 30, 2001 and December 31, 2000, respectively 251 2,354
Additional paid-in capital 1,317,065 1,299,390
Deferred compensation (4,168) (2,723)
Retained deficit (813,500) (798,906)
Treasury stock, 1.2 shares and 12 shares, respectively, at cost (242) (242)
Accumulated other comprehensive loss (3,766) --
---------- ----------
Total stockholders' equity 689,086 688,015
---------- ----------
Total liabilities and stockholders' equity $2,004,947 $2,176,992
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and amounts in thousands, except per share amounts)
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2001 2000
----------- -----------
REVENUE:
Management and other $ 481,909 $ --
Rental 4,198 22,926
Licensing fees from affiliates -- 5,242
----------- -----------
486,107 28,168
----------- -----------
EXPENSES:
Operating 373,836 --
General and administrative 17,034 34,740
Depreciation and amortization 25,877 26,331
Write-off of amounts under lease arrangements -- 8,416
----------- -----------
416,747 69,487
----------- -----------
OPERATING INCOME (LOSS) 69,360 (41,319)
----------- -----------
OTHER (INCOME) EXPENSE:
Equity loss and amortization of deferred gain,
net 175 4,257
Interest expense, net 67,115 59,749
Change in fair value of interest rate swap agreement 6,296 --
(Gain) loss on disposal of assets (39) 301
Unrealized foreign currency transaction (gain) loss 344 7,530
----------- -----------
73,891 71,837
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (4,531) (113,156)
Income tax expense (262) --
----------- -----------
NET INCOME (LOSS) (4,793) (113,156)
Distributions to preferred stockholders (9,801) (4,300)
----------- -----------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (14,594) $ (117,456)
=========== ===========
BASIC NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE $ (0.61) $ (9.92)
=========== ===========
DILUTED NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS PER COMMON SHARE $ (0.61) $ (9.92)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 23,938 11,840
=========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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192
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and amounts in thousands)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,793) $(113,156)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 25,877 26,331
Amortization of debt issuance costs and other non-cash interest 11,074 6,643
Deferred and other non-cash income taxes (1,253) --
Equity in loss and amortization of deferred gain 175 4,257
Write-off of amounts under lease agreement -- 8,416
(Gain) loss on disposal of assets (39) 301
Change in fair value of interest rate swap agreement 6,296 --
Unrealized foreign currency transaction loss 344 7,530
Other non-cash items 1,099 247
Changes in assets and liabilities:
Accounts receivable, prepaid expenses and other assets 10,029 1,248
Receivable from affiliates -- 10,789
Income tax receivable 32,012 --
Accounts payable, accrued expenses and other liabilities (14,674) 3,574
Income tax payable (1,633) 769
--------- ---------
Net cash provided by (used in) operating activities 64,514 (43,051)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment, net (1,694) (70,281)
(Increase) decrease in restricted cash (1,313) 14,993
Payments received on investments in affiliates -- 6,686
Proceeds from sales of assets 115,727 --
Increase in other assets (913) (107)
Payments received on direct financing leases and notes receivable 1,173 2,296
--------- ---------
Net cash provided by (used in) investing activities 112,980 (46,413)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) debt, net (155,901) 36,959
Payment of debt and equity issuance costs (425) (9,322)
Payment of dividends (32) (4,300)
Cash paid for fractional shares (91) --
--------- ---------
Net cash provided by (used in) financing activities (156,449) 23,337
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,045 (66,127)
CASH AND CASH EQUIVALENTS, beginning of period 20,889 84,493
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 41,934 $ 18,366
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 36,700 $ 53,599
========= =========
Income taxes $ 2,267 $ 615
========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(Unaudited and amounts in thousands)
SERIES A SERIES B ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN DEFERRED RETAINED
STOCK STOCK STOCK CAPITAL COMPENSATION DEFICIT
--------- --------- --------- ----------- ------------ ---------
Balance as of
December 31, 2000 $ 107,500 $ 80,642 $ 2,354 $1,299,390 $ (2,723) $(798,906)
--------- --------- --------- ---------- --------- ---------
Comprehensive income (loss):
Net loss -- -- -- -- -- (4,793)
Cumulative effect of
accounting change -- -- -- -- -- --
Amortization of transition
adjustment -- -- -- -- -- --
--------- --------- --------- ---------- --------- ---------
Total comprehensive loss -- -- -- -- -- (4,793)
--------- --------- --------- ---------- --------- ---------
Distributions to preferred
stockholders -- 5,327 -- -- -- (9,801)
Issuance of common stock
under terms of stockholder
litigation settlement -- -- 159 15,759 -- --
Amortization of deferred
compensation -- -- 3 (3) 513 --
Restricted stock issuances, net
of forfeitures -- -- -- (206) (1,958) --
Reverse stock split -- -- (2,265) 2,240 -- --
Other -- (23) -- (115) -- --
--------- --------- --------- ---------- --------- ---------
BALANCE AS OF
JUNE 30, 2001 $ 107,500 $ 85,946 $ 251 $1,317,065 $ (4,168) $(813,500)
========= ========= ========= ========== ========= =========
ACCUMULATED
OTHER
TREASURY COMPREHENSIVE
STOCK INCOME (LOSS) TOTAL
--------- ------------- ---------
Balance as of
December 31, 2000 $ (242) $ -- $ 688,015
--------- --------- ---------
Comprehensive income (loss):
Net loss -- -- (4,793)
Cumulative effect of
accounting change -- (5,023) (5,023)
Amortization of transition
adjustment -- 1,257 1,257
--------- --------- ---------
Total comprehensive loss -- (3,766) (8,559)
--------- --------- ---------
Distributions to preferred
stockholders -- -- (4,474)
Issuance of common stock
under terms of stockholder
litigation settlement -- -- 15,918
Amortization of deferred
compensation -- -- 513
Restricted stock issuances, net
of forfeitures -- -- (2,164)
Reverse stock split -- -- (25)
Other -- -- (138)
--------- --------- ---------
BALANCE AS OF
JUNE 30, 2001 $ (242) $ (3,766) $ 689,086
========= ========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY PRISON REALTY TRUST, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(Unaudited)
1. ORGANIZATION AND OPERATIONS
Corrections Corporation of America (together with its subsidiaries, the
"Company"), a Maryland corporation formerly known as Prison Realty Trust,
Inc., 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 with and into the Company (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 a publicly traded entity primarily in the business of
owning, operating and managing prisons on behalf of government entities
and providing prisoner transportation services to such entities. 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. 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 (which 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 (which subsequently
merged with Juvenile and Jail Facility Management Services, Inc.).
Effective January 1, 1999, the Company elected to qualify as a REIT for
federal income tax purposes commencing with its taxable year ended
December 31, 1999. Following the completion of the 1999 Merger and
through September 30, 2000, the Company specialized in acquiring,
developing, owning and leasing correctional and detention facilities.
Also effective January 1, 1999, the Company entered into lease agreements
and other agreements with Operating Company, whereby Operating Company
would lease the substantial majority of the Company's facilities and
Operating Company would provide certain services to the Company,
including services rendered to the Company in the development of its
correctional and detention facilities. The Company was therefore
dependent on Operating Company for a significant source of its income. As
a result of liquidity issues facing Operating Company and the Company,
the parties amended certain of the contractual agreements between the
Company and Operating Company during 2000, which,
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among other things, resulted in the forgiveness of approximately $190.8
million of rental payments due to the Company from Operating Company.
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"). 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. 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. 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.
During 2000, in order to address its liquidity concerns, 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 the Company 35 correctional and detention
facilities, with a total design capacity of 37,520 beds. Also in
connection with the 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".
On December 1, 2000, in connection with the Restructuring, the Company
completed the acquisitions of PMSI and JJFMSI. 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, and
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 facilities and providing inmate residential and 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 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.
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The Company currently owns or manages 71 correctional and detention
facilities with a total design capacity of approximately 66,000 beds in
21 states, the District of Columbia and Puerto Rico, of which 69
facilities are operating (of which two are idle) and two are under
construction.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying interim condensed consolidated financial statements have
been prepared by the Company without audit and, in the opinion of
management, reflect all normal recurring adjustments necessary for a fair
presentation of results for the unaudited interim periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The results of
operations for the interim period are not necessarily indicative of the
results to be obtained for the full fiscal year. Reference is made to the
audited financial statements of the Company included in its 2000 Annual
Report on Form 10-K with respect to certain significant accounting and
financial reporting policies as well as other pertinent information of
the Company.
The condensed 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. Management believes the comparison
between the results of operations for the six months ended June 30, 2001
and the results of operations for the six months ended June 30, 2000 are
not meaningful because, for the prior year quarters (and through
September 30, 2000), the financial condition, results of operations and
cash flows include real estate activities between the Company and
Operating Company during a period of severe liquidity problems. The
financial condition, results of operations and cash flows of the Company
since October 1, 2000, include the operations of the correctional and
detention facilities previously leased to and managed by Operating
Company. In addition, the Company's financial condition as of and for the
six months ended June 30, 2001 also includes the operations of the
Service Companies (as of the 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.
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 Accounting Principles Board Opinion No.
18, "The Equity Method of Accounting for Investments in Common Stock"
("APB 18").
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 addresses accounting and reporting
standards for acquired goodwill and other intangible assets and
supersedes Accounting Principles Board Opinion No. 17, "Intangible
Assets". Under this statement, goodwill will no longer be subject to
amortization over its estimated useful life. Instead, goodwill is to be
tested for impairment at least annually using a fair-value-based
approach. The impairment loss is the amount, if any, by which the implied
fair value of goodwill is less than the goodwill carrying amount and is
recognized in earnings. The statement also requires companies to disclose
information about the changes in the carrying amount of goodwill, the
carrying amount of intangible assets by major intangible asset class for
those assets subject to amortization and those not subject to
amortization, and the estimated intangible asset amortization expense for
the next five years. As of June 30, 2001, the Company had $108.6 million
of goodwill reflected in the accompanying condensed consolidated balance
sheet associated with the Operating Company Merger and the acquisitions
of the Service Companies completed during the fourth quarter of 2000.
Amortization of goodwill for the six months ended June 30, 2001 was $3.8
million.
Provisions of SFAS 142 are required to be applied starting with fiscal
years beginning after December 15, 2001. Because goodwill and some
intangible assets will no longer be amortized, the reported amounts of
goodwill and intangible assets (as well as total assets) will not
decrease at the same time and in the same manner as under previous
standards. There may be more volatility in reported income than under
previous standards because impairment losses may occur irregularly and in
varying amounts. The amount of impairment losses, if any, has not yet
been determined. The impairment losses, if any, that arise due to the
initial application of SFAS 142 resulting from a transitional impairment
test applied as of January 1, 2002, will be reported as a cumulative
effect of a change in accounting principle.
RECLASSIFICATIONS
Merger transaction expenses, totaling $28.1 million, for the six months
ended June 30, 2000 have been reclassified to general and administrative
expense to conform with the 2001 presentation.
3. FACILITY DISPOSITIONS
In March 2001, the Company sold its Mountain View Correctional Facility,
a facility located in North Carolina, which was classified as held for
sale under contract as of December 31, 2000, for a sales price of
approximately $24.9 million. The net proceeds were used to pay-down a
like portion of amounts outstanding under the Company's $1.0 billion
senior credit facility (the "Amended Bank Credit Facility").
On April 10, 2001, the Company sold its interest in its facility located
in Salford, England ("Agecroft") for approximately $65.7 million. The net
proceeds from the sale were used to pay-down a like portion of amounts
outstanding under the Amended Bank Credit Facility.
On June 28, 2001, the Company sold its Pamlico Correctional Facility, a
facility located in North Carolina, which was classified as held for sale
as of December 31, 2000, for a sales price of
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approximately $24.1 million. The net proceeds were used to pay-down a
like portion of amounts outstanding under the Company's Amended Bank
Credit Facility.
During June 2001, the Company identified the direct financing lease of
Southern Nevada Women's Correctional Facility as a non-strategic asset
and entered into discussions with a potential buyer of this facility, and
accordingly reclassified this asset as held for sale. Despite a potential
sale, the Company does, however, expect to continue managing this
facility. As of June 30, 2001, the aggregate carrying value of all assets
held for sale was $71.4 million. There can be no assurance that the
Company will be able to complete the sale of any of the assets held for
sale, or that the net proceeds received from these sales will achieve
expected levels.
4. REVERSE STOCK SPLIT
At the Company's 2000 annual meeting of stockholders held in December
2000, 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. The board of directors subsequently approved a
reverse stock split of the Company's common stock at a ratio of
one-for-ten, which was effective May 18, 2001.
As a result of the reverse stock split, every ten shares of the Company's
common stock issued and outstanding immediately prior to the reverse
stock split has been reclassified and changed into one fully paid and
nonassessable share of the Company's common stock. The Company paid its
registered common stockholders cash in lieu of issuing fractional shares
in the reverse stock split at a post reverse-split rate of $8.60 per
share, totaling approximately $15,000. The number of common shares and
per share amounts have been retroactively restated in the accompanying
financial statements and these notes to the financial statements to
reflect the reduction in common shares and corresponding increase in the
per share amounts resulting from the reverse stock split. In conjunction
with the reverse stock split, during the second quarter of 2001, the
Company amended the charter to reduce the number of shares of common
stock which the Company has authorized to issue to 80.0 million shares
from 400.0 million shares. As of June 30, 2001, the Company had 25.1
million shares of common stock issued and outstanding (on a post-reverse
stock split basis).
5. DEBT
AMENDED BANK CREDIT FACILITY
As of June 30, 2001, the Company had approximately $824.7 million
outstanding under the Amended Bank Credit Facility. During the first and
second quarters of 2001, the Company obtained amendments to the Amended
Bank Credit Facility to permit the issuance of indebtedness in partial
satisfaction of its obligations in the stockholder litigation settlement
(as further discussed in Note 7), modify certain financial covenants, and
change the consummation date for securitizing the lease payments (or
other similar transaction) related to the Company's Agecroft facility,
each as further discussed below.
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 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
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Amendment"), as further discussed in Note 7. 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: (i) changed the date the securitization of lease
payments (or other similar transactions) with respect to the Company's
Agecroft facility was required to 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 resulting 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.
The securitization of lease payments (or other similar transaction) with
respect to the Company's Agecroft facility did not close by the required
date under the Amended Bank Credit Facility. However, the covenant
allowed 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 Agecroft facility, the Company did not provide the
audited financial statements within the required time period. However, in
April 2001, the Company 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 subordinated notes.
The revolving loan portion of the Amended Bank Credit Facility (of which
$280.4 million was outstanding as of June 30, 2001) matures on January 1,
2002, and is therefore classified on the accompanying balance sheet as a
current liability at June 30, 2001. 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 balance sheet at June 30,
2001. 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 Amended Bank Credit Facility required the Company 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 Amended Bank
Credit Facility as any combination of the following transactions, which
together would result in net cash proceeds to the Company of at least
$100.0 million:
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- 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
Bank Credit Facility; or
- 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 Agecroft facility.
The Amended Bank Credit Facility also contains limitations upon the use
of proceeds obtained from the completion of such transactions. The
Company had considered 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. However, the Company
determined that it was not commercially reasonable to issue additional
equity or debt securities, other than those securities for which the
Company has already contractually agreed to issue, including primarily
the issuance of shares of the Company's common stock in connection with
the settlement of the Company's stockholder litigation, as more fully
discussed in Note 7. Further, as a result of the Company's restructuring
during the third and fourth quarters of 2000, prior to the completion of
the audit of the Company's 2000 financial statements and the filing of
the Company's Annual Report on Form 10-K for the year ended December 31,
2000 with the Securities and Exchange Commission (the "SEC") on April 17,
2001, the Company was unable to provide the SEC with the requisite
financial information required to be included in a registration
statement. Therefore, even if the Company had been able to negotiate a
public or private sale of its equity securities on commercially
reasonable terms, the Company's inability to obtain an effective SEC
registration statement with respect to such securities prior to April 17,
2001 would have effectively prohibited any such transaction. Moreover,
the terms of any private sale of the Company's equity securities likely
would have included a requirement that the Company register with the SEC
the resale of the Company's securities issued to a private purchaser
thereby also making it impossible to complete any private issuance of its
securities. Due to the fact that the Company would have been unable to
obtain an effective registration statement, and therefore, would have
been unable to make any public issuance of its securities (or any private
sale that included the right of resale), any actions prior to April 17,
2001 to complete a capital raising event through the sale of equity or
debt securities would have been futile.
Although the Company would technically have been able to file a
registration statement with the SEC following April 17, 2001, the Company
believes that various market factors, including the depressed market
price of the Company's common stock immediately preceding April 17, 2001,
the pending reverse stock split required to maintain the Company's
continued New York Stock Exchange ("NYSE") listing, and the uncertainty
regarding the Company's maturity of the revolving loans under the Amended
Bank Credit Facility, made the issuance of additional equity or debt
securities unreasonable.
Because the issuance of additional equity or debt securities was deemed
unreasonable, the Company determined that the sale of assets represented
the most effective means by which the Company could satisfy the covenant.
During the first quarter of 2001, the Company completed the sale of its
Mountain View Correctional Facility for approximately $24.9 million. In
addition, during the second quarter of 2001 the Company completed the
sale of its Pamlico Correctional
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Facility for approximately $24.1 million and is actively pursuing the
sales of additional assets. As a result of the foregoing, the Company
believes it has demonstrated commercially reasonable efforts to
complete the $100.0 million capital raising event as of June 30, 2001;
however, there can be no assurance that the lenders under the Amended
Bank Credit Facility concur with the Company's position that it has
used commercially reasonable efforts in its satisfaction of this
covenant.
Based on the Company's current credit rating, the current interest rate
applicable to the Company's Amended Bank Credit Facility is 2.75% over
the base rate and 4.25% over the London Interbank Offering Rate ("LIBOR")
for revolving loans, and 3.0% over the base rate and 4.5% over LIBOR for
term loans. These rates, however, were subject to an increase of 25 basis
points (0.25%) from the current interest rate on July 1, 2001 if the
Company had not prepaid $100.0 million of the outstanding loans under the
Amended Bank Credit Facility, and are subject to 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 outstanding
loans under the Amended Bank Credit Facility. The Company has satisfied
the condition to prepay, prior to July 1, 2001, $100.0 million of
outstanding loans under the Amended Bank Credit Facility through the
application of proceeds from the sale of the Mountain View Correctional
Facility, the Pamlico Correctional Facility and the completion of the
Agecroft transaction, and through the pay-down of $35.0 million of
outstanding loans under the Amended Bank Credit Facility with cash on
hand. The Company does not currently anticipate that cash generated from
operations combined with cash on hand will be sufficient to prepay an
aggregate of $200.0 million of outstanding loans prior to October 1,
2001. Therefore, the Company will be required to raise additional cash,
such as through the sale of additional assets, in order to satisfy this
condition. There can be no assurance that the Company will be successful
in generating sufficient cash in order to prepay such amount and satisfy
this condition.
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, subject to the foregoing discussion regarding the
capital raising event covenant and the registration obligation under the
terms of the $40.0 million convertible subordinated notes (as described
herein), 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 or that, if the Company defaults under any of its debt
covenants, the Company will be able to obtain additional waivers or
amendments. 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.
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 and the
Company's aggregate $70.0 million convertible subordinated notes,
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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.
$40.0 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 $40.0 million in convertible subordinated
notes due December 2008 (the "$40 Million Convertible Subordinated
Notes"). The notes bear interest at 10%, payable semi-annually. In
addition, due to the events of default, the Company is obligated to pay
the holders of the notes contingent interest sufficient to permit the
holders to receive a 15.5% rate of return, unless the holders of the
notes elect to convert the notes into the Company's common stock prior to
December 31, 2003, or if other contingencies are met, under terms of the
note purchase agreement. The existing and potential events of default
arose 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 restructuring proposed in 1999
and 2000 led by a group of institutional investors consisting of an
affiliate of Fortress Investment Group LLC and affiliates of The
Blackstone Group ("Fortress/Blackstone"), and a similar restructuring
subsequently proposed by Pacific Life Insurance Company.
In order to address the events of default discussed above, on June 30,
2000, the Company and MDP Ventures IV LLC and affiliated purchasers of
the notes (collectively, "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 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. The waiver and amendment to the note purchase
agreement also provided for the replacement of financial ratios
applicable to the Company. The conversion price for the notes has been
established at $11.90, 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 7, will
cause an adjustment to the conversion price of the notes. MDP, however,
has indicated its belief that such an adjustment is required. At an
adjusted conversion price of $11.90, the $40.0 Million Convertible
Subordinated Notes are convertible into approximately 3.4 million shares
of the Company's common stock. The price and shares have been adjusted in
connection with the completion of the reverse stock split.
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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 $11.90,
into approximately an additional 92,000 shares of the Company's common
stock. The price and shares have been adjusted in connection with the
completion of the reverse stock split. 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.
Under the terms of the registration rights agreement between the Company
and the holders of the $40.0 Million Convertible Subordinated Notes, the
Company is required to use its best efforts to file and maintain with the
SEC an effective shelf registration statement covering the future sale by
the holders of the shares of common stock to be issued upon conversion of
the notes. As a result of the completion of the Restructuring, as
previously discussed herein, the Company was unable to file such a
registration statement with the SEC prior to the filing of the Company's
Form 10-K with the SEC on April 17, 2001. Following the filing of the
Company's Form 10-K, the Company commenced negotiations with MDP with
respect to an amendment to the registration rights agreement to defer the
Company's obligations to use its best efforts to file and maintain the
registration statement. MDP has now informed the Company that it does not
intend to complete such an amendment, and as a result, the Company is in
the process of preparing a registration statement for filing with the SEC
to achieve compliance with this covenant. Pursuant to the terms of the
Company's agreements with the holders of its $30.0 Million Convertible
Subordinated Notes and the holders of certain of its warrants, at the
request of such holders, the Company will be required to include the
shares of common stock to be issued to each party upon conversion of the
securities held by them under the registration statement. In the event
the Company is unable to complete and file the registration statement,
the Company would suffer a default under the terms of the $40.0 Million
Convertible Subordinated Notes which would result in a cross-default
under the terms of the Amended Bank Credit Facility, and if as a result
of such default, the holders of the $40.0 Million Convertible
Subordinated Notes accelerated amounts due thereunder, a cross-default
under the terms of the Company's $100.0 million senior notes and $30.0
Million Convertible Subordinated Notes.
$30.0 MILLION CONVERTIBLE SUBORDINATED NOTES
At December 31, 2000, the Company was in default under the terms of the
note purchase agreement governing the Company's 8.0%, $30.0 million
convertible subordinated notes due February 2005 (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 the holder of the notes, PMI
Mezzanine Fund, L.P., 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 conversion price for the notes has been established at $10.68,
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 a 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
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of the Company's common stock in connection with the settlement of all
outstanding stockholder litigation against the Company, as further
discussed in Note 7, does 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, since all of the shares are not issued
simultaneously, multiple adjustments to the conversion ratio will be
required. The Company currently estimates that the $30.0 Million
Convertible Subordinated Notes will be convertible into approximately
3.4 million shares of the Company's common stock once all of the shares
under the stockholder litigation settlement have been issued. The price
and shares have been adjusted in connection with the completion of the
reverse stock split.
6. 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 period.
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
subordinated notes, restricted stock plans, stock options and warrants,
and in the prior year, also the convertible preferred stock.
The Company's restricted stock, stock options, and warrants were
convertible into 0.4 million shares for the six months ended June 30,
2001, using the treasury stock method. The Company's convertible
subordinated notes were convertible into 6.8 million shares for the six
months ended June 30, 2001, using the if-converted method. For the six
months ended June 30, 2000, the Company's stock options and warrants were
convertible into 2,042 shares, (on a post-reverse stock split basis),
using the treasury stock method. The Company's convertible subordinated
notes were convertible into 0.3 million shares (on a post-reverse stock
split basis) for the six months ended June 30, 2000, using the
if-converted method. These incremental shares were excluded from the
computation of diluted earnings per share for the six months ended June
30, 2001 and 2000, as the effect of their inclusion was anti-dilutive.
The Company has entered into definitive settlement agreements regarding
the settlement of all formerly existing stockholder litigation against
the Company and certain of its existing and former directors and
executive officers (as further discussed in Note 7). 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 and their counsel
an aggregate of 4.7 million shares of common stock, as adjusted for the
reverse stock split. As of June 30, 2001, the Company had issued
approximately 1.6 million shares under the terms of the settlement. The
issuance of these shares and the issuance of the remaining shares under
terms of the settlement agreement, which is currently expected to occur
in late 2001 or early 2002, increases the denominator used in the
earnings per share calculation, thereby reducing the net income (loss)
per common share of the Company.
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7. 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 (and their respective
legal counsel) in the actions: (i) an aggregate of 4.7 million shares of
the Company's common stock, as adjusted for the reverse stock split; (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.
The promissory note, which will be issued at the same time the remaining
shares under the settlement agreement are issued, 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 price meets or exceeds a
"termination price" equal to $16.30 per share for any fifteen consecutive
trading days following the note's issuance and 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 $4.90 per share, based on the average
trading price of the stock following the date of the note's issuance and
prior to the maturity of the note. The Company accrued the estimated
obligation of approximately $75.4 million associated with the stockholder
litigation during the third quarter of 2000. As of June 30, 2001, the
Company had issued 1.6 million shares under terms of the settlement to
plaintiffs' counsel in the actions, as adjusted for the reverse stock
split. The Company has been advised by the settlement claims processing
agent that the remaining settlement shares and therefore the promissory
note, will be issued in late 2001 or early 2002.
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
alleged that the defendants failed to pay amounts allegedly due under the
securities purchase agreement and asked for compensatory damages of
approximately $24.0 million consisting of various fees, expenses and
other relief the court may deem appropriate. During August 2001, the
Company and
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plaintiffs reached a definitive agreement to settle this litigation.
Under terms of the agreement, the Company will make a cash payment of
$15.0 million to the plaintiffs in full settlement of all claims. The
Company has recorded an accrual reflecting the terms of the settlement.
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 were
seeking damages in excess of $30.0 million plus prejudgment interest and
attorneys' fees. During the first quarter of 2001, the Company and
plaintiffs reached an agreement in principle to settle plaintiffs' claims
against the Company. However, no definitive agreement has been reached
between the plaintiffs and other defendants in the case as of the date
hereof, and there can be no assurance that a definitive settlement
agreement will be reached and/or approved by the courts. 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 under the proposed settlement. The Company is currently
contesting this issue with the carrier. The Company has recorded an
accrual reflecting the potential settlement amount, for which the Company
is seeking partial reimbursement from its insurance carrier.
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. 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's insurance
carrier had indicated to the Company that its coverage did not extend to
punitive damages such as those initially awarded in Pacetti. However,
during the second quarter of 2001, the Company and all plaintiffs reached
an agreement in principle to settle their claims, asserted and
unasserted, against the Company, and subsequently executed a definitive
settlement agreement which was approved by the court with the full
settlement funded by insurance.
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
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preparation are on-going. Both former employees are subject to pending
criminal charges in Houston, Harris County, Texas, and one has pleaded
guilty to criminal charges. The plaintiffs have 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 and TransCor's insurance carrier,
however, indicated during the first quarter of 2001 that, under
Tennessee law, it will not be responsible for any punitive damages.
During the second quarter of 2001, the carrier filed a declaratory
judgment action in federal court in Houston, which complaint has not
been served on TransCor or the Company, in which the carrier asserts,
among other things, that there is no coverage under Texas law for the
underlying events. 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.
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.
OTHER COMMITMENTS
The Company has received an invoice, dated October 25, 2000, from
Merrill Lynch for $8.1 million for services as the Company's financial
advisor in connection with the Restructuring. Prior to their
termination in the second quarter of 2000, 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. In July 2001, Merrill Lynch agreed to accept
payment of $3.0 million over a one year period in full and complete
satisfaction of the invoice.
DISTRIBUTIONS
Under the terms of the Amended Bank Credit Facility, 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 to the Amended Bank Credit Facility. Quarterly
dividends of $0.50 per share for the second, third and fourth quarters
of 2000, and for the first and second quarters of 2001 have been
accrued as of June 30, 2001. 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. Based on the existing non-payments, the
failure to pay
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dividends through the third quarter of 2001 will result in the ability
of the holders of the Series A Preferred Stock to elect two additional
directors to the Company's board of directors.
Management currently believes that reinstating the payment of dividends
on the Series A Preferred Stock prior to September 30, 2001 is in the
best interest of the Company and its stockholders for a variety of
reasons, including the fact that management believes such reinstatement
would: (i) enhance the Company's credit rating and thus its ability to
refinance or renew its debt obligations as they mature; (ii) eliminate
the requirement that two additional directors be elected to serve on
the Company's board of directors; and (iii) restore the Company's
eligibility to use Form S-3 under the rules of the SEC in connection
with the registration of the Company's securities in future offerings.
Accordingly, management has expressed the desire to remove the
restriction on the payment of such dividends prior to September 30,
2001 in its discussions with the lenders regarding refinancing
strategies for the Amended Bank Credit Facility. As of the date hereof,
the lenders have not expressed a willingness to remove the restriction
prior to September 30, 2001 or thereafter. However, management
continues to actively pursue an amendment to the terms of the Amended
Bank Credit Facility to remove the restriction on the payment of such
dividends prior to September 30, 2001, or in conjunction with a
refinancing if the lenders do not agree to an amendment prior to
September 30, 2001. No assurance can be given, however, that the
lenders will agree to a reinstatement, and that as a result, if and
when the Company will commence the payment of cash dividends on its
shares of Series A Preferred Stock.
In the event dividends are unpaid and in arrears through the third
quarter of 2001, the holders of the Series A Preferred Stock will be
entitled to vote for the election of two additional directors of the
Company at a special meeting called by the holders of record of at
least 20% of the shares of Series A Preferred Stock. If a special
meeting is not called, the holders of the Series A Preferred Stock on
the record date will be entitled to vote for two additional directors
of the Company at the next annual meeting of stockholders, and at such
subsequent annual meeting until all dividends accumulated on such
shares of Series A Preferred Stock for the past dividend periods and
the dividend for the then current dividend period shall have been fully
paid or declared and a sum sufficient for the payment thereof set aside
for payment.
The directors shall be elected upon affirmative vote of a plurality of
the Series A Preferred Shares present and voting in person or by proxy
at a meeting at which a majority of the outstanding Series A Preferred
Shares are represented. If and when all accumulated dividends and the
dividend for the then current dividend period on the Series A Preferred
Shares shall have been paid in full or set aside for payment in full,
the holders thereof shall be divested of the foregoing voting rights
and, if all accumulated dividends and the dividend for the then current
dividend period have been paid in full or set aside for payment in
full, the term of office of each director so elected shall immediately
terminate.
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
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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
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 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 returns for the taxable years
ended December 31, 2000 and 1999. The Company has received the IRS's
preliminary findings related to the taxable years ended December 31,
1998 and 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 2000 and
1999 federal tax returns 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 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.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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
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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, pending issuance, an 8.0%, $29.0
million promissory note due in 2009, expected to be issued in
conjunction with the issuance of shares of common stock 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, as discussed in Note 7.
In accordance with the terms of the Amended Bank Credit Facility, the
Company entered into certain swap arrangements in order to hedge the
variable interest rate associated with portions of the debt. The swap
arrangements fix LIBOR at 6.51% (prior to the applicable spread) on
outstanding balances of at least $325.0 million through December 31,
2001 and at least $200.0 million through December 31, 2002. The
difference between the floating rate and the swap rate is recognized in
interest expense.
On January 1, 2001, the Company adopted SFAS 133, as amended, and
reflected in earnings the change in the estimated fair value of the
interest rate swap agreement during the first quarter of 2001. The
Company estimates the fair value of its interest rate swap agreements
using option-pricing models that value the potential for interest rate
swap 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 June 30,
2001, due to a reduction in interest rates since entering the swap
agreement, the interest rate swap agreement had a negative fair value
of $10.1 million. This negative fair value consists of a transition
adjustment of $5.0 million as of January 1, 2001 reflected in other
comprehensive income (loss) during the first quarter of 2001 and a
reduction in the fair value of the swap agreement of $5.1 million
reflected in earnings for the six months ended June 30, 2001.
In accordance with SFAS 133, as amended, the Company recorded a $6.3
million non-cash charge for the change in fair value of derivative
instruments for the six months ended June 30, 2001, which includes $1.2
million for amortization of the transition adjustment. The unamortized
transition adjustment at June 30, 2001 of $3.8 million is expected to
be reclassified into earnings as a non-cash charge over the remaining
term of the swap agreement. The non-cash charge that will be
reclassified into earnings during 2001 is expected to be approximately
$2.5 million. The non-cash charge of $5.1 million for the six months
ended June 30, 2001 is expected to reverse into earnings through
increases in the fair value of the swap agreement, prior to the
maturity of the swap agreement on December 31, 2002, unless the swap is
terminated in conjunction with a refinancing of the Amended Bank Credit
Facility. However, for each quarterly period prior to the maturity of
the swap agreement, the Company will continue to adjust to market the
swap agreement potentially resulting in additional non-cash charges or
gains.
The ultimate liability relating to the $29.0 million promissory note
and related interest is expected to be determined on the future
issuance date and thereafter, based upon fluctuations in the Company's
common stock price. Pursuant to the terms of the settlement, the note
and accrued interest may be extinguished if the Company's common stock
price meets or exceeds a "termination price" equal to $16.30 per share
for any fifteen consecutive trading days following the note's issuance
and prior to the maturity date of the note. Additionally, to the extent
the
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211
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 $4.90 per
share, based on the average trading price of the stock following the
date of the note's issuance and prior to the maturity of the note. 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 June 30, 2001, the issuance of the
note 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
June 30, 2001. However, the impact cannot be determined until the
promissory note is issued and an estimated fair value of the promissory
note is determined.
9. SEGMENT REPORTING
As of June 30, 2001, the Company owned and managed 37 correctional and
detention facilities, and managed 28 correctional and detention
facilities it does not own. During the second quarter of 2001, the
Company began viewing the Company's operating results in two segments:
owned and managed correctional and detention facilities and
managed-only correctional and detention facilities. The accounting
policies of the segments are the same as those described in the summary
of significant accounting policies in the notes to consolidated
financial statements included in the Company's 2000 Form 10-K. Owned
and managed facilities include the operating results of those
facilities owned and managed by the Company. Managed-only facilities
include the operating results of those facilities owned by a third
party and managed by the Company. The Company measures the operating
performance of each facility within the above two segments, without
differentiation, based on facility contribution. The Company defines
facility contribution as a facility's operating income or loss from
operations before interest, taxes, depreciation and amortization. Since
each of the Company's facilities within the two operating segments
exhibit similar economic characteristics, provide similar services to
governmental agencies, and operate under a similar set of operating
procedures and regulatory guidelines, the facilities within the
identified segments have been aggregated and reported as two operating
segments.
The revenue and facility contribution for the reportable segments and a
reconciliation to the Company's operating income (loss) is as follows
for the six months ended June 30, 2001 and 2000 (dollars in thousands).
Intangible assets are not included in each segment's reportable assets
and the amortization of intangible assets is not included in the
determination of a segment's facility contribution:
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FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------------------
2001 2000
--------- --------
Revenue:
Owned and managed $ 311,250 $ --
Managed-only 161,919 --
--------- --------
Total management revenue 473,169 --
--------- --------
Operating expenses:
Owned and managed 235,438 --
Managed-only 130,508 --
--------- --------
Total operating expenses 365,946 --
--------- --------
Facility contribution:
Owned and managed 75,812 --
Managed-only 31,411 --
--------- --------
Total facility contribution 107,223 --
--------- --------
Other revenue (expense):
Rental and other revenue 12,938 28,168
Other operating expense (7,890) --
General and administrative (17,034) (34,740)
Depreciation and amortization (25,877) (26,331)
Write-off of amounts under lease
arrangements -- (8,416)
--------- --------
Operating income (loss) $ 69,360 $(41,319)
========= ========
JUNE 30, 2001 December 31, 2000
------------- -----------------
Assets:
Owned and managed $1,575,836 $1,564,279
Managed-only 78,786 84,397
Corporate and Other 350,325 528,316
---------- ----------
Total Assets $2,004,947 $2,176,992
========== ==========
10. SUPPLEMENTAL CASH FLOW DISCLOSURE
During the six months ended June 30, 2001, the Company issued 1.6
million shares of common stock in partial satisfaction of the
stockholder litigation discussed in Note 7, as adjusted for the reverse
stock split. As a result, accounts payable and accrued expenses were
reduced by, and common stock and additional paid-in capital were
increased by, $15.9 million. Also during the six months ended June 30,
2001, the Company issued $5.3 million of Series B Preferred Stock in
lieu of cash distributions to the holders of shares of Series B
Preferred Stock on the applicable record date.
11. PRO FORMA INFORMATION
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 six months ended June 30,
2000 as if the Operating Company Merger and acquisitions of PMSI
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and JJFMSI for the six months ended June 30, 2000 as if the Operating
Company Merger and acquisitions of PMSI and JJFMSI had collectively
occurred as of the beginning of the period 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 costs expensed by
the Company; (vi) strategic investor fees expensed by the Company; and
(vii) the Company's provisions for changes in tax status in 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 period presented.
PRO FORMA FOR THE SIX MONTHS ENDED
JUNE 30, 2000
----------------------------------
(unaudited)
Revenue $ 429,778
Operating income $ 29,520
Net loss available to common stockholders $ (48,130)
Net loss per common share:
Basic $ (3.44)
Diluted $ (3.44)
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 9.5 million shares of the Company's common stock (on a
post-reverse stock split basis) as if those conversions occurred at the
beginning of the period 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, restricted stock, stock options and warrants as
the provisions 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 an
aggregate of 4.7 million shares of the Company's common stock to be
issued in connection with the settlement of the Company's stockholder
litigation.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited and amounts in thousands, except per share amounts)
JUNE 30,
ASSETS 2000
--------------------------------------------------------------------------------- ---------
Cash and cash equivalents $ 3,227
Accounts receivable, net of allowances 73,298
Prepaid expenses 2,931
Other current assets 4,584
---------
Total current assets 84,040
Property and equipment, net 18,720
Investments in contracts 64,957
Other 8,998
---------
Total assets $ 176,715
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
---------------------------------------------------------------------------------
Accounts payable $ 25,543
Lease and trade name use payables to Prison Realty 161,309
Accrued salaries and wages 6,768
Accrued property taxes 9,714
Accrued interest to Prison Realty 29,268
Other accrued expenses 18,717
Short-term debt 5,153
Promissory note to Prison Realty 137,000
---------
Total current liabilities 393,472
Deferred lease incentives and service fees received from Prison Realty 103,056
---------
Total liabilities 496,528
---------
Commitments and contingencies
Common stock - Class A - $0.01 par value; 100,000 shares authorized, 9,349
shares issued and outstanding 93
Common stock - Class B - $0.01 par value; 100,000 shares authorized, 981
shares issued and outstanding 10
Additional paid-in-capital 25,133
Deferred compensation (2,719)
Retained deficit (342,330)
---------
Total stockholders' deficit (319,813)
---------
Total liabilities and stockholders' deficit $ 176,715
=========
The accompanying notes are an integral part of these condensed
consolidated financial statements
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited and amounts in thousands)
REVENUE $ 280,342
---------
EXPENSES:
Operating 220,404
Trade name use agreement 5,242
Lease 160,153
General and administrative 13,055
Depreciation and amortization 4,339
---------
403,193
---------
OPERATING LOSS (122,851)
INTEREST EXPENSE, NET 16,561
---------
NET LOSS $(139,412)
=========
The accompanying notes are an integral
part of these condensed consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited and amounts in thousands)
CLASS A CLASS B ADDITIONAL TOTAL
COMMON COMMON PAID-IN DEFERRED RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL COMPENSATION DEFICIT DEFICIT
------- -------- ---------- ------------ --------- -------------
BALANCE, DECEMBER 31, 1999 $93 $10 $25,133 $(3,108) $(202,918) $(180,790)
--- --- ------- ------- --------- ---------
Net loss -- -- -- -- (139,412) (139,412)
--- --- ------- ------- --------- ---------
Amortization of deferred
compensation -- -- -- 389 -- 389
--- --- ------- ------- --------- ---------
BALANCE, JUNE 30, 2000 $93 $10 $25,133 $(2,719) $(342,330) $(319,813)
=== === ======= ======= ========= =========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited and amounts in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(139,412)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 4,339
Lease incentives and service fees received from Prison Realty 1,421
Amortization of lease incentives and service fees received
from Prison Realty (4,014)
Other noncash items 3,608
Loss on disposal of assets 184
Changes in assets and liabilities, net:
Accounts receivable (6,884)
Prepaid expenses 802
Other current assets 1,770
Other assets 182
Accounts payable (3,395)
Lease and trade name use payables to Prison Realty 134,229
Accrued salaries and wages 926
Accrued property taxes 321
Accrued interest to Prison Realty 12,828
Other accrued expenses 1,203
---------
Net cash provided by operating activities 8,108
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 23
Property and equipment additions, net (881)
Payments received on note receivable 63
---------
Net cash used in investing activities (795)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term debt, net (11,061)
Payments of debt issuance costs (3,750)
---------
Net cash used in financing activities (14,811)
---------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (7,498)
CASH AND CASH EQUIVALENTS, beginning of period 10,725
---------
CASH AND CASH EQUIVALENTS, end of period $ 3,227
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 537
=========
Income taxes $ --
=========
The accompanying notes are an integral
part of these condensed consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
1. ORGANIZATION AND FORMATION TRANSACTIONS
Correctional Management Services Corporation, a Tennessee corporation,
was formed on September 11, 1998, and changed its name to Corrections
Corporation of America in 1999 (the "Company"). The Company was formed
in anticipation of the expected merger transaction (the "1999 Merger")
between Corrections Corporation of America ("Old CCA"), CCA Prison
Realty Trust ("Old Prison Realty") and Prison Realty Trust, Inc.
("Prison Realty", formerly Prison Realty Corporation). On September 22,
1998, the Company issued 5.0 million shares of Class A voting common
stock to certain founding shareholders at par value. Additionally, on
September 22, 1998, the Company issued 0.8 million restricted shares of
Class A voting common stock to certain wardens of Old CCA facilities at
the implied fair value of $3.9 million. Immediately prior to the
acquisition of management contracts discussed in Note 2, the Company
issued 3.5 million shares of Class A voting common stock to outside
investors in consideration of cash proceeds totaling $16.0 million. The
Company operates and manages prisons and other correctional facilities
and provides prisoner transportation services for governmental
agencies.
2. ACQUISITION OF MANAGEMENT CONTRACTS AND OTHER RELATIONSHIPS WITH PRISON
REALTY
Immediately after the issuance of the Class A voting common stock
discussed in Note 1, on December 31, 1998, the Company acquired all of
the issued and outstanding capital stock of certain wholly owned
corporate subsidiaries of Old CCA, certain management contracts and
certain other related assets and liabilities of Old CCA, and entered
into a trade name use agreement with Old CCA, as described below. In
exchange, the Company issued an installment promissory note in the
principal amount of $137.0 million that bears interest at 12% per annum
and is payable over 10 years (the "Promissory Note") and 1.0 million
shares of the Company's Class B non-voting common stock, which
represents 9.5% of the Company's outstanding stock. The Class B
non-voting common stock was valued at the implied fair market value of
$4.75 million.
The acquisition of the capital stock, the management contracts and
related assets and liabilities was accounted for as a purchase
transaction in accordance with Accounting Principles Board Opinion No.
16, "Business Combinations," and the aggregate purchase price of $141.8
million was allocated to the assets and liabilities acquired based on
management's estimates of the fair value of the assets and liabilities
acquired. An amount of $67.8 million was initially assigned to the
value of the management contracts acquired and is being amortized over
a fifteen-year period, which represents the average remaining lives of
the contracts acquired plus any contractual renewal options. During
1999, the Company continued to evaluate the values assigned to the
management contracts and the assets and liabilities acquired. As a
result, the Company increased the value of the management contracts by
approximately $4.4 million.
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TRADE NAME USE AGREEMENT
On December 31, 1998, immediately prior to the 1999 Merger and in
connection with the transactions described above, the Company entered
into a trade name use agreement with Old CCA (the "Trade Name Use
Agreement"). Under the Trade Name Use Agreement, which has a term of
ten years, the Company obtained the right to use the name, "Corrections
Corporation of America" and derivatives thereof, subject to specified
terms and conditions therein. In consideration for such right, the
Company agreed to pay a fee equal to (i) 2.75% of the Company's gross
revenues for the first three years of the Trade Name Use Agreement,
(ii) 3.25% of the Company's gross revenues for the following two years
of the Trade Name Use Agreement, and (iii) 3.625% of the Company's
gross revenues for the remaining term of the Trade Name Use Agreement,
provided that the amount of such fee may not exceed (a) 2.75% of Prison
Realty's gross revenues for the first three years of the Trade Name Use
Agreement, (b) 3.5% of Prison Realty's gross revenues for the following
two years of the Trade Name Use Agreement, and (c) 3.875% of Prison
Realty's gross revenues for the remaining term of the Trade Name Use
Agreement. The Company incurred $5.2 million of expenses under this
agreement for the six months ended June 30, 2000. At June 30, 2000, the
Company had a payable to Prison Realty totaling $5.2 million related to
expense under this agreement.
CCA LEASES
On January 1, 1999, the Company entered into a master lease agreement
and leases with respect to the thirty-six leased properties with Prison
Realty (the "CCA Leases"). The initial terms of the CCA Leases are 12
years and may be extended at fair market rates for three additional
five-year periods upon the mutual agreement of the Company and Prison
Realty. As of June 30, 2000, the Company leased 38 properties from
Prison Realty.
On December 31, 1999, Prison Realty and the Company amended the terms
of the CCA Leases to change the annual base rent escalation formula
with respect to each facility leased to the Company. Previously, the
annual base rent payable with respect to each facility was subject to
increase each year in an amount equal to a percentage of the total
rental payments with respect to each facility, such percentage being
the greater of (i) 4%; or (ii) 25% of the percentage increase of gross
management revenue derived from such facility. As a result of this
amendment, the annual base rent with respect to each facility is
subject to increase each year in an amount equal to the lesser of: (i)
4% of the annualized yearly rental payments with respect to such
facility; or (ii) 10% of the excess of the Company's aggregate gross
management revenues for the prior year over a base amount of $325.0
million.
During the six months ended June 30, 2000, the Company has failed to
make timely contractual payments under the terms of the CCA Leases. As
of June 30, 2000, approximately $156.1 million of rents were payable to
Prison Realty. For the six months ended June 30, 2000, the Company
incurred gross lease expense of $161.8 million.
CCA RIGHT TO PURCHASE AGREEMENT
Effective January 1, 1999, the Company entered into a Right to Purchase
Agreement (the "CCA Right to Purchase Agreement") with Prison Realty
pursuant to which the Company granted to Prison Realty the right to
acquire and lease back to the Company at fair market rental rates, any
correctional or detention facility acquired or developed and owned by
the Company in the future
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for a period of ten years following the date inmates are first received
at such facility. The initial annual rental rate on such facilities
will be the fair market rental rate as determined by the Company and
Prison Realty. Additionally, the Company granted Prison Realty the
right of first refusal to acquire any Company-owned correctional or
detention facility should the Company receive an acceptable third-party
offer to acquire any such facility. The Company sold no facilities to
Prison Realty under the CCA Right to Purchase Agreement.
CCA SERVICES AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a services agreement (the "CCA Services Agreement") with
Prison Realty pursuant to which the Company agreed to serve as a
facilitator of the construction and development of additional
facilities on behalf of Prison Realty for a term of five years from the
date of the CCA Services Agreement. In such capacity, the Company will
perform, at the direction of Prison Realty, such services as are
customarily needed in the construction and development of correctional
and detention facilities, including services related to construction of
the facilities, project bidding, project design and governmental
relations. In consideration for the performance of such services by the
Company, Prison Realty agreed to pay a fee equal to 5% of the total
capital expenditures (excluding the incentive fee discussed below and
the 5% fee herein referred to) incurred in connection with the
construction and development of a facility, plus an amount equal to
approximately $560 (five hundred sixty dollars) per bed for facility
preparation services provided by the Company prior to the date on which
inmates are first received at such facility. The Company may receive
payments up to an additional 5% of the total capital expenditures (as
determined above) from Prison Realty if additional services are
requested by Prison Realty. The Company has received a fee of 10% on a
majority of the construction and development services provided to
Prison Realty. Amounts that exceed the reimbursement of actual costs
incurred by the Company on facilities the Company will lease from
Prison Realty are being deferred and amortized as reductions in lease
expense over the terms of the respective leases. For the six months
ended June 30, 2000, the Company collected $1.4 million of the amounts
billed in 1999, billed $5.5 million and recognized $0.8 million as a
reduction of lease expense. As a result of the uncertainty regarding
the collectibility of the $5.5 million billed in 2000 due to the
financial condition of Prison Realty, the Company has recorded a
reserve for the entire amount and has not recognized any revenue or
reductions to lease expense related to this amount.
TENANT INCENTIVE AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a tenant incentive agreement with Prison Realty pursuant
to which Prison Realty agreed to pay the Company an incentive fee to
induce the Company to enter into leases with respect to those
facilities developed and facilitated by the Company. The amount of the
incentive fee was initially set at $840 (eight hundred forty dollars)
per bed for each facility leased by the Company where the Company has
served as developer and facilitator. On May 4, 1999, the Company and
Prison Realty entered into an amended and restated tenant incentive
agreement (the "Amended and Restated Tenant Incentive Agreement"),
effective as of January 1, 1999, providing for (i) a tenant incentive
fee of up to $4,000 (four thousand dollars) per bed payable with
respect to all future facilities developed and facilitated by the
Company, as well as certain other facilities which, although
operational on January 1, 1999, had not achieved full occupancy, and
(ii) an $840 (eight hundred forty dollars) per bed allowance for all
beds in operation at the beginning of January 1999, approximately
21,500 (twenty-one thousand five hundred) beds, that were not subject
to the
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tenant allowance in the first quarter of 1999. The term of the Amended
and Restated Tenant Incentive Agreement is four years unless extended
upon the written agreement of the Company and Prison Realty. The
incentive fees received by the Company are being deferred and amortized
as reductions in lease expense over the terms of the respective leases.
For the six months ended June 30, 2000, the Company billed $8.4 million
and recognized $3.1 million as reductions to lease expense relating to
amounts billed in 2000. As a result of the uncertainty regarding the
collectibility of the $8.4 million billed in 2000 due to the financial
condition of Prison Realty, the Company has recorded a reserve for the
entire amount and has not recognized any reductions to lease expense
related to this amount.
BUSINESS DEVELOPMENT AGREEMENT
Effective January 1, 1999, the Company entered into a business
development agreement (the "Business Development Agreement") with
Prison Realty, which provides that the Company will perform, at the
direction of Prison Realty, services designed to assist Prison Realty
in identifying and obtaining new business. Such services include, but
are not limited to, marketing and other business development services
designed to increase awareness of Prison Realty and the facility
development and construction services it offers, identifying potential
facility sites and pursuing all applicable zoning approvals related
thereto, identifying potential tenants for Prison Realty's facilities
and negotiation agreements related to the acquisition of the new
facility management contract for Prison Realty's tenants. Pursuant to
the Business Development Agreement, Prison Realty will also reimburse
the Company for expenses related to third-party entities providing
government and community relations services to the Company, in
connection with the provision of the business development services
described above. In consideration for the Company's performance of the
business development services, and in order to reimburse the Company
for the third-party government and community relations expenses
described above, Prison Realty has agreed to pay the Company a total
fee equal to 4.5% of the total capital expenditures (excluding the
amount of the tenant incentive fee and the services fee discussed above
as well as the 4.5% fee referred to herein) incurred in connection with
the construction and development of each new facility, or the
construction and development of an addition to an existing facility,
for which the Company performed business development services. The term
of the Business Development Agreement is four years unless extended
upon the written agreement of the Company and Prison Realty. The
business development fees received by the Company are being deferred
and amortized as reductions in lease expense over the terms of the
respective leases. For the six months ended June 30, 2000, the Company
recognized $0.3 million as a reduction in lease expense.
3. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do not
reflect any adjustments that might result if the Company is unable to
continue as a going concern. In addition, the consolidated financial
statements do not include any adjustments relating to recoverability
and classification of assets and liabilities that might be necessary
should the Company be unable to continue as a going concern. The
Company incurred a net loss of $139.4 million for the six months ended
June 30, 2000, and currently has a net working capital deficiency and a
net capital deficiency. As of June 30, 2000, the Company was in
violation of certain provisions of its revolving credit facility ("New
Credit Facility"), notwithstanding the waiver of certain events of
default under the New Credit Facility. The amount outstanding under the
New Credit Facility as June 30, 2000 was $5.2
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million. As a result of the Company's financial and liquidity condition
at December 31, 1999, the independent public accountants of the Company
indicated in their opinion on the Company's 1999 consolidated financial
statements that there is substantial doubt about the Company's ability
to continue as a going concern.
The Company is Prison Realty's primary lessee and Prison Realty's major
source of income. As a result of the financial condition of the Company
and Prison Realty, certain existing or potential events of default
arose under the provisions of Prison Realty's indebtedness. The
defaults related to Prison Realty's failure to comply with certain
financial covenants during 1999 and 2000, the issuance of a going
concern opinion qualification with respect to Prison Realty's 1999
consolidated financial statements, and certain transactions effected by
Prison Realty without the consent of Prison Realty's lenders, including
the execution of a securities purchase agreement with Pacific Life
Insurance Company ("Pacific Life") in connection with a series of
proposed transactions ("Pacific Life Restructuring"). Prison Realty has
obtained waivers of previously existing events of default under, and
amendments to, its senior secured bank credit facility and its
convertible subordinated notes.
Due to the Company's liquidity position, the Company has been unable to
make timely rental payments to Prison Realty under the original terms
of the CCA Leases. As of June 30, 2000, approximately $156.1 million of
2000 rents due from the Company to Prison Realty under the CCA Leases
were unpaid. The terms of the CCA Leases provide that rental payments
are due and payable on the 25th day of each month for the current
month. The CCA Leases provide that it shall be an event of default if
the Company fails to pay any installment of rent within 15 days after
notice of nonpayment from Prison Realty. The terms of the CCA Leases
provide that Prison Realty could require the Company to relinquish the
leased facilities in the event of default. However, Prison Realty has
not provided a notice of nonpayment to the Company with respect to
lease payments due and payable by the Company.
Also as a result of the Company's liquidity position, the Company has
been required to defer the first scheduled payment of accrued interest,
totaling approximately $16.4 million, on the Promissory Note payable by
the Company to Prison Realty. Pursuant to the terms of the Promissory
Note, the 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 Prison Realty and the agent
of the Company's New Credit Facility, the Company is prohibited from
making scheduled interest payments on the Promissory Note when the
Company is not in compliance with certain financial covenants set forth
in the New Credit Facility. As a result of the events of default under
the New Credit Facility, notwithstanding the waiver obtained on April
27, 2000, as amended in June 2000, discussed below, the Company is
prohibited from making the scheduled interest payment to Prison Realty.
Pursuant to the terms of the subordination agreement, Prison Realty is
prohibited from accelerating payment of the principal amount of the
Promissory Note or taking any other action to enforce its rights under
the provisions of the Promissory Note for so long as the New Credit
Facility remains outstanding. However, the amount due under the
Promissory Note has been classified as a current liability in the
accompanying consolidated balance sheet at June 30, 2000, since the
Company is in default under the Promissory Note's existing terms. At
June 30, 2000, interest under the Promissory Note, totaling $24.7
million, was unpaid.
On April 27, 2000, the Company obtained the consent of the requisite
percentage of the lenders under its New Credit Facility for a waiver of
the New Credit Facility's restrictions relating to:
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- Prison Realty's and the Company's amendments of the original
terms of the CCA Leases, the Amended and Restated Tenant
Incentive Agreement, the Business Development Agreement and
the Amended and Restated Services Agreement.
- The Company's violation of a net worth covenant contained in
its New Credit Facility.
- The Company's execution of an agreement and plan of merger
with respect to a merger of each of the Company, PMSI and
JJFMSI with and into wholly owned subsidiaries of Prison
Realty, in connection with the proposed Fortress/Blackstone
Restructuring (as defined in Note 8).
The terms of the waiver provided that the waiver would remain in effect
until the earlier of (i) July 31, 2000; (ii) the date the securities
purchase agreement with Pacific Life was terminated; (iii) the date the
Company makes any payments to Prison Realty other than as set forth in
the amendments to the Company's agreements with Prison Realty; or (iv)
the date the lenders under Prison Realty's bank credit facility
exercise any rights with respect to any default or event of default
under Prison Realty's bank credit facility.
Because the termination of the securities purchase agreement with
Pacific Life during the second quarter of 2000, as discussed more fully
in Note 8, resulted in the termination of the initial waiver and
because the Company's proposed execution of the merger agreement with
Prison Realty as part of the Restructuring (as defined and more fully
discussed in Note 8) was not addressed in the above waiver, in June
2000 the Company requested that its senior lenders amend the waiver to
provide for its continuation, notwithstanding the termination of the
securities purchase agreement with Pacific Life, and to permit the
Company's execution of the amended merger agreement in connection with
the Restructuring. The Company's senior lenders refused to agree to
such amendments unless the Company paid an additional waiver fee of
$1.0 million to the Company's senior lending group. Because of the
ramifications of the existence of a default under the New Credit
Facility, and the fact that such default would cause an event of
default under Prison Realty's senior credit facility, the Company
committed to pay its lenders the $1.0 million fee and obtained the
consent of the requisite percentage of the senior lenders under the New
Credit Facility to extend the term of the initial waiver to the earlier
of September 15, 2000 and the completion of Prison Realty's merger with
the Company in connection with the Restructuring and to permit the: (i)
termination of the merger agreement relating to the proposed
combination of Prison Realty with the Company under the Pacific Life
led restructuring; (ii) the execution by the Company of the merger
agreement related to the Restructuring; and (iii) the termination of
the securities purchase agreement with Pacific Life.
Continued operating losses by the Company and Prison Realty,
declarations of events of default and potential acceleration actions by
the Company's and Prison Realty's creditors, the continued inability of
the Company to make contractual payments to Prison Realty, and the
Company's limited resources currently available to meet its operating,
capital expenditure and debt service requirements will have a material
adverse impact on the Company's consolidated financial position,
results of operations and cash flows. In addition, these matters
concerning the Company and Prison Realty raise substantial doubt about
the Company's ability to continue as a going concern.
In response to the significant losses experienced by the Company during
1999 and by the Company and Prison Realty during the six months ended
June 30, 2000 and in response to the defaults under the Company's and
Prison Realty's debt agreements, Prison Realty had entered into
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an agreement with respect to a series of transactions led by Pacific
Life that include the proposed combination of the Company and Prison
Realty. A complete discussion of the Pacific Life Restructuring and
recent developments affecting the Pacific Life Restructuring is
included in Note 8.
4. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company had no operations prior to January 1, 1999. As such, the
accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material
intercompany balances have been eliminated in consolidation. The
accompanying interim consolidated financial statements are unaudited.
The financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and in conjunction with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include
all of the disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting solely of normal recurring
matters) necessary for a fair presentation of the financial statements
for this interim period have been included. The results of operations
for the interim period are not necessarily indicative of the results to
be obtained for the full fiscal year. Reference is made to the audited
financial statements of the Company included in the Prison Realty 1999
Form 10-K with respect to other pertinent information of the Company.
5. PROMISSORY NOTE AND CREDIT FACILITY
The Promissory Note is payable to Prison Realty over 10 years and bears
interest at 12% per annum. Interest only is payable for the first four
years and the principal is payable over the following six years. The
chief executive officer of the Company has personally guaranteed
payment of 10% of the outstanding principal amount. The original
contractual maturities of the Promissory Note for the next five years
and thereafter are: 2001 - $0; 2002 - $0; 2003 - $22.8 million, 2004 -
$22.8 million; 2005 - $22.8 million and thereafter - $68.5 million;
however, due to the existing default, these maturities may be
accelerated as discussed in Note 3.
On March 1, 1999, the Company obtained the New Credit Facility, which
provides for borrowings up to $100.0 million and bears interest at
Prime plus 2.50%. The New Credit Facility replaced the $30.0 million
old credit facility in place at December 31, 1998. Prior to obtaining
the New Credit Facility, the Company had made no draws under the old
credit facility. The deferred debt issuance costs totaling $2.7 million
related to the old credit facility were charged to interest expense
upon replacement of that credit facility. Borrowings outstanding under
the New Credit Facility are considered short-term obligations, as the
New Credit Facility requires the Company to maintain a lock-box with
the lender whereby all receipts are applied to reduce any borrowings
outstanding. At June 30, 2000, there was $5.2 million outstanding on
the New Credit Facility.
As of June 30, 2000, the Company was not, and, notwithstanding the
waiver of certain events of default under the New Credit Facility, the
Company currently is not in compliance with these financial covenants.
As discussed more fully in Note 3, on April 27, 2000, the Company
obtained the consent of the requisite percentage of the senior lenders
under its bank credit facility for an
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initial waiver of certain of its restrictions. The terms of this waiver
were subsequently amended in June 2000.
6. INCOME TAXES
During the first six months of 2000, the Company has made the decision
that income tax benefits relating to its losses should be fully
reserved after considering the Company's ability to generate taxable
income within the net operating loss carryforward period. Thus, no
income tax benefit was recorded during the six months ended June 30,
2000.
7. COMMITMENTS AND CONTINGENCIES
The Company has been named as one of the defendants in a purported
class action lawsuit filed by a Prison Realty shareholder against
Prison Realty, the Company and Prison Realty's directors. The lawsuit
alleges, among other things, certain violations of the Prison Realty
directors' fiduciary duties in connection with the approval of certain
payments to the Company. The Company is continuing to investigate the
allegations and an outcome is not determinable as of June 30, 2000.
The Company has been named as one of the defendants in a purported
class action lawsuit alleging that the telephone services at prisons
owned or run by the defendants result in charges for collect calls
placed by inmates that are unconscionably high. Due to the recent
filing of this purported class action lawsuit, an outcome is not
determinable as of June 30, 2000.
In June 2000, the Company was named as one of the defendants in a
complaint filed by Prison Acquisition Company, L.L.C. to recover fees
allegedly owed the plaintiff as a result of the termination the
securities purchase agreement by and among the parties related to a
proposed restructuring of the Company and Prison Realty led by
Fortress/Blackstone, as more fully discussed in Note 8. Prison Realty
is contesting this action vigorously.
In February 2000, a complaint was filed in federal court in the United
States District Court for the Western District of Texas against
TransCor, the Company's wholly owned inmate transportation subsidiary.
The lawsuit captioned Cheryl Schoenfeld v. TransCor America, Inc., et.
al., names as defendants TransCor and its directors. The lawsuit
alleges that two drivers sexually assaulted and raped the plaintiff
during her transportation to a facility in Texas. While the case is in
the very early stages of discovery, the plaintiff recently submitted a
$21.0 million settlement demand. The Company and TransCor intend to
defend the action vigorously. It is expected that a portion of any
liabilities resulting from this litigation will be covered by liability
insurance.
In addition to the litigation described above, owners and operators of
privatized correctional and detention facilities are subject to a
variety of legal proceedings arising in the ordinary course of
operating such facilities, including proceedings relating to personal
injury and property damage. Such proceedings are generally brought
against the operator of a correctional facility. Accordingly, the
Company expects that, in connection with the operation of correctional
and detention facilities, is will be a party to such proceedings. The
Company does not believe that such litigation, if resolved against it,
would have a material adverse effect upon its business or financial
position.
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8. PROPOSED MERGER
In order to address the capital and liquidity constraints facing the
Company and Prison Realty, Prison Realty elected to pursue strategic
alternatives. During the fourth quarter of 1999, the Company and Prison
Realty 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"). Under terms of the
restructuring led by Fortress/Blackstone (the "Fortress/Blackstone
Restructuring"), the Company would be merged with and into Prison
Realty, and the combined company would operate under the Corrections
Corporation of America name as a taxable subchapter C corporation,
rather than a real estate investment trust, commencing with its 1999
taxable year. Additionally, Prison Realty proposed to raise up to
$350.0 million by selling shares of convertible preferred stock and
warrants to purchase shares of Prison Realty's common stock to the
Fortress/Blackstone investors in a private placement and to Prison
Realty's existing common stockholders in a $75.0 million rights
offering. Further, Prison Realty proposed to obtain a new $1.2 billion
credit facility and restructure existing management through a newly
constituted board of directors and executive management team.
After publicly announcing the proposed Fortress/Blackstone
Restructuring, during February 2000, Prison Realty received an
unsolicited proposal from Pacific Life with respect to a series of
restructuring transactions intended to serve as an alternative to the
restructuring proposed by Fortress/Blackstone. Under terms of the
restructuring led by Pacific Life (the "Pacific Life Restructuring"),
the Company would be merged with and into Prison Realty on
substantially identical terms as proposed by Fortress/Blackstone, and
the combined company would operate under the Corrections Corporation of
America name as a taxable subchapter C corporation commencing with its
2000 taxable year. Additionally, Prison Realty would 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 Prison
Realty series B convertible preferred stock in satisfaction of this
commitment. Further, Prison Realty proposed to issue shares of
convertible preferred stock in satisfaction of its remaining 1999 REIT
distribution requirements, refinance or renew $1.0 billion of Prison
Realty's senior secured debt, and restructure existing management
through a newly constituted board of directors and executive management
team. Fortress/Blackstone elected not to match the terms of the
proposal from Pacific Life. Consequently, the Fortress/Blackstone
securities purchase agreement was terminated, and the Company and
Prison Realty entered into a securities purchase agreement with Pacific
Life.
Following the execution of the Pacific Life securities purchase
agreement, 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 Prison Realty's $1.0 billion
senior secured bank credit facility. As part of this process, 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 Prison Realty obtained a waiver and amendment to its amended bank
credit facility (the "June 2000 Waiver and Amendment"), Pacific Life
advised Prison Realty that it required certain information before it
could reach a definitive conclusion as to whether 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
Prison Realty whether the June 2000 Waiver and Amendment would satisfy
the condition contained in the securities purchase agreement that a
renewal of the senior credit facility would be in a form
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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 Prison
Realty, on June 30, 2000, the boards of directors of the Company and
Prison Realty approved the execution of an agreement with Pacific Life
mutually terminating the securities purchase agreement with Pacific
Life, and the boards of the Company and Prison Realty approved a series
of agreements providing for the comprehensive restructuring of Prison
Realty (the "Restructuring").
Under the proposed Restructuring, the Company will be merged with and
into Prison Realty, the combined company will operate under the
Corrections Corporation of America name as a taxable subchapter C
corporation commencing with its 2000 taxable year, management will be
restructured through a newly constituted board of directors and
executive management team, and Prison Realty will issue series B
cumulative convertible preferred stock in satisfaction of its remaining
1999 REIT distribution requirements. The Company and Prison Realty are
each seeking stockholder approval of the Restructuring at Special
Meetings of each company's stockholders scheduled for September 12,
2000. Pending stockholder approval, the Company and Prison Realty
intend to complete the Restructuring, including the merger of the
Company and Prison Realty, on or before September 15, 2000.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corrections Corporation of America (formerly Correctional Management Services
Corporation):
We have audited the accompanying consolidated balance sheets of CORRECTIONS
CORPORATION OF AMERICA (a Tennessee corporation and formerly Correctional
Management Services Corporation) AND SUBSIDIARIES as of December 31, 1999 and
1998, the related consolidated statement of operations for the year ended
December 31, 1999, and the related consolidated statements of stockholders'
equity (deficit) and cash flows for the year ended December 31, 1999 and for the
period from September 11, 1998 (inception) through December 31, 1998. These
consolidated financial statements are the responsibility of Corrections
Corporation of America's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Corrections
Corporation of America and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations for the year ended December 31, 1999, and their
cash flows for the year ended December 31, 1999 and for the period from
September 11, 1998 (inception) through December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Corrections Corporation of America will continue as a going concern. As
discussed in Note 3 to the consolidated financial statements, Corrections
Corporation of America and Subsidiaries have incurred significant net losses for
the year ended December 31, 1999, are in default of their revolving credit
facility, are in default under their promissory note with Prison Realty Trust,
Inc., have not made certain required lease payments to Prison Realty Trust,
Inc., and have a net working capital deficiency and a net capital deficiency at
December 31, 1999, all of which raise substantial doubt about their ability to
continue as a going concern. Management's plans in regard to these matters,
including the Proposed Merger of Corrections Corporation of America with Prison
Realty Trust, Inc., the possibility of obtaining waivers related to their
revolving credit facility and the possibility of deferring certain payments to
Prison Realty Trust, Inc., are also described in Note 3. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should Corrections Corporation
of America be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 29, 2000
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(in thousands, except per share amounts)
ASSETS 1999 1998
-------------------------------------------------------------------------- ---------- ----------
Cash and cash equivalents $ 10,725 $ 19,059
Accounts receivable, net of allowances 66,414 64,077
Prepaid expenses 3,733 4,602
Other current assets 7,775 7,103
---------- ----------
Total current assets 88,647 94,841
Property and equipment, net 19,959 24,668
Investment in contracts 67,363 67,795
Other 8,732 8,977
---------- ----------
Total assets $ 184,701 $ 196,281
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------
Accounts payable $ 28,938 $ 15,766
Lease and trade name use payables to Prison Realty 27,080 --
Accrued salaries and wages 5,842 4,419
Accrued property taxes 9,393 4,301
Accrued interest to Prison Realty 16,440 --
Other accrued expenses 17,514 13,444
Short-term debt 16,214 --
Promissory note to Prison Realty 137,000 --
---------- ----------
Total current liabilities 258,421 37,930
---------- ----------
Promissory note to Prison Realty -- 137,000
Deferred lease incentives and service fees received from Prison Realty 107,070 --
---------- ----------
Total liabilities 365,491 174,930
---------- ----------
Commitments and contingencies
Common stock - Class A - $0.01(one cent) par value; 100,000 shares
authorized, 9,349 shares issued and outstanding 93 93
Common stock - Class B - $0.01 (one cent) par value; 100,000 shares
authorized, 981 shares issued and outstanding 10 10
Additional paid-in capital 25,133 25,133
Deferred compensation (3,108) (3,885)
Retained deficit (202,918) --
---------- ----------
Total stockholders' equity (deficit) (180,790) 21,351
---------- ----------
Total liabilities and stockholders' equity (deficit) $ 184,701 $ 196,281
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands)
REVENUE $ 499,292
----------
EXPENSES:
Operating 376,724
Trade name use agreement 8,699
Lease 261,546
General and Administrative 26,166
Depreciation and amortization 8,601
----------
681,736
----------
OPERATING LOSS (182,444)
INTEREST EXPENSE, NET 20,474
----------
NET LOSS $ (202,918)
==========
The accompanying notes are an integral part of
these consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
SEPTEMBER 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(in thousands)
COMMON STOCK
---------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
--------------------------------- PAID-IN DEFERRED RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
------ ------ ------ ------ ---------- ------------ --------- ----------------
Issuance of common stock 9,349 $ 93 981 $ 10 $ 24,532 $(3,885) $ -- $ 20,750
Issuance of stock warrants -- -- -- -- 601 -- -- 601
----- ---- --- ------- -------- ------- --------- ---------
9,349 93 981 10 25,133 (3,885) -- 21,351
BALANCE, DECEMBER 31, 1998
Net loss -- -- -- -- -- -- (202,918) (202,918)
Amortization of deferred
compensation -- -- -- -- -- 777 -- 777
----- ---- --- ------- -------- ------- --------- ---------
BALANCE, DECEMBER 31, 1999 9,349 $ 93 981 $ 10 $ 25,133 $(3,108) $(202,918) $(180,790)
===== ==== === ======= ======== ======= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
SEPTEMBER 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(in thousands)
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (202,918) $ --
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 8,601 --
Lease incentives and service fees received from Prison Realty 109,349 --
Amortization of lease incentives and service fees received from
Prison Realty (4,427) --
Other non cash items 2,861 --
Write-off of debt issuance costs 2,706 --
Gain on sale of assets (22) --
Changes in assets and liabilities, net:
Accounts receivable (654) --
Prepaid expenses 869 --
Other current assets (2,062) --
Other assets 1,541 --
Accounts payable 14,375 --
Lease and trade name use payables to Prison Realty 27,080 --
Accrued salaries and wages 1,423 --
Accrued property taxes 5,092 --
Accrued interest to Prison Realty 16,440 --
Other accrued expenses 3,414 --
---------- ----------
Net cash used in operating activities (16,332) --
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 657 --
Property and equipment additions, net (2,748) --
Cash acquired in purchase of contracts and related net assets -- 3,059
---------- ----------
Net cash provided by (used in) investing activities (2,091) 3,059
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on short-term debt, net 16,214 --
Payment of debt issuance costs (6,125) --
Proceeds from issuance of common stock -- 16,000
---------- ----------
Net cash provided by financing activities 10,089 16,000
---------- ----------
(Continued)
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
SEPTEMBER 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(in thousands)
(Continued)
1999 1998
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (8,334) $ 19,059
CASH AND CASH EQUIVALENTS, beginning of period 19,059 --
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 10,725 $ 19,059
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,111 $ --
============ ============
Income taxes $ -- $ --
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Purchase of management contracts and related net assets through
issuance of the promissory note and common stock to Prison Realty:
Accounts receivable, net of allowances $ -- $ (64,077)
Prepaid expenses -- (4,602)
Other current assets -- (7,103)
Property and equipment -- (24,668)
Investment in contracts -- (70,854)
Other assets -- (8,376)
Accounts payable -- 15,766
Accrued salaries and wages -- 4,419
Accrued property taxes -- 4,301
Other accrued expenses -- 13,444
Promissory note to Prison Realty -- 137,000
Common stock -- 4,750
------------ ------------
$ -- $ --
============ ============
Issuance of stock warrants for financing services:
Other assets $ -- $ 601
Additional paid-in capital -- (601)
------------ ------------
$ -- $ --
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
(FORMERLY CORRECTIONAL MANAGEMENT SERVICES CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND FORMATION TRANSACTIONS
Correctional Management Services Corporation, a Tennessee corporation,
was formed on September 11, 1998, and changed its name to Corrections
Corporation of America (the "Company") in 1999. The Company was formed
in anticipation of the expected merger transactions (the "1999 Merger")
between Corrections Corporation of America ("Old CCA"), CCA Prison
Realty Trust ("Old Prison Realty") and Prison Realty Trust, Inc.
("Prison Realty", formerly Prison Realty Corporation). On September 22,
1998, the Company issued 5.0 million shares of Class A voting common
stock to certain founding shareholders at par value. Additionally, on
September 22, 1998, the Company issued 0.8 million restricted shares of
Class A voting common stock to certain wardens of Old CCA facilities at
the implied fair value of $3.9 million. Immediately prior to the
acquisition of management contracts discussed in Note 2, the Company
issued 3.5 million shares of Class A voting common stock to outside
investors in consideration of cash proceeds totaling $16.0 million. The
Company operates and manages prisons and other correctional facilities
and provides prisoner transportation services for governmental
agencies. In addition, the Chief Executive Officer of the Company is
also the Chief Executive Officer of Prison Realty.
2. ACQUISITION OF MANAGEMENT CONTRACTS AND OTHER RELATIONSHIPS WITH PRISON
REALTY
Immediately after the issuance of the Class A voting common stock
discussed in Note 1, on December 31, 1998, the Company acquired all of
the issued and outstanding capital stock of certain wholly-owned
corporate subsidiaries of Old CCA, certain management contracts and
certain other related assets and liabilities of Old CCA, and entered
into a trade name use agreement with Old CCA, as described below. In
exchange, the Company issued an installment promissory note in the
principal amount of $137.0 million that bears interest at 12% per annum
and is payable over 10 years (the "Promissory Note") and 1.0 million
shares of the Company's Class B non-voting common stock, which
represents 9.5% of the Company's outstanding stock. The Class B
non-voting common stock was valued at the implied fair market value of
$4.75 million.
The acquisition of the capital stock, the management contracts and
related assets and liabilities was accounted for as a purchase
transaction in accordance with Accounting Principles Board Opinion No.
16 "Business Combinations," and the aggregate purchase price of $141.8
million was allocated to the assets and liabilities acquired based on
management's estimates of the fair value of the assets and liabilities
acquired. An amount of $67.8 million was initially assigned to the
value of the management contracts acquired and is being amortized over
a fifteen-year period, which represents the average remaining lives of
the contracts acquired plus any contractual renewal options. During
1999, the Company continued to evaluate the values assigned to the
management contracts and the assets and liabilities acquired. As a
result, the Company increased the value of the management contracts by
approximately $4.4 million.
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TRADE NAME USE AGREEMENT
On December 31, 1998, immediately prior to the 1999 Merger and in
connection with the transactions described above, the Company entered
into a trade name use agreement with Old CCA (the "Trade Name Use
Agreement"). Under the Trade Name Use Agreement, which has a term of
ten years, the Company obtained the right to use the name, "Corrections
Corporation of America" and derivatives thereof, subject to specified
terms and conditions therein. In consideration for such right, the
Company agreed to pay a fee equal to (i) 2.75% of the Company's gross
revenues for the first three years of the Trade Name Use Agreement,
(ii) 3.25% of the Company's gross revenues for the following two years
of the Trade Name Use Agreement, and (iii) 3.625% of the Company's
gross revenues for the remaining term of the Trade Name Use Agreement,
provided that the amount of such fee may not exceed (a) 2.75% of the
gross revenues of Prison Realty for the first three years of the Trade
Name Use Agreement, (b) 3.5% of Prison Realty's gross revenues for the
following two years of the Trade Name Use Agreement, and (c) 3.875% of
Prison Realty's gross revenues for the remaining term of the Trade Name
Use Agreement. The Company incurred $8.7 million of operating expenses
under the Trade Name Use Agreement for the year ended December 31,
1999, of which $6.5 million had been paid as of December 31, 1999.
CCA LEASES
On January 1, 1999, the Company entered into a master lease agreement
and leases with respect to the thirty-six leased properties with Prison
Realty (the "CCA Leases"). The initial terms of the CCA Leases are 12
years and may be extended at fair market rates for three additional
five-year periods upon the mutual agreement of the Company and Prison
Realty. The Company incurred $263.5 million in gross lease expense
under the CCA Leases for the year ended December 31, 1999, of which
$238.6 million had been paid as of December 31, 1999.
On December 31, 1999, Prison Realty and the Company amended the terms
of the CCA Leases to change the annual base rent escalation formula
with respect to each facility leased to the Company. Previously, the
annual base rent payable with respect to each facility was subject to
increase each year in an amount equal to a percentage of the total
rental payments with respect to each facility, such percentage being
the greater of (i) 4%; or (ii) 25% of the percentage increase of gross
management revenue derived from such facility. As a result of this
amendment, the annual base rent with respect to each facility is
subject to increase each year in an amount equal to the lesser of: (i)
4% of the annualized yearly rental payments with respect to such
facility; or (ii) 10% of the excess of the Company's aggregate gross
management revenues for the prior year over a base amount of $325.0
million.
CCA RIGHT TO PURCHASE AGREEMENT
Effective January 1, 1999, the Company and Prison Realty entered into a
Right to Purchase Agreement (the "CCA Right to Purchase Agreement")
pursuant to which the Company granted to Prison Realty the right to
acquire and lease back to the Company at fair market rental rates, any
correctional or detention facility acquired or developed and owned by
the Company in the future for a period of ten years following the date
inmates are first received at such facility. The initial annual rental
rate on such facilities will be the fair market rental rate as
determined by the Company and Prison Realty. Additionally, the Company
granted Prison Realty the right
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of first refusal to acquire any Company-owned correctional or detention
facility should the Company receive an acceptable third party offer to
acquire any such facility. The Company sold no facilities to Prison
Realty during the year ended December 31, 1999 under the CCA Right to
Purchase Agreement.
CCA SERVICES AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a services agreement (the "CCA Services Agreement") with
Prison Realty pursuant to which the Company agreed to serve as a
facilitator of the construction and development of additional
facilities on behalf of Prison Realty for a term of five years from the
date of the CCA Services Agreement. In such capacity, the Company will
perform, at the direction of Prison Realty, such services as are
customarily needed in the construction and development of correctional
and detention facilities, including services related to construction of
the facilities, project bidding, project design and governmental
relations. In consideration for the performance of such services by the
Company, Prison Realty agreed to pay a fee equal to 5% of the total
capital expenditures (excluding the incentive fee discussed below and
the 5% fee herein referred to) incurred in connection with the
construction and development of a facility, plus an amount equal to
approximately $560 (five hundred sixty dollars) per bed for facility
preparation services provided by the Company prior to the date on which
inmates are first received at such facility. The Company may receive
payments up to an additional 5% of the total capital expenditures (as
determined above) from Prison Realty if additional services are
requested by Prison Realty. The Company has received a fee of 10% on a
majority of the construction and development services provided to
Prison Realty. Amounts that exceed the reimbursement of actual costs
incurred by the Company on facilities the Company will lease from
Prison Realty are being deferred and amortized as reductions in lease
expense over the terms of the respective leases. The Company billed
$41.6 million in fees under the CCA Services Agreement for the year
ended December 31, 1999, of which $39.4 million had been collected as
of December 31, 1999. The Company recognized $8.1 million as revenues
for services provided on projects where the Company does not lease the
facility from Prison Realty, $5.6 million as a reduction in operating
expenses, and deferred $27.9 million as deferred credits, of which $0.1
million was amortized as a reduction in lease expense.
TENANT INCENTIVE AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company
entered into a tenant incentive agreement with Prison Realty pursuant
to which Prison Realty agreed to pay the Company an incentive fee to
induce the Company to enter into leases with respect to those
facilities developed and facilitated by the Company. The amount of the
incentive fee was initially set at $840 (eight hundred forty dollars)
per bed for each facility leased by the Company where the Company has
served as developer and facilitator. On May 4, 1999, Prison Realty and
the Company entered into an amended and restated tenant incentive
agreement (the "Amended and Restated Tenant Incentive Agreement"),
effective as of January 1, 1999, providing for (i) a tenant incentive
fee of up to $4,000 (four thousand dollars) per bed payable with
respect to all future facilities developed and facilitated by the
Company, as well as certain other facilities which, although
operational on January 1, 1999, had not achieved full occupancy, and
(ii) an $840 (eight hundred forty dollars) per bed allowance for all
beds in operation at the beginning of January 1999, approximately
21,500 (twenty-one thousand five hundred) beds, that were not subject
to the tenant allowance in the first quarter of 1999. The
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term of the Amended and Restated Tenant Incentive Agreement is four
years unless extended upon the written agreement of the Company and
Prison Realty. The incentive fees received by the Company are being
deferred and amortized as reductions in lease expense over the terms of
the respective leases. The Company received $68.6 million in tenant
incentive fees under the Amended and Restated Tenant Incentive
Agreement for the year ended December 31, 1999. The Company amortized
$4.1 million as reductions in lease expense, with $64.5 million
remaining in deferred credits at December 31, 1999.
BUSINESS DEVELOPMENT AGREEMENT
Effective January 1, 1999, the Company entered into a business
development agreement (the "Business Development Agreement") with
Prison Realty which provides that the Company will perform, at the
direction of Prison Realty, services designed to assist Prison Realty
in identifying and obtaining new business. Such services include, but
are not limited to, marketing and other business development services
designed to increase awareness of Prison Realty and the facility
development and construction services it offers, identifying potential
facility sites and pursuing all applicable zoning approvals related
thereto, identifying potential tenants for Prison Realty's facilities
and negotiating agreements related to the acquisition of the new
facility management contract for Prison Realty's tenants. Pursuant to
the Business Development Agreement, Prison Realty will also reimburse
the Company for expenses related to third-party entities providing
government and community relations services to the Company, in
connection with the provision of the business development services
described above. In consideration for the Company's performance of the
business development services, and in order to reimburse the Company
for the third-party government and community relations expenses
described above, Prison Realty has agreed to pay the Company a total
fee equal to 4.5% of the total capital expenditures (excluding the
amount of the tenant incentive fee and the services fee discussed above
as well as the 4.5% fee referred to herein) incurred in connection with
the construction and development of each new facility, or the
construction and development of an addition to an existing facility,
for which the Company performed business development services. The term
of the Business Development Agreement is four years unless extended
upon the written agreement of the Company and Prison Realty. The
business development fees received by the Company are being deferred
and amortized as reductions in lease expense over the terms of the
respective leases. The Company received $15.0 million in fees under the
Business Development Agreement for the year ended December 31, 1999.
The Company amortized $0.2 million as reductions in lease expense, with
$14.8 million remaining in deferred credits at December 31, 1999.
3. LIQUIDITY CONCERNS AND PROPOSED MERGER
The Company incurred a net loss of $202.9 million for the year ended
December 31, 1999, has negative working capital of $169.8 million at
December 31, 1999 and has a net stockholders' deficit of $180.8 million
at December 31, 1999.
At December 31, 1999, the Company was in violation of certain
provisions of its revolving credit facility (the "New Credit
Facility"), including failure to comply with a financial covenant
pertaining to the Company's net worth. The default could cause further
borrowings under the New Credit Facility to be limited or totally
suspended and the due date of the outstanding borrowings may be
accelerated. The amount outstanding under the New Credit Facility at
December 31, 1999 was $16.2 million.
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Rental payments of $24.9 million due to Prison Realty from the Company
under the CCA Leases were unpaid as of December 31, 1999, while the
terms of the CCA Leases provide that rental payments were due and
payable on December 25, 1999. The terms of the CCA Leases provide that
it shall be an event of default if the Company fails to pay any
installment of rent within 15 days after notice of nonpayment from
Prison Realty. The terms of the CCA Leases provide that Prison Realty
has certain rights in the event of default, including the right to
require the Company to relinquish the leased facilities. As of March
29, 2000, Prison Realty has not provided a notice of nonpayment to the
Company and the amount of unpaid rentals related to 1999 totals $12.0
million. In addition, unpaid rentals related to periods subsequent to
December 31, 1999 total approximately $77.7 million (unaudited) at
March 29, 2000.
As a result of the Company's current liquidity position, the Company
has been required to defer the first scheduled payment of accrued
interest on the $137.0 million Promissory Note payable to Prison Realty
by the Company, which was due on December 31, 1999. Pursuant to the
terms of a subordination agreement, dated as of March 1, 1999, by and
between Prison Realty and the agent of the Company's New Credit
Facility, the Company is prohibited from making scheduled interest
payments on the Promissory Note if certain financial covenants relating
to the Company's liquidity position are not met. On December 31, 1999,
the Company was not in compliance with these financial covenants.
Accordingly, the Company was prohibited from making the scheduled
interest payment. Pursuant to the terms of the subordination agreement,
Prison Realty is prohibited from accelerating the principal amount of
the Promissory Note or taking any other action to enforce its rights
under the provisions of the Promissory Note for so long as the New
Credit Facility remains outstanding. However, the amount due under the
Promissory Note has been classified as a current liability in the
accompanying consolidated balance sheet at December 31, 1999, since the
Company is in default under the Promissory Note's existing terms.
Prison Realty, the Company's lessor, is also not in compliance with
certain of its debt convenants. In order to address the liquidity and
capital needs of both the Company and Prison Realty, the boards of
directors of the Company and Prison Realty, as well as the boards of
directors of two related service companies, Prison Management Services,
Inc. ("PMSI") and Juvenile and Jail Facility Management Services, Inc.
("JJFMSI") approved the formation of a special coordinating committee
to monitor the financial situation of both Prison Realty and the
Company and to coordinate with the companies' advisors regarding the
consideration of strategic alternatives. Based on the strategic
alternatives considered, (i) the Company's Board of Directors has
approved a proposed merger with Prison Realty, (ii) the Company and
Prison Realty currently intend to amend the terms of the CCA Leases and
the terms of various other agreements between the Company and Prison
Realty and (iii) the Company is negotiating to obtain waivers of the
default under the New Credit Facility, all of which are discussed in
more detail below. In addition, Prison Realty is in separate
negotiations with one or more groups of investors to make an equity
investment in Prison Realty (the "Potential Prison Realty Equity
Investment"), and currently expects that the completion of the proposed
merger will be a condition to the Potential Prison Realty Equity
Investment.
As discussed above, the Company's Board of Directors has approved a
proposed merger and related transactions pursuant to which the Company
will combine with Prison Realty, and the two related service companies,
PMSI and JJFMSI (the "Proposed Merger"). The boards of
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directors of Prison Realty, PMSI, and JJFMSI have also approved the
Proposed Merger, which is subject to shareholder approval by each
entity's stockholders.
The terms of the Proposed Merger specify that non-outside investor
shareholders of the Company will obtain the right to receive shares of
Prison Realty common stock valued at approximately $10.6 million in
exchange for shares of the Company that those shareholders own at the
consummation of the Proposed Merger. Immediately prior to the Proposed
Merger, the outside investors holding shares of the Company will
receive approximately $16.0 million in cash from Prison Realty for the
sale of shares of the Company common stock held by those outside
investors. Additionally, the terms of the Proposed Merger specify that
the $137.0 million Promissory Note due to Prison Realty will be valued
at the carrying amount as consideration in the Proposed Merger.
Approval of the Proposed Merger requires the affirmative vote of 80% of
the outstanding shares of the Company's common stock (class A and class
B voting together as a single class). Management anticipates that a
special meeting of the shareholders of the Company will be held for the
purpose of voting upon the Proposed Merger. In addition, pursuant to
the terms of an agreement between the Company and a shareholder, Baron
Capital Group, Inc., ("Baron"), the Proposed Merger must be approved
separately by Baron. A purported class action lawsuit has been filed
against Prison Realty seeking an injunction preventing the completion
of the Proposed Merger and the Potential Prison Realty Equity
Investment.
In an effort to address the Company's liquidity needs prior to the
Proposed Merger, Prison Realty and the Company currently intend to
amend the terms of the CCA Leases. Pursuant to this proposed amendment,
rent will be payable on each June 30 and December 31, instead of
monthly. In addition, the proposed amendment provides that the Company
is required to make certain scheduled monthly installment payments to
Prison Realty from January 1, 2000 through June 30, 2000. Approximately
$12.9 million was paid February 14, 2000, and future payments are
anticipated to be $12.0 million due in April 2000, $4.0 million due
April 30, 2000, $6.0 million due May 31, 2000 and $8.0 million due June
30, 2000. At the time these installment payments are made, the Company
will also be required to pay interest to Prison Realty upon such
payments at a rate equal to the then current interest rate under the
New Credit Facility. These installment payments represent the Company's
December 1999 lease payments and a portion of the rent accruing from
January 1, 2000 to June 30, 2000. The accrued but unpaid rent which
will have accrued at June 30, 2000, totaling $137.3 million, shall be
due and payable on June 30, 2000.
Prison Realty and the Company also currently intend to amend certain
agreements (the Business Development Agreement, the CCA Services
Agreement and the Amended and Restated Tenant Incentive Agreement)
between Prison Realty and the Company to provide for the deferral of
the payment of all fees under these agreements by Prison Realty to the
Company until September 30, 2000.
The terms of the Company's New Credit Facility provide that the Company
shall not amend or modify the terms of the CCA Services Agreement, the
Amended and Restated Tenant Incentive Agreement and the Business
Development Agreement in any manner which is on terms and conditions
less favorable to the Company than are in effect immediately prior to
such amendment or modification. If the proposed amendments to these
agreements are completed, these actions will be in violation of the New
Credit Facility. The terms of the New
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Credit Facility also provide that the execution of the Proposed Merger
agreement in December 1999 resulted in an event of default under the
New Credit Facility.
The Company has initiated discussions with the agent of the New Credit
Facility, and has requested the consent of the requisite percentage of
its participating lenders for a waiver of the restrictions relating to:
(i) the amendment of Prison Realty's agreements with the Company; (ii)
the execution of the Proposed Merger, (iii) the Company's deferral of
certain payments under the CCA Leases and (iv) the financial covenants
concerning the Company's net worth. The Company has requested that the
waivers remain in effect until the earlier of July 31, 2000 or the
completion of the Potential Prison Realty Equity Investment and
Proposed Merger.
There can be no assurance that the requisite participating lenders
under the New Credit Facility will consent to the proposed waivers of
the New Credit Facility or will not seek to declare an event of default
prior to such date. In the event the Company is unable to obtain the
necessary waivers or to comply with and maintain the proposed waivers,
the participating lenders are entitled, at their discretion, to
exercise certain remedies, including acceleration of the outstanding
borrowings and suspension of further borrowings under the New Credit
Facility. Upon the occurrence and during the continuation of a default,
the terms of the New Credit Facility allow the lenders to increase the
current interest rate (Prime plus 2.5%) by an additional 3.0% to a
default rate. As of March 29, 2000, the lenders have not notified the
Company of an event of default, and the Company is not currently
subject to the default rate. If the participating lenders elect to
exercise their rights to accelerate the Company's obligations under the
New Credit Facility, and/or if the participating lenders do not consent
to the proposed waivers, such events would have a material adverse
effect on the Company's liquidity and financial position. The Company
does not have sufficient working capital in the event of an
acceleration of the due dates of the New Credit Facility.
In addition to requiring the consent of the Company's lenders, the
completion of the proposed amendments described above are also subject
to the consent of Prison Realty's lenders. No assurance can be given
that such consents will be obtained or that Prison Realty's lenders
will not seek to declare an event of default prior to the effectiveness
of the consents. If Prison Realty does not obtain the proposed waivers
and consents, Prison Realty's lenders could exercise certain remedies
including the acceleration of Prison Realty's outstanding borrowings.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do not
reflect any adjustments that might result if the Company is unable to
continue as a going concern. The Company's outstanding amounts due to
Prison Realty, recent net losses, negative cash flows from operations,
negative working capital and net stockholders' deficit, along with
existing defaults under its New Credit Facility and the Promissory Note
raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments relating to recoverability and classification of recorded
asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
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4. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company had no operations prior to January 1, 1999. As such, the
accompanying consolidated financial statements represent the Company's
consolidated financial position as of December 31, 1999 and 1998, the
related consolidated statement of operations for the year ended
December 31, 1999, and the Company's consolidated cash flows and
consolidated activity in stockholders' equity (deficit) for the year
ended December 31, 1999, and for the period from September 11, 1998
(inception) through December 31, 1998. All material intercompany
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an
original maturity of three months or less to be cash equivalents.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized on a straight-line basis over the
life of the related debt. This amortization is charged to interest
expense.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are
capitalized; other repairs and maintenance are expensed. The cost and
accumulated depreciation applicable to assets retired are removed from
the accounts and the gain or loss on disposition is recognized in
income. Depreciation is computed by the straight-line method for
financial reporting purposes and accelerated methods for tax reporting
purposes based upon the estimated useful lives of the related assets.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." This statement generally requires the Company to record
deferred income taxes for the differences between book and tax bases of
its assets and liabilities.
MANAGEMENT CONTRACTS
In connection with the acquisition of management contracts discussed in
Note 2, the Company obtained contracts with various governmental
entities to manage their facilities for fixed per diem rates. These
contracts usually contain expiration dates with renewal options ranging
from annual to multi-year renewals. The Company expects to renew these
contracts for periods consistent with the remaining renewal options
allowed by the contracts or other reasonable extensions. Fixed per diem
revenue is recorded based on the per diem rate multiplied by the number
of inmates housed during the respective period. The Company recognizes
any additional management service revenues when earned or awarded by
the respective authorities.
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START-UP COSTS
In accordance with the AICPA's Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities," the Company expenses all start-up
costs as incurred in operating expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," the Company calculates the fair
value of financial instruments using quoted market prices. At December
31, 1999, there were no material differences in the book values of the
Company's financial instruments and their related fair values as
compared to similar financial instruments.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company
continually evaluates the recoverability of the carrying values of its
long-lived assets when events suggest that an impairment may have
occurred. In these circumstances, the Company utilizes estimates of
undiscounted cash flows to determine if an impairment exists.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that changes
in the amounts of certain items, including gains and losses on certain
securities, be shown in the financial statements. The provisions of
SFAS No. 130 had no impact on the Company's results of operations as
comprehensive loss was equivalent to the Company's reported net loss
for the year ended December 31, 1999.
SEGMENT DISCLOSURES
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business
enterprises or other enterprises that are required to file financial
statements with the Securities & Exchange Commission report information
about operating segments in annual financial statements and requires
that those enterprises report selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The Company operates in one
industry segment and the provisions of SFAS No. 131 have no significant
effect on the Company's disclosures.
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NEWLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
effective, as amended, for fiscal years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133 requires
all derivatives to be recognized in the statement of financial position
and to be measured at fair value. The Company anticipates adopting the
provisions of SFAS No. 133 effective January 1, 2001 and does not
believe the adoption of SFAS No. 133 will have a material impact on the
Company's consolidated financial position or results of operations.
RECLASSIFICATIONS
Certain reclassifications of 1998 amounts have been made to conform
with the 1999 presentation.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
December 31,
-----------------------------
1999 1998
--------- ---------
(in thousands)
Land $ 4,303 $ 4,303
Building improvements 6,815 10,348
Equipment 9,629 6,689
Office furniture and fixtures 2,888 2,585
Construction in progress 79 743
--------- ---------
23,714 24,668
Less accumulated depreciation (3,755) --
--------- ---------
$ 19,959 $ 24,668
========= =========
Depreciation expense was $3.8 million for the year ended December 31,
1999.
6. OTHER ASSETS
Other assets consist of the following:
December 31,
-----------------------------
1999 1998
--------- ---------
(in thousands)
Debt issuance costs $ 3,442 $ 2,619
Prepaid rent to a government entity 3,116 4,477
Other assets 2,174 1,881
--------- ---------
$ 8,732 $ 8,977
========= =========
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7. PROMISSORY NOTE AND CREDIT FACILITY
The Promissory Note of $137.0 million is payable to Prison Realty over
10 years and bears interest at 12% per annum. Interest only is payable
for the first four years and the principal is payable over the
following six years. The Chief Executive Officer of the Company has
personally guaranteed payment of 10% of the outstanding principal
amount. The original contractual maturities of the Promissory Note for
the next five years and thereafter are: 2000 - $0; 2001 - $0; 2002 -
$0; 2003 - $22.8 million; 2004 - $22.8 million and thereafter - $91.3
million; however, due to the existing default, these maturities may be
accelerated as discussed in Note 3.
At December 31, 1998, the Company had obtained a revolving credit
facility (the "Old Credit Facility") providing for borrowings up to
$30.0 million. The Old Credit Facility's terms required interest at
LIBOR plus 4.0%. The Old Credit Facility could be used for working
capital and letters of credit. The Company had made no draws under the
Old Credit Facility as of December 31, 1998.
On March 1, 1999, the Company obtained the New Credit Facility which
provides for borrowings up to $100.0 million and bears interest at
Prime plus 2.50%. The New Credit Facility replaced the $30.0 million
Old Credit Facility in place at December 31, 1998. Prior to obtaining
the New Credit Facility, the Company had made no draws under the Old
Credit Facility. The deferred debt issuance costs totaling $2.7 million
related to the Old Credit Facility were charged to interest expense
upon replacement of that credit facility. Borrowings outstanding under
the New Credit Facility are considered short-term obligations as the
New Credit Facility requires the Company to maintain a lock-box with
the lender whereby all receipts are applied to reduce any borrowings
outstanding. At December 31, 1999, there was $16.2 million outstanding
on the New Credit Facility. The New Credit Facility expires on June 1,
2002.
As discussed in Note 3, at December 31, 1999, the Company was in
violation of several provisions of the New Credit Facility including
failure to comply with a financial covenant which required the
Company's net worth to be greater than negative $105.0 million and the
execution of the Proposed Merger agreement. The defaults could cause
repayment of the Company's outstanding borrowings to be accelerated and
could result in a higher default rate of interest, as discussed in Note
3. The Company has initiated discussions with the agent of the New
Credit Facility, and has requested the consent of the requisite
percentage of its participating lenders for a waiver of the
restrictions relating to: (i) the amendment of Prison Realty's
agreements with the Company, (ii) the execution of the Proposed Merger,
and (iii) the Company's deferral of certain payments under the CCA
Leases. The Company has also requested the consent of such lenders with
respect to a waiver of the financial covenant concerning the Company's
net worth described above. The Company has requested that the waiver
remain in effect until the earlier of July 31, 2000 or the completion
of the Potential Prison Realty Equity Investment and the Proposed
Merger.
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Interest expense, net, is comprised of the following for the year ended
December 31, 1999 (in thousands):
Interest expense $ 20,974
Interest income (500)
--------
$ 20,474
========
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Realization of the future tax benefits related to deferred
tax assets is dependent on many factors, including the Company's
ability to generate taxable income within the net operating loss
carryforward period. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial
reporting purposes. Significant components of the Company's deferred
tax assets at December 31, 1999 are as follows (in thousands):
Current Deferred Tax Assets:
Asset reserves and liabilities not yet deductible for tax $ 3,059
---------
Total current deferred tax assets 3,059
Less valuation allowance (3,059)
---------
Net current deferred tax assets $ --
=========
Noncurrent Deferred Tax Assets:
Deferred lease incentives and service fees $ 41,757
Tax over book basis of certain assets 927
Net operating loss carryforwards 32,588
---------
Total noncurrent deferred tax assets 75,272
Less valuation allowance (75,272)
---------
Net noncurrent deferred tax assets $ --
=========
Due to the Company's recent operating losses, there is significant
uncertainty about the Company's ability to generate sufficient taxable
income in the future to realize the deferred tax assets. In accordance
with SFAS No. 109, the Company has provided a valuation allowance at
December 31, 1999 to fully reserve the deferred tax assets. At December
31, 1999, the Company had net operating loss carryforwards for income
taxes totaling $83.6 million available to offset future taxable income.
The carryforward period expires in 2019.
The following summarizes the change in the valuation allowance for the
year ended December 31, 1999 (in thousands):
Valuation allowance at January 1, 1999 $ --
Valuation allowance at December 31, 1999 78,331
---------
Increase in valuation allowance $ 78,331
=========
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9. ADMINISTRATIVE SERVICES AGREEMENTS
On January 1, 1999, the Company entered into administrative service
agreements with two separately owned, newly formed companies, PMSI and
JJFMSI, pursuant to which employees of the Company's administrative
departments perform administrative services (including, but not limited
to operational support, legal, finance, management information systems
and government relations services), as needed, for each of the two
companies. In connection therewith, the Company granted each of the two
companies the right to use the name "Corrections Corporation of
America" in connection with the servicing of management contracts. As
consideration for the foregoing, the Company received administrative
service fees of $0.25 million per month from each company for a total
of $6.0 million for the year ended December 31, 1999. The Company has
recognized these amounts as revenues in the statement of operations.
10. STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
During 1998, the Company authorized 50.0 million shares of $0.01 (one
cent) par value preferred stock. At December 31, 1999 and 1998, no
preferred stock was issued or outstanding.
COMMON STOCK
On September 22, 1998, the Company issued 5.0 million shares of Class A
voting common stock to certain employees of Old CCA and Prison Realty
who were also founding shareholders of the Company. Neither the Company
nor Old CCA received any proceeds from the issuance of these shares.
However, Old CCA recorded compensation expense of $22.9 million in 1998
for the implied fair value of the 5.0 million common shares. The fair
value of these common shares was determined at the date of the 1999
Merger based upon the fair value of the Company derived from the $16.0
million cash investments in the Company made by outside investors at
December 31, 1998, as discussed in Note 1.
Additionally, on September 22, 1998, the Company issued 0.8 million
restricted shares of Class A voting common stock to certain wardens of
Old CCA facilities. The shares held by the wardens are restricted and
will vest if, and only if, the wardens remain employees of the Company
through December 31, 2003. The Company is expensing the implied fair
value (approximately $3.9 million) of these restricted securities over
the respective vesting period. The implied fair value of these common
shares was also derived from the $16.0 million cash investments in the
Company made by outside investors at December 31, 1998, as discussed in
Note 1.
As discussed in Note 1, the Company sold 3.5 million shares of Class A
voting common stock to outside investors immediately prior to the 1999
Merger. The net proceeds of $16.0 million were used for general working
capital purposes.
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STOCK WARRANTS
In connection with the Company's Old Credit Facility, on December 31,
1998, the Company issued 0.5 million warrants to purchase Class A
common shares as part of the debt issuance costs associated with
obtaining the Old Credit Facility. The warrants were issued with an
exercise price of $4.57 per warrant and an expiration date of December
31, 2008. The warrants are exercisable from the date of issuance. The
Company determined the fair value of the warrants issued to be
approximately $0.6 million utilizing the Black-Scholes option-pricing
model and recorded the cost as debt issuance cost within other
noncurrent assets on the accompanying consolidated balance sheets.
These debt issuance costs were charged to interest expense upon
replacement of the Old Credit Facility as described in Note 7. At
December 31, 1999 and 1998, all stock warrants remained outstanding.
11. RETIREMENT PLAN
On December 28, 1998, the Company adopted a 401(k) plan (the "Plan")
for all eligible employees as defined in the plan documents. The Board
of Directors has discretion in establishing the amount of the Company's
contributions. The Company's contributions become 40% vested after four
years of service and 100% vested after five years of service, and the
vested portions are paid on death, retirement or termination. The CCA
Employee Stock Ownership Plan merged with the Plan in 1999. The
Company's contributions to the Plan amounted to $4.6 million for the
year ended December 31, 1999.
12. COMMITMENTS AND CONTINGENCIES
All of the Company's leases of its facilities and certain equipment
from Prison Realty are under long-term operating leases expiring
through the year 2011. The contractual minimum lease commitments
(excluding acceleration or demand provisions) under existing terms for
noncancelable leases are as follows (in thousands):
YEAR AMOUNT
----------------- -----------
2000 $ 310,651
2001 310,651
2002 310,651
2003 310,651
2004 310,651
Thereafter 1,890,193
-----------
Total $ 3,443,448
===========
As discussed in Note 3, the terms of the CCA Leases provide that it
shall be an event of default if the Company fails to pay any
installment of rent within 15 days after notice of nonpayment from
Prison Realty. Approximately $12.0 million in unpaid rentals related to
1999 exist as of March 29, 2000 as well as approximately $77.7 million
(unaudited) in unpaid rentals related to periods subsequent to December
31, 1999. The terms of the CCA Leases provide that Prison Realty could
require the Company to relinquish the leased facilities in the event of
default. However, as of March 29, 2000, Prison Realty has not provided
a notice of nonpayment to the Company.
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The Company has been named as one of the defendants in a purported
class action lawsuit filed by a Prison Realty shareholder against
Prison Realty, the Company and Prison Realty's directors. The lawsuit
alleges, among other things, certain violations of the Prison Realty
directors' fiduciary duties in connection with the approval of certain
payments to the Company. The Company is continuing to investigate the
allegations and an outcome is not determinable as of March 29, 2000.
Subsequent to year end, the Company was named as one of the defendants
in a purported class action lawsuit alleging that the telephone
services at prisons owned or run by the defendants result in charges
for collect calls placed by inmates that are unconscionably high. Due
to the recent filing of this purported class action lawsuit, an outcome
is not determinable as of March 29, 2000.
In addition to the above legal matters, the nature of the Company's
business results in claims and litigation alleging that the Company is
liable for damages arising from the conduct of its employees or others.
In the opinion of management, other than the outstanding litigation
discussed above, there are no pending legal proceedings that would have
a material effect on the consolidated financial position or results of
operations of the Company for which the Company has not established
adequate reserves.
Each of the Company's management contracts and the statutes of certain
states require the maintenance of insurance. The Company maintains
various insurance policies including employee health, worker's
compensation, automobile liability and general liability insurance.
These policies are fixed premium policies with various deductible
amounts that are self-funded by the Company. Reserves are provided for
estimated incurred claims within the deductible amounts.
13. CONCENTRATION OF CREDIT RISK
Approximately 97% of the Company's revenues for the year ended December
31, 1999, relate to amounts earned from federal, state and local
governmental management and transportation contracts.
The Company had revenues of 25% from the federal government and 62%
from state governments for the year ended December 31, 1999 for
management contracts. Two federal agencies accounted for revenues of
11% and 10% and one state government accounted for revenues of 11% for
the year ended December 31, 1999 for management contracts.
Substantially all of the Company's accounts receivable are due from
federal, state and local governments at December 31, 1999 and 1998.
Salaries and related benefits represented 58% of operating expenses for
the year ended December 31, 1999.
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14. QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly financial information for each of the quarters in
the year ended December 31, 1999 is as follows (in thousands):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
---------- ---------- ---------- ---------- ----------
Revenues $ 112,363 $ 122,985 $ 129,874 $ 134,070 $ 499,292
Operating loss (60,518) (55,923) (63,512) (2,491)(b) (182,444)
---------- ---------- ---------- ---------- ----------
Net loss $ (39,766) $ (37,262) $ (118,346)(a) $ (7,544)(b) $ (202,918)
========== ========== ========== ========== ==========
(a) The net loss in the third quarter reflects the Company's
decision that previously reported income tax benefits of $50.3
million related to its 1999 losses should be fully reserved.
(b) The operating loss and net loss in the fourth quarter were
substantially lower than the first three quarters due to
changes in the terms of the CCA Leases which allowed the
Company to reverse previously recorded straight line rent
accruals of $56.9 million.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred, or to be incurred, by the
registrant in connection with the registration and issuance of the securities
being registered hereunder. All amounts other than the registration fee paid to
the Securities and Exchange Commission (the "SEC" or the "Commission") are
estimates.
AMOUNT TO BE PAID
-----------------
SEC registration fee $ 12,957
Printing expenses 7,500
Legal fees and expenses 100,000
Accounting fees and expenses 40,000
Transfer agent and registrar fees 1,000
Miscellaneous 3,543
---------
Total $ 165,000
=========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the Amended and Restated Charter of Corrections Corporation of
America ("CCA" or the "Company") provides that, to the maximum extent that
Maryland law from time to time permits limitation of liability of directors or
officers of corporations, no person who at any time was or is a director or
officer of the Company shall be personally liable to the Company or its
stockholders for money damages.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") generally
permits indemnification of any director made a party to any proceedings by
reason of service as a director unless it is established that: (i) the act or
omission of such person was material to the matter giving rise to the
proceedings and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) such person actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceedings, such person had reasonable cause to believe that the act or
omission was unlawful. The indemnity may include judgments, penalties, fines,
settlements and reasonable expenses (including attorneys' fees) actually
incurred by the director in connection with the proceeding; but, if the
proceeding is one by, or in the right of, the corporation, indemnification is
not permitted with respect to any proceeding in which the director has been
adjudged to be liable to the corporation, or if the proceeding is one charging
improper personal benefit to the director, whether or not involving action in
the director's official capacity, indemnification of the director is not
permitted if the director was adjudged to be liable on the basis that personal
benefit was improperly received. The termination of any proceeding by conviction
or upon a plea of nolo contendere or its equivalent, or an entry of an order of
probation prior to judgment, creates a rebuttable presumption that the director
did not meet the requisite standard of conduct required for permitted
indemnification. The termination of any proceeding by judgment, order or
settlement, however, does not create a presumption that the director failed to
meet the requisite standard of conduct for permitted indemnification.
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Under the provisions of the Company's bylaws, the Company is required to
indemnify a current or former director or officer for reasonable expenses
incurred if such individual has been successful, on the merits or otherwise, in
defense of any proceeding arising out of such individual's official capacity.
Under the provisions of its bylaws, the Company is also required to indemnify
any current or former director, or any current or former officer in any
proceeding arising out of such individual's official capacity, unless it is
established that:
- the proceeding involves an act or omission of such individual which was
material to the matter giving rise to the proceeding and was either (i)
committed in bad faith; or (ii) was the result of active and deliberate
dishonesty;
- the individual actually received an improper personal benefit in money,
property or services; or
- in the case of a criminal proceeding, the director had reasonable cause
to believe the act or omission was unlawful.
In addition, under Maryland law, the Company is required to indemnify a current
or former director or officer in any proceeding arising out of such individual's
official capacity if a court of appropriate jurisdiction determines such
individual is entitled to indemnification.
Under Maryland law, any such indemnification may be against judgments,
penalties, settlements and reasonable expenses actually incurred in connection
with the proceeding. However, if the proceeding is one by or in the right of the
corporation, the Company may not provide indemnification with respect of any
proceeding in which the individual is adjudged liable to the corporation. In
addition, if the proceeding is one charging improper personal benefit to the
individual whether or not involving action in the director's official capacity,
indemnification is not permitted if the director is adjudged to be liable on the
basis that personal benefit was improperly received.
Under the Company's bylaws, the Company shall pay or reimburse, in advance of
final disposition of a proceeding, reasonable expenses incurred by a current or
former director or officer, if such individual affirms in good faith that he or
she has satisfied the applicable standard of conduct necessary for
indemnification and agrees to repay amounts paid to such individual if it is
determined that such standard is not met. Under the Company's bylaws, the
Company may also provide to directors or officers additional indemnification or
payment or reimbursement of expenses to the fullest extent permitted by Maryland
law for directors of Maryland corporations.
Indemnification under the provisions of Maryland law is not deemed exclusive of
any other rights, by indemnification or otherwise, to which a director may be
entitled under the charter, bylaws, any resolution of stockholders or directors,
any agreement or otherwise.
The statute permits a Maryland corporation to indemnify its officers, employees
and agents to the same extent as its directors. The Company's bylaws provide
that (i) the Company may, with the approval of its board of directors, indemnify
any employee or agent of the Company (or a predecessor) to the extent to which
the Company is required to indemnify its directors and officers and (ii) the
Company must indemnify its officers to the same extent it indemnifies directors.
The Company maintains directors' and officers' liability insurance to insure
against losses arising from claims made against its directors and officers,
subject to the limitations and conditions set forth in such policies.
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Reference is made to the following documents filed as exhibits to this
registration statement (or incorporated by reference herein) regarding relevant
indemnification provisions described above and elsewhere herein:
DOCUMENT EXHIBIT NUMBER
-------- --------------
Amended and Restated Charter of the Company.................. 3.1
Second Amended and Restated Bylaws of the Company............ 3.3
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
SALE OF UNREGISTERED SECURITIES
The following description sets forth sales or other issuances of unregistered
securities by the Company and the old Corrections Corporation of America, a
Tennessee corporation and successor in interest to a Delaware corporation of the
same name and the Company's predecessor by merger ("Old CCA"), within the past
three years. CCA Prison Realty Trust, a Maryland real estate investment trust
and also a predecessor by merger to the Company, did not issue unregistered
securities during the period from January 1, 1998 until completion of is and Old
CCA's merger with the Company on January 1, 1999 (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 was converted
into the right to receive 0.875 share of the Company's common stock (the "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"). All references to shares and prices of the Company's Common Stock
are on a pre-reverse stock split adjusted basis, unless otherwise indicated.
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.
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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 Alliance, S.A. ("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 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
Ventures IV LLC and certain affiliated purchasers ("MDP"), the Company issued
$40.0 million of its convertible subordinated notes (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.
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 Pacific Mezzanine
Fund, L.P., the Company issued $30.0 million of its convertible subordinated
notes which replaced a convertible subordinated note previously
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issued by Old CCA on February 29, 1996 (the "$30.0 Million Convertible
Subordinated Notes"). The Company received no cash proceeds from the issuance of
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 9.5 million shares of the
Company's Common Stock (as adjusted for the reverse stock split in May 2001)
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 also
issued an aggregate of approximately 0.2 million additional shares of Series B
Preferred Stock on April 2, 2001 and July 2, 2001 as paid-in-kind dividends on
outstanding shares of Series B Preferred Stock with respect to the first two
quarters of 2001.
ASSUMPTION OF OPERATING COMPANY WARRANTS. As a result of the Company's recently
completed restructuring (the "Restructuring"), effective October 1, 2000 the
Company assumed the obligation of Corrections Corporation of America, a
privately-held Tennessee corporation formerly known as Correctional Management
Services Corporation which, prior to the Restructuring, operated the majority of
the correctional and detention facilities owned by the Company (the "Operating
Company") to issue shares of Operating 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 50,046 shares of the Company's Common Stock to
G.E. Capital Corporation and (ii) an aggregate of approximately 25,023 shares of
the Company's Common Stock to Bank of America. The warrants, which have an
exercise price of $33.30 per share, expire December 31, 2008. These shares and
per share amounts are on a post-reverse stock split basis.
SERVICE COMPANY MERGERS. Effective December 1, 2000, the Company completed a
series of mergers with each of Prison Management Services, Inc. ("PMSI") and
Juvenile and Jail Facility Management Services, Inc. ("JJFMSI"), two
privately-held Tennessee corporations which managed certain adult prisons and
juvenile and jail detention facilities operated by Old CCA prior to the 1999
Merger (collectively, 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 approximately 0.3 million shares of its Common Stock (as adjusted
for the reverse-stock split in May 2001) 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
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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 New York Stock
Exchange. The Company received no cash proceeds from the issuance of these
shares of Common Stock.
SERIES B PREFERRED STOCK RESTRICTED STOCK PLANS. On May 22, 2001, the Company
established restricted stock plans pursuant to which an aggregate of
approximately 0.2 million shares of the Company's Series B Preferred Stock were
awarded to certain key employees of the Company and its subsidiaries. Pursuant
to the terms of the plans, the shares are subject to certain restrictions,
including forfeiture of any unvested portion of the shares upon the termination
of employment with the Company or its subsidiaries.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
Exhibits marked with an * are filed herewith. Other exhibits have previously
been filed with the SEC and are incorporated herein by reference.
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,
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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).
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 (previously filed as
Exhibit 2.5 to the Company's Annual Report on Form 10-K (Commission
File no. 0-25245), filed with the Commission on April 17, 2001 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).
2.6 Agreement and Plan of Merger, dated as of November 17, 2000, by and
among the Company, CCA of Tennessee, and JJFMSI (previously filed as
Exhibit 2.6 to the Company's Annual Report on Form 10-K (Commission
File no. 0-25245), filed with the Commission on April 17, 2001 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).
3.1 Amended and Restated Charter of the Company (previously filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K (Commission
File no. 0-25245), filed with the Commission on April 17, 2001 and
incorporated herein by this reference).
3.2 Amendment to the Charter of the Company effecting the reverse stock
split of the Company's common stock and a related reduction in the
stated capital stock of the Company (previously filed as Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ending June 30, 2001 (Commission File no. 0-25245), filed with the
Commission on August 13, 2001 and incorporated herein by this
reference.)
3.3 Second Amended and Restated Bylaws of the Company (previously filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K (Commission
File no. 0-25245), filed with the Commission on April 17, 2001 and
incorporated herein by this reference).
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
(referenced in Exhibit 3.1 hereto) and Article II of the Second Amended
and Restated Bylaws of the Company (referenced in 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-
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65017), filed with the Commission on September 30, 1998 and
incorporated herein by this reference).
4.3 Indenture, dated as of June 10, 1999, by and between the Company and
State Street Bank and Trust Company, as trustee, relating to the
issuance of debt securities (previously filed as Exhibit 4.1 to the
Company's Quarterly 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).
4.4 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).
5.1* Opinion of Stokes Bartholomew Evans & Petree, P.A. regarding the
validity of the Company's common stock offered hereby.
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 (previously filed as Exhibit 10.4 to the Company's
Annual Report on Form 10-K (Commission File no. 0-25245), filed with
the Commission on April 17, 2001 and incorporated herein by this
reference).
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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
(previously filed as Exhibit 10.5 to the Company's Annual Report on
Form 10-K (Commission File no. 0-25245), filed with the Commission on
April 17, 2001 and incorporated herein by this reference).
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 (previously filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K (Commission File no. 0-25245), filed with
the Commission on April 17, 2001 and incorporated herein by this
reference).
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 (previously filed as Exhibit
10.10 to the Company's Annual Report on Form 10-K (Commission File no.
0-25245), filed with the Commission on April 17, 2001 and incorporated
herein by this reference).
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).
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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 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
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).
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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 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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. (previously filed as
Exhibit 10.27 to the Company's Annual Report on Form 10-K (Commission
File no. 0-25245), filed with the Commission on April 17, 2001 and
incorporated herein by this reference).
10.26 Master Agreement to Lease, dated as of December 31, 2000, by and
between the Company, as landlord, and CCA of Tennessee, as tenant
(previously filed as Exhibit 10.28 to the Company's Annual Report on
Form 10-K (Commission File no. 0-25245), filed with the Commission on
April 17, 2001 and incorporated herein by this reference).
10.27 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).
10.28 Amended and Restated Services Agreement, dated as of March 5, 1999, by
and between the Company and Operating Company (previously filed as
Exhibit 10.30 to the Company's
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Annual Report on Form 10-K (Commission File no. 0-25245), filed with
the Commission on April 17, 2001 and incorporated herein by this
reference).
10.29 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).
10.30 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 (previously filed as Exhibit
10.32 to the Company's Annual Report on Form 10-K (Commission File no.
0-25245), filed with the Commission on April 17, 2001 and incorporated
herein by this reference).
10.31 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).
10.32 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).
10.33 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).
10.34 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 (previously filed as Exhibit
10.36 to the Company's Annual Report on Form 10-K (Commission File no.
0-25245), filed with the Commission on April 17, 2001 and incorporated
herein by this reference).
10.35 Business Development Agreement, by and between the Company and
Operating Company (previously filed as Exhibit 10.2 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).
10.36 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).
10.37 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 (previously filed as Exhibit 10.39 to the
Company's Annual Report on Form 10-K (Commission File no. 0-25245),
filed with the Commission on April 17, 2001 and incorporated herein by
this reference).
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10.38 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).
10.39 Amendment Number One to Administrative Services Agreement, dated as of
September 29, 2000, by and between the Company and PMSI (previously
filed as Exhibit 10.41 to the Company's Annual Report on Form 10-K
(Commission File no. 0-25245), filed with the Commission on April 17,
2001 and incorporated herein by this reference).
10.40 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).
10.41 Amendment Number One to Administrative Services Agreement, dated as of
September 29, 2000, by and between the Company and JJFMSI (previously
filed as Exhibit 10.43 to the Company's Annual Report on Form 10-K
(Commission File no. 0-25245), filed with the Commission on April 17,
2001 and incorporated herein by this reference).
10.42 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).
10.43 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).
10.44 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).
10.45 Service Mark and Trade Name Use Agreement, dated as of December 31,
1998, by and between Operating Company and Juvenile and Jail Facility
Management Services, LLC (previously filed as Exhibit 10.6 to the
Company's Current Report on Form 8-K (Commission File no. 0-25245),
filed with the Commission on January 6, 1999 and incorporated herein by
this reference).
10.46 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 (previously filed
as Exhibit 10.48 to the Company's Annual Report on Form 10-K
(Commission File no. 0-25245), filed with the Commission on April 17,
2001 and incorporated herein by this reference).
10.47 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).
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10.48 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).
10.49 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).
10.50 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).
10.51 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).
10.52 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).
10.53 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).
10.54 Old CCA's 1989 Stock Bonus Plan (previously filed as Exhibit 10(zz) to
Old CCA's Annual Report on Form 10-K (Commission File no. 0-15719),
filed with the Commission on March 30, 1990 and incorporated herein by
this reference).
10.55 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).
10.56 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).
10.57 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).
10.58 Amended and Restated Old CCA 1989 Stock Bonus Plan, dated as of
February 20, 1995 (previously filed as Exhibit 10.138 to Old CCA's
Annual Report on Form 10-K (Commission File no. 1-13560), filed with
the Commission on March 31, 1995 and incorporated herein by this
reference).
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10.59 Old CCA's 1995 Employee Stock Incentive Plan, effective as of March 20,
1995 (previously filed as Exhibit 4.3 to Old CCA's Registration
Statement on Form S-8 (Commission File no. 33-61173), filed with the
Commission on July 20, 1995 and incorporated herein by this reference).
10.60 First Amendment to Amended and Restated Old CCA 1989 Stock Bonus Plan,
dated as of November 3, 1995 (previously filed as Exhibit 10.153 to Old
CCA's Annual Report on Form 10-K (Commission File no. 1-13560), filed
with the Commission on March 29, 1996 and incorporated herein by this
reference).
10.61 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).
10.62 Old CCA's Non-Employee Directors' Compensation Plan (previously filed
as Appendix A to Old CCA's definitive Proxy Statement relating to Old
CCA's 1998 Annual Meeting of Shareholders (Commission File no.
0-15719), filed with the Commission on March 31, 1998 and incorporated
herein by this reference).
10.63 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).
10.64 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).
10.65 Employment Agreement, dated as of December 6, 2000, by and between the
Company and Irving E. Lingo, Jr. (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 April 17, 2001 and incorporated herein by
this reference).
10.66 Employment Agreement, dated as of August 3, 1999, by and between
Operating Company and J. Michael Quinlan (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 April 17, 2001 and incorporated
herein by this reference).
10.67 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).
10.68 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 (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 April 17, 2001 and incorporated herein by this
reference).
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10.69 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).
10.70 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).
10.71 Indemnity Agreement, dated as of September 29, 2000, by and between the
Company and PMSI (previously filed as Exhibit 10.77 to the Company's
Annual Report on Form 10-K (Commission File no. 0-25245), filed with
the Commission on April 17, 2001 and incorporated herein by this
reference).
10.72 Indemnity Agreement, dated as of September 29, 2000, by and between the
Company and JJFMSI (previously filed as Exhibit 10.78 to the Company's
Annual Report on Form 10-K (Commission File no. 0-25245), filed with
the Commission on April 17, 2001 and incorporated herein by this
reference).
10.73 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).
10.74 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 (previously filed as Exhibit 10.80 to the Company's
Annual Report on Form 10-K (Commission File no. 0-25245), filed with
the Commission on April 17, 2001 and incorporated herein by this
reference).
10.75 Second Waiver and Amendment, dated as of April 16, 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 (previously filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ending March 31,
2001 (Commission File no. 0-25245), filed with the Commission on May
15, 2001 and incorporated herein by this reference.)
10.76 Waiver to Loan and Security Agreement, as amended, dated as of April
16, 2001, by and among CCA of Tennessee, as Borrower, certain of CCA of
Tennessee's subsidiaries as Subsidiary Guarantors, certain lenders and
Lehman, as Administrative Agent (previously filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ending March 31, 2001 (Commission File no. 0-25245), filed with the
Commission on May 15, 2001 and incorporated herein by this reference.)
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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).
(b) Financial Statement Schedules
See Index to Consolidated Financial Statements.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this
Registration Statement or any material change to such
information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section
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15(d) of the Exchange Act (and, where applicable, each filing of the
employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
undersigned registrant certifies that it has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Nashville, State of Tennessee
on September 12, 2001.
CORRECTIONS CORPORATION OF AMERICA
By: /s/ John D. Ferguson
----------------------------------------
John D. Ferguson
Chief Executive Officer and President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
William F. Andrews, John D. Ferguson and Irving E. Lingo, Jr., and each of them,
the true and lawful attorneys-in-fact and agents of the undersigned, with full
power of substitution and resubstitution, for and in the name, place and stead
of the undersigned, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
registration statement relating to the same offering as the Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, as amended, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Commission, and hereby grants
to such attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done, as fully to all intents and purposes as the undersigned might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the capacities and on the date
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John D. Ferguson Chief Executive Officer and President September 12, 2001
--------------------------- (Principal Executive Officer),
John D. Ferguson Vice Chairman of the Board of
Directors and Director
/s/ Irving E. Lingo, Jr. Executive Vice President and September 12, 2001
--------------------------- Chief Financial Officer
Irving E. Lingo, Jr. (Principal Financial and
Accounting Officer)
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SIGNATURE TITLE DATE
--------- ----- ----
/s/ William F. Andrews Chairman of the Board of September 12, 2001
---------------------- Directors and Director
William F. Andrews
/s/ Lucius E. Burch, III Director September 12, 2001
---------------------------
Lucius E. Burch, III
/s/ John D. Correnti Director September 12, 2001
---------------------------
John D. Correnti
/s/ C. Michael Jacobi Director September 12, 2001
---------------------------
C. Michael Jacobi
/s/ John R. Prann, Jr. Director September 12, 2001
---------------------------
John R. Prann, Jr.
/s/ Joseph V. Russell Director September 12, 2001
---------------------------
Joseph V. Russell
/s/ Henri L. Wedell Director September 12, 2001
---------------------------
Henri L. Wedell
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